1

G.R. No. L-47740 July 20, 1982

LIM PIN, petitioner,

vs.

SPS. CONCHITA LIAO TAN, and TAN CHO HUA and HONORABLE CANCIO C. GARCIA, PRESIDING

JUDGE OF BRANCH I, CITY COURT OF CALOOCAN CITY, respondents.

GUTIERREZ, JR., J.:

In this petition for certiorari with prayer for the issuance of a writ of preliminary injunction, the petitioner prays:

(1) that Judgment be rendered annulling or modifying the Judgment, dated October 19, 1977, of the

Respondent Judge rendered in Civil Case No. 11716, City Court of Caloocan City. (2) That a Writ of

Preliminary Injunction be issued requiring Private Respondents, and all persons acting in their behalf, to

refrain from the Execution of the Judgment, dated October 19, 1977, of the City Court of Caloocan City

in Civil Case No. 11716 until further order.

The basis of the judgment, subject matter of the petition, is a compromise agreement entered into between the petitioner,

represented by her son, George Hung and the private respondent Conchita Liao Tan both parties assisted by their

respective counsel, during the October 19, 1977 hearing of Civil Case No. 11716 for unlawful detainer. The complaint for

unlawful detainer was filed in the court a quo on August 12, 1977 by the private respondents against the petitioner. The

judgment incorporating the compromise agreement reads as follows:

When this case was caged for hearing this afternoon, October 19, 1977, plaintiffs and defendant, the latter

acting thru her son, George Hung, as her duly authorized representative, assisted by their respective

counsels, personally appeared before this Court and mutually agreed as follows:

1. The parties admit that the stipulated rental for the leased premises is as follows:

(a) For the months of April and May, 1977, at P1,500.00 a month; thereafter a monthly

increase of P500.00 until the rent al reaches to P 5,000.00 by December, 1977,

2. That defendant admits having been in arrears in the payment of her rental obligation since April, 1977

and that as of October, 1977, her total accrued rentals already amounted to P18,000.00, broken down as

follows:

April, 1977.........................P 1,500.00

May, 1977............................. 1,500.00

June, 1977............................. 2,000.00

July,1977............................... 2,500.00

August,1977......................... 3,000.00

September,1977.....................3,500.00

October,1977........................ 4,000.00

TOTAL P18,000.00

2

3. That defendant binds herself to pay in full said accrued rentals of P18,000.00 and attorney's fee of P

2,000.00, not later than October 31, 1977.

4. That the rental for November, 1977, shall be P4,500.00 a month while the rentals for December, 1977

and for the succeeding months thereafter shall be P5,000.00, payable at the residence of plaintiff within

five (5) days of the current month.

5. That the Plaintiff hereby agrees to allow the defendant to remain in the leased premises at the rental

herein agreed upon.

6. That should defendant fails to pay her accrued rental of P18,000.00, plus attorney's fee of P2,000.00 by

October 31, 1977, Plaintiff shall be entitled to an immediate writ of execution to enforce defendant's

ejectment from the leased premises and the collection of all rental in arrears;

7. Defendant's representative, George Hung, affirmed before this court and the same is confirmed by

defendant's counsel, that he (George Hung) has the full authority of her mother, the herein defendant, to

act for her and to sign for and in behalf this amicable settlement.

WHEREFORE, this Court, as prayed for, hereby approves the foregoing compromise agreement and

consequently renders Judgment in accordance with the precise terms and conditions hereof. (Annex "D")

Spouses Conchita Liao Tan and Tan Cho Hua alleged in their complaint for unlawful detainer that the plaintiff Conchita

Liao Tan, as owner of a parcel of registered land with improvements located at Francisco Street, Caloocan City, had

leased a portion of it, more particularly known as 91 Francisco Street, Caloocan City to defendant Lim Pin on a month to

month basis but that the latter starting April, 1977 had not paid the agreed rental stipulated for such month and the

succeeding months thereafter based on the following schedule of payments: a) For the month of April, 1977 — P 1,500-

00; b) For the month of May, 1977 — P1,500-00: c) Commencing on the month of June, 1977 and for each calendar

month thereafter P6,000.00 per month; and that despite demand, the defendant refused to vacate the leased premises. In

addition to the actual damages, the plaintiffs asked for an attorney's fee in the amount of P3,000.00.

On August 25, 1977, the defendant Lim Pin, filed her Answer denying the material allegations of the complaint and

protesting the alleged highly "unconscionable and unreasonable" increase of rental demanded by plaintiffs. As a

counterclaim, she asked for an attorney's fee in the amount of P5,000.00. The counterclaim was denied in the plaintiffs'

Answer to Counterclaim, dated September 1, 1982.

The initial hearing set for September 1, 1977 was reset to September 14, 1977 upon the joint motion of the parties who

were trying to work out a possible amicable settlement. Upon the failure of the parties to reach an amicable settlement, the

September 14, 1977 hearing proceeded as scheduled during which plaintiff Conchita Liao Tan testified. For lack of

material time, Conchita Liao Tan's cross-examination was set for September 27, 1970 but this hearing was again cancelled

and reset to October 19, 1977.

On the scheduled October 19, 1977 hearing, defendant Lim Pin was absent. Her son George Hung who attended with his

mother all the previous hearings was present together with the defendant's counsel. Plaintiff Conchita Liao Tan together

with her counsel was also present. Through the initiative of the court a quo, the subject compromise agreement was

formulated and executed and it finally became the basis of the October 19, 1977 judgment in Civil Case No. 11716.

The aforesaid judgment was the subject of a motion for reconsideration filed on October 28, 1977 by defendant Lim Pin

on the following grounds: 1) that she never authorized her son nor her counsel on record (Atty. Pastor Mamaril) to enter

into such compromise agreement and 2) that had she been present when said agreement was prepared, she would not have

acceded thereto.

3

The motion prompted the plaintiffs to file an "Opposition To Motion for Reconsideration With Prayer that defendant's son

George Hung and Atty. Pastor P. Mamaril be cited for contempt" in the event they should belatedly deny that George

Hung was duly authorized by his mother to enter into the compromise agreement dated November 5, 1982.

In the meantime, the plaintiffs, on November 3, 1977 filed an "Urgent Motion For Immediate Execution of Judgment

dated October 19, 1977."

All the foregoing motions were resolved by the respondent court in its Order dated January 26, 1978.

The dispositive portion of the Order reads:

IN VIEW OF ALL THE FOREGOING, defendants' 'Motion For Reconsideration,' is hereby DENIED,

For reason hereinbefore mentioned, defendant's son George Hung, is hereby declared in direct contempt

of court and is hereby sentenced to pay a fine of TWO HUNDRED (P200.00) Pesos, with subsidiary

imprisonment in case of insolvency. Finding the explanations given by Atty. Mamaril during the hearing

of November 18, 1977, to be meritorious, this Court finds no basis to hold him in contempt. As prayed for

by plaintiffs in their motion for execution, which this Court finds justified, let a writ of execution be

issued in this case.

A writ of execution was issued by the respondent court on the same date. Pursuant to the writ of execution, the City

Sheriff of Caloocan City, Metro Manila served a "Notice of Ejectment" and "Notice to Levy", both dated February 3,

1978, which were received by the plaintiff on February 3, 1978. Hence, this petition.

On February 8, 1978, We issued a temporary restraining order "enjoining respondent judge from enforcing the execution

of the judgment dated October 19, 1977 issued in Civil Case No. 11714." The petitioner raises two issues in this petition:

1) Whether the respondent Judge committed grave abuse of discretion in allowing the October 19, 1977

compromise agreement in the absence of the petitioner; and

2) Whether the respondent Judge committed grave abuse of discretion amounting to lack of jurisdiction in

denying the petitioner's motion for reconsideration on the October 19, 1977 judgment and in granting the

issuance of execution thereto upon motion of the private respondents.

Anent the first issue, the petitioner argues that the respondent Judge should not have allowed her son George Hung and

her then counsel, Atty. Pastor Mamaril in her absence to enter into the October 19, 1977 compromise agreement with the

private respondent Conchita Liao Tan assisted by her counsel. She further argues that "... considering that such

compromise agreement would impose onerous obligations upon Petitioner, such as a tremendous increase of rentals in the

premises being leased from Private Respondents from P1,500.00 a month to P5,000.00 a month," and that said agreement

contained admissions by petitioner, the respondent Judge should have required a written authority and power of attorney

from her son and counsel. Her objections to the validity of the compromise agreement are premised on Article 1878 of the

Civil Code and Rule 138, Section 23 of the Rules of Court.

The arguments are not well taken.

Article 1878 is found in Title X of the Civil Code on Agency. It states that a special power of attorney is necessary to

compromise, to submit questions to arbitration, to renounce the right to appeal from a judgment, to waive objections to the

venue of an action or to abandon a prescription already acquired.

Section 23 of Rule 138 on Attorneys and Admission to the Bar governs the authority of attorneys to bind their clients and

provides that "Attorneys have authority to bind their clients in any case by any agreement in relation thereto made in

4

writing, and in taking appeal, and in an matters of ordinary Judicial Procedure, but they cannot, without special authority,

compromise their clients' litigation or receive anything in discharge of their clients' claims but the full amount in cash."

The requirements of a special power of attorney in Article 1878 of the Civil Code and of a special authority in Rule 138 of

the Rules of Court refer to the nature of the authorization and not its form. The requirements are met if there is a clear

mandate from the principal specifically authorizing the performance of the act. As early as 1906, this Court in Strong v.

Gutierrez-Repide (6 Phil. 680) stated that such a mandate may be either oral or written, the one vital thing being that it

shall be express. And more recently, We stated that, if the special authority is not written, then it must be duly established

by evidence:

... the Rules require, for attorneys to compromise the litigation of their clients, a special authority. And

while the same does not state that the special authority be in writing the Court has every reason to expect

that, if not in writing, the same be duly established by evidence other than the self-serving assertion of

counsel himself that such authority was verbally given him. (Home Insurance Company vs. United States

lines Company, et al., 21 SCRA 863; 866: Vicente vs. Geraldez, 52 SCRA 210; 225).

We are satisfied from the records of this case that Judge Cancio C. Garcia took the necessary precautionary measures and

acted on the basis of satisfactory evidence when he allowed the compromise agreement to be executed by George Hung

the petitioner's son.

The records show that prior to the October 19, 1977 hearing, the petitioner as defendant in Civil Case No. 11-116 had

repeatedly asked that the respondent Judge approve her proposals for a monthly increase of P500.00 starting April, 1977

and that the increases be pegged at that rate until the monthly rental reaches the sum of P5,000.00 on December, 1977.

Such a proposal was not acceptable at the time to the private respondents. Only at the October 19, 1977 hearing did

private respondent Conchita Liao Tan have a change of mind. She expressed a willingness to accomodate the proposals

originating from the petitioner prompting the court to suspend proceedings and initiate the execution of the compromise

agreement between the parties. Whereupon the following took place: (1) The court asked George Hung whether he was

willing to enter into the compromise agreement and whether he had the authority of his mother to enter into such a

compromise agreement; (2) The defendant's counsel confirmed in open court the assurance of George Hung that he had

the full authority of his mother to enter into a compromise agreement: (3) After the formulation of the compromise

agreement the Judge explained in Tagalog to both parties, including George Hung its terms and conditions after which the

same was reduced into writing; (4) George Hung willingly signed the compromise agreement, the terms and conditions of

which were those originally proposed by the petitioner herself. Hung was all the while assisted by their counsel.

There were other reasons which led the lower court to a finding that George Hung had the full authority to enter into the

compromise. The court itself observed during the earlier hearings and it is not disputed that ... defendant Lim Pin could

not decide on anything without first consulting her son." George Hung's later denial that he never manifested his authority

to represent his mother was rejected by the court. As a matter of fact, this sudden turnabout of George Hung led the court

to cite him for contempt. He was fined Two Hundred Pesos. The citation for contempt was never appealed.

And finally, even assuming that George Hung and the petitioner's counsel acted without authority, the compromise

agreement itself was not null and void. It would be merely unenforceable, capable of being ratified. (Dungo v. Lapena, 6

SCRA 1007). The compromise agreement was ratified by the petitioner when, on October 24, 1977, a few days after the

promulgation of the questioned judgment and before the filing of a motion for reconsideration, she filed an "Ex-Parte

Motion To Withdraw Deposits" in Civil Case No. 11709, a consignation case pending before the same court between the

same parties. The ex-parte motion in part reads:

xxx xxx xxx

3. That there is another case with this court assigned in Branch I docketed as Civil Case No. 11716, for

unlawful detainer, involving the same parties and subject property and in the said case, parties have

5

entered into a compromise agreement whereby, among others, petitioner herein shall pay the accrued

monthly rentals to respondent (plaintiff in the aforementioned case);

4. That in order to implement the aforementioned compromise agreement, it is necessary that the deposits

made by petitioner be withdrawn, the same to be paid to respondent Conchita Liao Tan. (Annex "2" for

the private respondents, p. 71, rollo).

The second ground for this petition is consequently unmeritorious. The Petitioner alleged that the respondent Judge acted

with grave abuse of discretion amounting to lack of jurisdiction when he denied the motion for reconsideration of the

October 19, 1977 judgment. The motion was based on the same alleged absence of authority of the petitioner's son and her

counsel. A similar allegation regarding the writ of execution is likewise without merit. It is a well-settled rule that a

compromise judgment is final and executory and unappealable. We also note that on or before June 26, 1978 the petitioner

abandoned the disputed property, notwithstanding our February 8, 1978 temporary restraining order enjoining

enforcement of the writ of execution.

WHEREFORE, the instant petition is hereby DISMISSED for lack of merit. The temporary restraining order issued by

this Court dated February 8, 1978 is LIFTED. The judgment appealed from is AFFIRMED with costs against the

petitioner.

6

G.R. No. 120528 January 29, 2001

ATTY. DIONISIO CALIBO, JR., petitioner,

vs.

COURT OF APPEALS and DR. PABLO U. ABELLA, respondents.

QUISUMBING, J.:

Before us is the petition for review on certiorari by petitioner Dionisio Calibo, Jr., assailing the decision of the Court of

Appeals in CA-G.R. CV No. 39705, which affirmed the decision of the Regional Trial Court of Cebu, Branch 11,

declaring private respondent as the lawful possessor of a tractor subject of a replevin suit and ordering petitioner to pay

private respondent actual damages and attorney's fees.

The facts of the case, as summarized by respondent court, are undisputed.

"…on January 25, 1979, plaintiff-appellee [herein petitioner] Pablo U. Abella purchased an MF 210 agricultural

tractor with Serial No. 00105 and Engine No. P126M00199 (Exhibit A; Record, p.5) which he used in his farm in

Dagohoy, Bohol.

Sometimes in October or November 1985, Pablo Abella's son, Mike abella rented for residential purpose the

house of defendant-appellant Dionosio R. Calibo, Jr., in Tagbilaran City.

In October 1986, Pablo Abella pulled out his aforementioned tractor from his farm in Dagohoy, Bohol, and left it

in the safekeeping of his son, Mike Abella, in Tagbilaran City. Mike kept the tractor in the garage of the house he

was leasing from Calibo.

Since he started renting Calibo's house, Mike had been religiously paying the monthly rentals therefor, but

beginning November of 1986, he stopped doing so. The following month, Calibo learned that Mike had never

paid the charges for electric and water consumption in the leased premises which the latter was duty-bound to

shoulder. Thus, Calibo confronted Mike about his rental arrears and the unpaid electric and water bills. During

this confrontation, Mike informed Calibo that he (Mike) would be staying in the leased property only until the end

of December 1986. Mike also assured Calibo that he would be settling his account with the latter, offering the

tractor as security. Mike even asked Calibo to help him find a buyer for the tractor so he could sooner pay his

outstanding obligation.1âwphi1.nêt

In January 1987 when a new tenant moved into the house formerly leased to Mike, Calibo had the tractor moved

to the garage of his father's house, also in Tagbilaran City.

Apprehensive over Mike's unsettled account, Calibo visited him in his Cebu City address in January, February

and March, 1987 and tried to collect payment. On all three occasions, Calibo was unable to talk to Mike as the

latter was reportedly out of town. On his third trip to Cebu City, Calibo left word with the occupants of the Abella

residence thereat that there was a prospective buyer for the tractor. The following week, Mike saw Calibo in

Tagbilaran City to inquire about the possible tractor buyer. The sale, however, did not push through as the buyer

did not come back anymore. When again confronted with his outstanding obligation, Mike reassured Calibo that

the tractor would stand as a guarantee for its payment. That was the last time Calibo saw or heard from Mike.

After a long while, or on November 22, 1988, Mike's father, Pablo Abella, came to Tagbilaran City to claim and

take possession of the tractor. Calibo, however, informed Pablo that Mike left the tractor with him as security for

the payment of Mike's obligation to him. Pablo offered to write Mike a check for P2,000.00 in payment of Mike's

unpaid lease rentals, in addition to issuing postdated checks to cover the unpaid electric and water bills the

correctness of which Pablo said he still had to verify with Mike. Calibo told Pablo that he would accept the

7

P2,000.00-check only if the latter would execute a promissory note in his favor to cover the amount of the unpaid

electric and water bills. Pablo was not amenable to this proposal. The two of them having failed to come to an

agreement, Pablo left and went back to Cebu City, unsuccessful in his attempt to take possession of the tractor."1

On November 25, 1988, private respondent instituted an action for replevin, claiming ownership of the tractor and seeking

to recover possession thereof from petitioner. As adverted to above, the trial court ruled in favor of private respondent; so

did the Court of Appeals when petitioner appealed.

The Court of Appeals sustained the ruling of the trial court that Mike Abella could not have validly pledged the subject

tractor to petitioner since he was not the owner thereof, nor was he authorized by its owner to pledge the tractor.

Respondent court also rejected petitioner's contention that, if not a pledge, then a deposit was created. The Court of

Appeals said that under the Civil Code, the primary purpose of a deposit is only safekeeping and not, as in this case,

securing payment of a debt.

The Court of Appeals reduced the amount of actual damages payable to private respondent, deducting therefrom the cost

of transporting the tractor from Tagbilaran, Bohol, to Cebu City.

Hence, this petition.

Essentially, petitioner claims that the tractor in question was validly pledged to him by private respondent's son Mike

Abella to answer for the latter's monetary obligations to petitioner. In the alternative, petitioner asserts that the tractor was

left with him, in the concept of an innkeeper, on deposit and that he may validly hold on thereto until Mike Abella pays

his obligations.

Petitioner maintains that even if Mike Abella were not the owner of the tractor, a principal-agent relationship may be

implied between Mike Abella and private respondent. He contends that the latter failed to repudiate the alleged agency,

knowing that his son is acting on his behalf without authority when he pledged the tractor to petitioner. Petitioner argues

that, under Article 1911 of the Civil Code, private respondent is bound by the pledge, even if it were beyond the authority

of his son to pledge the tractor, since he allowed his son to act as though he had full powers.

On the other hand, private respondent asserts that respondent court had correctly ruled on the matter.

In a contract of pledge, the creditor is given the right to retain his debtor's movable property in his possession, or in that of

a third person to whom it has been delivered, until the debt is paid. For the contract to be valid, it is necessary that: (1) the

pledge is constituted to secure the fulfillment of a principal obligation; (2) the pledgor be the absolute owner of the thing

pledged; and (3) the person constituting the pledge has the free disposal of his property, and in the absence thereof, that he

be legally authorized for the purpose.2

As found by the trial court and affirmed by respondent court, the pledgor in this case, Mike Abella, was not the absolute

owner of the tractor that was allegedly pledged to petitioner. The tractor was owned by his father, private respondent, who

left the equipment with him for safekeeping. Clearly, the second requisite for a valid pledge, that the pledgor be the

absolute owner of the property, is absent in this case. Hence, there is no valid pledge.

"He who is not the owner or proprietor of the property pledged or mortgaged to guarantee the fulfillment of a

principal obligation, cannot legally constitute such a guaranty as may validly bind the property in favor of his

creditor, and the pledgee or mortgagee in such a case acquires no right whatsoever in the property pledged or

mortgaged."3

There also does not appear to be any agency in this case. We agree with the Court of Appeals that:

8

"As indicated in Article 1869, for an agency relationship to be deemed as implied, the principal must know that

another person is acting on his behalf without authority. Here, appellee categorically stated that the only purpose

for his leaving the subject tractor in the care and custody of Mike Abella was for safekeeping, and definitely not

for him to pledge or alienate the same. If it were true that Mike pledged appeellee's tractor to appellant, then Mike

was acting not only without appellee's authority but without the latter's knowledge as well.

Article 1911, on the other hand, mandates that the principal is solidarily liable with the agent if the former

allowed the latter to act as though he had full powers. Again, in view of appellee's lack of knowledge of Mike's

pledging the tractor without any authority from him, it stands to reason that the former could not have allowed the

latter to pledge the tractor as if he had full powers to do so."4

There is likewise no valid deposit in this case. In a contract of deposit, a person receives an object belonging to another

with the obligation of safely keeping it and of returning the same.5 Petitioner himself states that he received the tractor not

to safely keep it but as a form of security for the payment of Mike Abella's obligations. There is no deposit where the

principal purpose for receiving the object is not safekeeping.6

Consequently, petitioner had no right to refuse delivery of the tractor to its lawful owner. On the other hand, private

respondent, as owner, had every right to seek to repossess the tractor, including the institution of the instant action for

replevin.1âwphi1.nêt

We do not here pass upon the other assignment of errors made by petitioner concerning alleged irregularities in the raffle

and disposition of the case at the trial court. A petition for review on certiorari is not the proper vehicle for such

allegations.

WHEREFORE, the instant petition is DENIED for lack of merit, and the decision of the Court of Appeals in CA-G.R.

CV No. 39705 is AFFIRMED. Costs against petitioner.

9

G.R. No. 6906 September 27, 1911

FLORENTINO RALLOS, ET AL., plaintiff-appellee,

vs.

TEODORO R. YANGCO, defendant-appellant.

MORELAND, J.:

This is an appeal from a judgment of the Court of First Instance of the Province of Cebu, the Hon. Adolph Wislizenus

presiding, in favor of the plaintiffs, in the sum of P1,537.08, with interest at 6 per cent per annum from the month of July,

1909, with costs.

The defendant in this case on the 27th day of November, 1907, sent to the plaintiff Florentino Rallos, among others, the

following letter:

CIRCULAR NO. 1.

MANILA, November 27, 1907

MR. FLORENTINO RALLOS, Cebu.

DEAR SIR: I have the honor to inform you that I have on this date opened in my steamship office at No. 163

Muelle de la Reina, Binondo, Manila, P. I., a shipping and commission department for buying and selling leaf

tobacco and other native products, under the following conditions:

1. When the consignment has been received, the consignor thereof will be credited with a sum not to exceed two-

thirds of the value of the goods shipped, which may be made available by acceptance of a draft or written order of

the consignor on five to ten day's sight, or by his ordering at his option a bill of goods. In the latter case he must

pay a commission of 2 per cent.

2. No draft or written order will be accepted without previous notice forwarding the consignment of goods to

guarantee the same.

3. Expenses of freight, hauling and everything necessary for duly executing the commission will be charged in the

commission.

4. All advances made under sections (1) and (3) shall bear interest at 10 per cent a year, counting by the sale of

the goods shipped or remittance of the amount thereof.

5. A commission of 2 ½ per cent will be collected on the amount realized from the sale of the goods shipped.

6. A Payment will be made immediately after collection of the price of the goods shipped.

7. Orders will be taken for the purchase of general merchandise, ship-stores, cloths, etc., upon remittance of the

amount with the commission of 2 per cent on the total value of the goods bought. Expenses of freight, hauling,

and everything necessary for properly executing the commission will be charged to the consignor.

8. The consignor of the good may not fix upon the consignee a longer period than four months, counting from the

date of receipt, for selling the same; with the understanding that after such period the consignee is authorized to

make the sale, so as to prevent the advance and cost of storage from amounting to more than the actual value of

said goods, as has often happened.

10

9. The shipment to the consignors of the goods ordered on account of the amount realized from the sale of the

goods consigned and of the goods bought on remittance of the value thereof, under sections (1) and (3), will not

be insured against risk by sea and land except on written order of the interested parties.

10. On all consignments of goods not insured according to the next preceding section, the consignors will bear the

risk.

11. All the foregoing conditions will take effect only after this office has acknowledged the consignor's previous

notice.

12. All other conditions and details will be furnished at the office of the undersigned.

If you care to favor me with your patronage, my office is at No. 163 Muelle de la Reinna, Binondo, Manila, P. I.,

under the name of "Teodoro R. Yangco." In this connection it gives me great pleasure to introduce to you Mr.

Florentino Collantes, upon whom I have conferred public power of attorney before the notary, Mr. Perfecto Salas

Rodriguez, dated November 16, 1907, to perform in my name and on my behalf all acts necessary for carrying out

my plans, in the belief that through his knowledge and long experience in the business, along with my commercial

connections with the merchants of this city and of the provinces, I may hope to secure the most advantageous

prices for my patrons. Mr. Collantes will sign by power of attorney, so I beg that you make due note of his

signature hereto affixed.

Very respectfully,

(Sgd.) T. R. YANGCO.

(Sgd.) F. COLLANTES.

Accepting this invitation, the plaintiffs proceeded to do a considerable business with the defendant through the said

Collantes, as his factor, sending to him as agent for the defendant a good deal of produce to be sold on commission. Later,

and in the month of February, 1909, the plaintiffs sent to the said Collantes, as agent for the defendant, 218 bundles of

tobacco in the leaf to be sold on commission, as had been other produce previously. The said Collantes received said

tobacco and sold it for the sum of P1,744. The charges for such sale were P206.96. leaving in the hands of said Collantes

the sum of P1,537.08 belonging to the plaintiffs. This sum was, apparently, converted to his own use by said agent.

It appears, however, that prior to the sending of said tobacco the defendant had severed his relations with Collantes and

that the latter was no longer acting as his factor. This fact was not known to the plaintiffs; and it is conceded in the case

that no notice of any kind was given by the defendant to the plaintiffs of the termination of the relations between the

defendant and his agent. The defendant refused to pay the said sum upon demand of the plaintiffs, placing such refusal

upon the ground that at the time the said tobacco was received and sold by Collantes he was acting personally and not as

agent of the defendant. This action was brought to recover said sum.

As is seen, the only question for our decision is whether or not the plaintiffs, acting in good faith and without knowledge,

having sent produce to sell on commission to the former agent of the defendant, can recover of the defendant under the

circumstances above set forth. We are of the opinion that the defendant is liable. Having advertised the fact that Collantes

was his agent and having given them a special invitation to deal with such agent, it was the duty of the defendant on the

termination of the relationship of principal and agent to give due and timely notice thereof to the plaintiffs. Failing to do

so, he is responsible to them for whatever goods may have been in good faith and without negligence sent to the agent

without knowledge, actual or constructive, of the termination of such relationship.

For these reasons the judgment appealed from is confirmed, without special finding as to costs.

11

G.R. No. 3188 March 12, 1907

THE UNITED STATES, plaintiff-appellee,

vs.

ALEC KIENE, defendant-appellant.

CARSON, J.:

The defendant was an insurance agent. As such agent there was paid over to him for the account of his employers, the

China Mutual Life Insurance Company, the sum of 1,539.20 pesos, Philippine currency, which he failed and refused to

turn over to them. For his failure and refusal so to do, he was convicted of the crime ofestafa in the Court of First Instance

of the city Manila in sentenced to be imprisoned for one year and six months in Bilibid, and to pay the costs of the trial.

The facts as stated above were fully established at the trial of the case; the accused offered no evidence on his own behalf

and rest his appeal substantially upon the alleged failure of the prosecution to establish the existence of a duty or

obligation imposed on the defendant to turn over his principal the funds which he is charged with appropriating to his own

use.

Counsel for the defendant contends that the trial court erroneously admitted in evidence a certain document purporting to

be a contract of agency signed by the defendant. The name of the accused is attached to this document, and one of the

witnesses, the district agent of the China Mutual Life Insurance Company, stated that it was the contract of agency it

purported to be, but failed to state specifically that the signature attached thereto was the signature of the defendant,

though he declared that he knew his signature and had seen him write it on various occasions.

An examination of the record seems to indicate that the failure of the witness to expressly identify the signature of the

defendant attached to the document was due to an oversight, but however this may be, it is contented that the execution of

the document was not formally established, and the trial court erred in taking into consideration one of its provisions

whereby the defendant appears to have expressly obligated himself to deliver to the China Mutual Life Insurance

Company the funds collected on its account, without deduction for any purpose whatever.

We do not deem it necessary to review the action of the court in admitting this document in evidence, because we are of

opinion that the obligation of the defendant to deliver the funds in question to his employers is determined by the

provision of article 1720 of the Civil Code, which is as follows:

Every agent is bound to give an account of his transactions and to pay to the principal all that he may have

received by virtue of the agency, even though what has been received is not owed to the principal.

Nothing to the contrary appearing in the record, and the existence of the agency and the collection of the funds on account

of the principal having been established, the obligation to deliver these funds to the principal must be held to have been

imposed upon the agent by virtue of the contract of agency.

Counsel for the appellant further contented that the court erred in admitting in evidence a certain letter written by the

defendant wherein he admitted the collection of certain funds on account of his principal, but we think that the execution

of this letter was conclusively established, and that it was properly admitted, being pertinent and material to the issue in

the case.

There were other objections to the admission of certain testimony at the trial of the case, but we find no error in the

proceedings prejudicial to the real rights of the accused, and it is unnecessary to discuss the assignments of error based on

these objections.

12

The crime of which the accused was convicted is defined and penalized in paragraph 5 of article 535, read together with

paragraph 3 of article 534, of the Penal Code, and the penalty prescribed is that of presidio correccional in its minimum

and medium degrees. There being no aggravating or extenuating circumstance to be taken into consideration, this penalty

should be imposed in its medium degree ,which, in accordance with the provisions of article 82 of the said code, is from

one year eight months and twenty-one days to two years eleven months and ten days of presidio correccional. The trial

court imposed the penalty of one year and six months of imprisonment in Bilibid, and failed to impose the accessory

penalties prescribed by law, and this sentence should therefore be reversed, and is hereby reversed, and instead thereof we

impose the penalty of one year eight months and twenty-one days' imprisonment ( presidio correccional), together with

the accessory penalties prescribed by law, and the payment to the agents of the China Mutual Life Insurance Company,

Limited, of the sum of 1,550.30 pesos, Philippine currency, with subsidiary imprisonment in case of insolvency, and the

costs in both instances. After the expiration of ten days let judgment be entered in accordance herewith, and ten days

thereafter let the case be remanded to the lower court for proper action. So ordered.

13

G.R. No. L-15092 May 18, 1962

ALFREDO MONTELIBANO, ET AL., plaintiffs-appellants,

vs.

BACOLOD-MURCIA MILLING CO., INC., defendant-appellee.

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

Appeal on points of law from a judgment of the Court of First Instance of Occidental Negros, in its Civil Case No. 2603,

dismissing plaintiff's complaint that sought to compel the defendant Milling Company to increase plaintiff's share in the

sugar produced from their cane, from 60% to 62.33%, starting from the 1951-1952 crop year.1äwphï1.ñët

It is undisputed that plaintiffs-appellants, Alfredo Montelibano, Alejandro Montelibano, and the Limited co-partnership

Gonzaga and Company, had been and are sugar planters adhered to the defendant-appellee's sugar central mill under

identical milling contracts. Originally executed in 1919, said contracts were stipulated to be in force for 30 years starting

with the 1920-21 crop, and provided that the resulting product should be divided in the ratio of 45% for the mill and 55%

for the planters. Sometime in 1936, it was proposed to execute amended milling contracts, increasing the planters' share to

60% of the manufactured sugar and resulting molasses, besides other concessions, but extending the operation of the

milling contract from the original 30 years to 45 years. To this effect, a printed Amended Milling Contract form was

drawn up. On August 20, 1936, the Board of Directors of the appellee Bacolod-Murcia Milling Co., Inc., adopted a

resolution (Acts No. 11, Acuerdo No. 1) granting further concessions to the planters over and above those contained in the

printed Amended Milling Contract. The bone of contention is paragraph 9 of this resolution, that reads as follows:

ACTA No. 11

SESSION DE LA JUNTA DIRECTIVA

AGOSTO 20, 1936

x x x x x x x x x

Acuerdo No. 1. — Previa mocion debidamente secundada, la Junta en consideracion a una peticion de los

plantadores hecha por un comite nombrado por los mismos, acuerda enmendar el contrato de molienda

enmendado medientelas siguentes:

x x x x x x x x x

9.a Que si durante la vigencia de este contrato de Molienda Enmendado, lascentrales azucareras, de

Negros Occidental, cuya produccion anual de azucar centrifugado sea mas de una tercera parte de la

produccion total de todas lascentrales azucareras de Negros Occidental, concedieren a sus plantadores

mejores condiciones que la estipuladas en el presente contrato, entonces esas mejores condiciones se

concederan y por el presente se entenderan concedidas a los platadores que hayan otorgado este Contrato

de Molienda Enmendado.

Appellants signed and executed the printed Amended Milling Contract on September 10, 1936, but a copy of the

resolution of August 10, 1936, signed by the Central's General Manager, was not attached to the printed contract until

April 17, 1937; with the notation —

Las enmiendas arriba transcritas forman parte del contrato de molienda enmendado, otorgado por — y la

Bacolod-Murcia Milling Co., Inc.

In 1953, the appellants initiated the present action, contending that three Negros sugar centrals (La Carlota, Binalbagan-

Isabela and San Carlos), with a total annual production exceeding one-third of the production of all the sugar central mills

14

in the province, had already granted increased participation (of 62.5%) to their planters, and that under paragraph 9 of the

resolution of August 20, 1936, heretofore quoted, the appellee had become obligated to grant similar concessions to the

plaintiffs (appellants herein). The appellee Bacolod-Murcia Milling Co., inc., resisted the claim, and defended by urging

that the stipulations contained in the resolution were made without consideration; that the resolution in question was,

therefore, null and void ab initio, being in effect a donation that was ultra vires and beyond the powers of the corporate

directors to adopt.

After trial, the court below rendered judgment upholding the stand of the defendant Milling company, and dismissed the

complaint. Thereupon, plaintiffs duly appealed to this Court.

We agree with appellants that the appealed decisions can not stand. It must be remembered that the controverted

resolution was adopted by appellee corporation as a supplement to, or further amendment of, the proposed milling

contract, and that it was approved on August 20, 1936, twenty-one days prior to the signing by appellants on September

10, of the Amended Milling Contract itself; so that when the Milling Contract was executed, the concessions granted by

the disputed resolution had been already incorporated into its terms. No reason appears of record why, in the face of such

concessions, the appellants should reject them or consider them as separate and apart from the main amended milling

contract, specially taking into account that appellant Alfredo Montelibano was, at the time, the President of the Planters

Association (Exhibit 4, p. 11) that had agitated for the concessions embodied in the resolution of August 20, 1936. That

the resolution formed an integral part of the amended milling contract, signed on September 10, and not a separate

bargain, is further shown by the fact that a copy of the resolution was simply attached to the printed contract without

special negotiations or agreement between the parties.

It follows from the foregoing that the terms embodied in the resolution of August 20, 1936 were supported by the

same causa or consideration underlying the main amended milling contract; i.e., the promises and obligations undertaken

thereunder by the planters, and, particularly, the extension of its operative period for an additional 15 years over and

beyond the 30 years stipulated in the original contract. Hence, the conclusion of the court below that the resolution

constituted gratuitous concessions not supported by any consideration is legally untenable.

All disquisition concerning donations and the lack of power of the directors of the respondent sugar milling company to

make a gift to the planters would be relevant if the resolution in question had embodied a separate agreement after the

appellants had already bound themselves to the terms of the printed milling contract. But this was not the case. When the

resolution was adopted and the additional concessions were made by the company, the appellants were not yet obligated

by the terms of the printed contract, since they admittedly did not sign it until twenty-one days later, on September 10,

1936. Before that date, the printed form was no more than a proposal that either party could modify at its pleasure, and the

appellee actually modified it by adopting the resolution in question. So that by September 10, 1936 defendant corporation

already understood that the printed terms were not controlling, save as modified by its resolution of August 20, 1936; and

we are satisfied that such was also the understanding of appellants herein, and that the minds of the parties met upon that

basis. Otherwise there would have been no consent or "meeting of the minds", and no binding contract at all. But the

conduct of the parties indicates that they assumed, and they do not now deny, that the signing of the contract on

September 10, 1936, did give rise to a binding agreement. That agreement had to exist on the basis of the printed terms as

modified by the resolution of August 20, 1936, or not at all. Since there is no rational explanation for the company's

assenting to the further concessions asked by the planters before the contracts were signed, except as further inducement

for the planters to agree to the extension of the contract period, to allow the company now to retract such concessions

would be to sanction a fraud upon the planters who relied on such additional stipulations.

The same considerations apply to the "void innovation" theory of appellees. There can be no novation unless two distinct

and successive binding contracts take place, with the later designed to replace the preceding convention. Modifications

introduced before a bargain becomes obligatory can in no sense constitute novation in law.

Stress is placed on the fact that the text of the Resolution of August 20, 1936 was not attached to the printed contract until

April 17, 1937. But, except in the case of statutory forms or solemn agreements (and it is not claimed that this is one), it is

the assent and concurrence (the "meeting of the minds") of the parties, and not the setting down of its terms, that

15

constitutes a binding contract. And the fact that the addendum is only signed by the General Manager of the milling

company emphasizes that the addition was made solely in order that the memorial of the terms of the agreement should be

full and complete.

Much is made of the circumstance that the report submitted by the Board of Directors of the appellee company in

November 19, 1936 (Exhibit 4) only made mention of 90%, the planters having agreed to the 60-40 sharing of the sugar

set forth in the printed "amended milling contracts", and did not make any reference at all to the terms of the resolution of

August 20, 1936. But a reading of this report shows that it was not intended to inventory all the details of the amended

contract; numerous provisions of the printed terms are alao glossed over. The Directors of the appellee Milling Company

had no reason at the time to call attention to the provisions of the resolution in question, since it contained mostly

modifications in detail of the printed terms, and the only major change was paragraph 9 heretofore quoted; but when the

report was made, that paragraph was not yet in effect, since it was conditioned on other centrals granting better

concessions to their planters, and that did not happen until after 1950. There was no reason in 1936 to emphasize a

concession that was not yet, and might never be, in effective operation.

There can be no doubt that the directors of the appellee company had authority to modify the proposed terms of the

Amended Milling Contract for the purpose of making its terms more acceptable to the other contracting parties. The rule

is that —

It is a question, therefore, in each case of the logical relation of the act to the corporate purpose expressed in the

charter. If that act is one which is lawful in itself, and not otherwise prohibited, is done for the purpose of serving

corporate ends, and is reasonably tributary to the promotion of those ends, in a substantial, and not in a remote

and fanciful sense, it may fairly be considered within charter powers. The test to be applied is whether the act in

question is in direct and immediate furtherance of the corporation's business, fairly incident to the express powers

and reasonably necessary to their exercise. If so, the corporation has the power to do it; otherwise, not. (Fletcher

Cyc. Corp., Vol. 6, Rev. Ed. 1950, pp. 266-268)

As the resolution in question was passed in good faith by the board of directors, it is valid and binding, and whether or not

it will cause losses or decrease the profits of the central, the court has no authority to review them.

They hold such office charged with the duty to act for the corporation according to their best judgment, and in so

doing they cannot be controlled in the reasonable exercise and performance of such duty. Whether the business of

a corporation should be operated at a loss during depression, or close down at a smaller loss, is a purely business

and economic problem to be determined by the directors of the corporation and not by the court. It is a well-

known rule of law that questions of policy or of management are left solely to the honest decision of officers and

directors of a corporation, and the court is without authority to substitute its judgment of the board of directors;

the board is the business manager of the corporation, and so long as it acts in good faith its orders are not

reviewable by the courts. (Fletcher on Corporations, Vol. 2, p. 390).

And it appearing undisputed in this appeal that sugar centrals of La Carlota, Hawaiian Philippines, San Carlos and

Binalbagan (which produce over one-third of the entire annual sugar production in Occidental Negros) have granted

progressively increasing participations to their adhered planter at an average rate of

62.333% for the 1951-52 crop year;

64.2% for 1952-53;

64.3% for 1953-54;

64.5% for 1954-55; and

63.5% for 1955-56,

16

the appellee Bacolod-Murcia Milling Company is, under the terms of its Resolution of August 20, 1936, duty bound to

grant similar increases to plaintiffs-appellants herein.

WHEREFORE, the decision under appeal is reversed and set aside; and judgment is decreed sentencing the defendant-

appellee to pay plaintiffs-appellants the differential or increase of participation in the milled sugar in accordance with

paragraph 9 of the appellee Resolution of August 20, 1936, over and in addition to the 60% expressed in the printed

Amended Milling Contract, or the value thereof when due, as follows:

0,333% to appellants Montelibano for the 1951-1952 crop year, said appellants having received an additional 2%

corresponding to said year in October, 1953;

2.333% to appellant Gonzaga & Co., for the 1951-1952 crop year; and to all appellants thereafter —

4.2% for the 1952-1953 crop year;

4.3% for the 1953-1954 crop year;

4.5% for the 1954-1955 crop year;

3.5% for the 1955-1956 crop year;

with interest at the legal rate on the value of such differential during the time they were withheld; and the right is reserved

to plaintiffs-appellants to sue for such additional increases as they may be entitled to for the crop years subsequent to

those herein adjudged.

Costs against appellee, Bacolod-Murcia Milling Co.

17

G.R. No. L-29640 June 10, 1971

GUILLERMO AUSTRIA, petitioner,

vs.

THE COURT OF APPEALS (Second Division), PACIFICO ABAD and MARIA G. ABAD, respondents.

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

Guillermo Austria petitions for the review of the decision rendered by the Court of Appeal (in CA-G.R. No. 33572-R), on

the sole issue of whether in a contract of agency (consignment of goods for sale) it is necessary that there be prior

conviction for robbery before the loss of the article shall exempt the consignee from liability for such loss.

In a receipt dated 30 January 1961, Maria G. Abad acknowledged having received from Guillermo Austria one (1)

pendant with diamonds valued at P4,500.00, to be sold on commission basis or to be returned on demand. On 1 February

1961, however, while walking home to her residence in Mandaluyong, Rizal, Abad was said to have been accosted by two

men, one of whom hit her on the face, while the other snatched her purse containing jewelry and cash, and ran away.

Among the pieces of jewelry allegedly taken by the robbers was the consigned pendant. The incident became the subject

of a criminal case filed in the Court of First Instance of Rizal against certain persons (Criminal Case No. 10649, People

vs. Rene Garcia, et al.).

As Abad failed to return the jewelry or pay for its value notwithstanding demands, Austria brought in the Court of First

Instance of Manila an action against her and her husband for recovery of the pendant or of its value, and damages.

Answering the allegations of the complaint, defendants spouses set up the defense that the alleged robbery had

extinguished their obligation.

After due hearing, the trial court rendered judgment for the plaintiff, and ordered defendants spouses, jointly and

severally, to pay to the former the sum of P4,500.00, with legal interest thereon, plus the amount of P450.00 as reasonable

attorneys' fees, and the costs. It was held that defendants failed to prove the fact of robbery, or, if indeed it was committed,

that defendant Maria Abad was guilty of negligence when she went home without any companion, although it was already

getting dark and she was carrying a large amount of cash and valuables on the day in question, and such negligence did

not free her from liability for damages for the loss of the jewelry.

Not satisfied with his decision, the defendants went to the Court of Appeals, and there secured a reversal of the judgment.

The appellate court overruling the finding of the trial court on the lack of credibility of the two defense witnesses who

testified on the occurrence of the robbery, and holding that the facts of robbery and defendant Maria Abad's possesion of

the pendant on that unfortunate day have been duly published, declared respondents not responsible for the loss of the

jewelry on account of a fortuitous event, and relieved them from liability for damages to the owner. Plaintiff thereupon

instituted the present proceeding.

It is now contended by herein petitioner that the Court of Appeals erred in finding that there was robbery in the case,

although nobody has been found guilty of the supposed crime. It is petitioner's theory that for robbery to fall under the

category of a fortuitous event and relieve the obligor from his obligation under a contract, pursuant to Article 1174 of the

new Civil Code, there ought to be prior finding on the guilt of the persons responsible therefor. In short, that the

occurrence of the robbery should be proved by a final judgment of conviction in the criminal case. To adopt a different

view, petitioner argues, would be to encourage persons accountable for goods or properties received in trust or

consignment to connive with others, who would be willing to be accused in court for the robbery, in order to be absolved

from civil liability for the loss or disappearance of the entrusted articles.

We find no merit in the contention of petitioner.

18

It is recognized in this jurisdiction that to constitute a caso fortuito that would exempt a person from responsibility, it is

necessary that (1) the event must be independent of the human will (or rather, of the debtor's or obligor's); (2) the

occurrence must render it impossible for the debtor to fulfill the obligation in a normal manner; and that (3) the obligor

must be free of participation in or aggravation of the injury to the creditor. 1 A fortuitous event, therefore, can be produced

by nature, e.g., earthquakes, storms, floods, etc., or by the act of man, such as war, attack by bandits, robbery, 2 etc.,

provided that the event has all the characteristics enumerated above.

It is not here disputed that if respondent Maria Abad were indeed the victim of robbery, and if it were really true that the

pendant, which she was obliged either to sell on commission or to return to petitioner, were taken during the robbery, then

the occurrence of that fortuitous event would have extinguished her liability. The point at issue in this proceeding is how

the fact of robbery is to be established in order that a person may avail of the exempting provision of Article 1174 of the

new Civil Code, which reads as follows:

ART. 1174. Except in cases expressly specified by law, or when it is otherwise declared by stipulation, or

when the nature of the obligation requires the assumption of risk, no person shall be responsible for those

events which could not be foreseen, or which, though foreseen, were inevitable.

It may be noted the reform that the emphasis of the provision is on the events, not on the agents or factors responsible for

them. To avail of the exemption granted in the law, it is not necessary that the persons responsible for the occurrence

should be found or punished; it would only be sufficient to established that the enforceable event, the robbery in this case

did take place without any concurrent fault on the debtor's part, and this can be done by preponderant evidence. To require

in the present action for recovery the prior conviction of the culprits in the criminal case, in order to establish the robbery

as a fact, would be to demand proof beyond reasonable doubt to prove a fact in a civil case.

It is undeniable that in order to completely exonerate the debtor for reason of a fortutious event, such debtor must, in

addition to the cams itself, be free of any concurrent or contributory fault or negligence. 3 This is apparent from Article

1170 of the Civil Code of the Philippines, providing that:

ART. 1170. Those who in the performance of their obligations are guilty of fraud, negligence, or delay,

and those who in any manner contravene the tenor thereof, are liable for damages.

It is clear that under the circumstances prevailing at present in the City of Manila and its suburbs, with their high

incidence of crimes against persons and property that renders travel after nightfall a matter to be sedulously avoided

without suitable precaution and protection, the conduct of respondent Maria G. Abad, in returning alone to her house in

the evening, carrying jewelry of considerable value would be negligent per se and would not exempt her from

responsibility in the case of a robbery. We are not persuaded, however, that the same rule should obtain ten years

previously, in 1961, when the robbery in question did take place, for at that time criminality had not by far reached the

levels attained in the present day.

There is likewise no merit in petitioner's argument that to allow the fact of robbery to be recognized in the civil case

before conviction is secured in the criminal action, would prejudice the latter case, or would result in inconsistency should

the accused obtain an acquittal or should the criminal case be dismissed. It must be realized that a court finding that a

robbery has happened would not necessarily mean that those accused in the criminal action should be found guilty of the

crime; nor would a ruling that those actually accused did not commit the robbery be inconsistent with a finding that a

robbery did take place. The evidence to establish these facts would not necessarily be the same.

WHEREFORE, finding no error in the decision of the Court of Appeals under review, the petition in this case is hereby

dismissed with costs against the petitioner.

19

G.R. No. 163720 December 16, 2004

GENEVIEVE LIM, petitioner,

vs.

FLORENCIO SABAN, respondents.

TINGA, J.:

Before the Court is a Petition for Review on Certiorari assailing the Decision1 dated October 27, 2003 of the Court of

Appeals, Seventh Division, in CA-G.R. V No. 60392.2

The late Eduardo Ybañez (Ybañez), the owner of a 1,000-square meter lot in Cebu City (the "lot"), entered into

anAgreement and Authority to Negotiate and Sell (Agency Agreement) with respondent Florencio Saban (Saban) on

February 8, 1994. Under the Agency Agreement, Ybañez authorized Saban to look for a buyer of the lot for Two Hundred

Thousand Pesos (P200,000.00) and to mark up the selling price to include the amounts needed for payment of taxes,

transfer of title and other expenses incident to the sale, as well as Saban’s commission for the sale.3

Through Saban’s efforts, Ybañez and his wife were able to sell the lot to the petitioner Genevieve Lim (Lim) and the

spouses Benjamin and Lourdes Lim (the Spouses Lim) on March 10, 1994. The price of the lot as indicated in the Deed of

Absolute Sale is Two Hundred Thousand Pesos (P200,000.00).4 It appears, however, that the vendees agreed to purchase

the lot at the price of Six Hundred Thousand Pesos (P600,000.00), inclusive of taxes and other incidental expenses of the

sale. After the sale, Lim remitted to Saban the amounts of One Hundred Thirteen Thousand Two Hundred Fifty Seven

Pesos (P113,257.00) for payment of taxes due on the transaction as well as Fifty Thousand Pesos (P50,000.00) as broker’s

commission.5 Lim also issued in the name of Saban four postdated checks in the aggregate amount of Two Hundred

Thirty Six Thousand Seven Hundred Forty Three Pesos (P236,743.00). These checks were Bank of the Philippine Islands

(BPI) Check No. 1112645 dated June 12, 1994 for P25,000.00; BPI Check No. 1112647 dated June 19, 1994

for P18,743.00; BPI Check No. 1112646 dated June 26, 1994 for P25,000.00; and Equitable PCI Bank Check No.

021491B dated June 20, 1994 forP168,000.00.

Subsequently, Ybañez sent a letter dated June 10, 1994 addressed to Lim. In the letter Ybañez asked Lim to cancel all the

checks issued by her in Saban’s favor and to "extend another partial payment" for the lot in his (Ybañez’s) favor.6

After the four checks in his favor were dishonored upon presentment, Saban filed a Complaint for collection of sum of

money and damages against Ybañez and Lim with the Regional Trial Court (RTC) of Cebu City on August 3, 1994.7 The

case was assigned to Branch 20 of the RTC.

In his Complaint, Saban alleged that Lim and the Spouses Lim agreed to purchase the lot for P600,000.00, i.e.,with a

mark-up of Four Hundred Thousand Pesos (P400,000.00) from the price set by Ybañez. Of the total purchase price

of P600,000.00, P200,000.00 went to Ybañez, P50,000.00 allegedly went to Lim’s agent, andP113,257.00 was given to

Saban to cover taxes and other expenses incidental to the sale. Lim also issued four (4) postdated checks8 in favor of

Saban for the remaining P236,743.00.9

Saban alleged that Ybañez told Lim that he (Saban) was not entitled to any commission for the sale since he concealed the

actual selling price of the lot from Ybañez and because he was not a licensed real estate broker. Ybañez was able to

convince Lim to cancel all four checks.

Saban further averred that Ybañez and Lim connived to deprive him of his sales commission by withholding payment of

the first three checks. He also claimed that Lim failed to make good the fourth check which was dishonored because the

account against which it was drawn was closed.

20

In his Answer, Ybañez claimed that Saban was not entitled to any commission because he concealed the actual selling

price from him and because he was not a licensed real estate broker.

Lim, for her part, argued that she was not privy to the agreement between Ybañez and Saban, and that she issued stop

payment orders for the three checks because Ybañez requested her to pay the purchase price directly to him, instead of

coursing it through Saban. She also alleged that she agreed with Ybañez that the purchase price of the lot was

only P200,000.00.

Ybañez died during the pendency of the case before the RTC. Upon motion of his counsel, the trial court dismissed the

case only against him without any objection from the other parties.10

On May 14, 1997, the RTC rendered its Decision11

dismissing Saban’s complaint, declaring the four (4) checks issued by

Lim as stale and non-negotiable, and absolving Lim from any liability towards Saban.

Saban appealed the trial court’s Decision to the Court of Appeals.

On October 27, 2003, the appellate court promulgated its Decision12

reversing the trial court’s ruling. It held that Saban

was entitled to his commission amounting to P236,743.00.13

The Court of Appeals ruled that Ybañez’s revocation of his contract of agency with Saban was invalid because the agency

was coupled with an interest and Ybañez effected the revocation in bad faith in order to deprive Saban of his commission

and to keep the profits for himself.14

The appellate court found that Ybañez and Lim connived to deprive Saban of his commission. It declared that Lim is

liable to pay Saban the amount of the purchase price of the lot corresponding to his commission because she issued the

four checks knowing that the total amount thereof corresponded to Saban’s commission for the sale, as the agent of

Ybañez. The appellate court further ruled that, in issuing the checks in payment of Saban’s commission, Lim acted as an

accommodation party. She signed the checks as drawer, without receiving value therefor, for the purpose of lending her

name to a third person. As such, she is liable to pay Saban as the holder for value of the checks.15

Lim filed a Motion for Reconsideration of the appellate court’s Decision, but her Motion was denied by the Court of

Appeals in a Resolution dated May 6, 2004.16

Not satisfied with the decision of the Court of Appeals, Lim filed the present petition.

Lim argues that the appellate court ignored the fact that after paying her agent and remitting to Saban the amounts due for

taxes and transfer of title, she paid the balance of the purchase price directly to Ybañez.17

She further contends that she is not liable for Ybañez’s debt to Saban under the Agency Agreement as she is not privy

thereto, and that Saban has no one but himself to blame for consenting to the dismissal of the case against Ybañez and not

moving for his substitution by his heirs.18

Lim also assails the findings of the appellate court that she issued the checks as an accommodation party for Ybañez and

that she connived with the latter to deprive Saban of his commission.19

Lim prays that should she be found liable to pay Saban the amount of his commission, she should only be held liable to

the extent of one-third (1/3) of the amount, since she had two co-vendees (the Spouses Lim) who should share such

liability.20

In his Comment, Saban maintains that Lim agreed to purchase the lot for P600,000.00, which consisted of theP200,000.00

which would be paid to Ybañez, the P50,000.00 due to her broker, the P113,257.00 earmarked for taxes and other

21

expenses incidental to the sale and Saban’s commission as broker for Ybañez. According to Saban, Lim assumed the

obligation to pay him his commission. He insists that Lim and Ybañez connived to unjustly deprive him of his

commission from the negotiation of the sale.21

The issues for the Court’s resolution are whether Saban is entitled to receive his commission from the sale; and, assuming

that Saban is entitled thereto, whether it is Lim who is liable to pay Saban his sales commission.

The Court gives due course to the petition, but agrees with the result reached by the Court of Appeals.

The Court affirms the appellate court’s finding that the agency was not revoked since Ybañez requested that Lim make

stop payment orders for the checks payable to Saban only after the consummation of the sale on March 10, 1994. At that

time, Saban had already performed his obligation as Ybañez’s agent when, through his (Saban’s) efforts, Ybañez executed

the Deed of Absolute Sale of the lot with Lim and the Spouses Lim.

To deprive Saban of his commission subsequent to the sale which was consummated through his efforts would be a

breach of his contract of agency with Ybañez which expressly states that Saban would be entitled to any excess in the

purchase price after deducting the P200,000.00 due to Ybañez and the transfer taxes and other incidental expenses of the

sale.22

In Macondray & Co. v. Sellner,23

the Court recognized the right of a broker to his commission for finding a suitable buyer

for the seller’s property even though the seller himself consummated the sale with the buyer.24

The Court held that it would

be in the height of injustice to permit the principal to terminate the contract of agency to the prejudice of the broker when

he had already reaped the benefits of the broker’s efforts.

In Infante v. Cunanan, et al.,25

the Court upheld the right of the brokers to their commissions although the seller revoked

their authority to act in his behalf after they had found a buyer for his properties and negotiated the sale directly with the

buyer whom he met through the brokers’ efforts. The Court ruled that the seller’s withdrawal in bad faith of the brokers’

authority cannot unjustly deprive the brokers of their commissions as the seller’s duly constituted agents.

The pronouncements of the Court in the aforecited cases are applicable to the present case, especially considering that

Saban had completely performed his obligations under his contract of agency with Ybañez by finding a suitable buyer to

preparing the Deed of Absolute Sale between Ybañez and Lim and her co-vendees. Moreover, the contract of agency very

clearly states that Saban is entitled to the excess of the mark-up of the price of the lot after deducting Ybañez’s share

of P200,000.00 and the taxes and other incidental expenses of the sale.

However, the Court does not agree with the appellate court’s pronouncement that Saban’s agency was one coupled with

an interest. Under Article 1927 of the Civil Code, an agency cannot be revoked if a bilateral contract depends upon it, or if

it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the

contract of partnership and his removal from the management is unjustifiable. Stated differently, an agency is deemed as

one coupled with an interest where it is established for the mutual benefit of the principal and of the agent, or for the

interest of the principal and of third persons, and it cannot be revoked by the principal so long as the interest of the agent

or of a third person subsists. In an agency coupled with an interest, the agent’s interest must be in the subject matter of the

power conferred and not merely an interest in the exercise of the power because it entitles him to compensation. When an

agent’s interest is confined to earning his agreed compensation, the agency is not one coupled with an interest, since an

agent’s interest in obtaining his compensation as such agent is an ordinary incident of the agency relationship.26

Saban’s entitlement to his commission having been settled, the Court must now determine whether Lim is the proper party

against whom Saban should address his claim.

Saban’s right to receive compensation for negotiating as broker for Ybañez arises from the Agency Agreement between

them. Lim is not a party to the contract. However, the record reveals that she had knowledge of the fact that Ybañez set

22

the price of the lot at P200,000.00 and that the P600,000.00—the price agreed upon by her and Saban—was more than the

amount set by Ybañez because it included the amount for payment of taxes and for Saban’s commission as broker for

Ybañez.

According to the trial court, Lim made the following payments for the lot: P113,257.00 for taxes, P50,000.00 for her

broker, and P400.000.00 directly to Ybañez, or a total of Five Hundred Sixty Three Thousand Two Hundred Fifty Seven

Pesos (P563,257.00).27

Lim, on the other hand, claims that on March 10, 1994, the date of execution of the Deed of

Absolute Sale, she paid directly to Ybañez the amount of One Hundred Thousand Pesos (P100,000.00) only, and gave to

Saban P113,257.00 for payment of taxes and P50,000.00 as his commission,28

and One Hundred Thirty Thousand Pesos

(P130,000.00) on June 28, 1994,29

or a total of Three Hundred Ninety Three Thousand Two Hundred Fifty Seven Pesos

(P393,257.00). Ybañez, for his part, acknowledged that Lim and her co-vendees paid him P400,000.00 which he said was

the full amount for the sale of the lot.30

It thus appears that he received P100,000.00 on March 10, 1994, acknowledged

receipt (through Saban) of theP113,257.00 earmarked for taxes and P50,000.00 for commission, and received the balance

of P130,000.00 on June 28, 1994. Thus, a total of P230,000.00 went directly to Ybañez. Apparently, although the amount

actually paid by Lim was P393,257.00, Ybañez rounded off the amount to P400,000.00 and waived the difference.

Lim’s act of issuing the four checks amounting to P236,743.00 in Saban’s favor belies her claim that she and her co-

vendees did not agree to purchase the lot at P600,000.00. If she did not agree thereto, there would be no reason for her to

issue those checks which is the balance of P600,000.00 less the amounts of P200,000.00 (due to Ybañez), P50,000.00

(commission), and the P113,257.00 (taxes). The only logical conclusion is that Lim changed her mind about agreeing to

purchase the lot at P600,000.00 after talking to Ybañez and ultimately realizing that Saban’s commission is even more

than what Ybañez received as his share of the purchase price as vendor. Obviously, this change of mind resulted to the

prejudice of Saban whose efforts led to the completion of the sale between the latter, and Lim and her co-vendees. This

the Court cannot countenance.

The ruling of the Court in Infante v. Cunanan, et al., cited earlier, is enlightening for the facts therein are similar to the

circumstances of the present case. In that case, Consejo Infante asked Jose Cunanan and Juan Mijares to find a buyer for

her two lots and the house built thereon for Thirty Thousand Pesos (P30,000.00) . She promised to pay them five percent

(5%) of the purchase price plus whatever overprice they may obtain for the property. Cunanan and Mijares offered the

properties to Pio Noche who in turn expressed willingness to purchase the properties. Cunanan and Mijares thereafter

introduced Noche to Infante. However, the latter told Cunanan and Mijares that she was no longer interested in selling the

property and asked them to sign a document stating that their written authority to act as her agents for the sale of the

properties was already cancelled. Subsequently, Infante sold the properties directly to Noche for Thirty One Thousand

Pesos (P31,000.00). The Court upheld the right of Cunanan and Mijares to their commission, explaining that—

…[Infante] had changed her mind even if respondent had found a buyer who was willing to close the deal, is a

matter that would not give rise to a legal consequence if [Cunanan and Mijares] agreed to call off the transaction

in deference to the request of [Infante]. But the situation varies if one of the parties takes advantage of the

benevolence of the other and acts in a manner that would promote his own selfish interest. This act is unfair as

would amount to bad faith. This act cannot be sanctioned without according the party prejudiced the reward

which is due him. This is the situation in which [Cunanan and Mijares] were placed by [Infante]. [Infante] took

advantage of the services rendered by [Cunanan and Mijares], but believing that she could evade payment of their

commission, she made use of a ruse by inducing them to sign the deed of cancellation….This act of subversion

cannot be sanctioned and cannot serve as basis for [Infante] to escape payment of the commission agreed upon.31

The appellate court therefore had sufficient basis for concluding that Ybañez and Lim connived to deprive Saban of his

commission by dealing with each other directly and reducing the purchase price of the lot and leaving nothing to

compensate Saban for his efforts.

Considering the circumstances surrounding the case, and the undisputed fact that Lim had not yet paid the balance

of P200,000.00 of the purchase price of P600,000.00, it is just and proper for her to pay Saban the balance

of P200,000.00.

23

Furthermore, since Ybañez received a total of P230,000.00 from Lim, or an excess of P30,000.00 from his asking price

of P200,000.00, Saban may claim such excess from Ybañez’s estate, if that remedy is still available,32

in view of the trial

court’s dismissal of Saban’s complaint as against Ybañez, with Saban’s express consent, due to the latter’s demise on

November 11, 1994.33

The appellate court however erred in ruling that Lim is liable on the checks because she issued them as an accommodation

party. Section 29 of the Negotiable Instruments Law defines an accommodation party as a person "who has signed the

negotiable instrument as maker, drawer, acceptor or indorser, without receiving value therefor, for the purpose of lending

his name to some other person." The accommodation party is liable on the instrument to a holder for value even though

the holder at the time of taking the instrument knew him or her to be merely an accommodation party. The

accommodation party may of course seek reimbursement from the party accommodated.34

As gleaned from the text of Section 29 of the Negotiable Instruments Law, the accommodation party is one who meets all

these three requisites, viz: (1) he signed the instrument as maker, drawer, acceptor, or indorser; (2) he did not receive

value for the signature; and (3) he signed for the purpose of lending his name to some other person. In the case at bar,

while Lim signed as drawer of the checks she did not satisfy the two other remaining requisites.

The absence of the second requisite becomes pellucid when it is noted at the outset that Lim issued the checks in question

on account of her transaction, along with the other purchasers, with Ybañez which was a sale and, therefore, a reciprocal

contract. Specifically, she drew the checks in payment of the balance of the purchase price of the lot subject of the

transaction. And she had to pay the agreed purchase price in consideration for the sale of the lot to her and her co-vendees.

In other words, the amounts covered by the checks form part of the cause or consideration from Ybañez’s end, as vendor,

while the lot represented the cause or consideration on the side of Lim, as vendee.35

Ergo, Lim received value for her

signature on the checks.

Neither is there any indication that Lim issued the checks for the purpose of enabling Ybañez, or any other person for that

matter, to obtain credit or to raise money, thereby totally debunking the presence of the third requisite of an

accommodation party.

WHEREFORE, in view of the foregoing, the petition is DISMISSED.

24

G.R. No. 150678 February 18, 2005

BIENVENIDO R. MEDRANO and IBAAN RURAL BANK, petitioners,

vs.

COURT OF APPEALS, PACITA G. BORBON, JOSEFINA E. ANTONIO and ESTELA A. FLOR, respondents.

D E C I S I O N

CALLEJO, SR., J.:

This is a petition for review of the Decision1 of the Court of Appeals (CA) affirming in toto the Decision

2 of the Regional

Trial Court (RTC) of Makati City, Branch 135, in Civil Case No. 15664 which awarded to the respondents their 5%

broker’s commission.

The facts are as follows:

Bienvenido R. Medrano was the Vice-Chairman of Ibaan Rural Bank, a bank owned by the Medrano family. In 1986, Mr.

Medrano asked Mrs. Estela Flor, a cousin-in-law, to look for a buyer of a foreclosed asset of the bank,3a 17-hectare mango

plantation priced at P2,200,000.00, located in Ibaan, Batangas.4

Mr. Dominador Lee, a businessman from Makati City, was a client of respondent Mrs. Pacita G. Borbon, a licensed real

estate broker. The two met through a previous transaction where Lee responded to an ad in a newspaper put up by Borbon

for an 8-hectare property in Lubo, Batangas, planted with atis trees. Lee expressed that he preferred a land with mango

trees instead. Borbon promised to get back to him as soon as she would be able to find a property according to his

specifications.

Borbon relayed to her business associates and friends that she had a ready buyer for a mango orchard. Flor then advised

her that her cousin-in-law owned a mango plantation which was up for sale. She told Flor to confer with Medrano and to

give them a written authority to negotiate the sale of the property.5 Thus, on September 3, 1986, Medrano issued the Letter

of Authority, as follows:

Mrs. Pacita G. Borbon & Miss Josefina E. Antonio

Campos Rueda Building

Tindalo, Makati, M.M.

Mrs. Estela A. Flor & Miss Maria Yumi S. Karasig

23 Mabini Street

Quezon City, M.M.

Dear Mesdames:

This letter will serve as your authority* to negotiate with any prospective buyer for the sale of a certain real estate

property more specifically a mango plantation which is described more particularly therein below:

Location : Barrio Tulay-na-Patpat, Ibaan, Batangas

Lot Area : 17 hectares (more or less) per

attached Appendix "A"

Improvements : 720 all fruit-bearing mango trees

(carabao variety) and other trees

25

Price : P 2,200,000.00

For your labor and effort in finding a purchaser thereof, I hereby bind myself to pay you a commission of 5% of the total

purchase price to be agreed upon by the buyer and seller.

Very truly yours,

(Sgd.)

B.R. Medrano

Owner

* Subject to price sale.6

The respondents arranged for an ocular inspection of the property together with Lee which never materialized – the first

time was due to inclement weather; the next time, no car was available for the tripping to Batangas.7 Lee then called up

Borbon and told her that he was on his way to Lipa City to inspect another property, and might as well also take a look at

the property Borbon was offering. Since Lee was in a hurry, the respondents could no longer accompany him at the time.

Thus, he asked for the exact address of the property and the directions on how to reach the lot in Ibaan from Lipa City.

Thereupon, Lee was instructed to get in touch with Medrano’s daughter and also an officer of the bank, Mrs. Teresa

Ganzon, regarding the property.81ªvvphi1.nét

Two days after the visit, respondent Josefina Antonio called Lee to inquire about the result of his ocular inspection. Lee

told her that the mango trees "looked sick" so he was bringing an agriculturist to the property. Three weeks thereafter,

Antonio called Lee again to make a follow-up of the latter’s visit to Ibaan. Lee informed her that he already purchased the

property and had made a down payment of P1,000,000.00. The remaining balance of P1,200,000.00 was to be paid upon

the approval of the incorporation papers of the corporation he was organizing by the Securities and Exchange

Commission. According to Antonio, Lee asked her if they had already received their commission. She answered "no," and

Lee expressed surprise over this.9

A Deed of Sale was eventually executed on November 6, 1986 between the bank, represented by its President/General

Manager Teresa M. Ganzon (as Vendor) and KGB Farms, Inc., represented by Dominador Lee (as Vendee), for the

purchase price of P1,200,000.00.10

Since the sale of the property was consummated, the respondents asked from the

petitioners their commission, or 5% of the purchase price. The petitioners refused to pay and offered a measly sum

of P5,000.00 each.11

Hence, the respondents were constrained to file an action against herein petitioners.

The petitioners alleged that Medrano issued the letter of authority in favor of all the respondents, upon the representation

of Flor that she had a prospective buyer. Flor was the only person known to Medrano, and he had never met Borbon and

Antonio. Medrano had asked that the name of their prospective buyer be immediately registered so as to avoid confusion

later on, but Flor failed to do so. Furthermore, the other officers of the bank had never met nor dealt with the respondents

in connection with the sale of the property. Ganzon also asked Lee if he had an agent and the latter replied that he had

none. The petitioners also denied that the purchase price of the property was P2,200,000.00 and alleged that the property

only cost P1,200,000.00. The petitioners further contended that the letter of authority signed by Medrano was not binding

or enforceable against the bank because the latter had a personality separate and distinct from that of Medrano. Medrano,

on the other hand, denied liability, considering that he was not the registered owner of the property, but the bank. The

petitioners, likewise, filed a counterclaim as they were constrained to hire the services of counsel and suffered damages.12

After the case was submitted for decision, Medrano died, but no substitution of party was made at this time.13

The trial court resolved the case based on the following common issues:

26

1. Whether or not the letter of authority is binding and enforceable against the defendant Bank only or both

defendants; and

2. Whether or not the plaintiffs are entitled to any commission for the sale of the subject property.14

On September 21, 1994, the trial court rendered a Decision in favor of the respondents. The petitioners were ordered to

pay, jointly and severally, the 5% broker’s commission to herein respondents. The trial court found that the letter of

authority was valid and binding as against Medrano and the Ibaan Rural bank. Medrano signed the said letter for and in

behalf of the bank, and as owner of the property, promising to pay the respondents a 5% commission for their efforts in

looking for a purchaser of the property. He is, therefore, estopped from denying liability on the basis of the letter of

authority he issued in favor of the respondents. The trial court further stated that the sale of the property could not have

been possible without the representation and intervention of the respondents. As such, they are entitled to the broker’s

commission of 5% of the selling price of P1,200,000.00 as evidenced by the deed of sale.15

The fallo of the decision reads

as follows:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the plaintiffs and against the defendants, for

the latter, jointly and severally:

1. To pay plaintiffs the sum of P60,000.00 representing their five percent (5%) commission of the purchase price

of the property sold based on Exh. "D" or "9" plus legal interest from date of filing of the herein complaint until

fully paid;

2. To pay plaintiffs the sum of P20,000.00 as and for attorney’s fees;

3. To pay the plaintiffs the sum of P10,000.00 as litigation expenses;

4. To pay the costs of the proceedings.16

Unable to agree with the RTC decision, petitioner Ibaan Rural Bank filed its notice of appeal.17

On October 10, 1994, the heirs of Bienvenido Medrano filed a Motion for Reconsideration18

praying that the late

Bienvenido Medrano be substituted by his heirs. They further prayed that the trial court’s decision as far as Medrano was

concerned be set aside and dismissed considering his demise. The trial court denied the motion for

reconsideration.19

Hence, the heirs of Medrano also filed their notice of appeal.20

On appeal, the petitioners reiterated their stance that the letter of authority was not binding and enforceable, as the same

was signed by Medrano, who was not actually the owner of the property. They refused to give the respondents any

commission, since the latter did not perform any act to consummate the sale. The petitioners pointed out that the

respondents (1) did not verify the real owner of the property; (2) never saw the property in question; (3) never got in touch

with the registered owner of the property; and (4) neither did they perform any act of assisting their buyer in having the

property inspected and verified.21

The petitioners further raised the trial court’s error in not dismissing the case against

Bienvenido Medrano considering his death.

On May 3, 2001, the CA promulgated the assailed decision affirming the finding of the trial court that the letter of

authority was valid and binding. Applying the principle of agency, the appellate court ruled that Bienvenido Medrano

constituted the respondents as his agents, granting them authority to represent and act on behalf of the former in the sale

of the 17-hectare mango plantation. The CA also ruled that the trial court did not err in finding that the respondents were

the procuring cause of the sale. Suffice it to state that were it not for the respondents, Lee would not have known that there

was a mango orchard offered for sale.1awphi1.nét

27

The CA further ruled that an action for a sum of money continues even after the death of the defendant, and shall remain

as a money claim against the estate of the deceased.

Undaunted by the CA’s unfavorable decision, the petitioners filed the instant petition, raising eight (8) assignments of

errors, to wit:

I. THE COURT OF APPEALS ERRED WHEN IT FOUND THE PRIVATE RESPONDENTS TO BE THE

PROCURING CAUSE OF THE SALE;

II. THE COURT OF APPEALS ERRED IN GIVING CREDENCE TO THE LETTER-AUTHORITY OF

PETITIONER MR. MEDRANO;

III. THE COURT OF APPEALS MADE A MISTAKE WHEN IT CORRECTLY RECOGNIZED THE EXTENT

OF THE PRIVATE RESPONDENTS’ OBLIGATION AND AUTHORITY CONTAINED IN MEDRANO’S

LETTER-AUTHORITY AND YET ERRONEOUSLY GRANTED THE PRIVATE-RESPONDENTS’

DEMAND, NOTWITHSTANDING THE NON-PERFORMANCE OF THEIR OBLIGATION THEREUNDER;

IV. THE COURT OF APPEALS ERRED IN PRESUMING BAD FAITH UPON THE PETITIONERS;

V. THE COURT OF APPEALS ERRED IN PLACING THE BURDEN OF PROOF UPON THE

DEFENDANTS-PETITIONERS;

VI. THE COURT OF APPEALS FAILED TO SUBSTANTIATE ITS CONCLUSION WITH EVIDENCE AND

INSTEAD RELIED ON INFERENCE;

VII. THE COURT OF APPEALS FAILED TO SUBSTANTIATE ITS CONCLUSION WITH EVIDENCE AND

MERELY RELIED ON SPECULATION AND SURMISE;

VIII. THE COURT OF APPEALS MISAPPRECIATED THE FACTS PRESENTED BEFORE IT, AND

CONSEQUENTLY FAILED TO CONSIDER REASONABLY THE TWO (2) BASIC ARGUMENTS OF THE

PETITIONERS.22

The petition is denied.

The records disclose that respondent Pacita Borbon is a licensed real estate broker23

and respondents Josefina Antonio and

Estela A. Flor are her associates.24

A broker is generally defined as one who is engaged, for others, on a commission,

negotiating contracts relative to property with the custody of which he has no concern; the negotiator between other

parties, never acting in his own name but in the name of those who employed him; he is strictly a middleman and for

some purposes the agent of both parties. A broker is one whose occupation is to bring parties together, in matters of trade,

commerce or navigation.25

For the respondents’ participation in finding a buyer for the petitioners’ property, the

petitioners refuse to pay them commission, asserting that they are not the efficient procuring cause of the sale, and that the

letter of authority signed by petitioner Medrano is not binding against the petitioners.

"Procuring cause" is meant to be the proximate cause.26

The term "procuring cause," in describing a broker’s activity,

refers to a cause originating a series of events which, without break in their continuity, result in accomplishment of prime

objective of the employment of the broker – producing a purchaser ready, willing and able to buy real estate on the

owner’s terms.27

A broker will be regarded as the "procuring cause" of a sale, so as to be entitled to commission, if his

efforts are the foundation on which the negotiations resulting in a sale are begun.28

The broker must be the efficient agent

or the procuring cause of the sale. The means employed by him and his efforts must result in the sale. He must find the

purchaser, and the sale must proceed from his efforts acting as broker.29

28

Indeed, the evidence on record shows that the respondents were instrumental in the sale of the property to Lee. Without

their intervention, no sale could have been consummated. They were the ones who set the sale of the subject land in

motion.30

Upon being informed by Flor that Medrano was selling his mango orchard, Borbon lost no time in informing

Lee that they had found a property according to his specifications. An ocular inspection of the property together with Lee

was immediately planned; unfortunately, it never pushed through for reasons beyond the respondents’ control. Since Lee

was in a hurry to see the property, he asked the respondents the exact address and the directions on how to reach Ibaan,

Batangas. The respondents thereupon instructed him to look for Teresa Ganzon, an officer of the Ibaan Rural Bank and

the person to talk to regarding the property. While the letter-authority issued in favor of the respondents was non-

exclusive, no evidence was adduced to show that there were other persons, aside from the respondents, who informed Lee

about the property for sale. Ganzon testified that no advertisement was made announcing the sale of the lot, nor did she

give any authority to other brokers/agents to sell the subject property.31

The fact that it was Lee who personally called

Borbon and asked for directions prove that it was only through the respondents that Lee learned about the property for

sale.32

Significantly, too, Ms. Teresa Ganzon testified that there were no other persons other than the respondents who

inquired from her about the sale of the property to Lee.33

It can thus be readily inferred that the respondents were the only

ones who knew about the property for sale and were responsible in leading a buyer to its consummation. All these

circumstances lead us to the inescapable conclusion that the respondents were the procuring cause of the sale. When there

is a close, proximate and causal connection between the broker’s efforts and the principal’s sale of his property, the broker

is entitled to a commission.34

The petitioners insist that the respondents are not entitled to any commission since they did not actually perform any acts

of "negotiation" as required in the letter-authority. They refuse to pay the commission since according to them, the

respondents’ participation in the transaction was not apparent, if not nil. The respondents did not even look at the property

themselves; did not introduce the buyer to the seller; did not hold any conferences with the buyer, nor take part in

concluding the sale. For the non-compliance of this obligation "to negotiate," the petitioners argue, the respondents are not

entitled to any commission.

We find the argument specious.l^vvphi1.net The letter of authority must be read as a whole and not in its truncated parts.

Certainly, it was not the intention of Medrano to expect the respondents to do just that (to negotiate) when he issued the

letter of authority. The clear intention is to reward the respondents for procuring a buyer for the property. Before

negotiating a sale, a broker must first and foremost bring in a prospective buyer. It has been held that a broker earns his

pay merely by bringing the buyer and the seller together, even if no sale is eventually made.35

The essential feature of a

broker’s conventional employment is merely to procure a purchaser for a property ready, able, and willing to buy at the

price and on the terms mutually agreed upon by the owner and the purchaser. And it is not a prerequisite to the right to

compensation that the broker conduct the negotiations between the parties after they have been brought into contact with

each other through his efforts.36

The case ofMacondray v. Sellner37

is quite instructive:

The business of a real estate broker or agent, generally, is only to find a purchaser, and the settled rule as stated by the

courts is that, in the absence of an express contract between the broker and his principal, the implication generally is that

the broker becomes entitled to the usual commissions whenever he brings to his principal a party who is able and willing

to take the property and enter into a valid contract upon the terms then named by the principal, although the particulars

may be arranged and the matter negotiated and completed between the principal and the purchaser directly.

Notably, there are cases where the right of the brokers to recover commissions were upheld where they actually took no

part in the negotiations, never saw the customer, and even some in which they did nothing except advertise the property,

as long as it can be shown that they were the efficient cause of the sale.38

In the case at bar, the role of the respondents in the transaction is undisputed. Whether or not they participated in the

negotiations of the sale is of no moment. Armed with an authority to procure a purchaser and with a license to act as

broker, we see no reason why the respondents can not recover compensation for their efforts when, in fact, they are the

procuring cause of the sale.39

29

Anent the validity of the letter-authority signed by Medrano, we find no reversible error with the findings of the appellate

and trial courts that the petitioners are liable thereunder. Such factual findings deserve this Court’s respect in the absence

of any cogent reason to reverse the same. Medrano’s obligation to pay the respondents commission for their labor and

effort in finding a purchaser or a buyer for the described parcel of land is unquestionable. In the absence of fraud,

irregularity or illegality in its execution, such letter-authority serves as a contract, and is considered as the law between the

parties. As such, Medrano can not renege on the promise to pay commission on the flimsy excuse that he is not the

registered owner of the property. The evidence shows that he comported himself to be the owner of the property. His

testimony is quite telling:

Q Mr. Medrano, do you know any of the plaintiffs in this case, Pacita Borbon, Josefina Antonio, and Stella (sic)

F. Flor?

WITNESS

A I know only Stella (sic) F. Flor. The rest, I do not know them. I have never met them, up to now.

Q How about the co-defendant Ibaan Rural Bank?

A I know co-defendant Ibaan Rural Bank, having been the founder and at one time or another, I have served

several capacities from President to Chairman of the Board.

Q Are you familiar with a certain parcel of land located at Barrio Tulay na Patpat, Ibaan, Batangas, with an area

of 17 hectares?

A Yes, Sir. I used to own that property but later on mortgaged it to Ibaan Rural Bank.

Q And what, if any, [did] the bank do to your property after you have mortgaged the same to it?

A After many demands for payment or redemption of my mortgage, which I failed to do so, the Ibaan Rural Bank

sold it.

Q After it was foreclosed?

A Yes, Sir.

Q Do you recall having made any transaction with plaintiff Stella (sic) F. Flor regarding the property?

A Yes, Sir. Since she is the first cousin of my wife, I remember [that] she came to my office once and requested

for a letter of authority which I issued [in] September 1986, I think, and I gave her the letter of authority.40

As to the liability of the bank, we quote with favor the disquisition of the respondent court, to wit:

Further, the appellants cannot use the flimsy excuse (only to evade liability) that "(w)hat Mr. Medrano represented to the

plaintiffs-appellees, without the knowledge or consent of the defendant Bank, did not bind the Bank. Res inter alios acta

alteri nocere non debet." (page 8 of the Appellant’s Brief; page 35 of the Rollo). While it may be true that technically the

Ibaan Rural Bank did not authorize Bienvenido R. Medrano to sell the land under litigation or that the latter was no longer

an officer of the said bank, still, these circumstances do not convince this Court fully well to absolve the bank. Note that,

as former President of the said bank, it is improbable that he (Bienvenido R. Medrano) was completely oblivious of the

developments therein. By reason of his past association with the officers of the said bank (who are, in fact, his relatives), it

is unbelievable that Bienvenido R. Medrano could simply have issued the said letter of authority without the knowledge of

the said officers. Granting por aguendothat Bienvenido R. Medrano did not act on behalf of the bank, however, We doubt

30

that he had no financial and/or material interest in the said sale – a fact that could not possibly have eluded Our

attention.41

From all the foregoing, there can be no other conclusion than the respondents are indeed the procuring cause of the sale. If

not for the respondents, Lee would not have known about the mango plantation being sold by the petitioners. The sale was

consummated. The bank had profited from such transaction. It would certainly be iniquitous if the respondents would not

be rewarded their commission pursuant to the letter of authority.

WHEREFORE, the petition is DENIED due course. The Decision of the Court of Appeals is AFFIRMED.

31

G.R. No. 76969 June 9, 1997

INLAND REALTY INVESTMENT SERVICE, INC. and ROMAN M. DE LOS REYES, petitioners,

vs.

HON. COURT OF APPEALS, GREGORIO ARANETA, INC. and J. ARMANDO EDUQUE, respondents.

HERMOSISIMA, JR., J.:

Herein petitioners Inland Realty Investment Service, Inc. (hereafter, "Inland Realty") and Roman M. de los Reyes seek the

reversal of the Decision 1 of the Intermediate Appellate Court (now Court of Appeals)

2 which affirmed the trial court's

dismissal 3 of petitioners' claim for unpaid agent's commission for brokering the sales transaction involving 9,800 shares

of stock in Architects' Bldg., Inc. (hereafter, "Architects"') between private respondent Gregorio Araneta, Inc. (hereafter,

"Araneta, Inc.") as seller and Stanford Microsystems, Inc. (hereafter, "Stanford") as buyer.

Petitioners come to us with a two-fold agenda: (1) to obtain from us a declaration that the trial court and the respondent

appellate court gravely erred when appreciating the facts of the case by disregarding Exhibits "L," a Letter dated October

28, 1976 signed by Gregorio Araneta II, renewing petitioners' authority to act as sales agent for a period of thirty (30) days

from same date, and Exhibit "M," a Letter dated November 16, 1976 signed by petitioner de los Reyes, naming four (4)

other prospective buyers, respectively; and (2) to obtain from us a categorical ruling that a broker is automatically entitled

to the stipulated commission merely upon securing for, and introducing to, the seller the particular buyer who ultimately

purchases from the former the object of the sale, regardless of the expiration of the broker's contract of agency and

authority to sell.

Before we proceed to address petitioners' objectives, there is a need to unfold the facts of the case. For that purpose, we

quote hereunder the findings of fact of the Court of Appeals with which petitioners agree, except as to the respondent

appellate court's non-inclusion of the aforementioned Exhibits "L" and "M":

From the evidence, the following facts appear undisputed: On September 16, 1975, defendant corporation

thru its co-defendant Assistant General Manager J. Armando Eduque, granted to plaintiffs a 30-day

authority to sell its . . . 9,800 shares of stock in Architects' Bldg., Inc. as follows:

September 16, 1975

TO WHOM IT MAY CONCERN:

This is to authorize Mr. R.M. de los Reyes, representing Inland Realty, to sell on a first

come first served basis the total holdings of Gregorio Araneta, Inc. in Architects' [Bldg.],

Inc. equivalent to 98% or 9,800 shares of stock at the price of P1,500.00 per share for a

period of 30 days.

(SGD.) J. ARMANDO

EDUQUE

Asst. General Manager'

Plaintiff Inland Realty Investment Service, Inc. (Inland Realty for short) is a corporation engaged [in],

among others . . . the real estate business [and] brokerages, duly licensed by the Bureau of Domestic

Trade . . . [Inland Realty] planned their sales campaign, sending proposal letters to prospective buyers.

One such prospective buyer to whom a proposal letter was sent to was Stanford Microsystems, Inc. . . .

[that] counter-proposed to buy 9,800 shares offered at P1,000.00 per share or for a total of P9,800,000.00,

P4,900,000.00 payable in five years at 12% per annum interest until fully paid.

32

Upon plaintiffs' receipt of the said counter-proposal, it immediately [sic] wrote defendant a letter to

register Stanford Microsystems, Inc. as one of its prospective buyers . . . Defendant Araneta, Inc., thru its

Assistant General Manager J. Armando Eduque, replied that the price offered by Stanford was too low

and suggested that plaintiffs see if the price and terms of payment can be improved upon by Stanford . . .

Other prospective buyers were submitted to defendants among whom were Atty. Maximo F. Belmonte

and Mr. Joselito Hernandez. The authority to sell given to plaintiffs by defendants was extended several

times: the first being on October 2, 1975, for 30 days from said date (Exh. "J"), the second on October 28,

1975 for 30 days from said date (Exh. "L") and on December 2, 1975 for 30 days from said date (Exh.

"K").

Plaintiff Roman de los Reyes, manager of Inland Realty's brokerage division, who by contract with Inland

Realty would be entitled to 1/2 of the claim asserted herein, testified that when his company was initially

granted the authority to sell, he asked for an exclusive authority and for a longer period but Armando

Eduque would not give, but according to this witness, the life of the authority could always be extended

for the purpose of negotiation that would be continuing.

On July 8, 1977, plaintiffs finally sold the 9,800 shares of stock

[in] Architects' [Bldg.], Inc. to Stanford Microsystems, Inc. for P13,500,000.00 . . .

On September 6, 1977, plaintiffs demanded formally [from] defendants, through a letter of demand, for

payment of their 5% broker['s] commission at P13,500,000.00 or a total amount of P675,000.00 . . . which

was declined by [defendants] on the ground that the claim has no factual or legal basis. 4

Ascribing merit to private respondents' defense that, after their authority to sell expired thirty (30) days from December 2,

1975, or on January 1, 1976, petitioners abandoned the sales transaction and were no longer privy to the consummation

and documentation thereof, the trial court dismissed petitioners' complaint for collection of unpaid broker's commission.

Petitioners appealed, but the Court of Appeals was unswayed in the face of evidence of the expiration of petitioners'

agency contract and authority to sell on January 1, 1976 and the consummation of the sale to Stanford on July 8, 1977 or

more than one (1) year and five (5) months after petitioners' agency contract and authority to sell expired. Respondent

appellate court dismissed petitioners' appeal in this wise:

. . . The resolution would seem to hinge on the question of whether plaintiff was instrumental in the final

consummation of the sale to Stanford which was the same name of the company submitted to defendants

as a prospective buyer although their price was considered by defendant to be too low and defendants

wrote to plaintiff if the price may be improved upon by Stanford . . . This was on October 13, 1975. After

that, there was an extension for 30 days from October 28, 1975 of the authority (Exh. "L") and another on

December 2, 1975 for another 30 days from the said date . . . . There is nothing in the record or in the

testimonial evidence that the authority extended 30 days from the last date of extension was ever reserved

nor extended, nor has there been any communication made to defendants that the plaintiff was actually

negotiating with Stanford a better price than what was previously offered by it . . . .

In fact there was no longer any agency after the last extension. Certainly, the length of time which had

transpired from the date of last extension of authority to the final consummation of the sale with Stanford

of about one (1) year and five (5) months without any communication at all from plaintiffs to defendants

with respect to the suggestion or defendants that Stanford's offer was too low and suggested if plaintiffs

may make it better. We have a case of proposal and counter-proposal which would not constitute a

definite closing of the transaction just because it was plaintiff who solely suggested to defendants the

name of Stanford as buyer . . . . 5

Unable to accept the dismissal of its claim for unpaid broker's commission, petitioners filed the instant petition for review

asking us (1) to pass upon the factual issue of the alleged extension of their agency contract and authority to sell and (2) to

33

rule in favor of a broker's automatic entitlement to the stipulated commission merely upon securing for, and introducing

to, the seller, the particular buyer who ultimately purchases from the former the object of the sale, regardless of the

expiration of the broker's contract of agency and authority to sell.

We find for private respondents.

I

Petitioners take exception to the finding of the respondent Court of Appeals that their contract of agency and authority to

sell expired thirty (30) days from its last renewal on December 2, 1975. They insist that, in the Letter dated October 28,

1976, Gregorio Araneta III, in behalf of Araneta, Inc., renewed petitioner Inland Realty's authority to act as agent to sell

the former's 9,800 shares in Architects' for another thirty (30) days from same date. This Letter dated October 28, 1976,

petitioners claim, was marked as Exhibit "L" during the trial proceedings before the trial court.

This claim is a blatant lie. In the first place, petitioners have conspicuously failed to attach a certified copy of this Letter

dated October 28, 1976. They have, in fact, not attached even a machine copy thereof. All they gave this court is their

word that said Letter dated October 28, 1976 does exist, and on that basis, they expect us to accordingly rule in their

favor.

Such naivety, this court will not tolerate. We will not treat lightly petitioners' attempt to mislead this court by claiming

that the Letter dated October 28, 1976 was marked as Exhibit "L" by the trial court, when the truth is that the trial court

marked as Exhibit "L", and the respondent Court of Appeals considered as Exhibit "L," private respondent Araneta, Inc.'s

Letter dated October 28, 1975, not 1976. Needless to say, this blatant attempt to mislead this court, is contemptuous

conduct that we sternly condemn.

II

The Letter dated November 16, 1976, claimed by petitioners to have been marked as Exhibit "M", has no probative value,

considering that its very existence remains under a heavy cloud of doubt and that hypothetically assuming its existence, its

alleged content, namely, a listing of four (4) other prospective buyers, does not at all prove that the agency contract and

authority to sell in favor of petitioners was renewed or revived after it expired on January 1, 1976. As in the case of the

Letter dated October 28, 1976, petitioners have miserably failed to attach any copy of the Letter dated November 16,

1976. A copy thereof would not help petitioners' failing cause, anyway, especially considering that said letter was signed

by petitioner De los Reyes and would therefore take on the nature of a self-serving document that has no evidentiary value

insofar as petitioners are concerned.

III

Finally, petitioners asseverate that, regardless of whether or not their agency contract and authority to sell had expired,

they are automatically entitled to their broker's commission merely upon securing for and introducing to private

respondent Araneta, Inc. the buyer in the person of Stanford which ultimately acquired ownership over Araneta, Inc.'s

9,800 shares in Architects'.

Petitioners' asseverations are devoid of merit.

It is understandable, though, why petitioners have resorted to a campaign for an automatic and blanket entitlement to

brokerage commission upon doing nothing but submitting to private respondent Araneta, Inc., the name of Stanford as

prospective buyer of the latter's shares in Architects'. Of course petitioners would advocate as such because precisely

petitioners did nothing but submit Stanford's name as prospective buyer. Petitioners did not succeed in outrightly selling

said shares under the predetermined terms and conditions set out by Araneta, Inc., e.g., that the price per share is

P1,500.00. They admit that they could not dissuade Stanford from haggling for the price of P1,000.00 per share with the

34

balance of 50% of the total purchase price payable in five (5) years at 12% interest per annum. From September 16, 1975

to January 1, 1976, when petitioners' authority to sell was subsisting, if at all, petitioners had nothing to show that they

actively served their principal's interests, pursued to sell the shares in accordance with their principal's terms and

conditions, and performed substantial acts that proximately and causatively led to the consummation of the sale to

Stanford of Araneta, Inc.'s 9,800 shares in Architects'.

The Court of Appeals cannot be faulted for emphasizing the lapse of more than one (1) year and five (5) months between

the expiration of petitioners' authority to sell and the consummation of the sale to Stanford, to be a significant index of

petitioners' non-participation in the really critical events leading to the consummation of said sale, i.e., the negotiations to

convince Stanford to sell at Araneta, Inc.'s asking price, the finalization of the terms and conditions of the sale, the

drafting of the deed of sale, the processing of pertinent documents, and the delivery of the shares of stock to Stanford.

Certainly, when the lapse of the period of more than one (1) year and five (5) months between the expiration of

petitioners' authority to sell and the consummation of the sale, is viewed in the context of the utter lack of evidence of

petitioners' involvement in the negotiations between Araneta, Inc. and Stanford during that period and in the subsequent

processing of the documents pertinent to said sale, it becomes undeniable that the respondent Court of Appeals did not at

all err in affirming the trial court's dismissal of petitioners' claim for unpaid brokerage commission.

Petitioners were not the efficient procuring cause 6 in bringing about the sale in question an July 8, 1977 and are,

therefore, not entitled to the stipulated broker's commission of "5% on the total price."

WHEREFORE, the instant petition is HEREBY DISMISSED.

35

G.R. No. L-18170 August 31, 1963

NATIONAL BREWERY & ALLIED INDUSTRIES LABOR UNION OF THE PHILIPPINES, plaintiff-appellant,

vs.

SAN MIGUEL BREWERY, INC., THE INDEPENDENT SAN MIGUEL BREWERY WORKERS'

ASSOCIATION and

ALL OTHER UNKNOWN NON-UNION WORKERS OF THE SAN MIGUEL BREWERY, INC., defendants-

appellees.

REGALA, J.:

This is an appeal directly coming from the Court of First Instance of Manila dismissing the complaint upon the petition of

the defendant San Miguel Brewery Workers' Association.

This case presents a question of first impression in this jurisdiction, namely, the validity of a union agency fee as a form

of union security.

Appellant National Brewery & Allied Industries Labor Union of the Philippines is the bargaining representative of all

regular workers paid on the daily basis and of route helpers of San Miguel Brewery, Inc.

On October 2, 1959, it signed a collective bargaining agreement with the company, which provided, among other things,

that —

The COMPANY will deduct the UNION agency fee from the wages of workers who are not members of the

UNION, provided the aforesaid workers authorized the COMPANY to make such deductions in writing or if no

such authorization is given, if a competent court direct the COMPANY to make such deduction. (Art. II, Sec. 4)

Alleging that it had obtained benefits for all workers in the company and that "defendant Independent S.M.B. Workers'

Association refused and still refuses to pay UNION AGENCY FEE to the plaintiff UNION and defendant COMPANY

also refuses and still refuses to deduct the UNION AGENCY FEE from the wages of workers who are not members of the

plaintiff UNION and remit the same to the latter," the union brought suit in the Court of First Instance of Manila on

November 17, 1960 for the collection of union agency fees under the bargaining contract.

The lower court, in dismissing the complaint, held that there was nothing in the Industrial Peace Act (Republic Act No.

875) which would authorize the collection of agency fees and that neither may such collection be justified under the rules

of quasi contract because the workers had not neglected their business so as to warrant the intervention, of an officious

manager. The trial court also held the rules of agency inapplicable because there was no agreement between the union and

the workers belonging to the other union as to the payment of fee nor was there, said the court, any allegation in the

complaint that the amount of P4.00, which the union sought to collect from each employee, was the expense incurred by

the union in representing him.

Its motion for reconsideration having been denied, the union appealed to this Court.

The right of employees "to self-organization and to form, join or assist labor organizations of their own choosing" (Sec. 3,

Republic Act No. 875) is a fundamental right that yields only to the proviso that "nothing in this Act or statute of the

Republic of the Philippines shall preclude an employer from making an agreement with a labor organization to require as

a condition of employment membership therein, if such labor organization is the representative of the employees as

provided in Section twelve." (Sec. 4[a] [4]).

The only question here is whether such an agreement is a permissible form of union security under Section 4(a)(4) as

contended by the union.

36

In the case of General Motors Corp., 130 NLRB 481, the National Labor Relations Board was faced with a similar

question. In that case, the union proposed to the company that employees represented by it and new employees hired

thereafter be required as a condition of continued employment after 30 days, following the date of the supplementary

agreement or of their initial employment (whichever was later) to pay to the union a sum equal to the initiation fee and a

monthly sum equal to the regular dues required of union members at each location. The company contended that the

clause was illegal under Section 7 and Section 8(a) (1) of the National Labor Relations Act, as amended.1

In upholding the company's contention the Board held:

. . . any union-security agreement, including one providing for an agency shop, necessarily interferes with the

Section 7 right of employees to refrain from assisting a labor organization, and encourages membership in a labor

organization. Such an agreement is therefore clearly unlawful under Section 8(a) (1) and (3), unless it is saved by

the proviso to Section 8(a) (3) of the Act. That proviso permits an employer to make an agreement with a labor

organization "to require as a condition of employment membership therein on or after the thirtieth day following

the beginning of such employment or the effective date of such agreement, whichever is later .. [Emphasis

supplied] There is, however, no other provision in the Act which specifically legalizes the interference and

encouragement inherent in an agency-shop arrangement, and the only question here is whether such an

arrangement can be lawful under the National Labor Relations Act in a State like Indiana, where it is clear that an

agreement requiring literal membership is prohibited by State law. To hold the agency shop lawful, one would

have to conclude that Congress intended the word "membership" in Sections 7 and 8(a)(3) to encompass not only

literal membership, but also other relationships between employees and the union in the picture, while at the same

time intending that the same word in Section 14(b) 2 encompass only literal membership; or further, that

Congress intended the word "membership" to mean one thing in Indiana and a different thing somewhere else.

Such reasoning I am not prepared to accept. Thus, the conclusion is inescapable that an agency-shop arrangement,

whatever its status under Indiana law, cannot be lawful under the National Labor Relations Act in a State like

Indiana where employment cannot lawfully be conditioned on literal membership.

In support of their contention that an agency-shop agreement is lawful, the General Counsel and UAW rely on

Public Service Company of Colorado, 89 NLRB 418, and American Seating Company, 98 NLRB 800. Such

reliance seems misplaced as, unlike the instant matter, both cases involved a valid agreement, requiring

membership as a condition of employment, which was protected under the first proviso to Section 8(a) (3); and

neither case involved a right-to-work jurisdiction. Significantly, in both Public Service and American Seating, no

legal impediment existed to preclude the parties from entering into the contracts requiring all employees to be

union members, and they made such contracts. Thus they were free to waive membership and to require in lieu

thereof some lesser form of union security, such as an agency-shop clause.

The instant case is different in that, as indicated above, GM and UAW were not free under the National Labor

Relations Act to require of Indiana employees union membership as a condition of employment, and so they were

not free to require, as a condition of employment of such employees, any lesser form of union security, such as an

agency shop. For one cannot waive a right he does not have.

It may be argued that the Board reached this conclusion in view of the right-to-work law of Indiana and that a different

result might have been reached where, as in the Philippines, there is no right-to-work law. But the basic principle

underlying the decision in that case equally applies here, namely, that where the parties are not free to require of

employees membership in a union as a condition of employment, neither can they require a lesser form of union security.

"For one cannot waive a right he does not have." And herein lies the error into which the union has fallen in arguing that

the agency shop agreement in this case can be justified under Section 4 (a) (4) because "the lesser must of necessity be

included in the greater."

For although a closed-shop agreement may validly be entered into under Section 4 (a) (4) of the Industrial Peace Act

(National Labor Union v. Aguinaldo's Echague, Inc., 51 O.G. p. 2899, We held that the same cannot be made to apply to

employees who, like the employees in this case, are already in the service and are members of another union. (Freeman

37

Shirt Mfg. Co. v. Court of Industrial Relations, G.R. No. L-16561, January 28, 1961.) Hence, if a closed shop agreement

cannot be applied to these employees, neither may an agency fee, as a lesser form of union security, be imposed upon

them.

It is true, as the union claims, that whatever benefits the majority union obtains from the employer accrue to its members

as well as to nonmembers. But this alone does not justify the collection of agency fee from non-members. For the benefits

of a collective bargaining agreement are extended to all employees regardless of their membership in the union because to

withhold the same from the nonmembers would be to discriminate against them. (International Oil Factory Workers

Union (FFW) v. Martinez, et al., G.R. No. L-15560, Dec. 31, 1960).

Moreover, when a union bids to be the bargaining agent, it voluntarily assumes the responsibility of representing all the

employees in the appropriate bargaining unit. That is why Section 12 of the law states that "The labor organization

designated or selected for the purpose of collective bargaining by the majority of the employees in an appropriate

collective bargaining unit shall be the exclusive representative of all employees in such unit for the purpose of collective

bargaining in respect to rates of pay, wages, hours of employment, or other conditions of employment."

The union's contention, that nonmembers are "free riders" who should be made to pay for benefits received by them is

answered in the concurring opinion of Mr. Jenkin in the General Motors case, supra at 498, thus: This statement of the

limits to permissible encouragement of union membership restricts unions, in contractually guaranteeing their own

financial security against "free riders," to agreements of the types contemplated by Congress, i.e., "permitted union shop"

or "maintenance of membership contract," both being agreements explicitly "requiring membership."

And now We come to the next point raised by the union, namely, that nonmembers should be made to pay on the principle

of quasi contract. The union invokes Article 2142 of the Civil Code which provides that —

Certain lawful, voluntary and unilateral acts give rise to the juridical relation of quasi-contract to the end thatno

one shall be unjustly enriched or benefited at the expense of another. (Emphasis supplied)

But the benefits that accrue to nonmembers by reason of a collective bargaining agreement can hardly be termed "unjust

enrichment" because, as already pointed out, the same are extended to them precisely to avoid discrimination among

employees. (International Oil Factory Workers' Union (FFW) v. Martinez, et al., G.R. No. L-15560, Dec. 31, 1960).

Besides, as the trial court held, there is no allegation in the complaint that the amount of P4.00 represents the expense

incurred by the union in representing each employee. For the benefits extended to nonmembers are merely incidental.

Lastly, it is contended that the collection of agency fee may be justified on the principle of agency. In answer to this point,

it may be stated that when a union acts as the bargaining agent, it assumes the responsibility imposed upon it by law to

represent not only its members but all employees in the appropriate bargaining unit of which it is the agent. The Civil

Code states that agency is presumed to be for compensation unless there is proof to the contrary. (Art. 1875.) There can be

no better proof that the agency created by law between the bargaining representative and the employees in the unit is

without compensation than the fact that these employees in the minority voted against the appellant union.

WHEREFORE, the orders dated December 6, 1960 and December 20, 1960 of the Court of First Instance of Manila are

hereby affirmed, without pronouncement as to costs.

38

G.R. No. L-4845 December 24, 1952

L. G. MARQUEZ and Z. GUTIERREZ LORA, plaintiffs.

L. G. Marquez, plaintiff-appellant,

vs.

FRANCISCO VARELA and CARMEN VARELA, defendants-appellees.

LABRADOR, J.:

This is an appeal against an order of the Court of First Instance of manila dismissing the complaint as to plaintiff L.G.

Marquez. The pertinent allegations of the complaint are as follows : that plaintiff Gutierrez Lora was authorized by

defendants to negotiate the sale of their share or interest in a parcel of land on Plaza Goiti, Manila, and having meet his

co-plaintiff L. G. Marquez, a real estate broker, both of them agreed to work together for the sale of defendant's property;

that they found a ready, willing, and able buyer, which accepted defendants' price and terms, but that thereafter

defendants, without any justifiable reason, refused to carry out the sale and execute the necessary deed therefor; and that

as a consequence plaintiffs failed to receive the commission which they were entitled to receive. The defendants presented

a motion to dismiss the complaint as to L. G . Marquez on the ground that he has no cause of action against defendants ,

and this motion having been granted, plaintiff L. G. Marquez has prosecuted this appeal.

The complaint was dismissed on the alleged ground that it states no cause of action against the defendants. Is this

objection to the complaint justified? The term "cause of action" has been held to be synonymous with "right of action" (37

Words and Phrases, 642), but in the law of pleading (Code Pleading) one is distinguished from the other in that a right of

action is a remedial right belonging to some person, while a cause of action is a formal statement of the operative facts

that give rise to such remedial right. The one is a matter of right and depends on the substantive law, while the other is a

matter of statement and is governed by the law of procedure. (Phillips, Code Pleading, section 189, page 170.)

It is not denied that Lora, if he rendered the service alleged in the complaint, would have a right to be paid compensation

for the service he rendered jointly with Marquez. He acted as a broker, and a broker is entitled to a commission for his

services. (Article 277, Code of Commerce: Henry vs. Velasco, 34 Phil. 587; Perez de Tagle vs. Luzon Surety Co, 38 Off.

Gaz. 1213). There is no prohibition in law against the employment of a companion to look for a buyer; neither is it against

public policy. Neither was there even any implied understanding between Lora and the defendants that no part of the

compensation to which Lora would be entitled to receive could be paid to any companion or helper of Lora. Marquez's

right to compensation can not, therefore, be disputed under the operative facts set forth in the complaint.

The next issue is, is there a cause of action in favor of Marquez against the defendants? From the facts alleged in the

complaint, it is clear that there is a primary right in favor of Marquez (to be paid for his services even through Lora only)

and a corresponding duty devolving upon the defendants (to pay for said services). Since (as alleged) defendants refuse to

comply with their duty, Marquez now is entitled to enforce his legal right by an action in court. The complaint in the case

at bar, therefore, contains both the primary right and duty and the delict or wrong combined which constitute the cause of

action in the legal sense as used in Code Pleading (Pomeroy, Code Remedies, section 347), and the cause of action is full

and complete.

Objection to the complaint, however, is not that Marquez has no right to share in the compensation to be paid Lora, whom

defendants had directly engaged, but that Marquez can not join in this action and enforce therein his rights directly against

the defendants, evidently because defendants never dealt with Marquez, directly or indirectly, or, in other words, that both

Marquez and his services were not known to dismiss show that such in fact was the objection:

This paragraph clearly shows that the authority to sell was only given to plaintiff Z. Gutierrez Lora and not to the

other plaintiff L. G. Marquez. Attention is respectfully called to the word "plaintiff" used in said paragraph III and

expressed in singular form to the exclusion of the other plaintiff L. G. Marquez. If the plaintiff L. G. Marquez had

worked at all for the sale of the property at the instance of an invitation of his co- plaintiff Z. Gutierrez Lora, we

maintain that his action if there is any is against his co-plaintiff and not against the defendants herein.

39

As far as the defendant are concerned in this case, plaintiff L. G. Marquez is not only a stranger in this case but

also unknown to the defendants; and if he had worked at all for the sale of the defendants' share and participation

in the parcels of lands referred to in the complaint, the same was made not only at his own look-out, risk and

responsibility but also with no authority whatsoever. (Record on Appeal, pages 16, 17)

The principle underlying defendants' objection is one of substantive law, recognized under common law, where no one

could sue for a breach of a contract who was not a party thereto, and the action allowed to be brought only in the name of

the one holding the legal title. The requirement was based upon the doctrine of privity of contract.

Sec. 234. Plaintiffs in Action ex Contractu. — When an action of contract concerns only the original parties to the

instrument, it is not difficult to determine who should be the plaintiff. Obviously the one seeking to enforce it is

the real party in interest. At common law no one could sue for the breach of contract who was not a party thereto.

Hence an action on contract, whether express or implied, was required to be brought in the name of the one who

held the legal interest. This requirement was based upon the doctrine of privity of contract. . . . (Phillips, Code

Pleading, page 226.)

Sec. 235. Privity of Contract. — When necessary. — It was a rule of the common law that before one may

complain of another for breach of contract, there must be some direct contractual relation, or privity, between

them; and this, with only a few exceptions, is a requirement of the law today. . . . (Phillips, code Pleading, page

227.)

At common law, in order that two or more persons may join in an action upon a contract, there must be

community of interest between them; that is, they must be parties to the contract and jointly interested in therein.

(47 . C. J. 54)lawphil.net

Persons subsequently admitted to the benefit of a contract, without the privity or assent of the promisor, can not

join in a suit on the contract. (47 C.J., 55)

But we did not import into this jurisdiction the common law procedure. Our original code of civil Procedure (Act 190)

was taken mainly from the code of Civil Procedure of California, and this in turn was based upon the Code of Civil

procedure of New York adopted in that stated in 1948. Our system of pleading is Code Pleading that system used in the

states of the Union that had adopted codes of procedure. The code system of pleading adopted in substance the rules of

equity practice as to parties, under which "all persons having an interest in the subject of the action, and in obtaining the

relief demanded, may be joined as plaintiffs". (Phillips, Code Pleading, section 251, page 247.) In New York and

California interest in the subject matter, or in any relief growing out of the same transaction or series of transactions is

sufficient to allow joinder. (Ibid, footnote 10a. page 247.)

Under the former Code of civil procedure "every action must be prosecuted in the name of the real party in interest," and

"all persons having an interest in the subject of the action and in obtaining the relief demanded shall be joined as

plaintiffs, " and " if any person having an interest and in obtaining the relief demanded refuses to join as plaintiff, he may

be made a defendant and the fact of his interest and refusal to join to be stated in the complaint." ( Section 114, Act 190)

The principle underlying the rule is that all persons having a material interest under the substantive law should be made

parties, as distinguished from that of the common law which allowed only a two-sided controversy, each party to be

opposed to the other. Phillips, Code Pleading, 2d ed. section 228, page 216.)

The above principles have not been changed by the reforms in the rules in 1940 and 1941. The action is still to be

prosecuted in the name of the real party in interest. Under section 6 of Rule 3, "All persons in whom . . . any right to relief

in respect to or arising out of the same transaction . . . is alleged to exist, whether jointly, severally, or in the alternative,

may, . . . join as plaintiffs . . . where any question of law or fact common to all such plaintiffs . . . may arise in the action;

Plaintiff Marquez, in the case at bar, clearly falls under the above rule. He is entitled to be paid his commission out of the

very contract of agency between Lora and the defendants; Lora and he acted jointly in rendering services to defendants

under Lora's contract, and the same questions of law and fact govern their claims. The rules do not require the existence of

40

privity of contract between Marquez and the defendants as required under the common law; all that they demand is that

Marquez has a material interest in the subject of the action, the right to share in the broker's commission to be paid Lora

under the latter's contract, which right Lora does not deny. This is sufficient to justify the joinder of Marquez as a party

plaintiff, even in the absence of privity of contract between him and the defendants.

We find, therefore, that the complaint of Marquez was improperly dismissed. The order of dismissal is hereby reversed,

with costs against defendants.

MONTEMAYOR, J., dissenting:

With all due respect to the learned majority opinion with its plausible arguments and citations of authorities, I believe that

the complaint of Marquez against the defendants-appellees was properly dismissed. There was absolutely no contractual

relation or privity of contract between Marquez and the defendants, and as far as the latter are concerned, Marquez never

rendered service, and he did not exist in their realm of contracts and obligations. I reproduce with favor the two

paragraphs contained in defendant's motion to dismiss and also reproduced in the majority opinion and which for the

purposes of reference I quote below:

This paragraph clearly shows that the authority to sell was only given to plaintiff Z. Gutierrez Lora and not to the

other plaintiff L.G. Marquez. Attention is respectfully called to the word plaintifff' used in paragraph III and

expressed in singular form to the exclusion of the other plaintiff L. G. Marquez. If the plaintiff L. G. Marquez had

worked at all for the sale of the property at the instance of an invitation of his co-plaintiff Z. Gutierrez Lora, we

maintain that his action if there is any is against his co-plaintiff and not against the defendants herein.

As far as the defendants are concerned in this case, plaintiff L. G. Marquez is not only a stranger in this case but

also unknown to the defendant; and if he had worked at all for the sale of the defendant's share and participation

in the parcels of lands referred to in the complaint, the same was made not only at his own lookout, risk and

responsibility but also with no authority whatsoever. (Record on Appeal, pages 16, 17.)

Marquez may have rendered some services in connection with the offer for sale and the supposed acceptance of said offer

by the alleged prospective buyer of the property ; but such service was clearly rendered at the instance of and for the

benefit of his co-plaintiff Z. Gutierrez Lora. His possible interest in this case would be a share in any money that may be

obtained or received by Gutierrez from the defendants as compensation for his services as broker by virtue of the contract

of employment between him and the defendants. Marquez may possibly intervene in this case for he is obviously

interested in the success of Gutierrez in obtaining a favorable judgment, but to proceed directly and file the claim against

the defendants, with whom he never contracted, who never saw him, much less employed him, he may not, in my opinion,

do legally.

To sustain a litigation or defend one's self against a suit in court involves embarrassment, expenditure of time and money

and vexation. A party has a right to be protected from being harassed, troubled and otherwise vexed by an action in court

brought by total stranger with whom the party made defendant has never dealt with, much less had any contractual

relation. In the field of torts, offenses, or violations or property rights such as forcible entry or detainer, etc. it is proper

that all the persons having an interest in obtaining damages for the tort or offense committed or for any other relief should

all be included as parties plaintiff against the tortfeasor, offender or the illegal occupant despite the absence of any

previous contract. But in the present case the relief sought is the performance of a contract. Consequently, only those who

were parties or privies to the contract can bring the action against the alleged violator of the agreement. Marquez in this

case is attempting to enforce a contract entered into not between him and the defendants but between him and his co-

plaintiff and defendants. To me, he has no right to do so. His right or cause of action lies against his co-plaintiff and not

against the defendants. Consequently, I hold that the dismissal of the complaint as to Marquez was warranted.

41

G.R. No. 3298 February 27, 1907

FELISA NEPOMUCENO AND MARCIANA CANON, plaintiffs-appellees,

vs.

GENARO HEREDIA, defendant-appellant.

CARSON, J.:

The complaint alleges that on the 24th of September, 1904, the defendant had in his possession for administration 500

pesos, the property of Felisa Nepomuceno, and 1,500 pesos, the property of Marciana Canon; that on that day he entered

into an agreement with them, in accordance with which he was to invest this money in a mortgage, or conditional

purchase of good real estate, the investment to bring in 1 per centum per month, and the principal to be payable in one

year; and that the defendant has failed to make the investment in accordance with his agreement and has refused, and

continues to refuse, to return the money.

The following facts are fully established by the evidence of record, and are substantially uncontroverted: That the

defendant is the business adviser of the plaintiff, Marciana Canon, and as such had in his hands 1,500 pesos paid to him

on her account on the 22d of September, 1904; that about the same time Felisa Nepomuceno, the other plaintiff, had an

unsecured debt due her of 500 pesos from one Marcelo Leaño; that on demand for security her debtor proposed to give her

a deed of conditional sale (venta con pacto de retro) to a certain tract of land, together with the buildings and

improvements thereon, in consideration of 2,000 pesos, she to be credited with 500 pesos on the purchase price and that to

advance the balance of 1,500 pesos; that knowing that the defendant had in his hands that amount of money, the property

of her coplaintiff, Marciana Canon, she proposed to the said Marciana Canon that they make a joint investment in the

land; that together they discussed the proposition with the defendant and later directed him to draw up the necessary

documents; that a deed of conditional sale of the land was executed on the 24th of September, 1904, the vendor reserving

the privilege of repurchasing the land at the end of one year and obligating himself to make monthly payments in

considerations of the right to retain the land in possession in sufficient amount to bring the plaintiffs' interest on their

money at the rate of 17 per centum per annum, and the vendees, the plaintiffs in this action, paying to the vendor the sum

of 1,500 pesos, cash, and discharging the above mentioned credit of 500 pesos due the plaintiff, Felisa Nepomuceno; that

the title to the land under the deed was placed in the name of the defendant, Genaro Heredia; and that a few days

thereafter the defendant, at the request of the plaintiffs, executed before a notary public a formal memorandum of the fact

that the plaintiff had furnished the money with which the land had been purchased, said memorandum setting forth the

amount furnished by each and their proportionate interest in the investment.

The plaintiffs insists that the defendant took the deed to the land in his own name without their knowledge or consent, but

we think that the weight of the evidence sustains the defendant's claim that he did so by their express direction as their

agent, and for their convenience, and that in any event his action in this regard was ratified and approved by their request

for and acceptance of the memorandum setting out the facts and by their continuance in the enjoyment of the profits of the

transaction after the purchase and without making any effort to have the title transferred in their own names.

The plaintiffs also allege that the defendant, without express authority from them, undertook to extend, and did extend, the

period within which the vendor had the privilege or repurchase, but we think that this action in this contention was also

ratified, approved, and acquiesced in by the plaintiffs and that in any event it can have no bearing on the merits of the

question submitted on appeal.

More than a year after the transactions above set out, during which time the vendor of the land continued to pay, and the

plaintiff to receive, the stipulated payments in consideration of the right to retain possession, a cloud was cast on the title

to the land by the institution of proceedings for the recovery of possession by third parties, which proceedings are still

pending on appeal from the judgment of the Court of First Instance, and the plaintiffs thereupon brought this action in

which they are seeking to recover from the defendant the whole of the amount of money invested, with interest from the

date of the investment, alleging with that purchase of the land was not made in accordance with their instructions, or on

their account.

42

The trial court gave judgment in favor of the plaintiffs for the full amount claimed on the ground that while acting as their

agent the defendant invested their money in land to which the vendor had not a good and sufficient title, contrary to the

tenor of his instructions. On appeal the plaintiffs ask that this judgment be affirmed, not on the grounds assigned by the

trial judge, but because, as they insists, their money was invested by the defendant in his own name and on his account,

and not as their agent, or on behalf. The judgment can not be sustained on either ground.

It was clearly established at the trial that the defendant was acting merely as the agent for the plaintiffs throughout the

entire transaction; that the purchase of the land was made not only with their full knowledge and consent, but at their

suggestion; and that after the purchase had been effected, the plaintiffs, with full knowledge of the facts, approved and

ratified the actions of their agent in the premises. There is nothing in the record which would indicate that the defendant

failed to exercise reasonable care and diligence in the performance of his duty as such agent, or that he undertook to

guarantee the vendors title to the land purchased by direction of the plaintiffs.

The judgment of the lower court should be, and is hereby, reversed, with the costs against the plaintiffs in the first

instance and without special condemnation of costs in this instance. After the expiration of twenty days let judgment be

entered in accordance herewith, and ten days thereafter let the record be returned to the court wherein it originated for

execution. So ordered.

43

G.R. No. L-42465 November 19, 1936

INTERNATIONAL FILMS (CHINA), LTD., plaintiff-appellant,

vs.

THE LYRIC FILM EXCHANGE, INC., defendant-appellee.

VILLA-REAL, J.:

This is an appeal taken by the plaintiff company International Films (China), Ltd. from the judgment of the Court of First

Instance of Manila dismissing the complaint filed by it against the defendant company the Lyric Film Exchange, Inc., with

costs to said plaintiff.

In support of its appeal the appellant assigns six alleged errors as committed by the court a quo in its said judgment, which

will be discussed in the course of this decision.

The record shows that Bernard Gabelman was the Philippine agent of the plaintiff company International Films (China),

Ltd. by virtue of a power of attorney executed in his favor on April 5, 1933 (Exhibit 1). On June 2, 1933, the International

Films (China), Ltd., through its said agent, leased the film entitled "Monte Carlo Madness" to the defendant company, the

Lyric Film Exchange, Inc., to be shown in Cavite for two consecutive days, that is, on June 1 and 2, 1933, for 30 per cent

of the receipts; in the Cuartel de España for one day, or on June 6, 1933, for P45; in the University Theater for two

consecutive days, or on June 8, and 9, 1933, for 30 per cent of the receipts; in Stotsenburg for two consecutive days, or on

June 18 and 19, 1933, for 30 per cent of the receipts, and in the Paz Theater for two consecutive days, or on June 21 and

22, 1933, for 30 per cent of the receipts (Exhibit C). One of the conditions of the contract was that the defendant company

would answer for the loss of the film in question whatever the cause. On June 23, 1933, following the last showing of the

film in question in the Paz Theater, Vicente Albo, then chief of the film department of the Lyric Film Exchange, Inc.,

telephoned said agent of the plaintiff company informing him that the showing of said film had already finished and

asked, at the same time, where he wished to have the film returned to him. In answer, Bernard Gabelman informed Albo

that he wished to see him personally in the latter's office. At about 11 o'clock the next morning, Gabelman went to

Vicente Albo's office and asked whether he could deposit the film in question in the vault of the Lyric Film Exchange,

Inc., as the International Films (China) Ltd. did not yet have a safety vault, as required by the regulations of the fire

department. After the case had been referred to O'Malley, Vicente Albo's chief, the former answered that the deposit could

not be made inasmuch as the film in question would not be covered by the insurance carried by the Lyric Film Exchange,

Inc. Bernard Gabelman then requested Vicente Albo to permit him to deposit said film in the vault of the Lyric Film

Exchange, Inc., under Gabelman's own responsibility. As there was a verbal contract between Gabelman and the Lyric

Film Exchange Inc., whereby the film "Monte Carlo Madness" would be shown elsewhere, O'Malley agreed and the film

was deposited in the vault of the defendant company under Bernard Gabelman's responsibility.

About July 27, 1933, Bernard Gabelman severed his connection with the plaintiff company, being succeeded by Lazarus

Joseph. Bernard Gabelman, upon turning over the agency to the new agent, informed the latter of the deposit of the film

"Monte Carlo Madness" in the vault of the defendant company as well as of the verbal contract entered into between him

and the Lyric Film Exchange, Inc., whereby the latter would act as a subagent of the plaintiff company, International

Films (China) Ltd., with authority to show this film "Monte Carlo Madness" in any theater where said defendant

company, the Lyric Film Exchange, Inc., might wish to show it after the expiration of the contract Exhibit C. As soon as

Lazarus Joseph had taken possession of the Philippine agency of the International Films (China) Ltd., he went to the

office of the Lyric Film Exchange, Inc., to ask for the return not only of the film "Monte Carlo Madness" but also of the

films "White Devils" and "Congress Dances". On August 13 and 19, 1933, the Lyric Film Exchange, Inc., returned the

films entitled "Congress Dances" and "White Devils" to Lazarus Joseph, but not the film "Monte Carlo Madness" because

it was to be shown in Cebu on August 29 and 30, 1933. Inasmuch as the plaintiff would profit by the showing of the film

"Monte Carlo Madness", Lazarus Joseph agreed to said exhibition. It happened, however, that the bodega of the Lyric

Film Exchange, Inc., was burned on August 19, 1933, together with the film "Monte Carlo Madness" which was not

insured.

44

The first question to be decided in this appeal, which is raised in the first assignment of alleged error, is whether or not the

court a quo erred in allowing the defendant company to amend its answer after both parties had already rested their

respective cases.

In Torres Viuda de Nery vs. Tomacruz (49 Phil., 913, 915), this court, through Justice Malcolm, said:

Sections 109 and 110 of the Philippine Code of Civil Procedure, relating to the subjects of Variance and

Amendments in General, should be equitably applied to the end that cases may be favorably and fairly presented

upon their merits, and that equal and exact justice may be done between the parties. Under code practice,

amendments to pleadings are favored, and should be liberally allowed in furtherance of justice. This liberality, it

has been said, is greatest in the early stages of a lawsuit, decreases as it progresses, and changes at times to a

strictness amounting to a prohibition. The granting of leave to file amended pleadings is a matter peculiarly within

the sound discretion of the trial court. The discretion will not be disturbed on appeal, except in case of an evident

abuse thereof. But the rule allowing amendments to pleadings is subject to the general but not inflexible limitation

that the cause of action or defense shall not be substantially changed, or that the theory of the case shall not be

altered. (21 R. C. L., pp. 572 et seq.; 3 Kerr's Cyc. Codes of California, sections 469, 470 and 473;

Ramirez vs. Murray [1855], 5 Cal., 222; Haydenvs. Hayden [1873], 46 Cal., 332; Hackett vs. Bank of California

[1881], 57 Cal., 335; Hancock vs. Board of Education of City of Santa Barbara [1903], 140 Cal., 554;

Dunphy vs. Dunphy [1911], 161 Cal., 87; 38 L. R. A. [N. S.], 818.)lawphi1.net

In the case of Gould vs. Stafford (101 Cal., 32, 34), the Supreme Court of California, interpreting section 473 of the Code

of Civil Procedure of said State, from which section 110 of our Code was taken, stated as follows:

The rule is that courts will be liberal in allowing an amendment to a pleading when it does not seriously impair

the rights of the opposite party — and particularly an amendment to an answer. A defendant can generally set up

as many defenses as he may have. Appellant contends that the affidavits upon which the motion to amend was

made show that it was based mainly on a mistake of law made by respondent's attorney; but, assuming that to be,

so, still the power of a court to allow an amendment is not limited by the character of the mistake which calls

forth its exercise. The general rule that a party cannot be relieved from an ordinary contract which is in its nature

final, on account of a mistake of law, does not apply to proceedings in an action at law while it is pending and

undetermined. Pleadings are not necessarily final until after judgment. Section 473 of the Code of Civil Procedure

provides that the court may allow an amendment to a pleading to correct certain enumerated mistakes or "a

mistake in any other respect," and "in other particulars." The true rule is well stated in Ward vs. Clay (62 Cal.

502). In the case at bar evidence of the lease was given at the first trial; and we cannot see that the amendment

before the second trial put plaintiff in a position any different from that which he would have occupied if the

amendment had been made before the first trial.

In the case of Ward vs. Clay (82 Cal., 502, 510), the Supreme Court of said State stated:

The principal purpose of vesting the court with this discretionary power is to enable it "to mold and direct its

proceedings so as to dispose of cases upon their substantial merits," when it can be done without injustice to either

party, whether the obstruction to such a disposition of cases be a mistake of fact or a mistake as to the law;

although it may be that the court should require a stronger showing to justify relief from the effect of a mistake in

law than in case of a mistake as to matter of fact. The exercise of the power conferred by section 473 of the code,

however, should appear to have, been "in furtherance of justice," and the relief, if any, should be granted upon just

terms.

Lastly, in the case of Simpson vs. Miller (94 Pac., 253), the said Supreme Court of California said:

In an action to recover property which had vested in plaintiff's trustee in bankruptcy prior to the suit, an

amendment to the answer, made after both parties had rested, but before the cause was submitted, pleading

plaintiff's bankruptcy in bar to the action, was properly allowed in the discretion of the court.

45

Under the above-cited doctrines, it is discretionary in the court which has cognizance of a case to allow or not the

amendment of an answer for the purpose of questioning the personality of the plaintiff to bring the action, even after the

parties had rested their cases, as it causes no injustice to any of the parties, and this court will not interfere in the exercise

of said discretion unless there is an evident abuse thereof, which does not exist in this case.

The second question to be decided is whether or not the defendant company, the Lyric Film Exchange, Inc., is responsible

to the plaintiff, International Films (China) Ltd., for the destruction by fire of the film in question, entitled "Monte Carlo

Madness".

The plaintiff company claims that the defendant's failure to return the film "Monte Carlo Madness" to the former was due

to the fact that the period for the delivery thereof, which expired on June 22, 1933, had been extended in order that it

might be shown in Cebu on August 29 and 30, 1933, in accordance with an understanding had between Lazarus Joseph,

the new agent of the plaintiff company, and the defendant. The defendant company, on the other hand, claims that when it

wanted to return the film "Monte Carlo Madness" to Bernard Gabelman, the former agent of the plaintiff company,

because of the arrival of the date for the return thereof, under the contract Exhibit C, said agent, not having a safety vault,

requested Vicente Albo, chief of the film department of the defendant company, to keep said film in the latter's vault

under Gabelman's own responsibility, verbally stipulating at the same time that the defendant company, as subagent of the

International Films (China) Ltd., might show the film in question in its theaters.

It does not appear sufficiently proven that the understanding had between Lazarus Joseph, second agent of the plaintiff

company, and Vicente Albo, chief of the film department of the defendant company, was that the defendant company

would continue showing said film under the same contract Exhibit C. The preponderance of evidence shows that the

verbal agreement had between Bernard Gabelman, the former agent of the plaintiff company, and Vicente Albo, chief of

the film department of the defendant company, was that said film "Monte Carlo Madness" would remain deposited in the

safety vault of the defendant company under the responsibility of said former agent and that the defendant company, as

his subagent, could show it in its theaters, the plaintiff company receiving 5 per cent of the receipts up to a certain amount,

and 15 per cent thereof in excess of said amount.

If, as it has been sufficiently proven in our opinion, the verbal contract had between Bernard Gabelman, the former agent

of the plaintiff company, and Vicente Albo, chief of the film department of the defendant company, was a sub-agency or a

submandate, the defendant company is not civilly liable for the destruction by fire of the film in question because as a

mere submandatary or subagent, it was not obliged to fulfill more than the contents of the mandate and to answer for the

damages caused to the principal by his failure to do so (art. 1718, Civil Code). The fact that the film was not insured

against fire does not constitute fraud or negligence on the part of the defendant company, the Lyric Film Exchange, Inc.,

because as a subagent, it received no instruction to that effect from its principal and the insurance of the film does not

form a part of the obligation imposed upon it by law.

As to the question whether or not the defendant company having collected the entire proceeds of the fire insurance policy

of its films deposited in its vault, should pay the part corresponding to the film in question which was deposited therein,

the evidence shows that the film "Monte Carlo Madness" under consideration was not included in the insurance of the

defendant company's films, as this was one of the reasons why O'Malley at first refused to receive said film for deposit

and he consented thereto only when Bernard Gabelman, the former agent of the plaintiff company, insisted upon his

request, assuming all responsibility. Furthermore, the defendant company did not collect from the insurance company an

amount greater than that for which its films were insured, notwithstanding the fact that the film in question was included

in the vault, and it would have collected the same amount even if said film had not been deposited in its safety vault.

Inasmuch as the defendant company, The Lyric Film Exchange, Inc., had not been enriched by the destruction by fire of

the plaintiff company's film, it is not liable to the latter.

For the foregoing considerations, we are of the opinion and so hold: (1) That the court a quo acted within its discretionary

power in allowing the defendant company to amend its answer by pleading the special defense of the plaintiff company's

lack of personality to bring the action, after both parties had already rested their respective cases; (2) that the defendant

company, as subagent of the plaintiff in the exhibition of the film "Monte Carlo Madness", was not obliged to insure it

46

against fire, not having received any express mandate to that effect, and it is not liable for the accidental destruction

thereof by fire.

Wherefore, and although on a different ground, the appealed judgment is affirmed, with the costs to the appellant. So

ordered.

47

G.R. No. L-11442 May 23, 1958

MANUELA T. VDA. DE SALVATIERRA, petitioner,

vs.

HON. LORENZO C. GARLITOS, in his capacity as Judge of the Court of First Instance of Leyte, Branch II, and

SEGUNDINO REFUERZO, respondents.

FELIX, J.:

This is a petition for certiorari filed by Manuela T. Vda. de Salvatierra seeking to nullify the order of the Court of First

Instance of Leyte in Civil Case No. 1912, dated March 21, 1956, relieving Segundino Refuerzo of liability for the contract

entered into between the former and the Philippine Fibers Producers Co., Inc., of which Refuerzo is the president. The

facts of the case are as follows:

Manuela T. Vda. de Salvatierra appeared to be the owner of a parcel of land located at Maghobas, Poblacion, Burauen,

Teyte. On March 7, 1954, said landholder entered into a contract of lease with the Philippine Fibers Producers Co., Inc.,

allegedly a corporation "duly organized and existing under the laws of the Philippines, domiciled at Burauen, Leyte,

Philippines, and with business address therein, represented in this instance by Mr. Segundino Q. Refuerzo, the President".

It was provided in said contract, among other things, that the lifetime of the lease would be for a period of 10 years; that

the land would be planted to kenaf, ramie or other crops suitable to the soil; that the lessor would be entitled to 30 per cent

of the net income accruing from the harvest of any, crop without being responsible for the cost of production thereof; and

that after every harvest, the lessee was bound to declare at the earliest possible time the income derived therefrom and to

deliver the corresponding share due the lessor.

Apparently, the aforementioned obligations imposed on the alleged corporation were not complied with because on April

5, 1955, Alanuela T. Vda, de Salvatierra filed with the Court of First Instance of Leyte a complaint against the Philippine

Fibers Producers Co., Inc., and Segundino Q. Refuerzo, for accounting, rescission and damages (Civil Case No. 1912).

She averred that sometime in April, 1954, defendants planted kenaf on 3 hectares of the leased property which crop was,

at the time of the commencement of the action, already harvested, processed and sold by defendants; that notwithstanding

that fact, defendants refused to render an accounting of the income derived therefrom and to deliver the lessor's share; that

the estimated gross income was P4,500, and the deductible expenses amounted to P1,000; that as defendants' refusal to

undertake such task was in violation of the terms of the covenant entered into between the plaintiff and defendant

corporation, a rescission was but proper.

As defendants apparently failed to file their answer to the complaint, of which they were allegedly notified, the Court

declared them in default and proceeded to receive plaintiff's evidence. On June 8, 1955, the lower Court rendered

judgment granting plaintiff's prayer, and required defendants to render a complete accounting of the harvest of the land

subject of the proceeding within 15 days from receipt of the decision and to deliver 30 per cent of the net income realized

from the last harvest to plaintiff, with legal interest from the date defendants received payment for said crop. It was further

provide that upon defendants' failure to abide by the said requirement, the gross income would be fixed at P4,200 or a net

income of P3,200 after deducting the expenses for production, 30 per cent of which or P960 was held to be due the

plaintiff pursuant to the aforementioned contract of lease, which was declared rescinded.

No appeal therefrom having been perfected within the reglementary period, the Court, upon motion of plaintiff, issued a

writ of execution, in virtue of which the Provincial Sheriff of Leyte caused the attachment of 3 parcels of land registered

in the name of Segundino Refuerzo. No property of the Philippine Fibers Producers Co., Inc., was found available for

attachment. On January 31, 1956, defendant Segundino Refuerzo filed a motion claiming that the decision rendered in

said Civil Case No. 1912 was null and void with respect to him, there being no allegation in the complaint pointing to his

personal liability and thus prayed that an order be issued limiting such liability to defendant corporation. Over plaintiff's

opposition, the Court a quo granted the same and ordered the Provincial Sheriff of Leyte to release all properties

belonging to the movant that might have already been attached, after finding that the evidence on record made no mention

or referred to any fact which might hold movant personally liable therein. As plaintiff's petition for relief from said order

48

was denied, Manuela T. Vda. de Salvatierra instituted the instant action asserting that the trial Judge in issuing the order

complained of, acted with grave abuse of discretion and prayed that same be declared a nullity.

From the foregoing narration of facts, it is clear that the order sought to be nullified was issued by tile respondent Judge

upon motion of defendant Refuerzo, obviously pursuant to Rule 38 of the Rules of Court. Section 3 of said Rule, however,

in providing for the period within which such a motion may be filed, prescribes that:

SEC. 3. WHEN PETITION FILED; CONTENTS AND VERIFICATION. — A petition provided for in either of

the preceding sections of this rule must be verified, filed within sixty days after the petitioner learns of the

judgment, order, or other proceeding to be set aside, and not more than six months after such judgment or order

was entered, or such proceeding was taken; and must be must be accompanied with affidavit showing the fraud,

accident, mistake, or excusable negligence relied upon, and the facts constituting the petitioner is good and

substantial cause of action or defense, as the case may be, which he may prove if his petition be granted". (Rule

38)

The aforequoted provision treats of 2 periods, i.e., 60 days after petitioner learns of the judgment, and not more than 6

months after the judgment or order was rendered, both of which must be satisfied. As the decision in the case at bar was

under date of June 8, 1955, whereas the motion filed by respondent Refuerzo was dated January 31, 1956, or after the

lapse of 7 months and 23 days, the filing of the aforementioned motion was clearly made beyond the prescriptive period

provided for by the rules. The remedy allowed by Rule 38 to a party adversely affected by a decision or order is certainly

an alert of grace or benevolence intended to afford said litigant a penultimate opportunity to protect his interest.

Considering the nature of such relief and the purpose behind it, the periods fixed by said rule are non-extendible and never

interrupted; nor could it be subjected to any condition or contingency because it is of itself devised to meet a condition or

contingency (Palomares vs. Jimenez,* G.R. No. L-4513, January 31, 1952). On this score alone, therefore, the petition for

a writ of certiorari filed herein may be granted. However, taking note of the question presented by the motion for relief

involved herein, We deem it wise to delve in and pass upon the merit of the same.

Refuerzo, in praying for his exoneration from any liability resulting from the non-fulfillment of the obligation imposed on

defendant Philippine Fibers Producers Co., Inc., interposed the defense that the complaint filed with the lower court

contained no allegation which would hold him liable personally, for while it was stated therein that he was a signatory to

the lease contract, he did so in his capacity as president of the corporation. And this allegation was found by the Court a

quo to be supported by the records. Plaintiff on the other hand tried to refute this averment by contending that her failure

to specify defendant's personal liability was due to the fact that all the time she was under the impression that the

Philippine Fibers Producers Co., Inc., represented by Refuerzo was a duly registered corporation as appearing in the

contract, but a subsequent inquiry from the Securities and Exchange Commission yielded otherwise. While as a general

rule a person who has contracted or dealt with an association in such a way as to recognize its existence as a corporate

body is estopped from denying the same in an action arising out of such transaction or dealing, (Asia Banking Corporation

vs. Standard Products Co., 46 Phil., 114; Compania Agricola de Ultramar vs. Reyes, 4 Phil., 1; Ohta Development Co.; vs.

Steamship Pompey, 49 Phil., 117), yet this doctrine may not be held to be applicable where fraud takes a part in the said

transaction. In the instant case, on plaintiff's charge that she was unaware of the fact that the Philippine Fibers Producers

Co., Inc., had no juridical personality, defendant Refuerzo gave no confirmation or denial and the circumstances

surrounding the execution of the contract lead to the inescapable conclusion that plaintiff Manuela T. Vda. de Salvatierra

was really made to believe that such corporation was duly organized in accordance with law.

There can be no question that a corporation with registered has a juridical personality separate and distinct from its

component members or stockholders and officers such that a corporation cannot be held liable for the personal

indebtedness of a stockholder even if he should be its president (Walter A. Smith Co. vs. Ford, SC-G.R. No. 42420) and

conversely, a stockholder or member cannot be held personally liable for any financial obligation be, the corporation in

excess of his unpaid subscription. But this rule is understood to refer merely to registered corporations and cannot be

made applicable to the liability of members of an unincorporated association. The reason behind this doctrine is obvious-

since an organization which before the law is non-existent has no personality and would be incompetent to act and

appropriate for itself the powers and attribute of a corporation as provided by law; it cannot create agents or confer

49

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 rights 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 comes personally liable for contracts entered into or for other acts performed

as such, agent (Fay vs. Noble, 7 Cushing [Mass.] 188. Cited in II Tolentino's Commercial Laws of the Philippines, Fifth

Ed., P. 689-690). Considering that defendant Refuerzo, as president of the unregistered corporation Philippine Fibers

Producers Co., Inc., was the moving spirit behind the consummation of the lease agreement by acting as its representative,

his liability cannot be limited or restricted that imposed upon corporate shareholders. In acting on behalf of a corporation

which he knew to be unregistered, he assumed the risk of reaping the consequential damages or resultant rights, if any,

arising out of such transaction.

Wherefore, the order of the lower Court of March 21, 1956, amending its previous decision on this matter and ordering

the Provincial Sheriff of Leyte to release any and all properties of movant therein which might have been attached in the

execution of such judgment, is hereby set aside and nullified as if it had never been issued. With costs against respondent

Segundino Refuerzo. It is so ordered.

50

G.R. No. L-19375 May 21, 1969

DY PEH, AND/OR VICTORY RUBBER MANUFACTURING,petitioner,

vs.

COLLECTOR OF INTERNAL REVENUE,respondent.

DIZON,J.:

Petition filed by Dy Peh for the review of the decision and resolution of the Court of Tax Appeals dated April 29 and

December 23, 1961, respectively, in C.T.A. Case No. 538, ordering him to pay deficiency percentage taxes in the total

amount of P51,939,27.

The following facts are not disputed: .

Petitioner, during all the time material to this case, was engaged in the business of manufacturing and selling rubber shoes

and allied products in the city of Cebu, under the registered firm name Victory Rubber Manufacturing.

Sometime in the year 1955 the Bureau of Internal Revenue unearthed anomalies committed in the office of the Treasurer

of the city of Cebu in connection with the payment of taxes by some taxpayers, amongst them petitioner herein. As a

result the respondent assessed against, and demanded from petitioner the payment of the following sums: P4,725,

including P100 as penalty, P29,980, including P50 as penalty, and P17,425 including P50 as penalty, on January 27, 1956,

November 12, 1955 and November 12, 1955, respectively. This assessment was based upon short payments in connection

with taxes due from petitioner during the periods covered by the assessment. The investigation of the anomalies disclosed

that the amounts of the taxes allegedly paid by him, as appearing in the original of every official receipt he had in his

possession, were bigger than the amounts appearing in the corresponding duplicate, triplicate and quadruplicate copies

thereof kept in the office of the City Treasurer of Cebu. Such discrepancies are hereunder tabulated as follows:

Official

Receipt

Number

Appearing in the Original Appearing in the Duplicate

Triplicate and/or

Quadruplicate Date Amount

Re 1st cause of action Date Amount Difference

699004 4-20-54 P3,227.47 4-20-54 P227.47 P3,000.00

704201 7-20-54 3,681.41 7-20-54 681.41 3,000.00

709008 10-20-54 1,892.78 10-20-54 192.78 1,700.00

A-210319 1-20-55 2,575.46 1-20-55 175.46 2,400.00

A-218105 4-20-55 3,968.68 4-20-55 168.69 3,800.00

Re 2nd cause of action

1923194 4-21-52 P4,380.37 4-21-52 P380.37 P4,000.00

1972817 7-21-52 4,140.29 7-21-52 140.29 4,000.00

51

6399188 10-20-52 2,113.07 10-20-52 113.07 2,000.00

7769180 1-17-53 1,457.42 4-7-53 6.00 1,451.42

7778387 4-18-53 4,057.56 4-18-52 57.56 4,000.00

8423087 7-20-53 2,850.63 7-20-53 50.63 2,800.00

8470851 10-20-53 2,901.87 10-20-53 101.87 2,800.00

693613 1-20-54 2,996.26 1-20-54 96.26 2,900.00

Re 3rd cause of action

A-1709018 1-17-52 P3,815.18 1-17-52 P115.18 P3,700.00

Petitioner's contention below and here is this: since the checks issued by him covered in full the amount due for each

quarter, and were accepted and deposited by the City Treasurer of Cebu; since the originals of the official receipts issued

by the latter show that the full amount of the taxes due from him had been paid, he must be deemed to have paid such

taxesin full, and any anomaly in the application of the amounts paid by him consisting in the diversion of part thereof to

pay the taxes of other taxpayers — whether attributable solely to employees in the office of said Treasurer or to other

parties — should not be held against him.

Respondent's contention, on the other hand, is that the amounts actually paid by petitioner were those appearing on the

duplicates, triplicates and quadruplicates of the official receipts mentioned heretofore; that the originals thereof were

falsified or altered to make them show payment in full of the taxes due from petitioner.

In connection with the issues thus joined petitioner tried to prove that the payments in question were made by him

personally, while, on the other hand, respondent claimed that said payments were made not by petitioner personally but by

Tan Chuan Liong, his authorized agent in the matter of payment of his taxes; that Bartolome Baguio, Chief of the Internal

Revenue Division of the City Treasurer's Office of Cebu, had allowed the wrongful practice of permitting Tan Chuan

Liong to prepare the official receipts in connection with tax payments made by him in behalf of his merchant clients; that

it was Tan Chuan Liong who applied a portion of the amounts given to him by petitioner to pay tax obligations of other

taxpayers, also his clients, and that therefore petitioner's recourse is against him.lawphi1.ñet

Whether it was petitioner, in person, who made the payment of his taxes herein involved, or it was his aforesaid agent, is

manifestly a question of fact squarely resolved by the Court of Tax Appeals as follows: "Petitioner sought to prove that he

never employed Tan Chuan Liong as a business agent in the payment of the tax in question. The preponderance of the

evidence shows otherwise. If, as alleged, petitioner paid the tax personally, why were the official receipts prepared by Tan

Chuan Liong and not by Bartolome Baguio or any authorized employee in the office of the City Treasurer of Cebu? It

appears that Tan Chuan Liong prepared the official receipts of payments of taxpayers who employed him as business

agent. It has not been shown that Tan Chuan Liong prepared any official receipt covering payment of taxpayers other than

those who employed him business agent."

After ruling against petitioner on this question, the Court of Tax Appeals said further:

Even assuming that Tan Chuan Liong was not employed by petitioner as business agent, petitioner is not entirely

blameless. The records show that the payments were made by checks. The number of the official receipts

covering the payments are indicated on the back of the checks. After the checks had been deposited and the

52

amounts credited in favor of the Government, the cancelled checks were returned to petitioner. Petitioner is,

therefore, charged with knowledge of the fact that the amount covered by each check was applied in payment not

only of his tax but also of taxes of other taxpayers, the numbers of the official receipts covering which are

indicated on the back of the check. The fact that he accepted the cancelled checks without protest is evidence of

his acquiescence to the manner in which the amount covered by each check was applied by the collecting officer.

He cannot now be heard to complain.lawphi1.ñet

We can hardly add any other consideration to strengthen the lower court's ruling.

Another question of fact vital to this case is whether or not the official receipts in petitioner's possession were falsified,

and if so by whom.

In this connection, We believe it established as a fact that petitioner had employed Tan Chuan Liong as a business agent

in the matter of payment of his taxes. The testimonies of Bartolome Baguio, Isidro Badana and Lauro Abalos on this

matter (T.s.n. pp. 200-201, 472-473, 483-484, 501-503, 508-510, 525, 535-539) were corroborated by the statement and

report of NBI handwriting expert Felipe Logan. That Tan Chuan Liong, as such petitioner's agent, actually paid to the

government less than the amounts of the taxes due from petitioner is also fully proven by their testimonies and the

duplicate, triplicate and quadruplicate copies of the official receipts which appear upon their face to be genuine or

authentic. The same thing cannot be claimed for the official receipts in question, because the lower court found that, as in

the case ofTiu Bon Sin vs. Collector etc., C.T.A. No. 286, andYap Pe Giok vs. Arañas, C.T.A. No. 533, appellant

employed the same business agent who misappropriated a portion of the amounts entrusted to him and paid less than what

was due from his principals. In plain words, the lower court expressed the view that the official receipts in petitioner's

hands did not reflect the truth.

The trial court's ruling upon these questions must be sustained pursuant to our consistent ruling to the effect that in

reviews of the nature of the present, only errors of law are reviewable by this Court (G.R. L-12174, Maria B. Castro vs.

Collector, April 26, 1962; G.R. L-9738, Blas Gutierrez, et al. vs. Court of Tax Appeals; G.R. L-8556, Benito Sanchez vs.

Commissioner of Customs, Sept. 30, 1957 and 54 O.G. No. 2, p. 361, Eugenie Perez vs. Court of Tax Appeals, G.R. L-

10507, May 30, 1958; G.R. No. L-13387, Sy Chiuco vs. Collector, March 23, 1960; G.R. No. L-11622, Collector vs.

Fisher and G.R. No. L-1168, Fisher vs. Collector, January 28, 1961).

The foregoing disposes of the first two assignments of error submitted in petitioner's brief. In the third, it is his contention

that the Court a quo erred in holding that he is estopped from questioning the misapplication of his payments.

This is only a corollary of the questions raised in the previous assignments of error. Inasmuch as We have held in

resolving the latter that, in point of fact, Tan Chuan Liong was petitioner's agent, the conclusion must necessarily be that

the agent's acts bind his principal; without prejudice, of course, to the latter seeking recourse against him in an appropriate

civil or criminal action.

The fourth and last assignment of error has been impliedly resolved adversely to petitioner in our rulings upon the first

three.

PREMISES CONSIDERED, the decision appealed from is hereby affirmed, with costs.

53

G.R. No. 142616 July 31, 2001

PHILIPPINE NATIONAL BANK, petitioner,

vs.

RITRATTO GROUP INC., RIATTO INTERNATIONAL, INC., and DADASAN GENERAL

MERCHANDISE,respondents.

KAPUNAN, J.:

In a petition for review on certiorari under Rule 45 of the Revised Rules of Court, petitioner seeks to annul and set aside

the Court of Appeals' decision in C.A. CV G.R. S.P. No. 55374 dated March 27, 2000, affirming the Order issuing a writ

of preliminary injunction of the Regional Trial Court of Makati, Branch 147 dated June 30, 1999, and its Order dated

October 4, 1999, which denied petitioner's motion to dismiss.

The antecedents of this case are as follows:

Petitioner Philippine National Bank is a domestic corporation organized and existing under Philippine law. Meanwhile,

respondents Ritratto Group, Inc., Riatto International, Inc. and Dadasan General Merchandise are domestic corporations,

likewise, organized and existing under Philippine law.

On May 29, 1996, PNB International Finance Ltd. (PNB-IFL) a subsidiary company of PNB, organized and doing

business in Hong Kong, extended a letter of credit in favor of the respondents in the amount of US$300,000.00 secured by

real estate mortgages constituted over four (4) parcels of land in Makati City. This credit facility was later increased

successively to US$1,140,000.00 in September 1996; to US$1,290,000.00 in November 1996; to US$1,425,000.00 in

February 1997; and decreased to US$1,421,316.18 in April 1998. Respondents made repayments of the loan incurred by

remitting those amounts to their loan account with PNB-IFL in Hong Kong.

However, as of April 30, 1998, their outstanding obligations stood at US$1,497,274.70. Pursuant to the terms of the real

estate mortgages, PNB-IFL, through its attorney-in-fact PNB, notified the respondents of the foreclosure of all the real

estate mortgages and that the properties subject thereof were to be sold at a public auction on May 27, 1999 at the Makati

City Hall.

On May 25, 1999, respondents filed a complaint for injunction with prayer for the issuance of a writ of preliminary

injunction and/or temporary restraining order before the Regional Trial Court of Makati. The Executive Judge of the

Regional Trial Court of Makati issued a 72-hour temporary restraining order. On May 28, 1999, the case was raffled to

Branch 147 of the Regional Trial Court of Makati. The trial judge then set a hearing on June 8, 1999. At the hearing of the

application for preliminary injunction, petitioner was given a period of seven days to file its written opposition to the

application. On June 15, 1999, petitioner filed an opposition to the application for a writ of preliminary injunction to

which the respondents filed a reply. On June 25, 1999, petitioner filed a motion to dismiss on the grounds of failure to

state a cause of action and the absence of any privity between the petitioner and respondents. On June 30, 1999, the trial

court judge issued an Order for the issuance of a writ of preliminary injunction, which writ was correspondingly issued on

July 14, 1999. On October 4, 1999, the motion to dismiss was denied by the trial court judge for lack of merit.

Petitioner, thereafter, in a petition for certiorari and prohibition assailed the issuance of the writ of preliminary injunction

before the Court of Appeals. In the impugned decision,1 the appellate court dismissed the petition. Petitioner thus seeks

recourse to this Court and raises the following errors:

1.

THE COURT OF APPEALS PALPABLY ERRED IN NOT DISMISSING THE COMPLAINT A QUO,

CONSIDERING THAT BY THE ALLEGATIONS OF THE COMPLAINT, NO CAUSE OF ACTION EXISTS

54

AGAINST PETITIONER, WHICH IS NOT A REAL PARTY IN INTEREST BEING A MERE ATTORNEY-

IN-FACT AUTHORIZED TO ENFORCE AN ANCILLARY CONTRACT.

2.

THE COURT OF APPEALS PALPABLY ERRED IN ALLOWING THE TRIAL COURT TO ISSUE IN

EXCESS OR LACK OF JURISDICTION A WRIT OF PRELIMINARY INJUNCTION OVER AND BEYOND

WHAT WAS PRAYED FOR IN THE COMPLAINT A QUO CONTRARY TO CHIEF OF STAFF, AFP VS.

GUADIZ JR., 101 SCRA 827.2

Petitioner prays, inter alia, that the Court of Appeals' Decision dated March 27, 2000 and the trial court's Orders dated

June 30, 1999 and October 4, 1999 be set aside and the dismissal of the complaint in the instant case.3

In their Comment, respondents argue that even assuming arguendo that petitioner and PNB-IFL are two separate entities,

petitioner is still the party-in-interest in the application for preliminary injunction because it is tasked to commit acts of

foreclosing respondents' properties.4 Respondents maintain that the entire credit facility is void as it contains stipulations

in violation of the principle of mutuality of contracts.5 In addition, respondents justified the act of the court a quo in

applying the doctrine of "Piercing the Veil of Corporate Identity" by stating that petitioner is merely an alter ego or a

business conduit of PNB-IFL.6

The petition is impressed with merit.

Respondents, in their complaint, anchor their prayer for injunction on alleged invalid provisions of the contract:

GROUNDS

I

THE DETERMINATION OF THE INTEREST RATES BEING LEFT TO THE SOLE DISCRETION OF THE

DEFENDANT PNB CONTRAVENES THE PRINCIPAL OF MUTUALITY OF CONTRACTS.

II

THERE BEING A STIPULATION IN THE LOAN AGREEMENT THAT THE RATE OF INTEREST

AGREED UPON MAY BE UNILATERALLY MODIFIED BY DEFENDANT, THERE WAS NO

STIPULATION THAT THE RATE OF INTEREST SHALL BE REDUCED IN THE EVENT THAT THE

APPLICABLE MAXIMUM RATE OF INTEREST IS REDUCED BY LAW OR BY THE MONETARY

BOARD.7

Based on the aforementioned grounds, respondents sought to enjoin and restrain PNB from the foreclosure and eventual

sale of the property in order to protect their rights to said property by reason of void credit facilities as bases for the real

estate mortgage over the said property.8

The contract questioned is one entered into between respondent and PNB-IFL, not PNB. In their complaint, respondents

admit that petitioner is a mere attorney-in-fact for the PNB-IFL with full power and authority to, inter alia, foreclose on

the properties mortgaged to secure their loan obligations with PNB-IFL. In other words, herein petitioner is an agent with

limited authority and specific duties under a special power of attorney incorporated in the real estate mortgage. It is not

privy to the loan contracts entered into by respondents and PNB-IFL.

The issue of the validity of the loan contracts is a matter between PNB-IFL, the petitioner's principal and the party to the

loan contracts, and the respondents. Yet, despite the recognition that petitioner is a mere agent, the respondents in their

55

complaint prayed that the petitioner PNB be ordered to re-compute the rescheduling of the interest to be paid by them in

accordance with the terms and conditions in the documents evidencing the credit facilities, and crediting the amount

previously paid to PNB by herein respondents.9

Clearly, petitioner not being a part to the contract has no power to re-compute the interest rates set forth in the contract.

Respondents, therefore, do not have any cause of action against petitioner.

The trial court, however, in its Order dated October 4, 1994, ruled that since PNB-IFL, is a wholly owned subsidiary of

defendant Philippine National Bank, the suit against the defendant PNB is a suit against PNB-IFL.10

In justifying its ruling,

the trial court, citing the case of Koppel Phil. Inc. vs. Yatco,11

reasoned that the corporate entity may be disregarded where

a corporation is the mere alter ego, or business conduit of a person or where the corporation is so organized and controlled

and its affairs are so conducted, as to make it merely an instrumentality, agency, conduit or adjunct of another

corporation.12

We disagree.

The general rule is that as a legal entity, a corporation has a personality distinct and separate from its individual

stockholders or members, and is not affected by the personal rights, obligations and transactions of the latter.13

The mere

fact that a corporation owns all of the stocks of another corporation, taken alone is not sufficient to justify their being

treated as one entity. If used to perform legitimate functions, a subsidiary's separate existence may be respected, and the

liability of the parent corporation as well as the subsidiary will be confined to those arising in their respective business.

The courts may in the exercise of judicial discretion step in to prevent the abuses of separate entity privilege and pierce

the veil of corporate entity.

We find, however, that the ruling in Koppel finds no application in the case at bar. In said case, this Court disregarded the

separate existence of the parent and the subsidiary on the ground that the latter was formed merely for the purpose of

evading the payment of higher taxes. In the case at bar, respondents fail to show any cogent reason why the separate

entities of the PNB and PNB-IFL should be disregarded.

While there exists no definite test of general application in determining when a subsidiary may be treated as a mere

instrumentality of the parent corporation, some factors have been identified that will justify the application of the

treatment of the doctrine of the piercing of the corporate veil. The case of Garrett vs. Southern Railway Co.14

is

enlightening. The case involved a suit against the Southern Railway Company. Plaintiff was employed by Lenoir Car

Works and alleged that he sustained injuries while working for Lenoir. He, however, filed a suit against Southern Railway

Company on the ground that Southern had acquired the entire capital stock of Lenoir Car Works, hence, the latter

corporation was but a mere instrumentality of the former. The Tennessee Supreme Court stated that as a general rule the

stock ownership alone by one corporation of the stock of another does not thereby render the dominant corporation liable

for the torts of the subsidiary unless the separate corporate existence of the subsidiary is a mere sham, or unless the

control of the subsidiary is such that it is but an instrumentality or adjunct of the dominant corporation. Said Court then

outlined the circumstances which may be useful in the determination of whether the subsidiary is but a mere

instrumentality of the parent-corporation:

The Circumstance rendering the subsidiary an instrumentality. It is manifestly impossible to catalogue the infinite

variations of fact that can arise but there are certain common circumstances which are important and which, if

present in the proper combination, are controlling.

These are as follows:

(a) The parent corporation owns all or most of the capital stock of the subsidiary.

(b) The parent and subsidiary corporations have common directors or officers.

56

(c) The parent corporation finances the subsidiary.

(d) The parent corporation subscribes to all the capital stock of the subsidiary or otherwise causes its

incorporation.

(e) The subsidiary has grossly inadequate capital.

(f) The parent corporation pays the salaries and other expenses or losses of the subsidiary.

(g) The subsidiary has substantially no business except with the parent corporation or no assets except those

conveyed to or by the parent corporation.

(h) In the papers of the parent corporation or in the statements of its officers, the subsidiary is described as a

department or division of the parent corporation, or its business or financial responsibility is referred to as the

parent corporation's own.

(i) The parent corporation uses the property of the subsidiary as its own.

(j) The directors or executives of the subsidiary do not act independently in the interest of the subsidiary but take

their orders from the parent corporation.

(k) The formal legal requirements of the subsidiary are not observed.

The Tennessee Supreme Court thus ruled:

In the case at bar only two of the eleven listed indicia occur, namely, the ownership of most of the capital stock of

Lenoir by Southern, and possibly subscription to the capital stock of Lenoir. . . The complaint must be dismissed.

Similarly, in this jurisdiction, we have held that the doctrine of piercing the corporate veil is an equitable doctrine

developed to address situations where the separate corporate personality of a corporation is abused or used for wrongful

purposes. The doctrine applies when the corporate fiction is used to defeat public convenience, justify wrong, protect

fraud or defend crime, or when it is made as a shield to confuse the legitimate issues, or where a corporation is the

mere alter ego or business conduit of a person, or where the corporation is so organized and controlled and its affairs are

so conducted as to make it merely an instrumentality, agency, conduit or adjunct of another corporation.15

In Concept Builders, Inc. v. NLRC,16

we have laid the test in determining the applicability of the doctrine of piercing the

veil of corporate fiction, to wit:

1. Control, not mere majority or complete control, but complete domination, not only of finances but of policy

and business practice in respect to the transaction attacked so that the corporate entity as to this transaction had at

the time no separate mind, will or existence of its own.

2. Such control must have been used by the defendant to commit fraud or wrong, to perpetuate the violation of a

statutory or other positive legal duty, or dishonest and, unjust act in contravention of plaintiffs legal rights; and,

3. The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of.

The absence of any one of these elements prevents "piercing the corporate veil." In applying the "instrumentality"

or "alter ego" doctrine, the courts are concerned with reality and not form, with how the corporation operated and

the individual defendant's relationship to the operation.17

57

Aside from the fact that PNB-IFL is a wholly owned subsidiary of petitioner PNB, there is no showing of the indicative

factors that the former corporation is a mere instrumentality of the latter are present. Neither is there a demonstration that

any of the evils sought to be prevented by the doctrine of piercing the corporate veil exists. Inescapably, therefore, the

doctrine of piercing the corporate veil based on the alter ego or instrumentality doctrine finds no application in the case at

bar.

In any case, the parent-subsidiary relationship between PNB and PNB-IFL is not the significant legal relationship

involved in this case since the petitioner was not sued because it is the parent company of PNB-IFL. Rather, the petitioner

was sued because it acted as an attorney-in-fact of PNB-IFL in initiating the foreclosure proceedings. A suit against an

agent cannot without compelling reasons be considered a suit against the principal. Under the Rules of Court, every action

must be prosecuted or defended in the name of the real party-in-interest, unless otherwise authorized by law or these

Rules.18

In mandatory terms, the Rules require that "parties-in-interest without whom no final determination can be had,

an action shall be joined either as plaintiffs or defendants."19

In the case at bar, the injunction suit is directed only against

the agent, not the principal.

Anent the issuance of the preliminary injunction, the same must be lifted as it is a mere provisional remedy but adjunct to

the main suit.20

A writ of preliminary injunction is an ancillary or preventive remedy that may only be resorted to by a

litigant to protect or preserve his rights or interests and for no other purpose during the pendency of the principal action.

The dismissal of the principal action thus results in the denial of the prayer for the issuance of the writ. Further, there is no

showing that respondents are entitled to the issuance of the writ. Section 3, Rule 58, of the 1997 Rules of Civil Procedure

provides:

SECTION 3. Grounds for issuance of preliminary injunction. — A preliminary injunction may be granted when it

is established:

(a) That the applicant is entitled to the relief demanded, and the whole or part of such relief consists in restraining

the commission or continuance of the act or acts complained of, or in requiring the performance of an act or acts,

either for a limited period or perpetually,

(b) That the commission, continuance or non-performance of the acts or acts complained of during the litigation

would probably work injustice to the applicant; or

(c) That a party, court, agency or a person is doing, threatening, or is attempting to do, or is procuring or suffering

to be done, some act or acts probably in violation of the rights of the applicant respecting the subject of the action

or proceeding, and tending to render the judgment ineffectual.

Thus, an injunctive remedy may only be resorted to when there is a pressing necessity to avoid injurious consequences

which cannot be remedied under any standard compensation.21

Respondents do not deny their indebtedness. Their

properties are by their own choice encumbered by real estate mortgages. Upon the non-payment of the loans, which were

secured by the mortgages sought to be foreclosed, the mortgaged properties are properly subject to a foreclosure sale.

Moreover, respondents questioned the alleged void stipulations in the contract only when petitioner initiated the

foreclosure proceedings. Clearly, respondents have failed to prove that they have a right protected and that the acts against

which the writ is to be directed are violative of said right.22

The Court is not unmindful of the findings of both the trial

court and the appellate court that there may be serious grounds to nullify the provisions of the loan agreement. However,

as earlier discussed, respondents committed the mistake of filing the case against the wrong party, thus, they must suffer

the consequences of their error.

All told, respondents do not have a cause of action against the petitioner as the latter is not privy to the contract the

provisions of which respondents seek to declare void. Accordingly, the case before the Regional Trial Court must be

dismissed and the preliminary injunction issued in connection therewith, must be lifted.

58

G.R. No. 16492 March 9, 1922

E. MACIAS & CO., importers and exporters, plaintiff-appellant,

vs.

WARNER, BARNES & CO., in its capacity as agents of "The China Fire Insurance Co.," of "The Yang-Tsze" and

of "The State Assurance Co., Ltd.," defendant-appellant.

The plaintiff is a corporation duly registered and domiciled in Manila. The defendant is a corporation duly licensed to do

business in the Philippine Islands, and is the resident agent of insurance companies "The China Fire Insurance Company,

Limited, of Hongkong," "The Yang-Tsze Insurance Association Limited, of Shanghai," and "The State Assurance

Company, Limited, of Liverpool. The plaintiff is an importer of textures and commercial articles for wholesale.

In the ordinary course of business, it applied for, and obtained, the following policies against loss by fire:

Policy No. 4143, issued by The China Fire Insurance

Co., Ltd., for ....................................................................... P12,000

Policy No. 4382, issued by The China Fire Insurance

Co., Ltd., for .......................................................................... 15,000

Policy No. 326, issued by The Yang-Tsze Insurance

Ass'n., Ltd., for ..................................................................... 10,000

Policy No. 796111, issued by The State Assurance

Co., Ltd., for ............................................................................ 8,000

Policy No. 4143, of P12,000, recites that Mrs. Rosario Vizcarra, having paid to the China Fire Insurance Company,

Limited, P102 for insuring against or damage by fire certain merchandise the description of which follows, "the company

agrees with the insured that, if the property above described, or any party thereof, shall be destroyed or damaged by fire

between September 16, 1918, and September 16, 1919," etc., "The company will, out of its capital, stock and funds, pay

or make good all such loss or damage, not exceeding" the amount of the policy. This policy was later duly assigned to the

plaintiff.

Policy No. 4382, for P15,000, was issued by the same company to, and in the name of, plaintiff.

Policy No. 326, for P10,000, was issued to, and in the name of policy No. 326, for P10,000, was issued to, and in the

name of the plaintiff by The Yang-Tsze Insurance Association, Limited, and recites that the premium of P125 was paid by

the plaintiff to the association, and that, in the event of loss by fire between certain dates, "the funds and property of the

said association shall be subject and liable to pay, reinstate, or make good to the said assured, their heirs, executors, or

administrators, such loss or damage as shall be occasioned by fire to the property above-mentioned and hereby insured,"

not exceeding the amount of the policy.

Policy No. 796111, for P8,000, was issued by The States Assurance Company, Limited, to the plaintiff for a premium of

P100, which was paid to the Assurance Company through the defendant, its authorized agent, and recites that "the

company agrees with the insured that in the event of loss by fire between certain dates, the company will, out of its

capital, stock and funds, pay the amount of such loss or damage," not exceeding the amount of the policy, and it is attested

by the defendant, through its "Cashier and Accountant and Manager, Agents, State Assurance Co., Ltd.," authorized

agents of the Assurance Company.

59

Policy No. 4143 is attested "on behalf of The China Fire Insurance Company, Limited," by the cashier and accountant and

manager of the defendant, as agents of The China Fire Insurance Company, Limited. The same is true as to policy no.

4382.

Policy No. 326 recites the payment of a premium of P125 by the plaintiff to The Yang-Tsze Insurance Association,

Limited, and that, in the event of loss, "the funds and property of the said association shall be subject and liable to pay,

reinstate, or make good to the said assured, their heirs, executors, or administrators, such loss or damage as shall be

occasioned by fire or lightning to the property" insured, not exceeding the amount of the policy, and it is attested by the

defendant, through its cashier and accountant and manager, as agents of the association "under the authority of a Power of

Attorney from The Yang-Tsze Insurance Association, Limited," "to sign, for and on behalf of the said Association, etc."

March 25, 1919, and while the policies were in force, a loss occurred in which the insured property was more or less

damaged by fire and the use of water resulting from the fire.

The plaintiff made a claim for damages under its policies, but could not agree as to the amount of loss sustained. It sold

the insured property in its then damaged condition, and brought this action against Warner, Barnes & Co., in its capacity

as agents, to recover the difference between the amount of the policies and the amount realized from the sale of the

property, and in the first cause of action, it prayed for judgment for P23,052.99, and in the second cause of action

P9,857.15.

The numbers and amounts of the policies and the names of the insurance companies are set forth and alleged in the

complaint.

The answer admits that the defendants is the resident agent of the insurance companies, the issuance of the policies, and

that a fire occurred on March 25, 1919, in the building in which the goods covered by the insurance policies were stored,

and that to extinguish the fire three packages of goods were damage by water not to exceed P500, and denies generally all

other material allegations of the complaint.

As a further and separate defense, the defendant pleads certain provisions in the policies, among which was a written

notice of loss, and all other insurance and certain detailed information. It is then alleged —

That although frequently requested to do so, plaintiff failed and refused to deliver to defendant or to any other

person authorized to receive it, any claim in writing specifying the articles or items of property damaged or

destroyed and of the alleged amount of the loss or damage caused thereto.

That defendant was at all times ready and willing to pay, on behalf of the insurance companies by whom said

policies were issued, and to the extent for which each was proportionately liable, the actual damage to plaintiff's

goods covered by the risks insured against, upon compliance within the time limited, with the terms of the clause

of the contracts of insurance above set forth.

Defendants prays judgment for costs.

Before the trial, counsel for the defendant objected to the introduction of any evidence in the case, and moved "that

judgment be entered for the defendant on the pleadings upon the ground that it appears from the averment of the

complaint that the plaintiff has had no contractual relations with the defendant, and that the action has not been brought

against the real party in interest." The objection and motion was overruled and exception duly taken. After trial the court

found that there was due the plaintiff from the three insurance companies p18,493.29 with interest thereon at the rate of 6

per cent per annum, from the date of the commencement of the action, and costs, and rendered the following judgment:

It is, therefore, ordered that judgment be entered against Warner, Barnes & Co., Ltd., in its capacity as agent and

representative in the Philippine Islands for The China fire Insurance Company, Ltd., The Yang-Tsze Insurance

60

Association, Ltd., and The State Assurance Co., Ltd., for the payment to the plaintiff, E. Macias & Co., of the sum

of P18,493.29, the amount of this judgment to be prorated by Warner, Barnes & Co., among the three insurance

companies above-mentioned by it represented, in proportion to the interest insured by each of said three insurance

companies, according to the policies issued by them in favor of the plaintiff, and sued upon in this action.

The defendant then filed a motion to set aside the judgment and for a new trial, which was overruled and exception taken.

From this judgment the defendant appealed, claiming that "the court erred in overruling defendant's motion for judgment

on the pleadings; that the court erred in giving judgment for the plaintiff; that the court erred in denying defendants

motion for a new trial," and specifying other assignments which are not material to this opinion, Plaintiff also appealed.

JOHNS, J.:

The material facts are not in dispute it must be conceded that the policies in question were issued by the different

insurance companies, through the defendant as their respective agent; that they were issued in consideration of a premium

which was paid by the insured to the respective companies for the amount of the policies, as alleged; that the defendant

was, and is now, the resident agent in Manila of the companies, and was authorized to solicit and do business for them as

such agent; that each company is a foreign corporation. The principal office and place business of the The China Fire

Insurance Company is at Hongkong; of The Yang-Tsze Insurance Association is at Shanghai; and of The State Assurance

Company is at Liverpool. As such foreign corporations they were duly authorized and licensed to do insurance business in

the Philippine Islands, and, to that end and for that purpose, the defendant corporation, Warner, Barnes & Co., was the

agent of each company.

All of the policies are in writing, and recite that the premium was paid by the insured to the insurance company which

issued the policy, and that, in the event of a loss, the insurance company which issued it will pay to the insured the amount

of the policy.

This is not a case of an undisclosed agent or an undisclosed principal. It is a case of a disclosed agent and a disclosed

principal.

The policies on their face shows that the defendant was the agent of the respective companies, and that it was acting as

such agent in dealing with the plaintiff. That in the issuance and delivery of the policies, the defendant was doing business

in the name of, acting for, and representing, the respective insurance companies. The different policies expressly recite

that, in the event of a loss, the respective companies agree to compensate the plaintiff for the amount of the loss. the

defendant company did not insure the property of the plaintiff, or in any manner agree to pay the plaintiff the amount of

any loss. There is no contract of any kind. either oral or written, between the plaintiff and Warner, Barnes & Co. Plaintiff's

contracts are with the insurance companies, and are in writing, and the premiums were paid to the insurance companies,

and are in writing, and the premiums were paid to the insurance companies and the policies were issued by, and in the

name of, the insurance companies, and on the face of the policy itself, the plaintiff knew that the defendant was acting as

agent for, and was representing, the respective insurance companies in the issuance and deliver of the policies. The

defendant company did not contract or agree to do anything or to pay the plaintiff any money at any time or on any

condition, either as agent or principal.

There is a very important distinction between the power and duties of a resident insurance agent of a foreign company and

that of an executor, administrator, or receiver. An insurance agent as such is not responsible for, and does not have, any

control over the corpus or estate of the corporate property, as does an executor, administrator, or receiver. Subject only to

the order of the court, such officers are legal custodians and have actual possession of the corporate property. It is under

their control and within their jurisdiction.

As stated by counsel for Warner, Barnes & Co., an attorney of record for an insurance company has greater power and

authority to act for, and bind, the company than does a soliciting agent of an insurance company. Yet, no attorney would

contend that a personal action would lie against local attorneys who represent a foreign corporation to recover on a

61

contract made by the corporation. On the same principles by which plaintiff seeks to recover from the defendant, an action

could be maintained against the cashier of any bank on every foreign draft which he signed for, and on behalf of, the bank.

Every cause of action ex contractu must be founded upon a contract, oral or written, either express or implied.

Warner, Barnes & Co., as principal or agent, did not make any contract, either or written, with the plaintiff. The contracts

were made between the respective insurance companies and the insured, and were made by the insurance companies,

through Warner, Barnes & Co., as their agent.

As in the case of a bank draft, it is not the cashier of the bank who makes the contract to pay the money evidenced by the

draft, it is the bank, acting through its cashier, that makes the contract. So, in the instant case, it was the insurance

companies, acting through Warner, Barnes & Co., as their agent, that made the written contracts wit the insured.

The trial court attached much importance to the fact that in the further and separate answer, an admission was made "that

defendant was at all times ready and will not to pay, on behalf of the insurance companies by whom each was

proportionately liable, the actual damage" sustained by the plaintiff covered by the policies upon the terms and conditions

therein stated.

When analyzed, that is nothing more than a statement that the companies were ready and willing to prorate the amount

when the losses were legally ascertained. Again, there is not claim or pretense that Warner, Barnes & Co. had any

authority to act for, and represent the insurance companies in the pending action, or to appear for them or make any

admission which would bind them. As a local agent, it could not do that without express authority. That power could only

exercised by an executive officer of the company, or a person who was duly authorized to act for, and represent, the

company in legal proceedings, and there is no claim or pretense, either express or implied, that the defendant has any such

authority.

Plaintiff's cause of action, if any, is direct against the insurance companies that issued the policies and agreed to pay the

losses.

The only defendant in the instant case is "Warner, Barnes & Co., in its capacity as agents of:" the insurance companies.

Warner, Barnes & Co. did not make any contract with the plaintiff, and are not liable to the plaintiff on any contract,

either as principal or agent. For such reason, plaintiff is not entitled to recover its losses from Warner, Barnes & Co.,

either as principal or agent. There is no breach of any contract with the plaintiff by Warners, Barnes & Co., either as agent

or principal, for the simple reason that Warner, Barnes & Co., as agent or principal, never made any contract, oral or

written, with the plaintiff. This defense was promptly raised before the taking of the testimony, and again renewed on the

motion to set aside the judgment.

Plaintiff's own evidence shows that any cause of action it may have is against the insurance companies which issued the

policies.

The complaint is dismissed, and the judgment of the lower court is reversed, and one will be entered here in favor of

Warner, Barnes & Co., Ltd., against the plaintiff, for costs in both this and the lower court. So ordered.

62

G.R. No. L-2344 February 10, 1906

GONZALO TUASON, plaintiff-appellee,

vs.

DOLORES OROZCO, defendant-appellant.

MAPA, J.:

On November 19, 1888, Juan de Vargas y Amaya, the defendant's husband, executed a power of attorney to Enrique

Grupe, authorizing him, among other things, to dispose of all his property, and particularly of a certain house and lot

known as No. 24 Calle Nueva, Malate, in the city of Manila, for the price at which it was actually sold. He was also

authorized to mortgage the house for the purpose of securing the payment of any amount advanced to his wife, Dolores

Orozco de Rivero, who, inasmuch as the property had been acquired with funds belonging to the conjugal partnership,

was a necessary party to its sale or incumbrance.

On the 21st of January, 1890, Enrique Grupe and Dolores Orozco de Rivero obtained a loan from the plaintiff secured by

a mortgage on the property referred to in the power of attorney. In the caption of the instrument evidencing the debt it is

stated that Grupe and Dolores Orozco appeared as the parties of the first part and Gonzalo Tuason, the plaintiff, as the

party of the second part; that Grupe acted for himself and also in behalf of Juan Vargas by virtue of the power granted him

by the latter, and that Dolores Orozco appeared merely for the purpose of complying with the requirement contained in

the power of attorney. In the body of the instrument the following appears:

1. Enrique Grupe acknowledges to have this day received from Gonzalo Tuason as a loan, after deducting

therefrom the interest agreed upon, the sum of 3,500 pesos in cash, to his entire satisfaction, which sum he

promises to pay within one year from the date hereof.

2. Grupe also declares that of the 3,500 pesos, he has delivered to Dolores Orozco the sum of 2,200 pesos, having

retained the remaining 1,300 pesos for use in his business; that notwithstanding this distribution of the amount

borrowed, he assumes liability for the whole sum of 3,500 pesos, which he promises to repay in current gold or

silver coin, without discount, in this city on the date of the maturity of the loan, he otherwise to be liable for all

expenses incurred and damages suffered by his creditor by reason of his failure to comply with any or all of the

conditions stipulated herein, and to pay further interest at the rate of 1 per cent per month from the date of default

until the debt is fully paid.

3. Grupe pledges as special security for the payment of the debt 13 shares of stock in the "Compañia de los

Tranvias de Filipinas," which shares he has delivered to his creditor duly indorsed so that the latter in case of his

insolvency may dispose of the same without any further formalities.

4. To secure the payment of the 2,200 pesos delivered to Dolores Orozco as aforesaid he specially mortgages the

house and lot No. 24, Calle Nueva, Malate, in the city of Manila (the same house referred to in the power at

attorney executed by Vargas to Grupe).

5. Dolores Orozco states that, in accordance with the requirement contained in the power of attorney executed by

Vargas to Grupe, she appears for the purpose of confirming the mortgage created upon the property in question.

6. Gonzalo Tuason does hereby accept all rights and actions accruing to him under his contract.

This instrument was duly recorded in the Registry of Property, and it appears therefrom that Enrique Grupe, as attorney in

fact for Vargas, received from the plaintiff a loan of 2,200 pesos and delivered the same to the defendant; that to secure its

payment he mortgaged the property of his principal with defendant's consent as required in the power of attorney. He also

received 1,300 pesos. This amount he borrowed for his own use. The recovery of this sum not being involved in this

63

action, it will not be necessary to refer to it in this decision. The complaint refers only to the 2,200 pesos delivered to the

defendant under the terms of the agreement.

The defendant denies having received this sum, but her denial can not overcome the proof to the contrary contained in the

agreement. She was one of the parties to that instrument and signed it. This necessarily implies an admission on her part

that the statements in the agreement relating to her are true. She executed another act which corroborates the delivery to

her of the money in question — that is, her personal intervention in the execution of the mortgage and her statement in the

deed that the mortgage had been created with her knowledge and consent. The lien was created precisely upon the

assumption that she had received that amount and for the purpose of securing its payment.

In addition to this the defendant wrote a letter on October 23, 1903, to the attorneys for the plaintiff promising to pay the

debt on or before the 5th day of November following. The defendant admits the authenticity of this letter, which is a

further evidence of the fact that she had received the amount in question. Thirteen years had elapsed since she signed the

mortgage deed. During all this time she never denied having received the money. On the contrary, she promised to settle

within a short time. The only explanation that we can find for this is that she actually received the money as set forth in

the instrument.

The fact that the defendant received the money from her husband's agent and not from the creditor does not affect the

validity of the mortgage in view of the conditions contained in the power of attorney under which the mortgage was

created. Nowhere does it appear in this power that the money was to be delivered to her by the creditor himself and not

through the agent or any other person. The important thing was that she should have received the money. This we think is

fully established by the record.

This being an action for the recovery of the debt referred to, the court below properly admitted the instrument executed

January 21, 1890, evidencing the debt.

The appellant claims that the instrument is evidence of a debt personally incurred by Enrique Grupe for his own benefit,

and not incurred for the benefit of his principal, Vargas, as alleged in the complaint. As a matter of fact, Grupe, by the

terms of the agreement, bound himself personally to pay the debt. The appellant's contention however, can not be

sustained. The agreement, so far as that amount is concerned, was signed by Grupe as attorney in fact for Vargas.

Pursuant to instructions contained in the power of attorney the money was delivered to Varga's wife, the defendant in this

case. To secure the payment of the debt, Varga's property was mortgaged. His wife took part in the execution of the

mortgage as required in the power of attorney. A debt thus incurred by the agent is binding directly upon the principal,

provided the former acted, as in the present case, within the scope of his authority. (Art. 1727 of the Civil Code.) The fact

that the agent has also bound himself to pay the debt does not relieve from liability the principal for whose benefit the

debt was incurred. The individual liability of the agent constitutes in the present case a further security in favor of the

creditor and does not affect or preclude the liability of the principal. In the present case the latter's liability was further

guaranteed by a mortgage upon his property. The law does not provide that the agent can not bind himself personally to

the fulfillment of an obligation incurred by him in the name and on behalf of his principal. On the contrary, it provides

that such act on the part of an agent would be valid. (Art. 1725 of the Civil Code.)

The above mortgage being valid and having been duly recorded in the Register of Property, directly subjects the property

thus encumbered, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was

created. (Art. 1876 of the Civil Code and art. 105 of the Mortgage Law.) This presents another phase of the question.

Under the view we have taken of the case it is practically of no importance whether or not Enrique Grupe bound himself

personally to pay the debt in question. Be this as it may and assuming that Vargas, though principal in the agency, was not

the principal debtor, the right in rem arising from the mortgage would have justified the creditor in bringing his action

directly against the property encumbered had he chosen to foreclose the mortgage rather than to sue Grupe, the alleged

principal debtor. This would be true irrespective of the personal liability incurred by Grupe. The result would be

practically the same even though it were admitted that appellant's contention is correct.

64

The appellant also alleges that Enrique Grupe pledged to the plaintiff thirteen shares of stock in the "Compañia de los

Tranvias de Filipinas" to secure the payment of the entire debt, and contends that it must be shown what has become of

these shares, the value of which might be amply sufficient to pay the debt, before proceeding to foreclose the mortgage.

This contention can not be sustained in the face of the law above quoted to the effect that a mortgage directly subjects the

property encumbered, whoever its possessor may be, to the fulfillment of the obligation for the security of which it was

created. Moreover it was incumbent upon the appellant to show that the debt had been paid with those shares. Payment is

not presumed but must be proved. It is a defense which the defendant may interpose. It was therefore her duty to show this

fact affirmatively. She failed, however, to do so.

The appellant's final contention is that in order to render judgment against the mortgaged property it would be necessary

that the minor children of Juan de Vargas be made parties defendant in this action, they having an interest in the property.

Under article 154 of the Civil Code, which was in force at the time of the death of Vargas, the defendant had the parental

authority over her children and consequently the legal representation of their persons and property. (Arts. 155 and 159 of

the Civil Code.) It can not be said, therefore, that they were not properly represented at the trial. Furthermore this action

was brought against the defendant in her capacity as administratrix of the estate of the deceased Vargas. She did not deny

in her answer that she was such administratix.

Vargas having incurred this debt during his marriage, the same should not be paid out of property belonging to the

defendant exclusively but from that pertaining to the conjugal partnership. This fact should be borne in mind in case the

proceeds of the mortgaged property be not sufficient to ay the debt and interest thereon. The judgment of the court below

should be modified in so far as it holds the defendant personally liable for the payment of the debt.

The judgment thus modified is affirmed and the defendant is hereby ordered to pay to the plaintiff the sum of 2,200 pesos

as principal, together with interest thereon from the 21st day of January, 1891, until the debt shall have been fully

discharged. The appellant shall pay the costs of this appeal.

After the expiration of ten days let judgment be entered in accordance herewith and let the case be remanded to the court

below for execution. So ordered.

65

G.R. No. L-10919 February 28, 1958

LORETO LORCA, plaintiff-appellant,

vs.

JOSE S. DINEROS, defendant-appellee.

BENGZON, J.:

This action for damages against Deputy Sheriff Jose S. Dineros was dismissed by Hon. Pantaleon Pelayo, Judge of Iloilo,

on the ground that it is the Sheriff who is responsible, if at all — not this deputy.

Such decision resulted from a motion for judgment on the pleadings. The facts are short and simple:

Pursuant to a writ of execution issued in Civil Case No. 1062 entitled "Rosario Suero vs. Jose Morata" Jose S. Dineros as

Deputy Sheriff and in the name of the Sheriff sold at public auction to Jose Bermejo and Rosario Suero the property

attached therein, disregarding the third-party claim of Loreto Lorca (herein Plaintiff) who asserted ownership over said

property. This suit for damages is the result of said auction sale. Defendant, in his answer, denied liability, pointing out,

that he had merely acted for and on behalf of Provincial Sheriff, Cipriano Cabaluna.

The appellant insists here that Dineros was responsible in view of sec. 334 of the Revised Administrative Code and sec.

15, Rule 39, Rules of Court, which provides as follows:

SEC. 334 — Right of Bonded Officer to require Bond from Deputy or assistant. — A sheriff or other accountable

official may require any of his deputies or assistants, not bonded in the fidelity fund, to give an adequate personal

bond as security against loss by reason of any wrong doing on the part of such deputy or assistant. The taking of

such security shall in no wise impair the independent civil liability of any of the parties.

. . . and in case the sheriff or attaching officer is sued for damages as a result of the attachment. . . .

In the light of section 330 of the Administrative Code we think the above provisions apply where the deputy acts in his

own name or is guilty of active malfeasance1 or possibly where he exceeds the limits of his agency. In this case it is clear

from the certificate of sale attached to the complaint as Annex C that Dineros acted all the time in the name of the Ex-

Officio Provincial Sheriff of Iloilo; and no allegations of misfeasance are made. The Sheriff is liable to third persons on

the acts of his deputy,2 in the same manner that the principal is responsible for the acts of his agent, that is why he is

required to post a bond for "the benefit of whom it may concern," (Section 330, Revised Administrative Code) for

instance the owners of property unlawfully sold by him on execution.3

The complaint should not have been dismissed, appellant argues, since the court could have included the Sheriff as party

defendant, in line with Rule 3, section 11 of the Rules of Court. However, what should have been done was not

"inclusion" as plaintiff asked, nor "exclusion" under said section 11. It was "substitution" of the deputy by the Sheriff.

Anyway, the word "may" in said see. 11 implies direction of the court; and we are shown no reasons indicating abuse

thereof.

This is not the first time an action is dismissed for the reason that the agent — instead of his principal — was made the

party defendant. (See Macias & Co. vs. Warner Barnes, 43 Phil., 155; Banque Generate Belge vs.Walter Bull & Co., 84

Phil., 164, 47 Off. Gaz., 138.)

Judgment affirmed, with costs against appellant.

66

G.R. No. L-2246 January 31, 1951

JOVITO R. SALONGA, plaintiff-appellee,

vs.

WARNER, BARNES AND CO., LTD., defendant-appellant.

BAUTISTA ANGELO, J.:

This is an appeal from a decision of the Court of First Instance of Manila ordering the defendant, as agent of Westchester

Fire Insurance Company of New York, to pay to the plaintiff the sum of P727. 82 with legal interest thereon from the

filing of the complaint until paid, and the costs. The case was taken to this court because it involves only questions of law.

On August 28, 1946, Westchester Fire Insurance Company of New York entered into a contract with Tina J. Gamboa

whereby said company insured one case of rayon yardage which said Tina J. Gamboa shipped from San Francisco,

California, on steamer Clovis Victory, to Manila, Philippines and consigned to Jovito Salonga, plaintiff herein. According

to the contract of insurance, the insurance company undertook to pay to the sender or her consignee the damages that may

be caused to the goods shipped subject to the condition that the liability of the company will be limited to the actual loss

which the insured may suffer not to the exceed the sum of (2,000. The ship arrived in Manila on September 10, 1946. On

October 7, the shipment was examined by C. B. Nelson and Co., marine surveyors, at the request of the plaintiff, and in

their examination the surveyors found a shortage in the shipment in the amount of P1,723,12. On October 9, plaintiff filed

a claim for damages in the amount of P1,723.12 against the American President Lines, agents of the ship Clovis Victory,

demanding settlement, and when apparently no action was taken on this claim, plaintiff demanded payment thereof from

Warner, Barnes and Co., Ltd., as agent of the insurance company in the Philippines, and this agent having refused to pay

the claim, on April 17, 1947, plaintiff instituted the present action.

In the meantime, the American President Lines, in a letter dated November 25, 1946, agreed to pay to the plaintiff the

amount of P476.17 under its liability in the bill of lading, and when this offer was rejected, the claim was finally settled in

the amount of P1,021.25. As a result, the amount claimed in the complaint as the ultimate liability of the defendant under

the insurance contract was reduced to P717.82 only.

After trial, at which both parties presented their respective evidence, the court rendered judgment as stated in the early

part of this decision. The motion for reconsideration filed by the defendant having been denied, the case was appealed to

this court.

Appellant now assigns the following errors:

I

The trial court erred in finding that the loss or damage of the case of rayon yardage (Pilferage, as found by the

marine surveyors)is included in the risks insured against as enunciated in the insurance policy.

II

The trial court erred in holding that defendant, as agent of Westchester Fire Insurance Company of New York,

United States of America, is responsible upon the insurance claim subject to the suit.

III

The trial court erred in denying defendant's motion for new trial and to set aside the decision. (Appellant's

assignments of error).

67

We will begin by discussing the second error assigned by appellant for the reason that if our view on the question raised is

in favor of the claim of appellant there would be no need to proceed with the discussion of the other errors assigned, for

that would put an end to the controversy.

As regards the second assignment of error, counsel claims that the defendant cannot be made responsible to pay the

amount in litigation because (1) said defendant has no contractual relation with either the plaintiff or his consignor; (2) the

defendant is not the real party in interest against whom the suit should be brought; and (3) a judgment for or against an

agent in no way binds the real party in interest.

1. We are of the opinion that the first point is well taken. It is a well known rule that a contractual obligation or liability,

or an action ex-contractu, must be founded upon a contract, oral or written, either express or implied. This is axiomatic. If

there is no contract, there is no corresponding liability, and no cause of action may arise therefrom. This is what is

provided for in article 1257 of the Civil Code. This article provides that contracts are binding upon the parties who make

them and their heirs, excepting, with respect to the latter, where the rights and obligations are not transmissible, and when

the contract contains a stipulation in favor of a third person, he may demand its fulfillment if he gives notice of his

acceptance before it is revoked. This is also the ruling laid down by this court in the case of E. Macias and Co. vs. Warner,

Barnes and Co. (43 Phil. 155) wherein, among others, the court said:

x x x x x x x x x

. . . There is no contract of any kind, either oral or written, between the plaintiff and Warner, Barnes and

Company. Plaintiff's contracts are with the insurance companies, and are in writing, and the premiums were paid

to the insurance companies and the policies were issued by, and in the name of, the insurance companies, and on

the face of the policy itself, the plaintiff knew that the defendant was acting as agent, for, and was representing,

the respective insurance companies in the issuance and delivery of the policies. The defendant company did not

contract or agree to do anything or to pay the plaintiff any money at any time or on any condition, either as agent

or principal.

x x x x x x x x x

Every cause of action ex-contractu must be founded upon a contract, oral or written, either express or implied.

Warner, Barnes and Co., as principal or agent, did not make any contract, either oral or written, with the plaintiff.

The contracts were made between the respective insurance companies and the insured, and were made by the

insurance companies, through Warner, Barnes and Co., as their agent.

As in the case of a bank draft, it is not the cashier of the bank who makes the contract to pay the money evidenced

by the draft, it is the bank, acting through its cashier, that makes the contract. So, in the instant case, it was the

insurance companies, acting through Warner, Barnes and Co., as their agent, that made the written contracts with

the insured. (E. Macias and Co. vs. Warner, Barnes and Co., 43 Phil., 155, 161, 162.)

Bearing in mind the above rule, we find that the defendant has not taken part, directly or indirectly, in the contract in

question. The evidence shows that the defendant did not enter into any contract either with the plaintiff or his consignor

— Tina J. Gamboa. The contract of marine insurance, Exhibit C, was made and executed only by and between the

Westchester Fire Insurance Company of New York and Tina J. Gamboa. The contract was entered in New York. There is

nothing therein which may affect, in favor or adversely, the defendant, the fulfillment of which may be demanded by or

against it. That contract is purely bilateral, binding only upon Gamboa and the insurance company. When the lower court,

therefore, imposed upon the defendant an obligation which it has never assumed, either expressly or impliedly, or when it

extended to the defendant the effects of a contract which was entered into exclusively by and between the Westchester

Fire Insurance Company of New York and Tina J. Gamboa, the error it has committed is evident. This is contrary to law.

68

We do not find any material variance between this case and the case of E. Macias and Co. vs. Warner, Barnes and

Co., supra, as pointed out by counsel for appellee, in so far as the principle we are considering is concerned. Both cases

involve similar facts which call for the application of a similar ruling. In both cases the issue is whether an agent, who acts

within the scope of his authority, can assume personal liability for a contract entered into by him in behalf of his principal.

And in the Macias case we said that the agent did not assume personal liability because the only party bound was the

principal. And in this case this principle acquires added force and effect when we consider the fact that the defendant did

not sign the contract as agent of the foreign insurance company as the defendant did in the Macias case. The Macias case,

therefore, is on all fours with this case and is decisive of the question under consideration.

2. Counsel next contends that Warner, Barnes and Co., Ltd., is not the real party in interest against whom the suit should

be brought. It is claimed that this action should have been filed against its principal, the Westchester Fire Insurance

Company of New York. This point is also well taken. Section 2, Rule 3 of the Rules of Court requires that "every action

must be prosecuted in the name of the real party in interest." A corollary proposition to this rule is that an action must be

brought against the real party in interest, or against a party which may be bound by the judgment to be rendered therein

(Salmon and Pacific Commercial Co. vs. Tan Cueco, 36 Phil., 556). 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" (1 Sutherland, Court Pleading Practice

and Forms, p. 11). And in the case at bar, the defendant issued upon in its capacity as agent of Westchester Fire Insurance

Company of New York in spite of the fact that the insurance contract has not been signed by it. As we have said, the

defendant did not assume any obligation thereunder either as agent or as a principal. It cannot, therefore, be made liable

under said contract, and hence it can be said that this case was filed against one who is not the real party in interest.

We agree with counsel for the appellee that the defendant is a settlement and adjustment agent of the foreign insurance

company and that as such agent it has the authority to settle all the losses and claims that may arise under the policies that

may be issued by or in behalf of said company in accordance with the instructions it may receive from time to time from

its principal, but we disagree with counsel in his contention that as such adjustment and settlement agent, the defendant

has assumed personal liability under said policies, and, therefore, it can be sued in its own right. An adjustment and

settlement agent is no different from any other agent from the point of view of his responsibility, for he also acts in a

representative capacity. Whenever he adjusts or settles a claim, he does it in behalf of his principal, and his action is

binding not upon himself but upon his principal. And here again, the ordinary rule of agency applies. The following

authorities bear this out:

An insurance adjuster is ordinarily a special agent for the person or company for whom he acts, and his authority

is prima facie coextensive with the business intrusted to him. . . .

An adjuster does not discharge functions of a quasi-judicial nature, but represents his employer, to whom he owes

faithful service, and for his acts, in the employer's interest, the employer is responsible so long as the acts are done

while the agent is acting within the scope of his employment. (45 C. J. S., 1338-1340.)

It, therefore, clearly appears that the scope and extent of the functions of an adjustment and settlement agent do not

include personal liability. His functions are merely to settle and adjusts claims in behalf of his principal if those claims are

proven and undisputed, and if the claim is disputed or is disapproved by the principal, like in the instant case, the agent

does not assume any personal liability. The recourse of the insured is to press his claim against the principal.

3. This brings us to the consideration of the third point. It is claimed that a judgment, for or against an agent, in no way

binds the real party in interest. In our opinion this point is also well taken, for it is but a sequel to the principle we have

pointed out above. The reason is obvious. An action is brought for a practical purpose, nay to obtain actual and positive

relief. If the party sued upon is not the proper party, any decision that may be rendered against him would be futile, for it

cannot be enforced or executed. The effort that may be employed will be wasted. Such would be the result of this case if it

will be allowed to proceed against the defendant, for even if a favorable judgment is obtained against it, it cannot be

enforced because the real party is not involved. The defendant cannot be made to pay for something it is not responsible.

Thus, in the following authorities it was held:

69

. . . Section 114 of the Code of Civil Procedure requires an action to be brought in the name of the real party in

interest; and a corollary proposition requires that an action shall be brought against the persons or entities which

are to be bound by the judgment obtained therein. An action upon a cause of action pertaining to his principal

cannot be brought by an attorney-in-fact in his name (Arroyo vs. Granada and Gentero, 18 Phil., 484); nor can an

action based upon a right of action belonging to a principal be brought in the name of his representative

(Lichauco vs. Limjuco and Gonzalo, 19 Phil., 12). Actions must be brought by the real parties in interest and

against the persons who are to be bound by the judgment obtained therein. (Salmon and Pacific Commercial

Co. vs. Tan Cueco, 36 Phil., 557-558.)

x x x x x x x x x

An action to set aside an instrument of transfer of land should be brought in the name of the real party in interest.

An apoderado or attorney in fact is not a real party. He has no interest in the litigation and has absolutely no right

to bring the defendant into court or to put him to the expense of a suit, and there is no pro-vision of law permitting

action to be brought in such manner. A judgment for or against the apoderadoin no way binds or affects the real

party, and a decision in the suit would be utterly futile. It would touch no interest, adjust no question, bind no one,

and settle no litigation. Courts should not be required to spend their time solemnly considering and deciding cases

where no one could be bound and no interest affected by such deliberation and decision. (Arroyo vs. Granada and

Gentero, 18 Phil., 484.)

If the case cannot be filed against the defendant as we have pointed out, what then is the remedy of the plaintiff under the

circumstances? Is the case of the plaintiff beyond remedy? We believe that the only way by which the plaintiff can bring

the principal into this case or make it come under the courts in this jurisdiction is to follow the procedure indicated in

section 14, Rule 7, of the Rules of Court concerning litigations involving foreign corporations. This rule says that if the

defendant is a foreign corporation and it has not designated an agent in the Philippines on whom service may be made in

case of litigation, such service may be made on any agent it may have in the Philippines. And in our opinion the

Westchester Fire Insurance Company of new York comes within the import of this rule for even if it has not designated an

agent as required by law, it has however a settling agent who may serve the purpose. In other words, an action may be

brought against said insurance company in the Philippines and the process may be served on the defendant to give our

courts the necessary jurisdiction. This is the way we have pointed out in the case of General Corporation of the

Philippines and Mayon Investment Co. vs.Union Insurance Society of Canton Ltd. et al., (87 Phil., 313).

In view of the foregoing, we are of the opinion and so hold that the lower court erred in holding the defendant responsible

for the loss or damage claimed in the complaint. And having arrived at this conclusion, we do not deem it necessary to

pass upon the other errors assigned by the appellant.

Wherefore, the decision appealed from is hereby reversed. The complaint is hereby dismissed, with costs against the

appellee.

70

G.R. No. L-3407 June 29, 1951

PHILIPPINE NATIONAL BANK, plaintiff-appellee,

vs.

BERNARDO BAGAMASPAD and BIENVENIDO M. FERRER, defendants-appellants.

MONTEMAYOR, J.:

On May 25, 1948, the plaintiff Philippine National Bank, a banking corporation organized and operating under the laws of

the Philippines, with main office in the City of Manila and agencies in different provinces like the province of Cotabato,

initiated this suit in the Court of First Instance of Cotabato for the purpose of collecting from the defendants Bernardo

Bagamaspad and Bienvenido M. Ferrer who, in the years 1946 and 1947, were its Agent and Assistant Agent,

respectively, in its Cotabato Agency, the sum of P704,903.18, said to have been disbursed and released by them as special

crop loans, without authority and in a careless manner to manifestly insolvent, unqualified or fictitious borrowers, all

contrary to the rules and regulations of the plaintiff Bank. In the course of the trial, upon petition of plaintiff's counsel, the

amount of the claim was reduced to P699,803.57, due to payments made by some of the borrowers. On March 31, 1949,

the trial court rendered judgment in favor of the plaintiff, ordering both defendants to pay jointly and severally to it the

sum of P699,803.57, representing the uncollected balance of the special crop loans improperly released by said

defendants, with legal interest thereon from the date of the filing of the complaint, plus costs. The two defendants

appealed from that decision. The appeal was first taken to the Court of Appeals but in view of the amount involved it was

certified to this Tribunal by the said Court of Appeals.

The uncontroverted facts in the present case may be briefly stated as follows. Because of the Pacific War and by reason of

the destruction and loss of animals of labor, farm implements, and damage to or abandonment of farm lands, after

liberation there was acute shortage of foodstuff. President Roxas in order to foment and encourage food production,

instructed the plaintiff Philippine National Bank to extend special facilities to farmers in the form of crop loans in order to

enable them to rehabilitate their farms. In pursuance of said instructions and to cooperate with the Administration, the

plaintiff Bank passed the corresponding resolution (Exhibit B) authorizing the granting of ten-month special crop loans to

bona fide food producers, land-owners or their tenants, under certain conditions. Delfin Buencamino, one of the Vice-

President of the Bank and head of the Branches and Agencies Department of said institution, was entrusted with the

supervision of the granting of these loans. Juan Tueres, one of the Assistant Managers of said Department drafted the

corresponding rules and regulations regarding the granting of said specials crops loans. After approval by Buencamino,

these rules and regulations were embodied in a circular letter (Exhibit C), a copy of which was personally delivered to

defendant Ferrer. These rules and regulations were later amplified by another circular letter (Exhibit D). Besides

circularizing its branches and agencies with these rules and regulations, on June 14, 1946, the Bank held in Manila a

conference in of all its manager and Agents. Defendant Ferrer, Assistant Agent of the Cotabato Agency attended the

conference in representation of said Agency. He arrived late but Tueres explained to him what had been discussed during

the conference, emphasizing to him the necessity of exercising diligence and care in the granting of the crop loans to see

to it that they are granted only to bona fide planters, land-owners or tenants, as well as repeating to him the advice of

Vicente Carmona, President of the bank, that the Managers and Agents of the Bank should not allow themselves to be

fooled.

The Cotabato Agency under the management of the two defendants began granting these special crop loans in July, 1946,

and by March of the following year, 1947, said Agency had granted to over 5,000 borrowers, loans in the total amount of

a little over eight and half million pesos.

The theory on which the Bank's claim and complaint are based is that the two defendants Bagamaspad and Ferrer acting

as Agent and Assistant Agent of the Cotabato Agency, in granting new crop loans after November 13, 1946, violated the

instructions of the Bank, and that furthermore, in granting said crop loans, they acted negligently and did not exercise the

care and precaution required of them in order to prevent the release of crop loans to persons who were neither qualified

borrowers nor entitled to the assistance being rendered by the Government and the Bank, all contrary to the rules and

regulations issued by the Bank.

71

Because of the form heavy disbursements made by the Cotabato Agency in the form of crop loans and because of

exhaustion of its funds, said agency sent a telegram, Exhibit 11, dated November 11, 1946, requesting authority from the

central office to secure cash from the Zamboanga Agency. Replying to this telegram, Delfin Buencamino sent a letter,

Exhibit E, dated November 13, 1946, addressed to the Cotabato Agency stating among other things that the purposes of

these funds (to be obtained from the Zamboanga Agency was to meet the release of the second installment crop loans

being granted which according to the telegram aggregated P60,000 daily. The letter reminded the Agency's that the

Central office had not yet received the Agency's monthly reports on special crop loans granted, as required by the

regulations, and it emphasized the necessity of performing inspection of the field to verify whether the amount released as

first installment was actually used for the purpose for which it was granted, before releasing the second installment. In

relation with the said letter, Exhibit F, dated November 18, 1946, to the central office making reference to said Exhibit E,

reiterating the Agency's heavy disbursements on second installments for crop loans and stating that Ferrer had been

instructed to proceed to Zamboanga to secure the needed cash, and that Ferrer was able to secure P300,000 from the

Zamboanga Agency. Then making reference to and quoting a portion of the letter of Buencamino, Exhibit E, Bagamaspad

in his letter said:

In connection with the following portion:

"In this connection, we would like to state that the purpose of these funds is to meet the release of the second

installment of crop loans being granted by that agency, which, according to your said telegram, will run

to P600,000 daily."

of your above mentioned letter, may we know if could still entertain new applicants on Special Crop Loans? We

are constrained to request for this matter because there are now on file no less than 1,000 new applicants which

we could not entertain because of your above quoted statement. Yesterday they held a demonstration and copy of

the picture is hereto attached. In addition, there are about 5,000 settlers in Koronadal Valley who, according to

your indorsement of Oct. 31, 1946 to the Technical Assistant to the President of the Philippines, could be given

crop loans. If we could not therefore disburse from the funds taken from Zamboanga Agency against first

installment of applicants on crop loans, we shall appreciate if you could give us definite course of action towards

the clarifications of our stand to the public.

We are again sending Asst. Agent B.M. Ferrer to Zamboanga to despatch this letter without delay and wait there

for whatever instruction that you may give with reference to our desire to secure more cash from our Zamboanga

Agency, say P1,000,000 and whether we shall continue granting special crop loans or not.

With reference to the cash that we desire to secure more, we could tell you with assurance that the same shall

arrive their safely under guard on a chartered plane which will cost not more than P300 only.

From this letter of Bagamaspad of which his co-defendant and Ferrer must have been aware, because he himself prepared

it upon order of Bagamaspad(pp. 340-344, t.s.n.), particularly the portion above-quoted, it will be seen that without

waiting for authority to secure funds from the Zamboanga Agency, Ferrer obtained P300,000 from said Agency, and that

Bagamaspad again had sent Ferrer to Zamboanga to await instruction from the central office regarding their desire and

intention to secure in additional P1,000,000 for the Cotabato Agency. As matter of fact, however, once in Zamboanga,

and without waiting for instructions, Ferrer again secured P500,000 from the Zamboanga Agency. It was while Ferrer

already carrying the P500,000 was about to board the plane that was to taken him to Cotabato, that he received the answer

from the central office, Exhibit G, authorizing him to obtain only P3,0000,000 from the Zamboanga Agency, with the

statement that as soon as the said amount was exhausted, the Cotabato Agency may again request for replenishment. This

letter of the Central Office again emphasized the necessity of strict compliance with the rules and regulations regarding

the required field inspection before releasing the second installment. The said letter, Exhibit G, ended with the following:

Concerning the new special crop loan applications numbering about 1,000, we would like to be informed whether

the farms of the said applicants have already been actually planted, considering that at this periodplanting season

in low-land palay region is now over. As the purpose for which special crop loans are being granted by the Bank

72

is to provide the farmers with funds to meet the expenses of their farms and if said farms have already been

planted, we believe that the farmers may not need said credit facilities unless it has been found out by actual

investigation and verification that said loans are needed by them.

Please, therefore, let us hear from you regarding this matter. (Emphasis ours)

In answer to this letter, Exhibit G, defendants sent a telegram, Exhibit H, dated November 25, 1946 to the central office in

Manila, stating that for Cotabato, the planting season for second crops of December. In answer to Exhibit H, the central

office sent a telegram, Exhibit I, dated November 28, 1946, expressly instructing the Cotabato Agency to discontinue

granting new crop loans. The defendants claim that this telegram, Exhibit I, was received by them by mail on December 7,

1946.

In their brief the appellant contend that the trial court erred in finding and holding that extending new special crop loans

after November 26, 1946, amounting to P726,680, as they as Agent and Assistant Agent, respectively, of the of the

Cotabato Agency, did so at their own risk and in violation of the instructions received from the Manila office; also that the

court erred in holding that they (appellants) acted with extreme laxity, negligence and carelessness in granting said new

special crops loans. On the first assigned error appellants maintain that outside of the telegram, Exhibit I, which they

claim to have received only on December 7, 1946, there was no instruction by the central office stopping the granting of

new special crop loans.

It may be that there was no such express instruction couched in so many words directly ordering the defendants to stop

granting new special crop loans, but that said idea of the central office could be gathered from its letter, Exhibit E, and

that it was understood and clearly, by the defendants, is evident. If defendants did not so understand it, namely, that they

were no longer authorized to grant new special crop loans, how else may we interpret the contents of the letter of

Bagamaspad, Exhibit F, particularly that portion wherein after quoting a portion of the central office letter Exhibit E, he

asks if they (defendants) could still entertain new applications for special crop loans? At least, they then doubted their to

grant new special crop loans and until that doubt was cleared up and determined by new instructions from their superiors,

it was their bounden duty to stop granting new loans. Appellant Ferrer himself, in response to question asked by the trial

court during the hearing, said that in case of doubt as to whether or not to disburse funds of the bank, he should consult

and await instructions. Appellants asked for instructions as to whether or not they should grant new special crop loans.

This request for instructions is contained clearly in Bagamaspad's letter, Exhibit F, where in one paragraph he ask: "May

we know if we could still entertain new applications on special crop loans?" And, in another paragraph he says? "We are

again sending Asst. Agent B.M. Ferrer to Zamboanga . . . and wait there for further instructions that you may give . . . and

whether we shall continue granting special crops loans or not." The trouble is that without waiting for said requested

instructions, appellants proceeded to grant new special crop loans from November 26, 1946, to January 4, 1947.

Appellants not only granted new special crop loans after they were given to understand by the central office that they

should no longer grant said loans and before appellants received instructions as to what they should do in that regard, but

they also violated the express instructions of the Bank to the effect that funds received from the Zamboanga Agency

should be utilized only to pay second installments on special crop loans. Of course, defendants contend that the total of

P800,000 secured from the Zamboanga Agency were all used in paying second installments, but the contrary is amply

established by Exhibit T, a statement prepared by Felicisimo Lopez, Chief Examiner of the Bank showing that out of the

P500,000 secured from the Zamboanga Agency on or about November 18, 1946, the amount of P232,931.58 was paid on

account of new special crop loans or first installments. The plaintiff-appellee Bank in its brief explains in details this use

of part of the Zamboanga funds in paying first installments on new crop loans.

As to the alleged error committed by the trial court in finding and holding that the appellants were extremely lax,

negligent and careless in granting new special crop loans, we quote with approval a portion of the well considered

decision of the trial Judge, Hon. Arsenio Solidum, on this point:

From the evidence of record, one cannot help but be amazed at the extreme laxity, negligence and carelessness on

the part of the defendants in the granting of the special crop loans. It seems that all precautions to protect the

73

interest of the Philippine National Bank as the principal of the defendants were thrown overboard. From all

appearances, the door of the Cotabato Agency was left wide open by the defendants as an invitation for all

persons to come in secure from them special crop loans regardless of whether or not under the rules prescribed

therefor they were rightfully entitled thereto. . . . (p. 165, Record on Appeal)

x x x x x x x x x

What really happened was that in those days of crop loan boom, the borrowers made a holiday of the funds of the

Cotabato Agency of the Philippine National Bank with indulgence and tolerance of the defendants as the

managing officials of the Agency. And the saddest part of it all was that the money did not go to the farmers who

needed it most but to unscrupulous persons, who, taking undue advantage of the laxity and looseness of the

defendants in doling out these loans, secured special crop loan funds without the least idea of investing them in

food production campaign for which they were primarily intended. Part of the booty went to the pockets of those

who acted as intermediaries in the procurement of the loans under the very noses of the defendants fully knowing

that such practice was prohibited by the rules and regulations of the Philippine National Bank governing the

operation of the provincial agencies (Exhibits "W", "T-1", to "T-11", "U-1" to "U-2") . . . (pp. 176-177, Record on

Appeal)

The lower court as may be seen, severely critcized and condemned the acts of laxity, negligence and carelessness of the

appellants. But the severity of this criticism and condemnation would appear to be amply warranted by the evidence. Out

of the numerous acts of laxity, negligence and carelessness established by the record, a few cases may be cited. Exhibit C

and D which contain instructions and rules and regulations governing the granting of special crop loans, provide that

before a crop is granted the Agent or Sub-Agent of the Bank must be satisfied that the applicant is either landowner well

known to be possessing the particular property on which the crop is to be produced, the particular property on which the

crop ids to be produced, or if the applicant be tenant he must be recommended by the landowner concerned or in the

absence of said landowner must be properly identified that he is the bona fide tenant actually tilling the land from which

the crop to mortgage would be harvested.

The evidence shows that in violation of these instructions and regulations, the defendants released large loans aggregating

P348,768.22 to about 103 borrowers who were neither landowners or tenants but only public land sales applicants that is

to say, persons who have merely filed applications to buy public lands. It is a well known fact that when a person desires

to apply for the purchase of public lands usually containing trees, under brush, cogon or other wild vegetation, and never

previously cultivated, he merely goes over the land, takes it out and then files his application, tries to determine the

location of the land, its identity, proceeds to classify it to see if it is open to sale and if so, perhaps makes rough survey of

it to establish its exact location and fix boundaries with respect to the entire area of the public domain. The application

naturally carries no implication of occupancy, possession, much less cultivation and dominion. And yet, in spite of all this,

the applicants who were neither landowners or tenants.

The record further shows that Mr. Villamarzo, District Land Officer for Cotabato with whom these sale applications had

been filed, came to know that he had been issuing to the applicants, which were nothing but acknowledgements of the

filing of the applications, had been used by said applicants to secure special crop loans, and so he went to see the

appellants as early as the middle of August of 1946 and advised them that those certificates were issued merely to show

that applications had been filed with him but that it did not mean that said applications had already been investigated,

much less that the lands covered by them had been surveyed. Then about the end of the same month Villamarzo

accompanied by Almonte, a Division Land Inspector of the Bureau of Lands, again went to the defendants and repeated

the advice and warning. Despite all these, as already stated, appellants granted new special crop loans to 103 of these

public land sales applicants, knowing as they must have known that the borrowers were neither landowners nor tenants.

Furthermore, it should be remembered that these special crop loans according to regulations were payable in ten (10)

months, and were to be secured by chattel mortgages on the crops to be produced. A virgin land, especially if covered

with trees or underbrush, needs to be cleared and placed in condition for cultivation before crops may produced. That

work of clearing would take some time. A public land sale applicant, even assuming that he immediately began to clear

the land applied for even before favorable action on his application is taken, is hardly in a position to meet the

74

requirements of the regulations governing the granting of special crop loans, namely, to mortgage the crop he is going to

produce, and pay the loan within ten months.

Appellants in their over-enthusiasm and seemingly inordinate desire to grant as many loans as possible and in amounts

disproportionate to the needs of the borrowers, admitted and passed upon more loan applications than they could properly

handle. From July, 1946 to March, 1947 the total amount of about eight and half (81/2) million pesos was released in the

form of special crop loans to about 5,105 borrowers and this, in a relatively sparsely populated province like Cotabato. As

a consequence of this big volume of business the bookkeeper of the Agency could not keep up with the posting of the

daily transactions in his books and ledgers and he was several months behind. There were so many applications acted

upon and accepted that they could not all be carefully examined and many of them do not even bear the initials or

signatures of the appellants as required by regulations. Some of the chattel mortgages given to secure the payments of the

loans, contrary to regulations, do not show the number of cavans of palay to be produced on the land and to be mortgaged

in favor of the Bank.

Contrary to the Bank's rules and regulations regarding the granting of special crops loans, the defendants allowed

intermediaries to intervene in the granting of special crop loans. Many lawyers, business agents and other persons

intervened in the granting of the loans. We may have an idea of the of the part played by these intermediaries by referring

to a portion of the report, Exhibit V, prepared by Mr. Lagdameo, one of the Assistant Managers of the Agencies and

Branches Department of the plaintiff Bank, sent to Cotabato to investigate the crop loan anomalies in the Cotabato

Agency, which portion we quote below:

On top of this, were the heavy expenses incurred by the borrowers to secure crop loans. The rush was so

unprecendented that applicants had to stay had to stay for weeks in hotels in Cotabato to lobby for the approval of

their applications. They even went to the extent of engaging intermediaries who in the words of some borrowers

were the best ones to fix things with the agency for the approval and immediate release of the loan. These

intermediaries are government employees and business agents and particularly practicing attorneys who charged

fees up to 5 per cent of the total loans approved. Instances have been shown that the Agency itself collected the

attorney's fees and delivered them to the parties concerned. In other cases, the intermediaries themselves were the

ones who received the proceeds of the loans and distributed them to the borrowers. It has also been found that

loan papers including the preparation of promissory notes, debit tickets, etc., were prepared by said intermediaries

and submitted to the Agency already executed. . . ..

There is evidence to the effect that sometimes the fees of these intermediaries were collected by the Agency itself and

were later turned over to appellant Ferrer, perhaps to be later given by him to said intermediaries.

One of the provisions of the rules and regulations concerning the granting of loans is to the effect that loans to be released

by a Provincial Agency like that of the appellant's should be approved by loan Board to be composed of the Agent, like

defendant Bagamaspad; the Assistant Agent, like defendant Ferrer or the Inspector if there is no Assistant Agent; and the

Municipal Treasurer where the borrower resides. The evidence, however, shows that many of the special crop loans

released by the appellants have not been approved by this Board and others have not even been approved by anyone of

them.

It will be remembered that in the letter of Vice President Buencamino, Exhibit G, dated November 19, 1946, speaking of

the new special crop loan applications numbering about 1,000 mentioned by appellant Bagamaspad in his letter, Exhibit F,

the plaintiff Bank wanted to know whether on that date, November 19th, the farmers in Cotabato had already planted their

farms in which case there was no need for obtaining crop loans to meet the expenses of planting. Answering this query,

the Cotabato Agency under the appellants, sent a telegram (Exhibit H) dated November 25, 1946, to the plaintiff Bank

saying that the planting season for Cotabato for second crops ends in December. This was evidently intended to justify the

granting of special crop loans even at the end of the year. The evidence however, belies the correctness of this statement

and information. Mr. Aniceto Padilla, Assistant Provincial Agricultural Supervisor, a graduate of the College of

Agriculture of the University of the Philippines, told the court that his office, which is the Provincial Agricultural Station

in Cotabato, has determined the proper period for planting crops raised in that province and that for upland palay, the

75

planting season is during the months of March, April up to May; that for lowland palay is June and July; and that second

crops may be planted in September even as late as October. From this, one may conclude that it is not true as the

appellants informed the bank that the planting season for palay (second crop) in Cotabato ends in December. Whether this

incorrect information was given deliberately or thru negligence and carelessness, we deem it unnecessary to determine.

To give a further idea of the confusion, lack of care and method with which the Cotabato Agency was managed by the

appellants, the record shows that in January, 1947, Mr. Simeon Intal, Traveling Auditor of the Philippine National Bank,

was sent to Cotabato with instructions to make an audit of the accounts of the Cotabato Agency and to see for himself the

reported irregularities being committed in said Agency with respect to the granting of special crop loans. According to

Mr. Intal he found the Cotabato Agency like a market place full of people. He saw crop loan papers like promissory notes,

loan applications and chattel mortgages scattered all over the Agency, some on the desks of employees, on open shelves

or on top of filing cabinets, and others on the floor. He found that transactions which had taken place five months before

were not yet posted in the books of the Agency. In February, 1947, Mr. Amado Lagdameo, then one of the Assistant

Managers of the Branches and Agencies Department of the Bank, was also sent to Cotabato and there he found the same

condition found and reported by Intal. In order to make thorough investigation of the anomalies reportedly obtaining in

the Cotabato Agency, Felicisimo Lopez, a certified public accountant and Chief Examiner of the plaintiff Bank, was sent

to Cotabato in June, 1947. He checked up the findings of Intal about the deplorable condition of the books and records of

the Agency and he agreed with said findings. Lopez and Intal and assisted by Benjamin de Guzman, Branch Auditor of

the Bank at the Davao Branch, Mr. Macuja (who later succeeded Benjamin de Guzman), Mr. Juan B. Sanchez, now

Branch Auditor in Legaspi, Mr. Antonio Cruz of the Head Office, Mr. Danao from Oriental Misamis, Mr. Fernandez from

Zamboanga and Mr. Romena of the Davao Branch, went to work on the books and records of the books and records of the

Cotabato Agency and it took them almost four months to straighten out the special crop loan accounts and bring the books

up-to-date, after which, they found that as of June 10, 1947, the Cotabato Agency had released special crop loans in the

aggregate sum of P8,688,864.

To us who have always had the impression and the idea that the business of a Bank is conducted in an orderly, methodical

and businesslike manner, that its papers, especially those relating to loans with their corresponding securities, are properly

filed, well-kept and in a safe place, its books kept up-to-date, and that its funds are not given out in loans without careful

and scrupulous scrutiny of the responsibility and solvency of the borrowers and the sufficiency of the security given by

them, the conditions obtaining in the Cotabato Agency due to the apparent indifference, carelessness or negligence of the

appellants, is indeed shocking. And it is because of these shortcomings of the appellants their disregard of the elementary

rules and practice of banking and their violation of instructions of their superiors, that these anomalies resulting in

financial losses to the Bank were made possible.

The trial court based the civil liability of the appellants herein on the provisions of Arts. 1718 and 1719 of the Civil Code,

defining and enumerating the duties and obligations of an agent and his liability for failure to comply with such duties,

and Art. 259 of the Code of Commerce which provides that an agent must observe the provisions of law and regulations

with respect to business transactions entrusted to him otherwise he shall be responsible for the consequences resulting

from their breach or omissions; and also Art. 1902 of the Civil Code which provides for the liability of one for his tortious

act, that is to say, any act or omission which causes damage to another by his fault or negligence. Appellants while

agreeing with the meaning and scope of the legal provisions cited, nevertheless insist that those provisions are not

applicable to them inasmuch as they are not guilty of any violation of instructions or regulations of the plaintiff Bank; and

that neither are they guilty of negligence of carelessness as found by the trial court. A careful study and consideration of

the record, however, convinces us and we agree with the trial court that the defendants-appellants have not only violated

instructions of the plaintiff Bank, including things which said Bank wanted done or not done, all of which were fully

understood by them, but they (appellants) also violated standing regulations regarding the granting of loans; and, what is

more, thru their carelessness, laxity and negligence, they allowed loans to be granted to persons who were not entitled to

receive loans.

It is the contention of the appellants that the act of plaintiff Bank in filling suits against the borrowers to whom appellants

were said to have granted loans without authority, which suits resulted in the payment of part of said loans resulting in the

reduction of the original claim of the plaintiff Bank from P704,903.18 to P699,803.57, should be interpreted and

76

considered as a ratification of the acts of the appellants. What is more, it is more, it is contended that it would be

iniquitous for the plaintiff to go against the defendants for whatever amounts may have been loaned by the latter and at the

same time go against the individual borrowers for collection of the respective sums borrowed by them. That would be

enriching the plaintiff at the expense of the defendants." We cannot subscribe to this theory. As pointed out by Counsel

for appellee, ordinarily, a principal who collects either judicially or extrajudicially a loan made by an agent without

authority, thereby ratifies the said act of the agent. In the present case, however, in filing suits against some of the

borrowers to collect at least part of the unauthorized loans, there was no intention on the part of the plaintiff Bank to ratify

the acts of appellants. Neither did the plaintiff receive any substantial benefit by its act of filing these suits if we consider

the fact that the collections so far made, form a small or insignificant portion of the entire principal and interest. And, we

fail to see any iniquity in this act of the plaintiff in suing some of the borrowers to collect what it could at the same time

holding the appellants liable for the balance, because the plaintiff Bank is not trying to enrich itself at the expense of the

defendants but is merely trying to diminish as much as possible the loss to itself and automatically decrease the financial

liability of appellants. Considering the large amount for which appellants are found liable, it is a matter of serious doubt if

they are in a position to pay it. Moreover, whatever amount is collected by the plaintiff Bank from borrowers, serves to

diminish the financial liability of the appellants, in the same way that the original claim of P704,903.18, at the very

instance of plaintiff was reduced to P699,803.57. In other words, the act of the plaintiff Bank in the matter, far from being

iniquitous, is really beneficial to the appellants.

Appellants further contend that the present action is rather premature for the reason that there is no showing that the

borrowers to whom they allegedly gave loans without authority, are manifestly insolvent or unqualified, and that the loans

granted to them are uncollectible and have been written off the books of the Bank as "bad debts". We find this contention

untenable. It is not necessary for the plaintiff Bank to first go against the individual borrowers, exhaust all remedies

against them and then hold the defendants liable only for the balance which cannot be collected. The case of Corsicana

National Bank vs. Johnson, 64 L. ed. 141, cited by the trial court and by the plaintiff bank is in point. The issue in that

case whether or not a bank could proceed against one of its officials for losses which it had sustained in consequence of

the unauthorized loans released by said official, or whether it should first pursue its remedies against the borrowers or

await the liquidation of their estates. The Supreme Court of the United States in said case held that the cause of action of

the Bank accrued and the injury to it was complete on the very day that the amounts of the unauthorized loans were

released by the erring official. We quote a part of that decision:

Assuming the Fleming and Templeton notes were found to represent an excessive loan, knowingly participated in

or assented to by defendant as a director of the Bank, in our opinion the cause of action against him accrued on or

about June 10, 1907, when the Bank, through his act, parted with the money loaned, receiving in return only

negotiable paper that it could not lawfully accept because the transaction was prohibited by section 5200, Rev.

Stat. (Comp. Stat. section 9761, 6 Fed. Stat. Anno. 2d ed., p. 761). The damage as well as the injury was complete

at that time, and the Bank was not obliged to await the maturity of the notes, because immediately it became the

duty of the officers or directors who knowingly participated in making the excessive loan to undo the wrong done

by taking the notes off the hands of the Bank and restoring to it the money that had been loaned. Of course,

whatever of value the Bank recovered from the borrowers on account of the loan would go in diminution of the

damages; but the responsible officials would have no right to require the Bank to pursue its remedies against the

borrowers or await the liquidation of their estates. The liability imposed by the statute upon the director is a direct

liability, not contingent or collateral.

In view of all the foregoing, and finding no reversible error in the decision appealed from, the same is hereby affirmed

with costs against the appellants. So ordered.

77

G.R. Nos. L-25836-37 January 31, 1981

THE PHILIPPINE BANK OF COMMERCE, plaintiff-appellee,

vs.

JOSE M. ARUEGO, defendant-appellant.

FERNANDEZ, J.:

The defendant, Jose M. Aruego, appealed to the Court of Appeals from the order of the Court of First Instance of Manila,

Branch XIII, in Civil Case No. 42066 denying his motion to set aside the order declaring him in default, 1and from the

order of said court in the same case denying his motion to set aside the judgment rendered after he was declared in

default. 2 These two appeals of the defendant were docketed as CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R,

respectively.

Upon motion of the defendant on July 25, 1960, 3 he was allowed by the Court of Appeals to file one consolidated record

on appeal of CA-G.R. NO. 27734-R and CA-G.R. NO. 27940-R. 4

In a resolution promulgated on March 1, 1966, the Court of Appeals, First Division, certified the consolidated appeal to

the Supreme Court on the ground that only questions of law are involved. 5

On December 1, 1959, the Philippine Bank of Commerce instituted against Jose M. Aruego Civil Case No. 42066 for the

recovery of the total sum of about P35,000.00 with daily interest thereon from November 17, 1959 until fully paid and

commission equivalent to 3/8% for every thirty (30) days or fraction thereof plus attorney's fees equivalent to 10% of the

total amount due and costs. 6 The complaint filed by the Philippine Bank of Commerce contains twenty-two (22) causes of

action referring to twenty-two (22) transactions entered into by the said Bank and Aruego on different dates covering the

period from August 28, 1950 to March 14, 1951. 7 The sum sought to be recovered represents the cost of the printing of

"World Current Events," a periodical published by the defendant. To facilitate the payment of the printing the defendant

obtained a credit accommodation from the plaintiff. Thus, for every printing of the "World Current Events," the printer,

Encal Press and Photo Engraving, collected the cost of printing by drawing a draft against the plaintiff, said draft being

sent later to the defendant for acceptance. As an added security for the payment of the amounts advanced to Encal Press

and Photo-Engraving, the plaintiff bank also required defendant Aruego to execute a trust receipt in favor of said bank

wherein said defendant undertook to hold in trust for plaintiff the periodicals and to sell the same with the promise to turn

over to the plaintiff the proceeds of the sale of said publication to answer for the payment of all obligations arising from

the draft. 8

Aruego received a copy of the complaint together with the summons on December 2, 1959. 9 On December 14, 1959

defendant filed an urgent motion for extension of time to plead, and set the hearing on December 16, 1959. 10

At the

hearing, the court denied defendant's motion for extension. Whereupon, the defendant filed a motion to dismiss the

complaint on December 17, 1959 on the ground that the complaint states no cause of action because:

a) When the various bills of exchange were presented to the defendant as drawee for acceptance, the amounts thereof had

already been paid by the plaintiff to the drawer (Encal Press and Photo Engraving), without knowledge or consent of the

defendant drawee.

b) In the case of a bill of exchange, like those involved in the case at bar, the defendant drawee is an accommodating party

only for the drawer (Encal Press and Photo-Engraving) and win be liable in the event that the accommodating party

(drawer) fails to pay its obligation to the plaintiff. 11

The complaint was dismissed in an order dated December 22, 1959, copy of which was received by the defendant on

December 24, 1959. 12

78

On January 13, 1960, the plaintiff filed a motion for reconsideration. 13

On March 7, 1960, acting upon the motion for

reconsideration filed by the plaintiff, the trial court set aside its order dismissing the complaint and set the case for hearing

on March 15, 1960 at 8:00 in the morning. 14

A copy of the order setting aside the order of dismissal was received by the

defendant on March 11, 1960 at 5:00 o'clock in the afternoon according to the affidavit of the deputy sheriff of Manila,

Mamerto de la Cruz. On the following day, March 12, 1960, the defendant filed a motion to postpone the trial of the case

on the ground that there having been no answer as yet, the issues had not yet been joined. 15

On the same date, the

defendant filed his answer to the complaint interposing the following defenses: That he signed the document upon which

the plaintiff sues in his capacity as President of the Philippine Education Foundation; that his liability is only secondary;

and that he believed that he was signing only as an accommodation party. 16

On March 15, 1960, the plaintiff filed an ex parte motion to declare the defendant in default on the ground that the

defendant should have filed his answer on March 11, 1960. He contends that by filing his answer on March 12, 1960,

defendant was one day late. 17

On March 19, 1960 the trial court declared the defendant in default. 18

The defendant

learned of the order declaring him in default on March 21, 1960. On March 22, 1960 the defendant filed a motion to set

aside the order of default alleging that although the order of the court dated March 7, 1960 was received on March 11,

1960 at 5:00 in the afternoon, it could not have been reasonably expected of the defendant to file his answer on the last

day of the reglementary period, March 11, 1960, within office hours, especially because the order of the court dated

March 7, 1960 was brought to the attention of counsel only in the early hours of March 12, 1960. The defendant also

alleged that he has a good and substantial defense. Attached to the motion are the affidavits of deputy sheriff Mamerto de

la Cruz that he served the order of the court dated March 7, 1960 on March 11, 1960, at 5:00 o'clock in the afternoon and

the affidavit of the defendant Aruego that he has a good and substantial defense. 19

The trial court denied the defendant's

motion on March 25, 1960. 20

On May 6, 1960, the trial court rendered judgment sentencing the defendant to pay to the

plaintiff the sum of P35,444.35 representing the total amount of his obligation to the said plaintiff under the twenty-two

(22) causes of action alleged in the complaint as of November 15, 1957 and the sum of P10,000.00 as attorney's fees. 21

On May 9, 1960 the defendant filed a notice of appeal from the order dated March 25, 1961 denying his motion to set

aside the order declaring him in default, an appeal bond in the amount of P60.00, and his record on appeal. The plaintiff

filed his opposition to the approval of defendant's record on appeal on May 13, 1960. The following day, May 14, 1960,

the lower court dismissed defendant's appeal from the order dated March 25, 1960 denying his motion to set aside the

order of default. 22

On May 19, 1960, the defendant filed a motion for reconsideration of the trial court's order dismissing

his appeal. 23

The plaintiff, on May 20, 1960, opposed the defendant's motion for reconsideration of the order dismissing

appeal. 24

On May 21, 1960, the trial court reconsidered its previous order dismissing the appeal and approved the

defendant's record on appeal. 25

On May 30, 1960, the defendant received a copy of a notice from the Clerk of Court dated

May 26, 1960, informing the defendant that the record on appeal filed ed by the defendant was forwarded to the Clerk of

Court of Appeals. 26

On June 1, 1960 Aruego filed a motion to set aside the judgment rendered after he was declared in default reiterating the

same ground previously advanced by him in his motion for relief from the order of default. 27

Upon opposition of the

plaintiff filed on June 3, 1960, 28

the trial court denied the defendant's motion to set aside the judgment by default in an

order of June 11, 1960. 29

On June 20, 1960, the defendant filed his notice of appeal from the order of the court denying

his motion to set aside the judgment by default, his appeal bond, and his record on appeal. The defendant's record on

appeal was approved by the trial court on June 25, 1960. 30

Thus, the defendant had two appeals with the Court of

Appeals: (1) Appeal from the order of the lower court denying his motion to set aside the order of default docketed as CA-

G.R. NO. 27734-R; (2) Appeal from the order denying his motion to set aside the judgment by default docketed as CA-

G.R. NO. 27940-R.

In his brief, the defendant-appellant assigned the following errors:

I

THE LOWER COURT ERRED IN HOLDING THAT THE DEFENDANT WAS IN DEFAULT.

79

II

THE LOWER COURT ERRED IN ENTERTAINING THE MOTION TO DECLARE DEFENDANT IN

DEFAULT ALTHOUGH AT THE TIME THERE WAS ALREADY ON FILE AN ANSWER BY HIM

WITHOUT FIRST DISPOSING OF SAID ANSWER IN AN APPROPRIATE ACTION.

III

THE LOWER COURT ERRED IN DENYING DEFENDANT'S PETITION FOR RELIEF OF ORDER

OF DEFAULT AND FROM JUDGMENT BY DEFAULT AGAINST DEFENDANT. 31

It has been held that to entitle a party to relief from a judgment taken against him through his mistake, inadvertence,

surprise or excusable neglect, he must show to the court that he has a meritorious defense. 32

In other words, in order to set

aside the order of default, the defendant must not only show that his failure to answer was due to fraud, accident, mistake

or excusable negligence but also that he has a meritorious defense.

The record discloses that Aruego received a copy of the complaint together with the summons on December 2, 1960; that

on December 17, 1960, the last day for filing his answer, Aruego filed a motion to dismiss; that on December 22, 1960 the

lower court dismissed the complaint; that on January 23, 1960, the plaintiff filed a motion for reconsideration and on

March 7, 1960, acting upon the motion for reconsideration, the trial court issued an order setting aside the order of

dismissal; that a copy of the order was received by the defendant on March 11, 1960 at 5:00 o'clock in the afternoon as

shown in the affidavit of the deputy sheriff; and that on the following day, March 12, 1960, the defendant filed his answer

to the complaint.

The failure then of the defendant to file his answer on the last day for pleading is excusable. The order setting aside the

dismissal of the complaint was received at 5:00 o'clock in the afternoon. It was therefore impossible for him to have filed

his answer on that same day because the courts then held office only up to 5:00 o'clock in the afternoon. Moreover, the

defendant immediately filed his answer on the following day.

However, while the defendant successfully proved that his failure to answer was due to excusable negligence, he has

failed to show that he has a meritorious defense. The defendant does not have a good and substantial defense.

Defendant Aruego's defenses consist of the following:

a) The defendant signed the bills of exchange referred to in the plaintiff's complaint in a representative capacity, as the

then President of the Philippine Education Foundation Company, publisher of "World Current Events and Decision Law

Journal," printed by Encal Press and Photo-Engraving, drawer of the said bills of exchange in favor of the plaintiff bank;

b) The defendant signed these bills of exchange not as principal obligor, but as accommodation or additional party

obligor, to add to the security of said plaintiff bank. The reason for this statement is that unlike real bills of exchange,

where payment of the face value is advanced to the drawer only upon acceptance of the same by the drawee, in the case in

question, payment for the supposed bills of exchange were made before acceptance; so that in effect, although these

documents are labelled bills of exchange, legally they are not bills of exchange but mere instruments evidencing

indebtedness of the drawee who received the face value thereof, with the defendant as only additional security of the

same. 33

The first defense of the defendant is that he signed the supposed bills of exchange as an agent of the Philippine Education

Foundation Company where he is president. Section 20 of the Negotiable Instruments Law provides that "Where the

instrument contains or a person adds to his signature words indicating that he signs for or on behalf of a principal or in a

representative capacity, he is not liable on the instrument if he was duly authorized; but the mere addition of words

80

describing him as an agent or as filing a representative character, without disclosing his principal, does not exempt him

from personal liability."

An inspection of the drafts accepted by the defendant shows that nowhere has he disclosed that he was signing as a

representative of the Philippine Education Foundation Company. 34

He merely signed as follows: "JOSE ARUEGO

(Acceptor) (SGD) JOSE ARGUEGO For failure to disclose his principal, Aruego is personally liable for the drafts he

accepted.

The defendant also contends that he signed the drafts only as an accommodation party and as such, should be made liable

only after a showing that the drawer is incapable of paying. This contention is also without merit.

An accommodation party is one who has signed the instrument as maker, drawer, indorser, without receiving value

therefor and for the purpose of lending his name to some other person. Such person is liable on the instrument to a holder

for value, notwithstanding such holder, at the time of the taking of the instrument knew him to be only an accommodation

party. 35

In lending his name to the accommodated party, the accommodation party is in effect a surety for the latter. He

lends his name to enable the accommodated party to obtain credit or to raise money. He receives no part of the

consideration for the instrument but assumes liability to the other parties thereto because he wants to accommodate

another. In the instant case, the defendant signed as a drawee/acceptor. Under the Negotiable Instrument Law, a drawee is

primarily liable. Thus, if the defendant who is a lawyer, he should not have signed as an acceptor/drawee. In doing so, he

became primarily and personally liable for the drafts.

The defendant also contends that the drafts signed by him were not really bills of exchange but mere pieces of evidence of

indebtedness because payments were made before acceptance. This is also without merit. Under the Negotiable

Instruments Law, a bill of exchange is an unconditional order in writting addressed by one person to another, signed by

the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future

time a sum certain in money to order or to bearer. 36

As long as a commercial paper conforms with the definition of a bill

of exchange, that paper is considered a bill of exchange. The nature of acceptance is important only in the determination

of the kind of liabilities of the parties involved, but not in the determination of whether a commercial paper is a bill of

exchange or not.

It is evident then that the defendant's appeal can not prosper. To grant the defendant's prayer will result in a new trial

which will serve no purpose and will just waste the time of the courts as well as of the parties because the defense is nil or

ineffective. 37

WHEREFORE, the order appealed from in Civil Case No. 42066 of the Court of First Instance of Manila denying the

petition for relief from the judgment rendered in said case is hereby affirmed, without pronouncement as to costs.

81

G.R. No. 95641 September 22, 1994

SANTOS B. AREOLA and LYDIA D. AREOLA, petitioners-appellants,

vs.

COURT OF APPEALS and PRUDENTIAL GUARANTEE AND ASSURANCE, INC., respondents-appellees.

ROMERO, J.:

On June 29, 1985, seven months after the issuance of petitioner Santos Areola's Personal Accident Insurance Policy No.

PA-20015, respondent insurance company unilaterally cancelled the same since company records revealed that petitioner-

insured failed to pay his premiums.

On August 3, 1985, respondent insurance company offered to reinstate same policy it had previously cancelled and even

proposed to extend its lifetime to December 17, 1985, upon a finding that the cancellation was erroneous and that the

premiums were paid in full by petitioner-insured but were not remitted by Teofilo M. Malapit, respondent insurance

company's branch manager.

These, in brief, are the material facts that gave rise to the action for damages due to breach of contract instituted by

petitioner-insured before

Branch 40 RTC, Dagupan City against respondent insurance company.

There are two issues for resolution in this case:

(1) Did the erroneous act of cancelling subject insurance policy entitle petitioner-insured to payment of damages?

(2) Did the subsequent act of reinstating the wrongfully cancelled insurance policy by respondent insurance company, in

an effort to rectify such error, obliterate whatever liability for damages it may have to bear, thus absolving it therefrom?

From the factual findings of the trial court, it appears that petitioner-insured, Santos Areola, a lawyer from Dagupan City,

bought, through

the Baguio City branch of Prudential Guarantee and Assurance, Inc. (hereinafter referred to as Prudential), a personal

accident insurance policy covering the one-year period between noon of November 28, 1984 and noon of November 28,

1985. 1 Under the terms of the statement of account issued by respondent insurance company, petitioner-insured was

supposed to pay the total amount of P1,609.65 which included the premium of P1,470.00, documentary stamp of P110.25

and 2% premium tax of P29.40. 2 At the lower left-hand corner of the statement of account, the following is legibly

printed:

This Statement of Account must not be considered a receipt. Official Receipt will be issued to you upon

payment of this account.

If payment is made to our representative, demand for a Provisional Receipt and if our Official Receipts is

(sic) not received by you within 7 days please notify us.

If payment is made to our office, demand for an OFFICIAL RECEIPT.

On December 17, 1984, respondent insurance company issued collector's provisional receipt No. 9300 to petitioner-

insured for the amount of P1,609.65 3 On the lower portion of the receipt the following is written in capital letters:

Note: This collector's provisional receipt will be confirmed by our official receipt. If our official receipt is

not received by you within 7 days, please notify us. 4

82

On June 29, 1985, respondent insurance company, through its Baguio City manager, Teofilo M. Malapit, sent petitioner-

insured Endorsement

No. BG-002/85 which "cancelled flat" Policy No. PA BG-20015 "for non-payment of premium effective as of inception

dated." 5 The same endorsement also credited "a return premium of P1,609.65 plus documentary stamps and premium tax"

to the account of the insured.

Shocked by the cancellation of the policy, petitioner-insured confronted Carlito Ang, agent of respondent insurance

company, and demanded the issuance of an official receipt. Ang told petitioner-insured that the cancellation of the policy

was a mistake but he would personally see to its rectification. However, petitioner-insured failed to receive any official

receipt from Prudential.

Hence, on July 15, 1985, petitioner-insured sent respondent insurance company a letter demanding that he be insured

under the same terms and conditions as those contained in Policy No. PA-BG-20015 commencing upon its receipt of his

letter, or that the current commercial rate of increase on the payment he had made under provisional receipt No. 9300 be

returned within five days. 6 Areola also warned that should his demands be unsatisfied, he would sue for damages.

On July 17, 1985, he received a letter from production manager Malapit informing him that the "partial payment" of

P1,000.00 he had made on the policy had been "exhausted pursuant to the provisions of the Short Period Rate Scale"

printed at the back of the policy. Malapit warned Areola that should be fail to pay the balance, the company's liability

would cease to operate. 7

In reply to the petitioner-insured's letter of July 15, 1985, respondent insurance company, through its Assistant Vice-

President Mariano M. Ampil III, wrote Areola a letter dated July 25, 1985 stating that the company was verifying whether

the payment had in fact been issued therefor. Ampil emphasized that the official receipt should have been issued seven

days from the issuance of the provisional receipt but because no official receipt had been issued in Areola's name, there

was reason to believe that no payment had been made. Apologizing for the inconvenience, Ampil expressed the

company's concern by agreeing "to hold you cover (sic) under the terms of the referenced policy until such time that this

matter is cleared." 8

On August 3, 1985, Ampil wrote Areola another letter confirming that the amount of P1,609.65 covered by provisional

receipt No. 9300 was in fact received by Prudential on December 17, 1984. Hence, Ampil informed

Areola that Prudential was "amenable to extending PGA-PA-BG-20015 up to December 17, 1985 or one year from the

date when payment was received." Apologizing again for the inconvenience caused Areola, Ampil exhorted him to

indicate his conformity to the proposal by signing on the space provided for in the letter. 9

The letter was personally delivered by Carlito Ang to Areola on

August 13, 1985 10

but unfortunately, Areola and his wife, Lydia, as early as August 6, 1985 had filed a complaint for

breach of contract with damages before the lower court.

In its Answer, respondent insurance company admitted that the cancellation of petitioner-insured's policy was due to the

failure of Malapit to turn over the premiums collected, for which reason no official receipt was issued to him. However, it

argued that, by acknowledging the inconvenience caused on petitioner-insured and after taking steps to rectify its

omission by reinstating the cancelled policy prior to the filing of the complaint, respondent insurance company had

complied with its obligation under the contract. Hence, it concluded that petitioner-insured no longer has a cause of action

against it. It insists that it cannot be held liable for damages arising from breach of contract, having demonstrated fully

well its fulfillment of its obligation.

The trial court, on June 30, 1987, rendered a judgment in favor of petitioner-insured, ordering respondent insurance

company to pay the former the following:

a) P1,703.65 as actual damages;

83

b) P200,000.00 as moral damages; and

c) P50,000.00 as exemplary damages;

2. To pay to the plaintiff, as and for attorney's fees the amount of P10,000.00; and

3. To pay the costs.

In its decision, the court below declared that respondent insurance company acted in bad faith in unilaterally cancelling

subject insurance policy, having done so only after seven months from the time that it had taken force and effect and

despite the fact of full payment of premiums and other charges on the issued insurance policy. Cancellation from the date

of the policy's inception, explained the lower court, meant that the protection sought by petitioner-insured from the risks

insured against was never extended by respondent insurance company. Had the insured met an accident at the time, the

insurance company would certainly have disclaimed any liability because technically, the petitioner could not have been

considered insured. Consequently, the trial court held that there was breach of contract on the part of respondent insurance

company, entitling petitioner-insured to an award of the damages prayed for.

This ruling was challenged on appeal by respondent insurance company, denying bad faith on its part in unilaterally

cancelling subject insurance policy.

After consideration of the appeal, the appellate court issued a reversal of the decision of the trial court, convinced that the

latter had erred in finding respondent insurance company in bad faith for the cancellation of petitioner-insured's policy.

According to the Court of Appeals, respondent insurance company was not motivated by negligence, malice or bad faith

in cancelling subject policy. Rather, the cancellation of the insurance policy was based on what the existing records

showed, i.e., absence of an official receipt issued to petitioner-insured confirming payment of premiums. Bad faith, said

the Court of Appeals, is some motive of self-interest or ill-will; a furtive design of ulterior purpose, proof of which must

be established convincingly. On the contrary, it further observed, the following acts indicate that respondent insurance

company did not act precipitately or willfully to inflict a wrong on petitioner-insured:

(a) the investigation conducted by Alfredo Bustamante to verify if petitioner-insured had indeed paid the premium; (b) the

letter of August 3, 1985 confirming that the premium had been paid on December 17, 1984; (c) the reinstatement of the

policy with a proposal to extend its effective period to December 17, 1985; and (d) respondent insurance company's

apologies for the "inconvenience" caused upon petitioner-insured. The appellate court added that respondent insurance

company even relieved Malapit, its Baguio City manager, of his job by forcing him to resign.

Petitioner-insured moved for the reconsideration of the said decision which the Court of Appeals denied. Hence, this

petition for review on certiorari anchored on these arguments:

I

Respondent Court of Appeals is guilty of grave abuse of discretion and committed a serious and

reversible error in not holding Respondent Prudential liable for the cancellation of the insurance contract

which was admittedly caused by the fraudulent acts and bad faith of its own officers.

II

Respondent Court of Appeals committed serious and reversible error and abused its discretion in ruling

that the defenses of good faith and honest mistake can co-exist with the admitted fraudulent acts and

evident bad faith.

III

84

Respondent Court of Appeals committed a reversible error in not finding that even without considering

the fraudulent acts of its own officer in misappropriating the premium payment, the act itself in cancelling

the insurance policy was done with bad faith and/or gross negligence and wanton attitude amounting to

bad faith, because among others, it was

Mr. Malapit — the person who committed the fraud — who sent and signed the notice of cancellation.

IV

Respondent Court of Appeals has decided a question of substance contrary to law and applicable decision

of the Supreme Court when it refused to award damages in favor of herein Petitioner-Appellants.

It is petitioner-insured's submission that the fraudulent act of Malapit, manager of respondent insurance company's branch

office in Baguio, in misappropriating his premium payments is the proximate cause of the cancellation of the insurance

policy. Petitioner-insured theorized that Malapit's act of signing and even sending the notice of cancellation himself,

notwithstanding his personal knowledge of petitioner-insured's full payment of premiums, further reinforces the allegation

of bad faith. Such fraudulent act committed by Malapit, argued petitioner-insured, is attributable to respondent insurance

company, an artificial corporate being which can act only through its officers or employees. Malapit's actuation, concludes

petitioner-insured, is therefore not separate and distinct from that of respondent-insurance company, contrary to the view

held by the Court of Appeals. It must, therefore, bear the consequences of the erroneous cancellation of subject insurance

policy caused by the non-remittance by its own employee of the premiums paid. Subsequent reinstatement, according to

petitioner-insured, could not possibly absolve respondent insurance company from liability, there being an obvious breach

of contract. After all, reasoned out petitioner-insured, damage had already been inflicted on him and no amount of

rectification could remedy the same.

Respondent insurance company, on the other hand, argues that where reinstatement, the equitable relief sought by

petitioner-insured was granted at an opportune moment, i.e. prior to the filing of the complaint, petitioner-insured is left

without a cause of action on which to predicate his claim for damages. Reinstatement, it further explained, effectively

restored petitioner-insured to all his rights under the policy. Hence, whatever cause of action there might have been

against it, no longer exists and the consequent award of damages ordered by the lower court in unsustainable.

We uphold petitioner-insured's submission. Malapit's fraudulent act of misappropriating the premiums paid by petitioner-

insured is beyond doubt directly imputable to respondent insurance company. A corporation, such as respondent insurance

company, acts solely thru its employees. The latters' acts are considered as its own for which it can be held to

account. 11

The facts are clear as to the relationship between private respondent insurance company and Malapit. As

admitted by private respondent insurance company in its answer, 12

Malapit was the manager of its Baguio branch. It is

beyond doubt that he represented its interest and acted in its behalf. His act of receiving the premiums collected is well

within the province of his authority. Thus, his receipt of said premiums is receipt by private respondent insurance

company who, by provision of law, particularly under Article 1910 of the Civil Code, is bound by the acts of its agent.

Article 1910 thus reads:

Art. 1910. The principal must comply with all the obligations which the agent may have contracted within

the scope of his authority.

As for any obligation wherein the agent has exceeded his power, the principal is not bound except when

he ratifies it expressly or tacitly.

Malapit's failure to remit the premiums he received cannot constitute a defense for private respondent insurance company;

no exoneration from liability could result therefrom. The fact that private respondent insurance company was itself

defrauded due to the anomalies that took place in its Baguio branch office, such as the non-accrual of said premiums to its

85

account, does not free the same from its obligation to petitioner Areola. As held inPrudential Bank v. Court of

Appeals 13

citing the ruling in McIntosh v. Dakota Trust Co.: 14

A bank is liable for wrongful acts of its officers done in the interests of the bank or in the course of

dealings of the officers in their representative capacity but not for acts outside the scope of their authority.

A bank holding out its officers and agent as worthy of confidence will not be permitted to profit by the

frauds they may thus be enabled to perpetrate in the apparent scope of their employment; nor will it be

permitted to shirk its responsibility for such frauds, even though no benefit may accrue to the bank

therefrom. Accordingly, a banking corporation is liable to innocent third persons where the representation

is made in the course of its business by an agent acting within the general scope of his authority even

though, in the particular case, the agent is secretly abusing his authority and attempting to perpetrate a

fraud upon his principal or some other person, for his own ultimate benefit.

Consequently, respondent insurance company is liable by way of damages for the fraudulent acts committed by Malapit

that gave occasion to the erroneous cancellation of subject insurance policy. Its earlier act of reinstating the insurance

policy can not obliterate the injury inflicted on petitioner-insured. Respondent company should be reminded that a

contract of insurance creates reciprocal obligations for both insurer and insured. Reciprocal obligations are those which

arise from the same cause and in which each party is both a debtor and a creditor of the other, such that the obligation of

one is dependent upon the obligation of the other. 15

Under the circumstances of instant case, the relationship as creditor and debtor between the parties arose from a common

cause: i.e., by reason of their agreement to enter into a contract of insurance under whose terms, respondent insurance

company promised to extend protection to petitioner-insured against the risk insured for a consideration in the form of

premiums to be paid by the latter. Under the law governing reciprocal obligations, particularly the second paragraph of

Article 1191, 16

the injured party, petitioner-insured in this case, is given a choice between fulfillment or rescission of the

obligation in case one of the obligors, such as respondent insurance company, fails to comply with what is incumbent

upon him. However, said article entitles the injured party to payment of damages, regardless of whether he demands

fulfillment or rescission of the obligation. Untenable then is reinstatement insurance company's argument, namely, that

reinstatement being equivalent to fulfillment of its obligation, divests petitioner-insured of a rightful claim for payment of

damages. Such a claim finds no support in our laws on obligations and contracts.

The nature of damages to be awarded, however, would be in the form of nominal damages 17

contrary to that granted by

the court below. Although the erroneous cancellation of the insurance policy constituted a breach of contract, private

respondent insurance company, within a reasonable time took steps to rectify the wrong committed by reinstating the

insurance policy of petitioner. Moreover, no actual or substantial damage or injury was inflicted on petitioner Areola at

the time the insurance policy was cancelled. Nominal damages are "recoverable where a legal right is technically violated

and must be vindicated against an invasion that has produced no actual present loss of any kind, or where there has been a

breach of contract and no substantial injury or actual damages whatsoever have been or can be shown. 18

WHEREFORE, the petition for review on certiorari is hereby GRANTED and the decision of the Court of Appeals in

CA-G.R. No. 16902 on May 31, 1990, REVERSED. The decision of Branch 40, RTC Dagupan City, in Civil Case No. D-

7972 rendered on June 30, 1987 is hereby REINSTATED subject to the following modifications: (a) that nominal

damages amounting to P30,000.00 be awarded petitioner in lieu of the damages adjudicated by court a quo; and (b) that in

the satisfaction of the damages awarded therein, respondent insurance company is ORDERED to pay the legal rate of

interest computed from date of filing of complaint until final payment thereof.

86

G.R. No. L-56294 May 20, 1991

SMITH BELL AND COMPANY (PHILIPPINES), INC. and TOKYO MARINE AND FIRE INSURANCE CO.,

INC.,petitioners,

vs.

THE COURT OF APPEALS and CARLOS A. GO THONG AND CO., respondents.

FELICIANO, J.:

In the early morning of 3 May 1970—at exactly 0350 hours, on the approaches to the port of Manila near Caballo Island,

a collision took place between the M/V "Don Carlos," an inter-island vessel owned and operated by private respondent

Carlos A. Go Thong and Company ("Go Thong"), and the M/S "Yotai Maru," a merchant vessel of Japanese registry. The

"Don Carlos" was then sailing south bound leaving the port of Manila for Cebu, while the "Yotai Maru" was approaching

the port of Manila, coming in from Kobe, Japan. The bow of the "Don Carlos" rammed the portside (left side) of the

"Yotai Maru" inflicting a three (3) cm. gaping hole on her portside near Hatch No. 3, through which seawater rushed in

and flooded that hatch and her bottom tanks, damaging all the cargo stowed therein.

The consignees of the damaged cargo got paid by their insurance companies. The insurance companies in turn, having

been subrogated to the interests of the consignees of the damaged cargo, commenced actions against private respondent

Go Thong for damages sustained by the various shipments in the then Court of First Instance of Manila.

Two (2) cases were filed in the Court of First Instance of Manila. The first case, Civil Case No. 82567, was commenced

on 13 March 1971 by petitioner Smith Bell and Company (Philippines), Inc. and Sumitomo Marine and Fire Insurance

Company Ltd., against private respondent Go Thong, in Branch 3, which was presided over by Judge Bernardo P.

Fernandez. The second case, Civil Case No. 82556, was filed on 15 March 1971 by petitioners Smith Bell and Company

(Philippines), Inc. and Tokyo Marine and Fire Insurance Company, Inc. against private respondent Go Thong in Branch 4,

which was presided over by then Judge, later Associate Justice of this Court, Serafin R. Cuevas.

Civil Cases Nos. 82567 (Judge Fernandez) and 82556 (Judge Cuevas) were tried under the same issues and evidence

relating to the collision between the "Don Carlos" and the "Yotai Maru" the parties in both cases having agreed that the

evidence on the collision presented in one case would be simply adopted in the other. In both cases, the Manila Court of

First Instance held that the officers and crew of the "Don Carlos" had been negligent that such negligence was the

proximate cause of the collision and accordingly held respondent Go Thong liable for damages to the plaintiff insurance

companies. Judge Fernandez awarded the insurance companies P19,889.79 with legal interest plus P3,000.00 as attorney's

fees; while Judge Cuevas awarded the plaintiff insurance companies on two (2) claims US $ 68,640.00 or its equivalent in

Philippine currency plus attorney's fees of P30,000.00, and P19,163.02 plus P5,000.00 as attorney's fees, respectively.

The decision of Judge Fernandez in Civil Case No. 82567 was appealed by respondent Go Thong to the Court of Appeals,

and the appeal was there docketed as C.A.-G.R. No. 61320-R. The decision of Judge Cuevas in Civil Case No. 82556 was

also appealed by Go Thong to the Court of Appeals, the appeal being docketed as C.A.-G.R. No. 61206-R. Substantially

identical assignments of errors were made by Go Thong in the two (2) appealed cases before the Court of Appeals.

In C.A.-G.R. No. 61320-R, the Court of Appeals through Reyes, L.B., J., rendered a Decision on 8 August 1978 affirming

the Decision of Judge Fernandez. Private respondent Go Thong moved for reconsideration, without success. Go Thong

then went to the Supreme Court on Petition for Review, the Petition being docketed as G.R. No. L-48839 ("Carlos A. Go

Thong and Company v. Smith Bell and Company [Philippines], Inc., et al."). In its Resolution dated 6 December 1978,

this Court, having considered "the allegations, issues and arguments adduced in the Petition for Review on Certiorari, of

the Decision of the Court of Appeals as well as respondent's comment", denied the Petition for lack of merit. Go Thong

filed a Motion for Reconsideration; the Motion was denied by this Court on 24 January 1979.

87

In the other (Cuevas) case, C.A.-G.R. No. 61206-R, the Court of Appeals, on 26 November 1980 (or almost two [2] years

after the Decision of Reyes, L.B., J., in C.A.-G.R. No. 61320-R, had been affirmed by the Supreme Court on Petition for

Review) through Sison, P.V., J., reversed the Cuevas Decision and held the officers of the "Yotai Maru" at fault in the

collision with the "Don Carlos," and dismissed the insurance companies' complaint. Herein petitioners asked for

reconsideration, to no avail.

The insurance companies are now before us on Petition for Review on Certiorari, assailing the Decision of Sison, P.V., J.,

in C.A.-G.R. No. 61206-R. Petitioners' principal contentions are:

a. that the Sison Decision had disregarded the rule of res judicata;

b. that Sison P.V., J., was in serious and reversible error in accepting Go Thong's defense that the question of fault

on the part of the "Yotai Maru" had been settled by the compromise agreement between the owner of the "Yotai

Maru" and Go Thong as owner of the "Don Carlos;" and

c. that Sison, P. V. J., was in serious and reversible error in holding that the "Yotai Maru" had been negligent and

at fault in the collision with the "Don Carlos."

I

The first contention of petitioners is that Sison, P. V. J. in rendering his questioned Decision, failed to apply the rule of res

judicata. Petitioners maintain that the Resolution of the Supreme Court dated 6 December 1978 in G.R. No. 48839 which

dismissed Go Thong's Petition for Review of the Decision of Reyes, L.B., J., in C.A.-G.R. No. 61320-R, had effectively

settled the question of liability on the part of the "Don Carlos." Under the doctrine of res judicata, petitioners contend,

Sison, P. V. J. should have followed the Reyes, L.B., J. Decision since the latter had been affirmed by the Supreme Court

and had become final and executory long before the Sison Decision was rendered.

Private respondent Go Thong, upon the other hand, argues that the Supreme Court, in rendering its minute Resolution in

G.R. No. L- 48839, had merely dismissed Go Thong's Petition for Review of the Reyes, L.B., J. Decision for lack of merit

but had not affirmed in toto that Decision. Private respondent, in other words, purports to distinguish between denial of a

Petition for Review for lack of merit and affirmance of the Court of Appeals' Decision. Thus, Go Thong concludes, this

Court did not hold that the "Don Carlos" had been negligent in the collision.

Private respondent's argument must be rejected. That this Court denied Go Thong's Petition for Review in a minute

Resolution did not in any way diminish the legal significance of the denial so decreed by this Court. The Supreme Court is

not compelled to adopt a definite and stringent rule on how its judgment shall be framed. 1 It has long been settled that this

Court has discretion to decide whether a "minute resolution" should be used in lieu of a full-blown decision in any

particular case and that a minute Resolution of dismissal of a Petition for Review oncertiorari constitutes an adjudication

on the merits of the controversy or subject matter of the Petition. 2 It has been stressed by the Court that the grant of due

course to a Petition for Review is "not a matter of right, but of sound judicial discretion; and so there is no need to fully

explain the Court's denial. For one thing, the facts and law are already mentioned in the Court of Appeals' opinion."3 A

minute Resolution denying a Petition for Review of a Decision of the Court of Appeals can only mean that the Supreme

Court agrees with or adopts the findings and conclusions of the Court of Appeals, in other words, that the Decision sought

to be reviewed and set aside is correct.4

Private respondent Go Thong argues also that the rule of res judicata cannot be invoked in the instant case whether in

respect of the Decision of Reyes, L.B., J. or in respect of the Resolution of the Supreme Court in G.R. No. L-48839, for

the reason that there was no identity of parties and no identity of cause of action between C.A.-G.R. No. 61206-R and

C.A.-G.R. No. 61320-R.

88

The parties in C.A.-G.R. No. 61320-R Where the decision of Judge Fernandez was affirmed, involved Smith Bell and

Company (Philippines), Inc., and Sumitomo Marine and Fire Insurance Co., Ltd. while the petitioners in the instant case

(plaintiffs below) are Smith Bell and Co. (Philippines), Inc. and Tokyo Marine and Fire Insurance Co., Ltd. In other

words, there was a common petitioner in the two (2) cases, although the co-petitioner in one was an insurance company

different from the insurance company co-petitioner in the other case. It should be noted, moreover, that the co-petitioner

in both cases was an insurance company arid that both petitioners in the two (2) cases represented the same interest, i.e.,

the cargo owner's interest as against the hull interest or the interest of the shipowner. More importantly, both cases had

been brought against the same defendant, private respondent Go Thong, the owner of the vessel "Don Carlos." In sum,

C.A.-G.R. No. 61320R and C.A-G.R. No. 61206-R exhibited substantial identity of parties.

It is conceded by petitioners that the subject matters of the two (2) suits were not identical, in the sense that the cargo

which had been damaged in the one case and for which indemnity was sought, was not the very same cargo which had

been damaged in the other case indemnity for which was also sought. The cause of action was, however, the same in the

two (2) cases, i.e., the same right of the cargo owners to the safety and integrity of their cargo had been violated by the

same casualty, the ramming of the "Yotai Maru" by the "Don Carlos." The judgments in both cases were final judgments

on the merits rendered by the two (2) divisions of the Court of Appeals and by the Supreme Court, the jurisdiction of

which has not been questioned.

Under the circumstances, we believe that the absence of identity of subject matter, there being substantial identity of

parties and identity of cause of action, will not preclude the application of res judicata. 5

In Tingson v. Court of Appeals,6 the Court distinguished one from the other the two (2) concepts embraced in the principle

of res judicata, i.e., "bar by former judgment" and "conclusiveness of judgment:"

There is no question that where as between the first case Where the judgment is rendered and the second case

where such judgment is invoked, there is identity of parties, subject-matter and cause of action, the judgment on

the merits in the first case constitutes an absolute bar to the subsequent action not only as to every matter which

was offered and received to sustain or defeat the claim or demand, but also as to any other admissible matter

which might have been offered for that purpose and to all matters that could have been adjudged in that case. This

is designated as "bar by former judgment."

But where the second action between the same parties is upon a different claim or demand, the judgment in the

prior action operates as an estoppel only as to those matters in issue or points controverted, upon the

determination of which the finding or judgment was rendered. In fine, the previous judgment is conclusive in the

second case, only as those matters actually and directly controverted and determined and not as to matters merely

involved therein. This is the rule on 'conclusiveness of judgment' embodied in subdivision (c) of Section 49 of

Rule 39 of the Revised Rules of' Court.7 (Citations omitted) (Emphases supplied)

In Lopez v. Reyes, 8 the Court elaborated further the distinction between bar by former judgment which bars the

prosecution of a second action upon the same claim, demand or cause of action, and conclusiveness of judgment which

bars the relitigation of particular facts or issues in another litigation between the same parties on a different claim or cause

of action:

The doctrine of res judicata has two aspects. The first is the effect of a judgment as a bar to the prosecution of a

second action upon the same claim, demand or cause of action. The second aspect is that it precludes the

relitigation of a particular fact or issues in another action between the same parties on a different claim or cause of

action.

The general rule precluding the relitigation of material facts or questions which were in issue and adjudicated in

former action are commonly applied to all matters essentially connected with the subject matter of the litigation.

Thus, it extends to questions "necessarily involved in an issue, and necessarily adjudicated, or necessarily

implied in the final judgment, although no specific finding may have been made in reference thereto, and although

89

such matters were directly referred to in the pleadings and were not actually or formally presented. Under this

rule, if the record of the former trial shows that the judgment could not have been rendered without deciding the

particular matter it will be considered as having settled that matter as to all future actions between the parties,

and if a judgment necessarily presupposes certain premises, they are as conclusive as the judgment itself. Reasons

for the rule are that a judgment is an adjudication on all the matters which are essential to support it, and

that every proposition assumed or decided by the court leading up to the final conclusion and upon which such

conclusion is based is as effectually passed upon as the ultimate question which is finally solved. 9 (Citations

omitted) (Emphases supplied)

In the case at bar, the issue of which vessel ("Don Carlos" or "Yotai Maru") had been negligent, or so negligent as to have

proximately caused the collision between them, was an issue that was actually, directly and expressly raised, controverted

and litigated in C.A.-G.R. No. 61320-R. Reyes, L.B., J., resolved that issue in his Decision and held the "Don Carlos" to

have been negligent rather than the "Yotai Maru" and, as already noted, that Decision was affirmed by this Court in G.R.

No. L-48839 in a Resolution dated 6 December 1978. The Reyes Decision thus became final and executory approximately

two (2) years before the Sison Decision, which is assailed in the case at bar, was promulgated. Applying the rule of

conclusiveness of judgment, the question of which vessel had been negligent in the collision between the two (2) vessels,

had long been settled by this Court and could no longer be relitigated in C.A.-G.R. No. 61206- R. Private respondent Go

Thong was certainly bound by the ruling or judgment of Reyes, L.B., J. and that of this Court. The Court of Appeals fell

into clear and reversible error When it disregarded the Decision of this Court affirming the Reyes Decision. 10

Private respondent Go Thong also argues that a compromise agreement entered into between Sanyo Shipping Company as

owner of the "Yotai Maru" and Go Thong as owner of the "Don Carlos," under which the former paid P268,000.00 to the

latter, effectively settled that the "Yotai Maru" had been at fault. This argument is wanting in both factual basis and legal

substance. True it is that by virtue of the compromise agreement, the owner of the "Yotai Maru" paid a sum of money to

the owner of the "Don Carlos." Nowhere, however, in the compromise agreement did the owner of the "Yotai Maru "

admit or concede that the "Yotai Maru" had been at fault in the collision. The familiar rule is that "an offer of compromise

is not an admission that anything is due, and is not admissible in evidence against the person making the offer." 11

A

compromise is an agreement between two (2) or more persons who, in order to forestall or put an end to a law suit, adjust

their differences by mutual consent, an adjustment which everyone of them prefers to the hope of gaining more, balanced

by the danger of losing more.12

An offer to compromise does not, in legal contemplation, involve an admission on the part

of a defendant that he is legally liable, nor on the part of a plaintiff that his claim or demand is groundless or even

doubtful, since the compromise is arrived at precisely with a view to avoiding further controversy and saving the expenses

of litigation. 13

It is of the very nature of an offer of compromise that it is made tentatively, hypothetically and in

contemplation of mutual concessions. 14

The above rule on compromises is anchored on public policy of the most insistent

and basic kind; that the incidence of litigation should be reduced and its duration shortened to the maximum extent

feasible.

The collision between the "Yotai Maru" and the "Don Carlos" spawned not only sets of litigations but also administrative

proceedings before the Board of Marine Inquiry ("BMI"). The collision was the subject matter of an investigation by the

BMI in BMI Case No. 228. On 12 July 1971, the BMI through Commodore Leovegildo L. Gantioki, found both vessels to

have been negligent in the collision.

Both parties moved for reconsideration of the BMI's decision. The Motions for Reconsideration were resolved by the

Philippine Coast Guard ("PCG") nine (9) years later, in an order dated 19 May 1980 issued by PCG Commandant,

Commodore Simeon M. Alejandro. The dispositive portion of the PCG decision read as follows:

Premises considered, the Decision dated July 12, 1971 is hereby reconsidered and amended absolving the officers

of "YOTAI MARU" from responsibility for the collision. This Headquarters finds no reason to modify the

penalties imposed upon the officers of Don Carlos. (Annex "C", Reply, September 5, 1981).15

Go Thong filed a second Motion for Reconsideration; this was denied by the PCG in an order dated September 1980.

90

Go Thong sought to appeal to the then Ministry of National Defense from the orders of the PCG by filing with the PCG

on 6 January 1981 a motion for a 30-day extension from 7 January 1981 within which to submit its record on appeal. On 4

February 1981, Go Thong filed a second urgent motion for another extension of thirty (30) days from 7 February 1981.

On 12 March 1981, Go Thong filed a motion for a final extension of time and filed its record on appeal on 17 March

1981. The PCG noted that Go Thong's record on appeal was filed late, that is, seven (7) days after the last extension

granted by the PCG had expired. Nevertheless, on 1 July 1981 (after the Petition for Review on Certiorari in the case at

bar had been filed with this Court), the Ministry of Defense rendered a decision reversing and setting aside the 19 May

1980 decision of the PCG

The owners of the "Yotai Maru" then filed with the Office of the President a Motion for Reconsideration of the Defense

Ministry's decision. The Office of the President rendered a decision dated 17 April 1986 denying the Motion for

Reconsideration. The decision of the Office of the President correctly recognized that Go Thong had failed to appeal in a

seasonable manner:

MV "DON CARLOS" filed her Notice of Appeal on January 5, 1981. However, the records also show beyond

peradventure of doubt that the PCG Commandant's decision of May 19, 1980, had already become final and

executory When MV "DON CARLOS" filed her Record on Appeal on March 17, 1981, and When the motion for

third extension was filed after the expiry date.

Under Paragraphs (c), (d), (e) and (f), Chapter XVI, of the Philippine Merchant Marine Rules and Regulations,

decisions of the PCG Commandant shall be final unless, within thirty (30) days after receipt of a copy thereof, an

appeal to the Minister of National Defense is filed and perfected by the filing of a notice of appeal and a record

on appeal. Such administrative regulation has the force and effect of law, and the failure of MV "DON

CARLOS" to comply therewith rendered the PCG Commandant's decision on May 19, 1980, as final and

executory, (Antique Sawmills, Inc. vs. Zayco, 17 SCRA 316; Deslata vs. Executive Secretary, 19 SCRA 487;

Macailing vs. Andrada, 31 SCRA 126.) (Annex "A", Go Thong's Manifestation and Motion for Early Resolution,

November 24, 1986).16

(Emphases supplied)

Nonetheless, acting under the misapprehension that certain "supervening" events had taken place, the Office of the

President held that the Minister of National Defense could validly modify or alter the PCG Commandant's decision:

However, the records likewise show that, on November 26, 1980, the Court of Appeals rendered a decision in

CA-G.R. No. 61206-R (Smith Bell & Co., Inc., et al. vs. Carlos A. Go Thong & Co.) holding that the proximate

cause of the collision between MV "DON CARLOS" AND MS "YOTAI MARU" was the negligence, failure and

error of judgment of the officers of MS "YOTAI MARU". Earlier, or on February 27, 1976, the Court of First

Instance of Cebu rendered a decision in Civil Case No. R-11973 (Carlos A. Go Thong vs. San-yo Marine Co.)

holding that MS "YOTAI MARU" was solely responsible for the collision, which decision was upheld by the

Court of Appeals.

The foregoing judicial pronouncements rendered after the finality of the PCG Commandant's decision of May 19,

1980, were supervening causes or reasons that rendered the PCG Commandant's decision as no longer

enforceable and entitled MV "DON CARLOS" to request the Minister of National Defense to modify or alter the

questioned decision to harmonize the same with justice and tile facts. (De la Costa vs. Cleofas, 67 Phil. 686; City

of Bututan vs. Ortiz, 3 SCRA 659; Candelario vs. Canizares, 4 SCRA 738; Abellana vs. Dosdos, 13 SCRA

244). Under such precise circumstances, the Minister of National Defense may validly modify or alter the PCG

commandant's decision. (Sec. 37, Act 4007; Secs. 79(c) and 550, Revised Administrative Code; Province of

Pangasinan vs. Secretary of Public Works and Communications, 30 SCRA 134; Estrelia vs. Orendain, 37 SCRA

640). 17

(Emphasis supplied)

The multiple misapprehensions under which the Office of the President labored, were the following:

91

It took account of the Decision of Sison, P.V., J. in C.A.-G.R. No. 61206-R, the very decision that is the subject of review

in the Petition at bar and therefore not final. At the same time, the Office of the President either ignored or was unaware of

the Reyes, L.B., J., Decision in C.A.-G.R. No 61320-R finding the "Don Carlos" solely liable for the collision, and of the

fact that that Decision had been affirmed by the Supreme Court and had long ago become final and executory. A third

misapprehension of the Office of the President related to a decision in a Cebu Court of First Instance litigation which had

been settled by the compromise agreement between the Sanyo Marine Company and Go Thong. The Office of the

President mistakenly believed that the Cebu Court of First Instance had rendered a decision holding the "Yotai Maru"

solely responsible for the collision, When in truth the Cebu court had rendered a judgment of dismissal on the basis of the

compromise agreement. The Cebu decision was not, of course, appealed to the Court of Appeals.

It thus appears that the decision of the Office of the President upholding the belated reversal by the Ministry of National

Defense of the PCG'S decision holding the "Don Carlos" solely liable for the collision, is so deeply flawed as not to

warrant any further examination. Upon the other hand, the basic decision of the PCG holding the "Don Carlos" solely

negligent in the collision remains in effect.

II

In their Petition for Review, petitioners assail the finding and conclusion of the Sison Decision, that the "Yotai Maru" was

negligent and at fault in the collision, rather than the "Don Carlos." In view of the conclusions reached in Part I above, it

may not be strictly necessary to deal with the issue of the correctness of the Sison Decision in this respect. The Court

considers, nonetheless, that in view of the conflicting conclusions reached by Reyes, L.B.,J., on the one hand, and Sison,

P.V., J., on the other, and since in affirming the Reyes Decision, the Court did not engage in a detailed written

examination of the question of which vessel had been negligent, and in view of the importance of the issues of admiralty

law involved, the Court should undertake a careful review of the record of the case at bar and discuss those issues in

extenso.

The decision of Judge Cuevas in Civil Case No. 82556 is marked by careful analysis of the evidence concerning the

collision. It is worth underscoring that the findings of fact of Judge Fernandez in Civil Case No. 82567 (which was

affirmed by the Court of Appeals in the Reyes Decision and by this Court in G.R. No. L-48839) are just about identical

with the findings of Judge Cuevas. Examining the facts as found by Judge Cuevas, the Court believes that there are three

(3) principal factors which are constitutive of negligence on the part of the "Don Carlos," which negligence was the

proximate cause of the collision.

The first of these factors was the failure of the "Don Carlos" to comply with the requirements of Rule 18 (a) of the

International Rules of the Road ("Rules")," which provides as follows

(a) When two power-driven vessels are meeting end on, or nearly end on, so as to involve risk of collision, each

shall alter her course to starboard, so that each may pass on the port side of the other. This Rule only applies to

cases where vessels are meeting end on or nearly end on, in such a manner as to involve risk of collision, and does

not apply to two vessels which must, if both keep on their respective course, pass clear of each other. The only

cases to which it does apply are when each of two vessels is end on, or nearly end on, to the other; in other words,

to cases in which, by day, each vessel sees the masts of the other in a line or nearly in a line with her own; and by

night to cases in which each vessel is in such a position as to see both the sidelights of the other. It does not apply,

by day, to cases in which a vessel sees another ahead crossing her own course; or, by night, to cases where the red

light of one vessel is opposed to the red light of the other or where the green light of one vessel is opposed to the

green light of the other or where a red light without a green light or a green light without a red light is seen ahead,

or Where both green and red lights are seen anywhere but ahead. (Emphasis supplied)

The evidence on this factor was summarized by Judge Cuevas in the following manner:

Plaintiff's and defendant's evidence seem to agree that each vessel made a visual sighting of each other ten minute

before the collision which occurred at 0350. German's version of the incident that followed, was that "Don

92

Carlos" was proceeding directly to [a] meeting [on an] "end-on or nearly end-on situation" (Exh. S, page 8). He

also testified that "Yotai Maru's' headlights were "nearly in line at 0340 A.M." (t.s.n., June 6, 1974) clearly

indicating that both vessels were sailing on exactly opposite paths (t.s.n. June 6, 1974, page 56). Rule 18 (a) of the

International Rules of the Road provides as follows:

x x x x x x x x x

And yet German altered "Don Carlos" course by five degrees to the left at 0343 hours instead of to the right (t.s.n. June 6,

1974, pages 4445) which maneuver was the error that caused the collision in question. Why German did so is likewise

explained by the evidence on record. "Don Carlos" was overtaking another vessel, the "Don Francisco", and was then at

the starboard (right side) of the aforesaid vessel at 3:40 a.m. It was in the process of overtaking "Don

Francisco" that "Don Carlos' was finally brought into a situation where he was meeting end-on or nearly end-on "Yotai

Maru, thus involving risk of collision. Hence, German in his testimony before the Board of Marine inquiry stated:

Atty. Chung:

You said in answer to the cross-examination that you took a change of course to the left. Why did you not take a

course to the right instead?

German:

I did not take any course to the right because the other vessel was in my mind at the starboard side following me.

Besides, I don't want to get risk of the Caballo Island (Exh. 2, pages 209 and 210). 19

(Emphasis supplied)

For her part, the "Yotai Maru" did comply with its obligations under Rule 18 (a). As the "Yotai Maru" found herself on an

"end-on" or a "nearly end-on" situation vis-a-vis the "Don Carlos, " and as the distance between them was rapidly

shrinking, the "Yotai Maru" turned starboard (to its right) and at the same time gave the required signal consisting of one

short horn blast. The "Don Carlos" turned to portside (to its left), instead of turning to starboard as demanded by Rule 18

(a). The "Don Carlos" also violated Rule 28 (c) for it failed to give the required signal of two (2) short horn blasts

meaning "I am altering my course to port." When the "Yotai Maru" saw that the "Don Carlos" was turning to port, the

master of the "Yotai Maru" ordered the vessel turned "hard starboard" at 3:45 a.m. and stopped her engines; at about 3:46

a.m. the "Yotai Maru" went "full astern engine." 20

The collision occurred at exactly 3:50 a.m.

The second circumstance constitutive of negligence on the part of the "Don Carlos" was its failure to have on board that

night a "proper look-out" as required by Rule I (B) Under Rule 29 of the same set of Rules, all consequences arising from

the failure of the "Don Carlos" to keep a "proper look-out" must be borne by the "Don Carlos." Judge Cuevas' summary

of the evidence said:

The evidence on record likewise discloses very convincingly that "Don Carlos" did not have "look-out" whose

sole and only duty is only to act as Such. . . . 21

A "proper look-out" is one who has been trained as such and who is given no other duty save to act as a look-out and who

is stationed where he can see and hear best and maintain good communication with the officer in charge of the vessel, and

who must, of course, be vigilant. Judge Cuevas wrote:

The "look-out" should have no other duty to perform. (Chamberlain v. Ward, 21, N.O.W. 62, U.S. 548, 571). He

has only one duty, that which its name implies—to keep "look-out". So a deckhand who has other duties, is not a

proper "look-out" (Brooklyn Perry Co. v. U.S., 122, Fed. 696). The navigating officer is not a sufficient "look-

out" (Larcen B. Myrtle, 44 Fed. 779)—Griffin on Collision, pages 277-278). Neither the captain nor the

[helmsman] in the pilothouse can be considered to be a "look-out" within the meaning of the maritime law. Nor

93

should he be stationed in the bridge. He should be as near as practicable to the surface of the water so as to be

able to see low-lying lights (Griffin on Collision, page 273).

On the strength of the foregoing authorities, which do not appear to be disputed even by the defendant, it is hardly

probable that neither German or Leo Enriquez may qualify as "look-out" in the real sense of the

word.22

(Emphasis supplied)

In the case at bar, the failure of the "Don Carlos" to recognize in a timely manner the risk of collision with the "Yotai

Maru" coming in from the opposite direction, was at least in part due to the failure of the "Don Carlos" to maintain a

proper look-out.

The third factor constitutive of negligence on the part of the "Don Carlos" relates to the fact that Second Mate Benito

German was, immediately before and during the collision, in command of the "Don Carlos." Judge Cuevas summed up

the evidence on this point in the following manner:

The evidence on record clearly discloses that "Don Carlos" was, at the time of the collision and immediately prior

thereto, under the command of Benito German, a second mate although its captain, Captain Rivera, was very

much in the said vessel at the time. The defendant's evidence appears bereft of any explanation as to why second

mate German was at the helm of the aforesaid vessel when Captain Rivera did not appear to be under any

disability at the time. In this connection, Article [633] of the Code of Commerce provides:

Art. [633] — The second mate shall take command of the vessel in case of the inability or disqualification

of the captain and sailing mate, assuming, in such case, their powers and liability.

The fact that second mate German was allowed to be in command of "Don Carlos" and not the chief or the sailing

mate in the absence of Captain Rivera, gives rise to no other conclusion except that said vessel [had] no chief

mate. Otherwise, the defense evidence should have at least explained why it was German, only a second mate,

who was at the helm of the vessel "Don Carlos" at the time of the fatal collision.

But that is not all. Worst still, aside from German's being only a second mate, is his apparent lack of sufficient

knowledge of the basic and generally established rules of navigation. For instance, he appeared unaware of the

necessity of employing a "look- out" (t.s.n. June 6, 1974, page 27) which is manifest even in his testimony before

the Board of Marine Inquiry on the same subject (Exh. 2, page 209). There is, therefore, every reasonable ground

to believe that his inability to grasp actual situation and the implication brought about by inadequacy of

experience and technical know-how was mainly responsible and decidedly accounted for the collision of the

vessels involved in this case.. . . 23

(Emphasis supplied)

Second Mate German simply did not have the level of experience, judgment and skill essential for recognizing and coping

with the risk of collision as it presented itself that early morning when the "Don Carlos," running at maximum speed and

having just overtaken the "Don Francisco" then approximately one mile behind to the starboard side of the "Don

Carlos," found itself head-on or nearly head on vis-a-vis the "Yotai Maru. " It is essential to point out that this situation

was created by the "Don Carlos" itself.

The Court of Appeals in C.A.-G.R. No. 61206-R did not make any findings of fact which contradicted the findings of fact

made by Judge Cuevas. What Sison, P.V., J. actually did was to disregard all the facts found by Judge Cuevas, and

discussed above and, astonishingly, found a duty on the "Yotai Maru" alone to avoid collision with and to give way to the

"Don Carlos ". Sison, P.V., J., wrote:

At a distance of eight (8) miles and with ten (10) minutes before the impact, [Katoh] and Chonabayashi had ample

time to adopt effective precautionary measures to steer away from the Philippine vessel, particularly because both

[Katoh] and Chonabayashi also deposed that at the time they had first eyesight of the "Don Carlos" there was still

94

"no danger at all" of a collision.1âwphi1 Having sighted the "Don Carlos" at a comparatively safe distance—"no

danger at all" of a collision—the Japanese ship should have observed with the highest diligence the course and

movements of the Philippine interisland vessel as to enable the former to adopt such precautions as will

necessarily present a collision, or give way, and in case of a collision, the former is prima facie at fault. In G.

Urrutia & Co. vs. Baco River Plantation Co., 26 Phil. 632, the Supreme Court held:

Nautical rules require that where a steamship and sailing vessel are approaching each other from opposite

directions, or on intersecting lines, the steamship, from the moment the sailing vessel is seen, shall watch

with the highest diligence her course and movements so as to enable it to adopt such timely means of

precaution as will necessarily prevent the two boats from coming in contact.' (Underscoring in the

original)

At 3:44 p.m., or 4 minutes after first sighting the "Don Carlos", or 6 minutes before contact time, Chonabayashi

revealed that the "Yotai Maru" gave a one-blast whistle to inform the Philippine vessel that the Japanese ship was

turning to starboard or to the right and that there was no blast or a proper signal from the "Don Carlos" (pp. 67-68.

Deposition of Chonabayashi, List of Exhibits). The absence of a reply signal from the "Don Carlos" placed

the "Yotai Maru" in a situation of doubt as to the course the "Don Carlos" would take. Such being the case, it was

the duty of the Japanese officers "to stop, reverse or come to a standstill until the course of the "Don Carlos" has

been determined and the risk of a collision removed(The Sabine, 21 F (2d) 121, 124, cited in Standard Vacuum,

etc. vs. Cebu Stevedoring, etc., 5 C.A.R. 2d 853, 861-862).. . . . 24

(Emphasis supplied)

The Court is unable to agree with the view thus taken by Sison, P.V., J. By imposing an exclusive obligation uponone of

the vessels, the "Yotai Maru, " to avoid the collision, the Court of Appeals not only chose to overlook all the above facts

constitutive of negligence on the part of the "Don Carlos;" it also in effect used the very negligence on the part of the

"Don Carlos" to absolve it from responsibility and to shift that responsibility exclusively onto the "Yotai Maru" the vessel

which had observed carefully the mandate of Rule 18 (a). Moreover, G. Urrutia and Company v. Baco River Plantation

Company 25

invoked by the Court of Appeals seems simply inappropriate and inapplicable. For the collision in

the Urrutia case was between a sailing vessel, on the one hand, and a power-driven vessel, on the other; the Rules, of

course, imposed a special duty on the power-driven vessel to watch the movements of a sailing vessel, the latter being

necessarily much slower and much less maneuverable than the power-driven one. In the case at bar, both the "Don

Carlos" and the "Yotai Maru" were power-driven and both were equipped with radar; the maximum speed of the "Yotai

Maru" was thirteen (13) knots while that of the "Don Carlos" was eleven (11) knots. Moreover, as already noted, the

"Yotai Maru" precisely took last minute measures to avert collision as it saw the "Don Carlos" turning to portside: the

"Yotai Maru" turned "hard starboard" and stopped its engines and then put its engines "full astern."

Thus, the Court agrees with Judge Cuevas (just as it had agreed with Reyes, L.B., J.), with Judge Fernandez and

Nocon, J., 26

that the "Don Carlos" had been negligent and that its negligence was the sole proximate cause of the

collision and of the resulting damages.

FOR ALL THE FOREGOING, the Decision of the Court of Appeals dated 26 November 1980 in C.A.-G.R. No. 61206-R

is hereby REVERSED and SET ASIDE. The decision of the trial court dated 22 September 1975 is hereby REINSTATED

and AFFIRMED in its entirety. Costs against private respondent.

95

G.R. No. L-30098 February 18, 1970

THE COMMISSIONER OF PUBLIC HIGHWAYS and the AUDITOR GENERAL, petitioners,

vs.

HON. LOURDES P. SAN DIEGO

TEEHANKEE, J.:

In this special civil action for certiorari and prohibition, the Court declares null and void the two questioned orders of

respondent Court levying upon funds of petitioner Bureau of Public Highways on deposit with the Philippine National

Bank, by virtue of the fundamental precept that government funds are not subject to execution or garnishment.

The background facts follow:

On or about November 20, 1940, the Government of the Philippines filed a complaint for eminent domain in the Court of

First Instance of Rizal1 for the expropriation of a parcel of land belonging to N. T. Hashim, with an area of 14,934 square

meters, needed to construct a public road, now known as Epifanio de los Santos Avenue. On November 25, 1940, the

Government took possession of the property upon deposit with the City Treasurer of the sum of P23,413.64 fixed by the

Court therein as the provisional value of all the lots needed to construct the road, including Hashim's property. The

records of the expropriation case were destroyed and lost during the second world war, and neither party took any step

thereafter to reconstitute the proceedings.

In 1958, however, the estate of N.T. Hashim, deceased, through its Judicial Administrator, Tomas N. Hashim, filed a

money claim with the Quezon City Engineer's Office in the sum of P522,620.00, alleging said amount to be the fair

market value of the property in question, now already converted and used as a public highway. Nothing having come out

of its claim, respondent estate filed on August 6, 1963, with the Court of First Instance of Rizal, Quezon City Branch,

assigned to Branch IX, presided by respondent judge,2 a complaint for the recovery of the fair market price of the said

property in the sum of P672,030.00 against the Bureau of Public Highways, which complaint was amended on August 26,

1963, to include as additional defendants, the Auditor General and the City Engineer of Quezon City.3

The issues were joined in the case with the filing by then Solicitor General Arturo A. Alafriz of the State's answer, stating

that the Hashim estate was entitled only to the sum of P3,203.00 as the fair market value of the property at the time that

the State took possession thereof on November 25, 1940, with legal interest thereon at 6% per annum, and that said

amount had been available and tendered by petitioner Bureau since 1958. The parties thereafter worked out a compromise

agreement, respondent estate having proposed on April 28, 1966, a payment of P14.00 per sq. m. for its 14,934 sq.m.-

parcel of land or the total amount of P209,076.00, equivalent to the land's total assessed value,4 which was confirmed,

ratified and approved in November, 1966 by the Commissioner of Public Highways and the Secretary of Public Works

and Communications. On November 7, 1966, the Compromise Agreement subscribed by counsel for respondent estate

and by then Solicitor General Antonio P. Barredo, now a member of this Court, was submitted to the lower Court and

under date of November 8, 1966, respondent judge, as prayed for, rendered judgment approving the Compromise

Agreement and ordering petitioners, as defendants therein, to pay respondent estate as plaintiff therein, the total sum of

P209,076.00 for the expropriated lot.

On October 10, 1968, respondent estate filed with the lower Court a motion for the issuance of a writ of execution,

alleging that petitioners had failed to satisfy the judgment in its favor. It further filed on October 12, 1968, an ex-

parte motion for the appointment of respondent Benjamin Garcia as special sheriff to serve the writ of execution. No

opposition having been filed by the Solicitor General's office to the motion for execution at the hearing thereof on October

12, 1968, respondent judge, in an order dated October 14, 1968, granted both motions.

On the same date, October 14, 1968, respondent Garcia, as special sheriff, forthwith served a Notice of Garnishment,

together with the writ of execution dated October 14, 1968, issued by respondent Manuela C. Florendo as Deputy Clerk of

96

Court, on respondent Philippine National Bank, notifying said bank that levy was thereby made upon funds of petitioners

Bureau of Public Highways and the Auditor General on deposit, with the bank to cover the judgment of P209,076.00 in

favor of respondent estate, and requesting the bank to reply to the garnishment within five days. On October 16, 1968,

three days before the expiration of the five-day deadline, respondent Benjamin V. Coruña in his capacity as Chief,

Documentation Staff, of respondent bank's Legal Department, allegedly acting in excess of his authority and without the

knowledge and consent of the Board of Directors and other ranking officials of respondent bank, replied to the notice of

garnishment that in compliance therewith, the bank was holding the amount of P209,076.00 from the account of petitioner

Bureau of Public Highways. Respondent bank alleged that when it was served with Notice to Deliver Money signed by

respondent Garcia, as special sheriff, on October 17, 1968, it sent a letter to the officials of the Bureau of Public Highways

notifying them of the notice of garnishment.

Under date of October 16, 1968, respondent estate further filed with the lower Court an ex-parte motion for the issuance

of an order ordering respondent bank to release and deliver to the special sheriff, respondent Garcia, the garnished amount

of P209,076.00 deposited under the account of petitioner Bureau, which motion was granted by respondent judge in an

order of October 18, 1968. On the same day, October 18, 1968, respondent Coruña allegedly taking advantage of his

position, authorized the issuance of a cashier's check of the bank in the amount of P209,076.00, taken out of the funds of

petitioner Bureau deposited in current account with the bank and paid the same to respondent estate, without notice to said

petitioner.

Later on December 20, 1968, petitioners, through then Solicitor General Felix V. Makasiar, wrote respondent bank

complaining that the bank acted precipitately in having delivered such a substantial amount to the special sheriff without

affording petitioner Bureau a reasonable time to contest the validity of the garnishment, notwithstanding the bank's being

charged with legal knowledge that government funds are exempt from execution or garnishment, and demanding that the

bank credit the said petitioner's account in the amount of P209,076.00, which the bank had allowed to be illegally

garnished. Respondent bank replied on January 6, 1969 that it was not liable for the said garnishment of government

funds, alleging that it was not for the bank to decide the question of legality of the garnishment order and that much as it

wanted to wait until it heard from the Bureau of Public Highways, it was "helpless to refuse delivery under the teeth" of

the special order of October 18, 1968, directing immediate delivery of the garnished amount.

Petitioners therefore filed on January 28, 1969 the present action against respondents, in their capacities as above stated in

the title of this case, praying for judgment declaring void the question orders of respondent Court. Petitioners also sought

the issuance of a writ of preliminary mandatory injunction for the immediate reimbursement of the garnished sum of

P209,076.00, constituting funds of petitioner Bureau on deposit with the Philippine National Bank as official depository

of Philippine Government funds, to the said petitioner's account with the bank, so as to forestall the dissipation of said

funds, which the government had allocated to its public highways and infrastructure projects. The Court ordered on

January 31, 1969 the issuance of the writ against the principal respondents solidarily, including respondent judge therein

so that she would take forthwith all the necessary measures and processes to compel the immediate return of the said

government funds to petitioner Bureau's account with respondent bank.5

In compliance with the writ, respondent bank restored the garnished sum of P209,076.00 to petitioner Bureau's account

with it.6 The primary responsibility for the reimbursement of said amount to petitioner Bureau's account with the

respondent bank, however, rested solely on respondent estate, since it is the judgment creditor that received the amount

upon the questioned execution.

Strangely enough, as appears now from respondent bank's memorandum in lieu of oral argument,7 what respondent bank

did, acting through respondent Coruña as its counsel, was not to ask respondent estate to reimburse it in turn in the same

amount, but to file with the probate court with jurisdiction over respondent estate,8 a motion for the estate to deposit the

said amount with it, purportedly in compliance with the writ. Respondent estate thereupon deposited with respondent bank

as a savings account the sum of P125,446.00, on which the bank presumably would pay the usual interest, besides. As to

the balance of P83,630.00, this sum had been in the interval paid as attorney's fees to Atty. Jesus B. Santos, counsel for

the estate, by the administrator, allegedly without authority of the probate court.9 Accordingly, respondent estate has not

97

reimbursed the respondent bank either as to this last amount, and the bank has complacently not taken any steps in the

lower court to require such reimbursement.

The ancillary questions now belatedly raised by the State may readily be disposed of. Petitioners may not invoke the

State's immunity from suit, since the case below was but a continuation in effect of the pre-war expropriation proceedings

instituted by the State itself. The expropriation of the property, which now forms part of Epifanio, de los Santos Avenue,

is a fait accompli and is not questioned by the respondent state. The only question at issue was the amount of the just

compensation due to respondent estate in payment of the expropriated property, which properly pertained to the

jurisdiction of the lower court. 10

It is elementary that in expropriation proceedings, the State precisely submits to the

Court's jurisdiction and asks the Court to affirm its lawful right to take the property sought to be expropriated for the

public use or purpose described in its complaint and to determine the amount of just compensation to be paid therefor.

Neither may the State impugn the validity of the compromise agreement executed by the Solicitor General on behalf of

the State with the approval of the proper government officials, on the ground that it was executed only by the lawyer of

respondent estate, without any showing of having been specially authorized to bind the estate thereby, because such

alleged lack of authority may be questioned only by the principal or client, and respondent estate as such principal has on

the contrary confirmed and ratified the compromise agreement. 11

As a matter of fact, the Solicitor General, in

representation of the State, makes in the petition no prayer for the annulment of the compromise agreement or of the

respondent court's decision approving the same.

On the principal issue, the Court holds that respondent Court's two questioned orders (1) for execution of the judgment, in

pursuance whereof respondent deputy clerk issued the corresponding writ of execution and respondent special sheriff

issued the notice of garnishment, and (2) for delivery of the garnished amount of P209,076.00 to respondent estate as

judgment creditor through respondent special sheriff, are null and void on the fundamental ground that government funds

are not subject to execution or garnishment.

1. As early as 1919, the Court has pointed out that although the Government, as plaintiff in expropriation proceedings,

submits itself to the jurisdiction of the Court and thereby waives its immunity from suit, the judgment that is thus rendered

requiring its payment of the award determined as just compensation for the condemned property as a condition precedent

to the transfer to the title thereto in its favor, cannot be realized upon execution.12

The Court there added that it is

incumbent upon the legislature to appropriate any additional amount, over and above the provisional deposit, that may be

necessary to pay the award determined in the judgment, since the Government cannot keep the land and dishonor the

judgment.

In another early case, where the government by an act of the Philippine Legislature, expressly consented to be sued by the

plaintiff in an action for damages and waived its immunity from suit, the Court adjudged the Government as not being

legally liable on the complaint, since the State under our laws would be liable only for torts caused by its special agents,

specially commissioned to carry out the acts complained of outside of such agents' regular duties. We held that the

plaintiff would have to look to the legislature for another legislative enactment and appropriation of sufficient funds, if the

Government intended itself to be legally liable only for the damages sustained by plaintiff as a result of the negligent act

of one of its employees. 13

The universal rule that where the State gives its consent to be sued by private parties either by general or special law, it

may limit claimant's action "only up to the completion of proceedings anterior to the stage of execution" and that the

power of the Courts ends when the judgment is rendered, since government funds and properties may not be seized under

writs of execution or garnishment to satisfy such judgments, is based on obvious considerations of public policy.

Disbursements of Public funds must be covered by the corresponding appropriation as required by law. The functions and

public services rendered by the State cannot be allowed to be paralyzed or disrupted by the diversion of public funds from

their legitimate and specific objects, as appropriated by law.

Thus, as pointed out by the Court in Belleng vs. Republic, 14

while the State has given its consent to be sued in

compensation cases, the pauper-claimant therein must look specifically to the Compensation Guarantee Fund provided by

98

the Workmen's Compensation Act for the corresponding disbursement in satisfaction of his claim, since the State in Act

3083, the general law waiving its immunity from suit "upon any money claim involving liability arising from contract

express or implied," imposed the limitation in Sec. 7 thereof that "no execution shall issue upon any judgment rendered by

any Court against the Government of the (Philippines) under the provisions of this Act;" and that otherwise, the claimant

would have to prosecute his money claim against the State under Commonwealth Act 327.

This doctrine was again stressed by. the Court in Republic vs. Palacio, 15

setting aside as null and void the order of

garnishment issued by the sheriff pursuant to the lower Court's writ of execution on funds of the Pump Irrigation Trust

Fund in the account of the Government's Irrigation Service Unit with the Philippine National Bank. The Court emphasized

then and re-emphasizes now that judgments against the State or its agencies and instrumentalities in cases where the State

has consented to be sued, operate merely to liquidate and establish the plaintiff's claim; such judgments may not be

enforced by writs of execution or garnishment and it is for the legislature to provide for their payment through the

corresponding appropriation, as indicated in Act 3083.

2. Respondent bank and its Chief, Documentation Staff, respondent Coruña have advanced two specious arguments to

justify their wrongful delivery of the garnished public funds to respondent estate. Their first contention that the said

government funds by reason of their being deposited by petitioner Bureau under a current account subject to withdrawal

by check, instead of being deposited as special trust funds, "lost their kind and character as government funds," 16

is

untenable. As the official depositary of the Philippine Government, respondent bank and its officials should be the first

ones to know that all government funds deposited with it by any agency or instrumentality of the government, whether by

way of general or special deposit, remain government funds, since such government agencies or instrumentalities do not

have any non-public or private funds of their own.

Their second contention that said government funds lost their character as such "the moment they were deposited with the

respondent bank", 17

since the relation between a depositor and a depository bank is that of creditor and debtor, is just as

untenable, absolutely. Said respondents shockingly ignore the fact that said government funds were deposited with

respondent bank as the official depositary of the Philippine Government. Assuming for the nonce the creation of such

relationship of creditor and debtor, petitioner Bureau thereby held a credit against respondent bank whose obligation as

debtor was to pay upon demand of said petitioner-creditor the public funds thus deposited with it; even though title to the

deposited funds passes to the bank under this theory since the funds become mingled with other funds which the bank

may employ in its ordinary business, what was garnished was not the bank's own funds but the credit of petitioner bureau

against the bank to receive payment of its funds, as a consequence of which respondent bank delivered to respondent

estate the garnished amount of P209,076.00 belonging to said petitioner. Petitioner bureau's credit against respondent

bank thereby never lost its character as a credit representing government funds thus deposited. The moment the payment

is made by respondent bank on such deposit, what it pays out represents the public funds thus deposited which are not

garnishable and may be expended only for their legitimate objects as authorized by the corresponding legislative

appropriation. Neither respondent bank nor respondent Coruña are the duly authorized disbursing officers and auditors of

the Government to authorize and cause payment of the public funds of petitioner Bureau for the benefit or private persons,

as they wrongfully did in this case.

3. Respondents bank and Coruña next pretend that refusal on their part to obey respondent judge's order to deliver the

garnished amount, "which is valid and binding unless annulled, would have exposed them for contempt of court." 18

They

make no excuse for not having asked the lower court for time and opportunity to consult petitioner Bureau or the Solicitor

General with regard to the garnishment and execution of said deposited public funds which were allocated to specific

government projects, or for not having simply replied to the sheriff that what they held on deposit for petitioner Bureau

were non-garnishable government funds. They have not given any cogent reason or explanation, — charged as they were

with knowledge of the nullity of the writ of execution and notice of garnishment against government funds, for in the

earlier case of Republic vs. Palacio, supra, they had then prudently and timely notified the proper government officials of

the attempted levy on the funds of the Irrigation Service Unit deposited with it, thus enabling the Solicitor General to take

the corresponding action to annul the garnishment — for their failure to follow the same prudent course in this case.

Indeed, the Court is appalled at the improper haste and lack of circumspection with which respondent Coruña and other

responsible officials of respondent bank precipitately allowed the garnishment and delivery of the large amount involved,

99

all within the period of just four days, even before the expiration of the five-day reglementary period to reply to the

sheriff's notice of garnishment. Failure on the State's part to oppose the issuance of the writ of execution, which was

patently null and void as an execution against government funds, could not relieve them of their own responsibility.

4. Respondents bank and Coruña further made common cause with respondent estate beyond the legal issues that should

solely concern them, by reason of their having wrongfully allowed the garnishment and delivery of government funds,

instead assailing petitioners for not having come to court with "clean hands" and asserting that in fairness, justice and

equity, petitioners should not impede, obstruct or in any way delay the payment of just compensation to the land owners

for their property that was occupied way back in 1940. This matter of payment of respondent estate's judgment credit is of

no concern to them as custodian and depositary of the public funds deposited with them, whereby they are charged with

the obligation of assuring that the funds are not illegally or wrongfully paid out.

Since they have gone into the records of the expropriation case, then it should be noted that they should have considered

the vital fact that at the time that the compromise agreement therein was executed in November, 1966, respondent estate

was well aware of the fact that the funds for the payment of the property in the amount of P209,076.00 still had to be

released by the Budget Commissioner and that at the time of the garnishment, respondent estate was still making the

necessary representations for the corresponding release of such amount, pursuant to the Budget Commissioner's favorable

recommendation.19

And with regard to the merits of the case, they should have likewise considered that respondent estate

could have no complaint against the fair attitude of the authorities in not having insisted on their original stand in their

answer that respondent estate was entitled only to the sum of P3,203.00 as the fair market value of the property at the time

the State took possession thereof on November 25, 1940, with legal interests thereon, but rather agreed to pay therefor the

greatly revised and increased amount of P209,076.00 at P14.00 per square meter, not to mention the consequential

benefits derived by said respondent from the construction of the public highway with the resultant enhanced value of its

remaining properties in the area.

5. The manner in which respondent bank's counsel and officials proceeded to comply with the writ of preliminary

mandatory injunction issued by the Court commanding respondent estate, its judicial administrator and respondents bank

and Coruña, in solidum, to reimburse forthwith the account of petitioner Bureau in the garnished amount of P209,076.00,

does not speak well of their fidelity to the bank's interests. For while respondent bank had restored with its own funds the

said amount of P209,076.00 to petitioner Bureau's account, it has not required respondent estate as the party primarily

liable therefor as the recipient of the garnished amount to reimburse it in turn in this same amount. Rather, said bank

officials have allowed respondent estate to keep all this time the whole amount of P209,076.00 wrongfully garnished by it.

For as stated above, respondent bank allowed respondent estate merely to deposit with it as a savings account, of

respondent estate, the lesser sum of P125,446.00 on which the bank presumably has paid and continues paying respondent

estate, besides the usual interest rates on such savings accounts, and neither has it taken any steps to require

reimbursement to it from respondent estate of the remainder of P83,630.00 which respondent estate of its own doing and

responsibility paid by way of attorney's fees.

It thus appears that all this time, respondent bank has not been reimbursed by respondent estate as the party primarily

liable for the whole amount of P209,076.00 wrongfully and illegally garnished and received by respondent estate. This

grave breach of trust and dereliction of duty on the part of respondent bank's officials should be brought to the attention of

respondent bank's Board of Directors and management for the appropriate administrative action and other remedial action

for the bank to recover the damages it has been made to incur thereby.

6. The Solicitor General has likewise questioned the legality of respondent Court's Order of October 14, 1968, appointing

respondent Garcia as "special sheriff" for the purpose of effecting service of the writ of execution, simply on respondent

estate's representation that it was desirable "for a speedy enforcement of the writ."

The Court finds this general practice of the lower courts of appointing "special sheriffs" for the service of writs of

execution to be unauthorized by law. The duty of executing all processes" of the courts in civil cases, particularly, writs of

execution, devolves upon the sheriff or his deputies, under Section 183 of the Revised Administrative Code and Rule 39,

section 8 of the Rules of Court. Unlike the service of summons which may be made, aside from the sheriff or other proper

100

court officers, "for special reasons by any person especially authorized by the judge of the court issuing the summons"

under Rule 14, section 5 of the Rules of Court, the law requires that the responsibility of serving writs of execution, which

involve the taking delivery of money or property in trust for the judgment creditor, should be carried out by regularly

bonded sheriffs or other proper court officers. (Sections 183 and 330, Revised Administrative Code). The bond required

by law of the sheriff is conditioned inter alia, "for the delivery or payment to the Government, or the persons entitled

thereto, of all the property or sums of money that shall officially come into his or their (his deputies') hands" (Section

330, idem), and thus avoids the risk of embezzlement of such properties and moneys.

Section 185 of the Revised Administrative Code restrictively authorizes the judge of the Court issuing the process or writ

to deputize some suitable person only "when the sheriff is party to any action or proceeding or is otherwise incompetent to

serve process therein." The only other contingency provided by law is when the office of sheriff is vacant, and the judge is

then authorized, "in case of emergency, (to) make a temporary appointment to the office of sheriff ... pending the

appointment and qualification of the sheriff in due course; and he may appoint the deputy clerk of the court or other

officer in the government service to act in said capacity." (Section 189, idem).

None of the above contingencies having been shown to be present, respondent Court's order appointing respondent Garcia

as "special sheriff" to serve the writ of execution was devoid of authority.

7. No civil liability attaches, however, to respondents special sheriff and deputy clerk, since they acted strictly pursuant to

orders issued by respondent judge in the discharge of her judicial functions as presiding judge of the lower court, and

respondent judge's immunity from civil responsibility covers them, although the said orders are herein declared null and

void. 20

ACCORDINGLY, the writs of certiorari and prohibition are granted. The respondent court's questioned Orders of

October 14, and 18, 1968, are declared null and void, and all further proceedings in Civil Case No. Q-7441 of the Court of

First Instance of Rizal, Quezon City, Branch IX are abated. The writ of preliminary mandatory injunction heretofore

issued is made permanent, except as to respondent judge who is excluded therefrom, without prejudice to any cause of

action that private respondents may have, inter se. Respondent estate and respondent Tomas N. Hashim as prayed for by

respondent Philippine National Bank in its Answer, are ordered jointly and severally to reimburse said respondent bank in

the amount of P209,076.00 with legal interest until the date of actual reimbursement. Respondents Estate of N. T. Hashim,

Philippine National Bank and Benjamin Coruña are ordered jointly to pay treble costs.

The Clerk of Court is directed to furnish copies of this decision to the Board of Directors and to the president of

respondent Philippine National Bank for their information and appropriate action. So ordered.

101

G.R. No. L-29161 December 29, 1928

JAMES J. RAFFERTY, plaintiff-appellant,

vs.

PROVINCE OF CEBU, defendant-appellee.

STATEMENT

For cause of action in case No. 6336 in the lower court, plaintiff alleges that he is the owner of lot No. 522 in question,

and that the defendant usurped a large portion of it for a park, and for such purpose constructed a house thereon and

enclosed it with wire. That thereafter the plaintiff made numerous demands for the possession of the land and the removal

of the improvements, all of which have been refused. As second cause of action, plaintiff alleges that lots Nos. 522 and

523 of the Hacienda Banilad did not have access to any street, and he asked for a right of way through lots Nos. 525 and

524, under article 565 of the Civil Code, stating that he is willing to pay a reasonable price for a strip 8 meters wide.

Plaintiff's third cause of action is in the nature of a supplemental complaint, in which he alleges that he is a resident of San

Francisco, California, and that the defendant refused to show his attorneys the document which purports to have been

executed by plaintiff in 1912, in which for the sum of P226 he transferred to the defendant lots Nos. 523 and 541, and

6,723 square meters of lot No. 522, by reason of which plaintiff had to come to the Philippines to attend the trial of this

case, and that in doing so he incurred expenses amounting to P1,920, and was deprived of the profit of his ordinary work,

for which he prays judgment against the defendant for P4,420, with legal interest. 1awphi1.net

The motion to file a supplemental complaint was denied by the court.

In his amended complaint in case No. 6362 in the lower court, plaintiff alleges that he is the owner of lot No. 541

consisting of 4,030 square meters across which the municipality of Cebu constructed the Fructuoso Ramos Street, thereby

appropriating to itself 1,154 square meters without the consent of the plaintiff, by reason of which the plaintiff has been

damaged in the sum of P1,600, for which he prays a corresponding judgment.

For answer to the two different complaints, the defendants made a general and specific denial, and as a special defense

alleged that on March 15, 1912, the plaintiff sold to the defendant for the sum of two hundred twenty-six pesos 6,723

square meters from and out of lot No. 522, together with lots Nos. 523 and 541, and because of the fact that at the time of

the sale, the titles were still in the name of the Government of the Philippines, the plaintiff could not transfer title to the

defendant. That since that time the defendant has been occupying and possessing the land as owner peacefully, quietly and

adversely to the whole world and with the knowledge and consent of the plaintiff, and in case No. 6362, as a special

defense the defendant alleged that lot No. 541, together with lots Nos. 523 and 522-B, as stated in the first special defense,

was acquired by purchase by the defendant from the plaintiff for a consideration of P226, and the Province of Cebu

transferred sublot No. 541-B to the municipality of Cebu for the construction of Fructuoso Ramos Street, for the

occupation, possession and use of said property, since which time the defendant has been in possession as owner

peacefully and adversely, and as a cross-complaint, the defendant, Province of Cebu, alleges that it is a public corporation

organized and existing under the laws of the Philippine Islands with authority to acquire real property, and that as such

owner of the land in question, and through such adverse possession, and having made public improvements thereon, it

prays that the complaint be dismissed, and that the plaintiff be ordered to execute to the defendant the necessary deeds for

the transfer of the title to lots Nos. 523 and 541, and to the 6,723 square meters of lot No. 522, known as sublot No. 522-

B, and that it have judgment against him for costs.

To this cross-complaint, the plaintiff invokes the provisions of paragraph 5 of section 335 of Act No. 190, and certain

provisions of the Jones Law, and alleges that the defedant is estopped to claim and assert that it is the owner of the land in

question, and in substance that the defendant is not the owner of the land; that it has never been in possession of it, and

that the plaintiff is the owner and entitled to its possession of it, and that any title which the defendant may have or claim

was obtained through fraud, and for such reason is null and void.

102

Upon such issues the two cases were tried as one, and in an exhaustive opinion the lower court found all of the material

facts for the defendant, dismissed plaintiff's complaint, and rendered judgment for the defendants as prayed for in its

cross-complaint, from which plaintiff appeals and files a brief of one hundred fifty-six pages, in which he makes forty-one

assignments of error.

JOHNS, J.:

The record in this case is voluminous, and the trial court made a careful and detailed analysis of all of the material facts

which he found for the defendant. Although the appellant makes numerous assignments of error, yet in the main the real

questions involved on this appeal are questions of fact and the legal force and effect of the instrument which purports to

have been executed by the plaintiff on November 23, 1910, by and through E. Michael, as his agent and attorney-in-fact,

in and by which, for a consideration of P226, Michael undertook to convey all of the right, title and interest of the plaintiff

in and to about 6,723 square meters of a part of lot No. 522, 2,042 square meters of lot No. 523, and 4,030 square meters

of lot No. 541, which were expropriated within the provincial park.

The record is conclusive that the P226 was paid to the plaintiff at the time of this alleged conveyance, and that he received

and accepted the money and that the defendant relying thereon entered in, and upon, and took possession of, the land in

question, and made permanent improvements therein, and claimed to be its owner, and that in truth and in fact, the

plaintiff never questioned the right or title of the defendant until these actions were brought on December 5, 1926. If it be

true, as plaintiff now contends, that Michael had no authority to execute the instrument in question, he ought not to have

accepted and receipted for its consideration, and having done so, he could not wait for fifteen years to rescind and set it

aside upon the ground of fraud. The actions of the defendant after the instrument was executed in taking possession of the

land and making improvements thereon were open and notorious and were a matter of common knowledged and were

known or legally should have been known to the plaintiff.

Plaintiff having receipt for and accepted the consideration for the instrument executed November 23, 1910, and the

defendant having relied thereon and having entered upon and taken possession and made valuable improvements on the

land, we are clearly of the opinion that he cannot, fifteen years later, maintain an action to set aside that instrument upon

the ground of fraud and deceit in its execution.

The lands in question are now a portion of what is known as the Osmena Park in the City of Cebu, and the plaintiff

undertook to justify his neglect and delay upon the ground that he was not previously in a position to cope with such a

powerful influence. That position is not tenable or even plausible, and does not in the least justify plaintiff for his delay

and neglect to assert his legal right, if any, he had.

Assuming, as he now contends, that at one time the plaintiff may have had some legal rights, he could not sleep upon

them for fifteen years, during all of which time the defendant relied in good faith on the instrument executed by his agent

on November 23, 1910, and had made valuable improvements on the lands in question, and then obtain legal relief from

his own delay and neglect. Those legal principles apply with equal force and effect to the facts in both cases.

With all due respects to the able and vigorious brief for the appellant and the numerous assigments of error, the main

question involved on this appeal are founded upon questions of fact, all of which were found by the trial court in favor of

the defendant, and there is ample evidence to sustain its findings.

The judgment of the lower court is affirmed in both cases, with costs on the appeal. So ordered.

103

G.R. No. 11897 September 24, 1918

J. F. RAMIREZ, plaintiff-appellee,

vs.

THE ORIENTALIST CO., and RAMON J. FERNANDEZ, defendants-appellants.

STREET, J.:

The Orientalist Company is a corporation, duly organized under the laws of the Philippine Islands, and in 1913 and 1914,

the time of the occurrences which gave rise to this lawsuit, was engaged in the business of maintaining and conducting a

theatre in the city of Manila for the exhibition of cinematographic films. Under the articles of incorporation the company

is authorized to manufacture, buy, or otherwise obtain all accessories necessary for conducting such a business. The

plaintiff J. F. Ramirez was, at the same time, a resident of the city of Paris, France, and was engaged in the business of

marketing films for a manufacturer or manufacturers, there engaged in the production or distribution of cinematographic

material. In this enterprise the plaintiff was represented in the city of Manila by his son, Jose Ramirez.

In the month of July, 1913, certain of the directors of the Orientalist Company, in Manila, became apprised of the fact that

the plaintiff in Paris had control of the agencies for two different marks of films, namely, the "Eclair Films" and the

"Milano Films;" and negotiations were begun with said officials of the Orientalist Company by Jose Ramirez, as agent of

the plaintiff, for the purpose of placing the exclusive agency of these films in the hands of the Orientalist Company. The

defendant Ramon J. Fernandez, one of the directors of the Orientalist Company and also its treasure, was chiefly active in

this matter, being moved by the suggestions and representations of Vicente Ocampo, manage of the Oriental Theater, to

the effect that the securing of the said films was necessary to the success of the corporation.

Near the end of July of the year aforesaid, Jose Ramirez, as representative of his father, placed in the hands of Ramon J.

Fernandez an offer, dated July 4, 1913, stating detail the terms upon which the plaintiff would undertake to supply from

Paris the aforesaid films. This officer was declared to be good until the end of July; and as only about for the Orientalist

Company to act on the matter speedily, if it desired to take advantage of said offer. Accordingly, Ramon J. Fernandez, on

July 30, had an informal conference with all the members of the company's board of directors except one, and with

approval of those with whom he had communicated, addressed a letter to Jose Ramirez, in Manila, accepting the offer

contained in the memorandum of July 4th for the exclusive agency of the Eclair films. A few days later, on August 5, he

addressed another letter couched in the same terms, likewise accepting the office of the exclusive agency for

the Milano Films.

The memorandum offer contained a statement of the price at which the films would be sold, the quantity which the

representative of each was required to take and information concerning the manner and intervals of time for the respective

shipments. The expenses of packing, transportation and other incidentals were to be at the cost of the purchaser. There

was added a clause in which J. F. Ramirez described his function in such transactions as that of a commission agent and

stated that he would see to the prompt shipment of the films, would pay the manufacturer, and take care that the films

were insured — his commission for such services being fixed at 5 per cent.

What we consider to be the most portion of the two letters of acceptance written by R. J. Fernandez to Jose Ramirez is in

the following terms:

We willingly accepted the officer under the terms communicated by your father in his letter dated at Paris on July

4th of the present year.

These communications were signed in the following form, in which it will be noted the separate signature of R. J.

Fernandez, as an individual, is placed somewhat below and to the left of the signature of the Orientalist Company as

singed by R. J. Fernandez, in the capacity of treasurer:

104

THE ORIENTALIST COMPANY,

By R. J. FERNANDEZ,

Treasurer,

R. J. FERNANDEZ.

Both of these letters also contained a request that Jose Ramirez should at once telegraph to his father in Paris that his offer

had been accepted by the Orientalist Company and instruct him to make a contract with the film companies, according to

the tenor of the offer, and in the capacity of attorney-in-fact for the Orientalist Company. The idea behind the latter

suggestion apparently was that the contract for the films would have to be made directly between the film-producing

companies and the Orientalist Company; and it seemed convenient, in order to save time, that the Orientalist Company

should clothed J. F. Ramirez with full authority as its attorney-in-fact. This idea was never given effect; and so far as the

record shows, J. F. Ramirez himself procured the films upon his own responsibility, as he indicated in the officer of July 4

that he would do, with the result that the only contracting parties in this case are J. F. Ramirez of the one part, and the

Orientalist Company, with Ramon J. Fernandez of the other.

In due time the films began to arrive in Manila, a draft for the cost and expenses incident to each shipment being attached

to the proper bill of lading. It appears that the Orientalist Company was without funds to meet these obligations and the

first few drafts were dealt with in the following manner: The drafts, upon presented through the bank, were accepted in

the name of the Orientalist Company by its president B. Hernandez, and were taken up by the latter with his own funds.

As the drafts had thus been paid by B. Hernandez, the films which had been procured by he payment of said drafts were

treated by him as his own property; and they in fact never came into the actual possession of the Orientalist Company as

owner at all, though it is true Hernandez rented the films to the Orientalist Company and they were exhibited by it in the

Oriental Theater under an arrangement which was made between him and the theater's manager.

During the period between February 27, 1914, and April 30, 1914, there arrived in the city of Manila several remittances

of films from Paris, and it is these shipments which have given occasion for the present action. All of the drafts

accompanying these films were drawn, as on former occasions, upon the Orientalist Company; and all were accepted in

the name of B. Hernandez, except the last, which was accepted by B. Hernandez individually. None of the drafts thus

accepted were taken up by the drawee or by B. Hernandez when they fell due; and it was finally necessary for the plaintiff

himself to take them up as dishonored by non-payment.

Thereupon this action was instituted by the plaintiff on May 19, 1914, against the Orientalist Company, and Ramon J.

Fernandez. As the films which accompanied the dishonored were liable to deteriorate, the court, upon application of the

plaintiff, and apparently without opposition on the part of the defendants, appointed a receiver who took charge of the

films and sold them. The amount realized from this sale was applied to the satisfaction of the plaintiff's claim and was

accordingly delivered to him in part payment thereof. At trial judgment was given for the balance due to the plaintiff,

namely P6,018.93, with interest from May 19, 1914, the date of the institution of the action. In the judgment of the trial

court the Orientalist Company was declared to be a principal debtor and Ramon J. Fernandez was declared to be liable

subsidiarily as guarantor. From this judgment both of the parties defendant appealed.

In this Court neither of the parties appellant make any question with respect to the right of the plaintiff to recover from

somebody the amount awarded by the lower court; but each of the defendants insists the other is liable for the whole. It

results that the real contention upon this appeal is between the two defendants.

It is stated in the brief of the appellant Ramon J. Fernandez and the statement is not challenged by the Orientalist

Company that the judgment has already been executed as against the company is exclusively and primarily liable the

entire indebtedness, the question as to the liability of Ramon J. Fernandez would be academic. But if the latter is liable as

principal obligor for the whole or any part of the debt, it will be necessary to modify the judgment in order to adjust the

rights of the defendants in accordance with such finding.

105

It will be noted that the action is primarily founded upon the liability created by the letters dated July 30th and August 5,

1913, in connection with the plaintiff's offer of July 4, 1913; and both of the letters mentioned are copied into the

complaint as the foundation of the action. The action is not based upon the dishonored drafts which were accepted by B.

Hernandez in the name of the Orientalist Company; and although these drafts, as well as the last draft, which was

accepted by B. Hernandez individually, have been introduced in evidence, this was evidently done for the purpose of

proving the amount of damages which the plaintiff was entitled to recover.

In the discussion which is to follow we shall consider, first, the question of the liability of the corporation upon the

contracts contained in the letters of July 30 and August 5, 1913, and, secondly the question of the liability of Ramon J.

Fernandez, based upon his personal signature to the same documents.

As to the liability of the corporation a preliminary point of importance arises upon the pleadings. The action, as already

stated, is based upon documents purporting to be signed by the Orientalist Company, and copies of the documents are set

out in the complaint. It was therefore incumbent upon the corporation, if it desired to question the authority of Fernandez

to bind it, to deny the due execution of said contracts under oath, as prescribed in section 103 of the Code of Civil

procedure. Said section, in the part pertinent to the situation now under consideration, reads as follows:

When an action is brought upon a written instrument and the complaint contains or has annexed or has annexed a

copy of such instrument, the genuineness and due execution of the instrument shall be deemed admitted, unless

specifically denied under oath in the answer.

No sworn answer denying the genuineness and due execution of the contracts in question or questioning the authority of

Ramon J. Fernandez to bind the Orientalist Company was filed in this case; but evidence was admitted without objection

from the plaintiff, tending to show that Ramon J. Fernandez had no such authority. This evidence consisted of extracts

from the minutes of the proceedings of the company's board of directors and also of extracts from the minutes of the

proceedings of the company's stockholders, showing that the making of this contract had been under consideration in both

bodies and that the authority to make the same had been withheld by the stockholders. It therefore becomes necessary for

us to consider whether the administration resulting from the failure of the defendant company to deny the execution of the

contracts under oath is binding upon it for all purposes of this lawsuit, or whether such failure should be considered a

mere irregularity of procedure which was waived when the evidence referred to was admitted without objection from the

plaintiff. The proper solution of this problem makes it necessary to consider carefully the principle underlying the

provision above quoted.

That the situation was one in which an answer under oath denying the authority of the agent should have been interposed,

supposing that the company desired to contest this point, is not open to question. In the case of Merchant vs. International

Banking Corporation, (6 Phil. Rep., 314), it appeared that one Brown has signed the name of the defendant bank as

guarantor of a promissory note. The bank was sued upon this guaranty and at the hearing attempted to prove that Brown

had no authority to bind the bank by such contract. It was held that buy failing to deny the contract under oath, the bank

had admitted the genuineness and due execution thereof, and that this admission extended not only to the authenticity of

the signature of Brown but also to his authority. Said Justice Willard: "The failure of the defendant to deny the

genuineness and due execution of this guaranty under oath was an admission not only of the signature of Brown, but also

his authority to make the contract in behalf of the defendant and of the power the contract in behalf of the defendant and

of the power of the defendant to enter into such a contract.

The rule thus stated is in entire accord with the doctrine prevailing in the United States, as will be seen by reference to the

following, among other authorities:

The case of Barrett Mining Co. vs. Tappan (2 Colo., 124) was an action against a mining corporation upon an appeal

bond. The name of the company had been affixed to the obligation by an agent, and no sufficient affidavit was filed by the

corporation questioning its signature or the authority of the agent to bind the company. It was held that the plaintiff did

not have to prove the due execution of the bond and that the corporation as to be taken as admitting the authority of the

agent to make the signature. Among other things the court said: "But it is said that the authority of Barrett to execute the

106

bond is distinguishable from the signing and, although the signature must be denied under oath, the authority of the agent

need not be. Upon this we observe that the statute manifestly refers to the legal effect of the signature, rather than the

manual act of singing. If the name of the obligor, in a bond, is subscribed by one in his presence, and by his direction, the

effect is the same as if his name should be signed with his own hand, and under such circumstances we do not doubt that

the obligor must deny his signature under oath, in order to put the obligee to proof of the fact. Quit facit per aliam facit

per se, and when the name is signed by one thereunto authorized, it is as much as the signature of the principal as if

written with his own hand. Therefore, if the principal would deny the authority of the agent, as the validity of the

signature is thereby directly attacked, the denial must be under oath.

In Union Dry Company vs. Reid (26 Ga., 107), an action was brought upon a promissory note purporting to have been

given by on A. B., as the treasurer of the defendant company. Said the court: "Under the Judiciary Act of 1799, requiring

the defendant to deny on oath an instrument of writing, upon which he is sued, the plea in this case should have been

verified.

If the person who signed this note for the company, and upon which they are sued, was not authorized to make it, let them

say so upon oath, and the onus is then on the plaintiff to overcome the plea."

It should be noted that the provision contained in section 103 of our Code of Civil Procedure is embodied in some form or

other in the statutes of probably all of the American States, and it is not by any means peculiar to the laws of California,

though it appears to have been taken immediately from the statutes of that State. (Secs. 447, 448, California Code of Civil

Procedure.)

There is really a broader question here involved than that which relates merely to the formality of verifying the answer

with an affidavit. This question arises from the circumstance that the answer of the corporation does not in any was

challenge the authority of Ramon J. Fernandez to bind it by the contracts in question and does not set forth, as a special

defense, any such lack of authority in him. Upon well-established principles of pleading lack of authority in an officer of a

corporation to bind it by a contract executed by him in its name is a defense which should be specially pleaded — and this

quite apart from the requirement, contained in section 103, that the answer setting up such defense should be verified by

oath. But is should not here escape observation that section 103 also requires — in denial contemplated in that section

shall be specific. An attack on the instrument in general terms is insufficient, even though the answer is under oath.

(Songco vs. Sellner, 37 Phil. Rep., 254.)

In the first edition of a well-known treatise on the laws of corporations we find the following proposition:

If an action is brought against a corporation upon a contract alleged to be its contract, if it desires to set up the

defense that the contract was executed by one not authorized as its agent, it must plead non est factum.

(Thompson on Corporations, 1st ed., vol. 6, sec. 7631.)

Again, says the same author:

A corporation can not avail itself of the defense that it had no power to enter into the obligation to enforce which

the suit is brought, unless it pleads that defense. This principle applies equally where the defendant intends to

challenge the power of its officer or agent to execute in its behalf the contract upon which the action brought and

where it intends to defend on the ground of total want of power in the corporation to make such a contract. (Opus

citat. sec. 7619.)

In Simon vs. Calfee (80 Ark., 65), it was said:

Though the power of the officers of a business corporation to issue negotiable paper in its name is not presumed,

such corporation can not avail itself of a want of power in its officers to bind it unless the defense was made on

such ground.

107

The rule has been applied where the question was whether corporate officer, having admitted power to make a contract,

had in the particular instance exceeded that authority, (Merill vs. Consumers' Coal Co., 114 N.Y., 216); and it has been

held that where the answer in a suit against a corporation on its note relies simply on the want of power of the corporation

to issue notes, the defendant can not afterwards object that the plaintiff has not shown that the officer executing the note

were empowered to do so. (Smith vs. Eureka Flour Mills Co., 6 Cal., 1.)

The reason for the rule enunciated in the foregoing authorities will, we think, be readily appreciated. In dealing with

corporations the public at large is bound to rely to a large extent upon outward appearances. If a man is found acting for a

corporation with the external indicia of authority, any person, not having notice of want of authority, may usually rely

upon those appearances; and if it be found that the directors had permitted the agent to exercise that authority and thereby

held him out as a person competent to bind the corporation, or had acquiesced in a contract and retained the benefit

supposed to have been conferred by it, the corporation will be bound, notwithstanding the actual authority may never have

been granted. The public is not supposed nor required to know the transactions which happen around the table where the

corporate board of directors or the stockholders are from time to time convoked. Whether a particular officer actually

possesses the authority which he assumes to exercise is frequently known to very few, and the proof of it usually is not

readily accessible to the stranger who deals with the corporation on the faith of the ostensible authority exercised by some

of the corporate officers. It is therefore reasonable, in a case where an officer of a corporation has made a contract in its

name, that the corporation should be required, if it denies his authority, to state such defense in its answer. By this means

the plaintiff is apprised of the fact that the agent's authority is contested; and he is given an opportunity to adduce

evidence showing either that the authority existed or that the contract was ratified and approved.

We are of the opinion that the failure of the defendant corporation to make any issue in its answer with regard to the

authority of Ramon J. Fernandez to bind it, and particularly its failure to deny specifically under oath the genuineness and

due execution of the contracts sued upon, have the effect of elimination the question of his authority from the case,

considered as a matter of mere pleading. The statute (sec. 103) plainly says that if a written instrument, the foundation of

the suit, is not denied upon oath, it shall be deemed to be admitted. It is familiar doctrine that an admission made in a

pleading can not be controverted by the party making such admission; and all proof submitted by him contrary thereto or

inconsistent therewith should simply be ignored by the court, whether objection is interposed by the opposite party or not.

We can see no reason why a constructive admission, created by the express words of the statute, should be considered to

have less effect than any other admission.

The parties to an action are required to submit their respective contentions to the court in their complaint and answer.

These documents supply the materials which the court must use in order to discover the points of contention between the

parties; and where the statute says that the due execution of a document which supplies the foundation of an action is to be

taken as admitted unless denied under oath, the failure of the defendant to make such denial must be taken to operate as a

conclusive admission, so long as the pleadings remain that form.

It is true that it is declared in section 109 of the Code of Civil Procedure that immaterial variances between the allegations

of a pleading and the proof shall be disregarded and the facts shall be found according to the evidence. The same section,

however, recognizes the necessity for an amendment of the pleadings. And judgment must be in conformity with the case

made in conformity with the case made in the pleadings and established by the proof, and relief can not be granted that is

substantially inconsistent with either. A party can no more succeed upon a case proved but not alleged than upon a case

alleged but nor proved. This rule of course operates with like effect upon both parties, and applies equality to the

defendants special defense as to the plaintiffs cause of action.

Of course this Court, under section 109 of the Code of Civil Procedure, has authority even now to permit the answer of

the defendant to be amended; and if we believed that the interests of justice so required, we would either exercise that

authority or remand the cause for a new trial in court below. As will appear further on in this opinion, however, we think

that the interests of justice will best be promoted by deciding the case, without more ado, upon the issues presented in the

record as it now stands.

108

That we may not appear to have overlooked the matter, we will observe that two cases are cited from California in which

the Supreme Court of the State has held that where a release is pleaded by way of defense and evidence tending to destroy

its effect is introduced without objection, the circumstance that it was not denied under oath is immaterial. In the earlier of

these cases, Crowley, vs. Railroad Co. (60 Cal., 628), an action was brought against a railroad company to recover

damages for the death of the plaintiff's minor son, alleged to have been killed by the negligence of the defendant. The

defendant company pleaded by way of defense a release purporting to be signed by the plaintiff, and in its answer inserted

a copy of the release. The execution of the release was not denied under oath; but at the trial evidence was submitted on

behalf of the plaintiff tending to show that at the time he signed the release, he was incompetent by reason of drunkenness

to bind himself thereby. It was held that inasmuch as this evidence had been submitted by the plaintiff without objection,

it was proper for the court to consider it. We do not question the propriety of that decision, especially as the issue had

been passed upon by a jury; but we believe that the decision would have been more soundly planted if it had been said that

the incapacity of the plaintiff, due to his drunken condition, was a matter which did not involve either the genuineness or

due execution of the release. Like the defenses of fraud, coercion, imbecility, and mistake, it was a matter which could be

proved under the general issue and did not have to be set up in a sworn reply. (Cf. Moore vs. Copp, 119 Cal., 429, 432,

433.) A somewhat similar explanation can, we think, be given of the case of Clark vs. Child in which the rule declared in

the earlier case was followed. With respect to both decisions which we merely observe that upon point of procedure which

they are supposed to maintain, the reasoning of the court is in our opinion unconvincing.

We shall now consider the liability of the defendant company on the merits just as if that liability had been properly put in

issue by a specific answer under oath denying the authority of Fernandez go to bind it. Upon this question it must at the

outset be premised that Ramon J. Fernandez, as treasurer, had no independent authority to bind the company by signing its

name to the letters in question. It is declared by signing its name to the letters in question. It is declared in section 28 of

the Corporation Law that corporate power shall be exercised, and all corporate business conducted by the board of

directors; and this principle is recognized in the by-laws of the corporation in question which contain a provision

declaring that the power to make contracts shall be vested in the board of directors. It is true that it is also declared in the

same by-laws that the president shall have the power, and it shall be his duty, to sign contract; but this has reference rather

to the formality of reducing to proper form the contract which are authorized by the board and is not intended to confer an

independent power to make contract binding on the corporation.

The fact that the power to make corporate contract is thus vested in the board of directors does not signify that a formal

vote of the board must always be taken before contractual liability can be fixed upon a corporation; for the board can

create liability, like an individual, by other means than by a formal expression of its will. In this connection the case of

Robert Gair Co. vs. Columbia Rice Packing Co. (124 La., 194) is instructive. If there appeared that the secretary of the

defendant corporation had signed an obligation on its behalf binding it as guarantor of the performance of an important

contract upon which the name of another corporation appeared as principal. The defendant company set up by way of

defense that is secretary had no authority to bind it by such an engagement. The court found that the guaranty was given

with the knowledge and consent of the president and directors, and that this consent of the president and directors, and

that this consent was given with as much observance of formality as was customary in the transaction of the business of

the company. It was held that, so far as the authority of the secretary was concerned, the contract was binding. In

discussing this point, the court quoted with approval the following language form one of its prior decisions:

The authority of the subordinate agent of a corporation often depends upon the course of dealings which the

company or its director have sanctioned. It may be established sometimes without reference to official record of

the proceedings of the board, by proof of the usage which the company had permitted to grow up in business, and

of the acquiescence of the board charged with the duty of supervising and controlling the company's business.

It appears in evidence, in the case now before us, that on July 30, the date upon which the letter accepting the offer of the

Eclair films was dispatched the board of directors of the Orientalist Company convened in special session in the office of

Ramon J. Fernandez at the request of the latter. There were present the four members, including the president, who had

already signified their consent to the making of the contract. At this meeting, as appears from the minutes, Fernandez

informed the board of the offer which had been received from the plaintiff with reference to the importation of films. The

109

minutes add that terms of this offer were approved; but at the suggestion of Fernandez it was decided to call a special

meeting of the stockholders to consider the matter and definite action was postponed.

The stockholders meeting was convoked upon September 18, 1913, upon which occasion Fernandez informed those

present of the offer in question and of the terms upon which the films could be procured. He estimated that the company

would have to make an outlay of about P5,500 per month, if the offer for the two films should be accepted by it.

The following extracts from the minutes of this meeting are here pertinent:

Mr. Fernandez informed the stockholders that, in view of the urgency of the matter and for the purpose of

avoiding that other importers should get ahead of the corporation in this regard, he and Messrs. B. Hernandez,

Leon Monroy, and Dr. Papa met for the purpose of considering the acceptance of the offer together with the

responsibilities attached thereto, made to the corporation by the film manufacturers ofEclair and Milano of Paris

and Italy respectively, inasmuch as the first shipment of films was then expected to arrive.

At the same time he informed the said stockholders that he had already made arrangements with respect to renting

said films after they have been once exhibited in the Cine Oriental, and that the corporation could very well meet

the expenditure involved and net a certain profit, but that, if we could enter into a contract with about nine

cinematographs, big gains would be obtained through such a step.

The possibility that the corporation might not see fit to authorize the contract, or might for lack of funds be unable to

make the necessary outlay, was foreseen; and in such contingency the stockholders were informed, that the four

gentlemen above mentioned (Hernandez, Fernandez, Monroy, and Papa) "would continue importing said films at their

own account and risk, and shall be entitled only to a compensation of 10 per cent of their outlay in importing the films,

said payment to be made in shares of said corporation, inasmuch as the corporation is lacking available funds for the

purpose, and also because there are 88 shares of stock remaining still unsold."

In view of this statement, the stockholders adopted a resolution to the effect that the agencies of the Eclair and Milano

films should be accepted, if the corporation could obtain the money with which to meet the expenditure involved, and to

this end appointed a committee to apply to the bank for a credit. The evidence shows that an attempt was made, on behalf

of the corporation, to obtain a credit of P10,000 from the Bank of the Philippine Islands for the purpose indicated, but the

bank declined to grant his credit. Thereafter another special meeting of the shareholders of the defendant corporation was

called at which the failure of their committee to obtain a credit from the bank was made known. A resolution was

thereupon passed to the effect that the company should pay to Hernandez, Fernandez, Monroy, and Papa an amount equal

to 10 per cent of their outlay in importing the films, said payment to be made in shares of the company in accordance with

the suggestion made at the previous meeting. At the time this meeting was held three shipment of the films had already

been received in Manila.

We believe it is a fair inference from the recitals of the minutes of the stockholders meeting of September 18, and

especially from the first paragraph above quoted, that this body was then cognizant that the officer had already been

accepted in the name of the Orientalist Company and that the films which were then expected to arrive were being

imported by virtue of such acceptance. Certainly four members of the board of directors there present were aware of this

fact, as the letter accepting the offer had been sent with their knowledge and consent. In view of this circumstance, a

certain doubt arises whether they meant to utilize the financial assistance of the four so-called importers in order that the

corporation might bet the benefit of the contract for the films, just as it would have utilized the credit of the bank if such

credit had been extended. If such was the intention of the stockholders their action amounted to a virtual, though indirect,

approval of the contract. It is not however, necessary to found the judgment on this interpretation of the stockholders

proceedings, inasmuch as we think for reasons presently to be stated, that the corporation is bound, and we will here

assume that in the end the contract were not approved by the stockholders.

It will be observed that Ramon J. Fernandez was the particular officer and member of the board of directors who was most

active in the effort to secure the films for the corporation. The negotiations were conducted by him with the knowledge

110

and consent of other members of the board; and the contract was made with their prior approval. As appears from the

papers in this record, Fernandez was the person to who keeping was confided the printed stationery bearing the official

style of the corporation, as well as rubber stencil with which the name of the corporation could be signed to documents

bearing its name.

Ignoring now, for a moment, the transactions of the stockholders, and reverting to the proceedings of the board of

directors of the Orientalist Company, we find that upon October 27, 1913, after Fernandez had departed from the

Philippine Islands, to be absent for many months, said board adopted a resolution conferring the following among other

powers on Vicente Ocampo, the manager of the Oriental theater, namely:

(1) To rent a box for the films in the "Kneeler Building."

(4) To be in charge of the films and of the renting of the same.

(5) To advertise in the different newspapers that we are importing films to be exhibited in the Cine Oriental.

(6) Not to deliver any film for rent without first receiving the rental therefor or the guaranty for the payment

thereof.

(7) To buy a book and cards for indexing the names of the films.

(10) Upon the motion of Mr. Ocampo, it was decided to give ample powers to the Hon. R. Acuña to enter into

agreements with cinematograph proprietors in the provinces for the purpose of renting films from us.

It thus appears that the board of directors, before the financial inability of the corporation to proceed with the project was

revealed, had already recognized the contract as being in existence and had proceeded to take the steps necessary to utilize

the films. Particularly suggestive is the direction given at this meeting for the publication of announcements in the

newspapers to the effect that the company was engaged in importing films. In the light of all the circumstances of the

case, we are of the opinion that the contracts in question were thus inferentially approved by the company's board of

directors and that the company is bound unless the subsequent failure of the stockholders to approve said contracts had the

effect of abrogating the liability thus created.

Both upon principle and authority it is clear that the action of the stockholders, whatever its character, must be ignored.

The functions of the stockholders of a corporation are, it must be remembered, of a limited nature. The theory of a

corporation is that the stockholders may have all the profits but shall turn over the complete management of the enterprise

to their representatives and agents, called directors. Accordingly, there is little for the stockholders to do beyond electing

directors, making by-laws, and exercising certain other special powers defined by-law. In conformity with this idea it is

settled that contract between a corporation and third person must be made by the director and not by the stockholders. The

corporation, in such matters, is represented by the former and not by the latter. (Cook on Corporations, sixth ed., secs.

708, 709.) This conclusion is entirely accordant with the provisions of section 28 of our Corporation Law already referred

to. It results that where a meeting of the stockholders is called for the purpose of passing on the propriety of making a

corporate contract, its resolutions are at most advisory and not in any wise binding on the board.

In passing upon the liability of a corporation in cases of this kind it is always well to keep in mind the situation as it

presents itself to the third party with whom the contract is made. Naturally he can have little or no information as to what

occurs in corporate meetings; and he must necessarily rely upon the external manifestations of corporate consent. The

integrity of commercial transactions can only be maintained by holding the corporation strictly to the liability fixed upon

it by its agents in accordance with law, and we would be sorry to announce a doctrine which would permit the property of

a man in the city of Paris to be whisked out of his hands and carried into a remote quarter of the earth without recourse

against the corporations whose name and authority had been used in the manner disclosed in this case. As already

observed, it is familiar doctrine that if a corporation knowingly permits one of its officer, or any other agent, to do acts

111

within the scope of an apparent authority, and thus hold him out to the public as possessing power to do those acts, the

corporation will as against any one who has in good faith dealt with the corporation through such agent, be estopped from

denying his authority; and where it is said "if the corporation permits" this means the same as "if the thing is permitted by

the directing power of the corporation."

It being determined that the corporation is bound by the contract in question, it remains to consider the character of the

liability assumed by R. J. Fernandez, in affixing his personal signature to said contract. The question here is whether

Fernandez is liable jointly with the Orientalists Company as a principal obligor, or whether his liability is that of a

guarantor merely.

As appears upon the face of the contracts, the signature of Fernandez, in his individual capacity, is not in line with the

signature of the Orientalist Company, but is set off to the left of the company's signature and somewhat who sign contracts

in some capacity other than that of principal obligor to place their signature alone would justify a court in holding that

Fernandez here took upon himself the responsibility of a guarantor rather than that of a principal obligor. We do, however,

think, that the form in which the contract is signed raises a doubt as to what the real intention was; and we feel justified, in

looking to the evidence to discover that intention. In this connection it is entirely clear, from the testimony of both

Ramirez and Ramon J. Fernandez, that the responsibility of the latter was intended to be that of guarantor. There is, to be

sure, a certain difference between these witnesses as to the nature of this guaranty, inasmuch as Fernandez would have us

believe that his name was signed as a guaranty that the contract would be approved by the corporation, while Ramirez

says that the name was put on the contract for the purpose of guaranteeing, not the approval of the contract, but its

performance. We are convinced that the latter was the real intention of the contracting parties.

We are not unmindful of the force of that rule of law which declares that oral evidence is admissible to show the character

in which the signature was affixed. This conclusion is perhaps supported by the language of the second paragraph of

article 1281 of the Civil Code, which declares that if the words of a contract should appear contrary to the evident

intention of the parties, the intention shall prevail. But the conclusion reached is, we think, deducible from the general

principle that in case of ambiguity parol evidence is admissible to show the intention of the contracting parties.

It should be stated in conclusion that as the issues in this case have been framed, the only question presented to this court

is: To what extent are the signatory parties to the contract liable to the plaintiff J. F. Ramirez? No contentious issue is

raised directly between the defendants, the Orientalist Company and Ramon H. Fernandez; nor does the present the

present action involve any question as to the undertaking of Fernandez and his three associates to effect the importation of

the films upon their own account and risk. Whether they may be bound to hold the company harmless is a matter upon

which we express no opinion.

The judgment appealed from is affirmed, with costs equally against the two appellant. So ordered.

112

G.R. No. L-12986 March 31, 1966

THE SPOUSES BERNABE AFRICA and SOLEDAD C. AFRICA, and the HEIRS OF DOMINGA

ONG,petitioners-appellants,

vs.

CALTEX (PHIL.), INC., MATEO BOQUIREN and THE COURT OF APPEALS, respondents-appellees.

MAKALINTAL., J.:

This case is before us on a petition for review of the decision of the Court of Appeals, which affirmed that of the Court of

First Instance of Manila dismissing petitioners' second amended complaint against respondents.

The action is for damages under Articles 1902 and 1903 of the old Civil Code. It appears that in the afternoon of March

18, 1948 a fire broke out at the Caltex service station at the corner of Antipolo street and Rizal Avenue, Manila. It started

while gasoline was being hosed from a tank truck into the underground storage, right at the opening of the receiving tank

where the nozzle of the hose was inserted. The fire spread to and burned several neighboring houses, including the

personal properties and effects inside them. Their owners, among them petitioners here, sued respondents Caltex (Phil.),

Inc. and Mateo Boquiren, the first as alleged owner of the station and the second as its agent in charge of operation.

Negligence on the part of both of them was attributed as the cause of the fire.

The trial court and the Court of Appeals found that petitioners failed to prove negligence and that respondents had

exercised due care in the premises and with respect to the supervision of their employees.

The first question before Us refers to the admissibility of certain reports on the fire prepared by the Manila Police and Fire

Departments and by a certain Captain Tinio of the Armed Forces of the Philippines. Portions of the first two reports are as

follows:

1. Police Department report: —

Investigation disclosed that at about 4:00 P.M. March 18, 1948, while Leandro Flores was transferring

gasoline from a tank truck, plate No. T-5292 into the underground tank of the Caltex Gasoline Station

located at the corner of Rizal Avenue and Antipolo Street, this City, an unknown Filipino lighted a

cigarette and threw the burning match stick near the main valve of the said underground tank. Due to the

gasoline fumes, fire suddenly blazed. Quick action of Leandro Flores in pulling off the gasoline hose

connecting the truck with the underground tank prevented a terrific explosion. However, the flames

scattered due to the hose from which the gasoline was spouting. It burned the truck and the following

accessorias and residences.

2. The Fire Department report: —

In connection with their allegation that the premises was (sic) subleased for the installation of a coca-cola and

cigarette stand, the complainants furnished this Office a copy of a photograph taken during the fire and which is

submitted herewith. it appears in this picture that there are in the premises a coca-cola cooler and a rack which

according to information gathered in the neighborhood contained cigarettes and matches, installed between the

gasoline pumps and the underground tanks.

The report of Captain Tinio reproduced information given by a certain Benito Morales regarding the history of the

gasoline station and what the chief of the fire department had told him on the same subject.

The foregoing reports were ruled out as "double hearsay" by the Court of Appeals and hence inadmissible. This ruling is

now assigned as error. It is contended: first, that said reports were admitted by the trial court without objection on the part

113

of respondents; secondly, that with respect to the police report (Exhibit V-Africa) which appears signed by a Detective

Zapanta allegedly "for Salvador Capacillo," the latter was presented as witness but respondents waived their right to cross-

examine him although they had the opportunity to do so; and thirdly, that in any event the said reports are admissible as an

exception to the hearsay rule under section 35 of Rule 123, now Rule 130.

The first contention is not borne out by the record. The transcript of the hearing of September 17, 1953 (pp. 167-170)

shows that the reports in question, when offered as evidence, were objected to by counsel for each of respondents on the

ground that they were hearsay and that they were "irrelevant, immaterial and impertinent." Indeed, in the court's resolution

only Exhibits J, K, K-5 and X-6 were admitted without objection; the admission of the others, including the disputed ones,

carried no such explanation.

On the second point, although Detective Capacillo did take the witness stand, he was not examined and he did not testify

as to the facts mentioned in his alleged report (signed by Detective Zapanta). All he said was that he was one of those who

investigated "the location of the fire and, if possible, gather witnesses as to the occurrence, and that he brought the report

with him. There was nothing, therefore, on which he need be cross-examined; and the contents of the report, as to which

he did not testify, did not thereby become competent evidence. And even if he had testified, his testimony would still have

been objectionable as far as information gathered by him from third persons was concerned.

Petitioners maintain, however, that the reports in themselves, that is, without further testimonial evidence on their

contents, fall within the scope of section 35, Rule 123, which provides that "entries in official records made in the

performance of his duty by a public officer of the Philippines, or by a person in the performance of a duty specially

enjoined by law, are prima facie evidence of the facts therein stated."

There are three requisites for admissibility under the rule just mentioned: (a) that the entry was made by a public officer,

or by another person specially enjoined by law to do so; (b) that it was made by the public officer in the performance of

his duties, or by such other person in the performance of a duty specially enjoined by law; and (c) that the public officer or

other person had sufficient knowledge of the facts by him stated, which must have been acquired by him personally or

through official information (Moran, Comments on the Rules of Court, Vol. 3 [1957] p. 398).

Of the three requisites just stated, only the last need be considered here. Obviously the material facts recited in the reports

as to the cause and circumstances of the fire were not within the personal knowledge of the officers who conducted the

investigation. Was knowledge of such facts, however, acquired by them through official information? As to some facts the

sources thereof are not even identified. Others are attributed to Leopoldo Medina, referred to as an employee at the gas

station were the fire occurred; to Leandro Flores, driver of the tank truck from which gasoline was being transferred at the

time to the underground tank of the station; and to respondent Mateo Boquiren, who could not, according to Exhibit V-

Africa, give any reason as to the origin of the fire. To qualify their statements as "official information" acquired by the

officers who prepared the reports, the persons who made the statements not only must have personal knowledge of the

facts stated but must have the duty to give such statements for record.1

The reports in question do not constitute an exception to the hearsay rule; the facts stated therein were not acquired by the

reporting officers through official information, not having been given by the informants pursuant to any duty to do so.

The next question is whether or not, without proof as to the cause and origin of the fire, the doctrine of res ipsa

loquitur should apply so as to presume negligence on the part of appellees. Both the trial court and the appellate court

refused to apply the doctrine in the instant case on the grounds that "as to (its) applicability ... in the Philippines, there

seems to he nothing definite," and that while the rules do not prohibit its adoption in appropriate cases, "in the case at bar,

however, we find no practical use for such doctrine." The question deserves more than such summary dismissal. The

doctrine has actually been applied in this jurisdiction, in the case of Espiritu vs. Philippine Power and Development Co.

(CA-G.R. No. 3240-R, September 20, 1949), wherein the decision of the Court of Appeals was penned by Mr. Justice

J.B.L. Reyes now a member of the Supreme Court.

The facts of that case are stated in the decision as follows:

114

In the afternoon of May 5, 1946, while the plaintiff-appellee and other companions were loading grass between

the municipalities of Bay and Calauan, in the province of Laguna, with clear weather and without any wind

blowing, an electric transmission wire, installed and maintained by the defendant Philippine Power and

Development Co., Inc. alongside the road, suddenly parted, and one of the broken ends hit the head of the plaintiff

as he was about to board the truck. As a result, plaintiff received the full shock of 4,400 volts carried by the wire

and was knocked unconscious to the ground. The electric charge coursed through his body and caused extensive

and serious multiple burns from skull to legs, leaving the bone exposed in some parts and causing intense pain

and wounds that were not completely healed when the case was tried on June 18, 1947, over one year after the

mishap.

The defendant therein disclaimed liability on the ground that the plaintiff had failed to show any specific act of

negligence, but the appellate court overruled the defense under the doctrine of res ipsa loquitur. The court said:

The first point is directed against the sufficiency of plaintiff's evidence to place appellant on its defense. While it

is the rule, as contended by the appellant, that in case of noncontractual negligence, or culpa aquiliana, the burden

of proof is on the plaintiff to establish that the proximate cause of his injury was the negligence of the defendant,

it is also a recognized principal that "where the thing which caused injury, without fault of the injured person, is

under the exclusive control of the defendant and the injury is such as in the ordinary course of things does not

occur if he having such control use proper care, it affords reasonable evidence, in the absence of the explanation,

that the injury arose from defendant's want of care."

And the burden of evidence is shifted to him to establish that he has observed due care and diligence. (San Juan

Light & Transit Co. v. Requena, 244, U.S. 89, 56 L. ed. 680.) This rule is known by the name of res ipsa

loquitur (the transaction speaks for itself), and is peculiarly applicable to the case at bar, where it is unquestioned

that the plaintiff had every right to be on the highway, and the electric wire was under the sole control of

defendant company. In the ordinary course of events, electric wires do not part suddenly in fair weather and injure

people, unless they are subjected to unusual strain and stress or there are defects in their installation, maintenance

and supervision; just as barrels do not ordinarily roll out of the warehouse windows to injure passersby, unless

some one was negligent. (Byrne v. Boadle, 2 H & Co. 722; 159 Eng. Reprint 299, the leading case that

established that rule). Consequently, in the absence of contributory negligence (which is admittedly not present),

the fact that the wire snapped suffices to raise a reasonable presumption of negligence in its installation, care and

maintenance. Thereafter, as observed by Chief Baron Pollock, "if there are any facts inconsistent with negligence,

it is for the defendant to prove."

It is true of course that decisions of the Court of Appeals do not lay down doctrines binding on the Supreme Court, but we

do not consider this a reason for not applying the particular doctrine of res ipsa loquitur in the case at bar. Gasoline is a

highly combustible material, in the storage and sale of which extreme care must be taken. On the other hand, fire is not

considered a fortuitous event, as it arises almost invariably from some act of man. A case strikingly similar to the one

before Us is Jones vs. Shell Petroleum Corporation, et al., 171 So. 447:

Arthur O. Jones is the owner of a building in the city of Hammon which in the year 1934 was leased to the Shell

Petroleum Corporation for a gasoline filling station. On October 8, 1934, during the term of the lease, while

gasoline was being transferred from the tank wagon, also operated by the Shell Petroleum Corporation, to the

underground tank of the station, a fire started with resulting damages to the building owned by Jones. Alleging

that the damages to his building amounted to $516.95, Jones sued the Shell Petroleum Corporation for the

recovery of that amount. The judge of the district court, after hearing the testimony, concluded that plaintiff was

entitled to a recovery and rendered judgment in his favor for $427.82. The Court of Appeals for the First Circuit

reversed this judgment, on the ground the testimony failed to show with reasonable certainty any negligence on

the part of the Shell Petroleum Corporation or any of its agents or employees. Plaintiff applied to this Court for a

Writ of Review which was granted, and the case is now before us for decision.1äwphï1.ñët

In resolving the issue of negligence, the Supreme Court of Louisiana held:

115

Plaintiff's petition contains two distinct charges of negligence — one relating to the cause of the fire and the other

relating to the spreading of the gasoline about the filling station.

Other than an expert to assess the damages caused plaintiff's building by the fire, no witnesses were placed on the

stand by the defendant.

Taking up plaintiff's charge of negligence relating to the cause of the fire, we find it established by the record that

the filling station and the tank truck were under the control of the defendant and operated by its agents or

employees. We further find from the uncontradicted testimony of plaintiff's witnesses that fire started in the

underground tank attached to the filling station while it was being filled from the tank truck and while both the

tank and the truck were in charge of and being operated by the agents or employees of the defendant, extended to

the hose and tank truck, and was communicated from the burning hose, tank truck, and escaping gasoline to the

building owned by the plaintiff.

Predicated on these circumstances and the further circumstance of defendant's failure to explain the cause of the

fire or to show its lack of knowledge of the cause, plaintiff has evoked the doctrine of res ipsa loquitur. There are

many cases in which the doctrine may be successfully invoked and this, we think, is one of them.

Where the thing which caused the injury complained of is shown to be under the management of defendant or his

servants and the accident is such as in the ordinary course of things does not happen if those who have its

management or control use proper care, it affords reasonable evidence, in absence of explanation by defendant,

that the accident arose from want of care. (45 C.J. #768, p. 1193).

This statement of the rule of res ipsa loquitur has been widely approved and adopted by the courts of last resort.

Some of the cases in this jurisdiction in which the doctrine has been applied are the following, viz.: Maus v.

Broderick, 51 La. Ann. 1153, 25 So. 977; Hebert v. Lake Charles Ice, etc., Co., 111 La. 522, 35 So. 731, 64

L.R.A. 101, 100 Am. St. Rep. 505; Willis v. Vicksburg, etc., R. Co., 115 La. 63, 38 So. 892; Bents v. Page, 115

La. 560, 39 So. 599.

The principle enunciated in the aforequoted case applies with equal force here. The gasoline station, with all its

appliances, equipment and employees, was under the control of appellees. A fire occurred therein and spread to and

burned the neighboring houses. The persons who knew or could have known how the fire started were appellees and their

employees, but they gave no explanation thereof whatsoever. It is a fair and reasonable inference that the incident

happened because of want of care.

In the report submitted by Captain Leoncio Mariano of the Manila Police Department (Exh. X-1 Africa) the following

appears:

Investigation of the basic complaint disclosed that the Caltex Gasoline Station complained of occupies a lot

approximately 10 m x 10 m at the southwest corner of Rizal Avenue and Antipolo. The location is within a very

busy business district near the Obrero Market, a railroad crossing and very thickly populated neighborhood where

a great number of people mill around t

until

gasoline

tever be theWactjvities of these peopleor lighting a cigarette cannot be excluded and this constitute a secondary

hazard to its operation which in turn endangers the entire neighborhood to conflagration.

116

Furthermore, aside from precautions already taken by its operator the concrete walls south and west adjoining the

neighborhood are only 2-1/2 meters high at most and cannot avoid the flames from leaping over it in case of fire.

Records show that there have been two cases of fire which caused not only material damages but desperation and

also panic in the neighborhood.

Although the soft drinks stand had been eliminated, this gasoline service station is also used by its operator as a

garage and repair shop for his fleet of taxicabs numbering ten or more, adding another risk to the possible

outbreak of fire at this already small but crowded gasoline station.

The foregoing report, having been submitted by a police officer in the performance of his duties on the basis of his own

personal observation of the facts reported, may properly be considered as an exception to the hearsay rule. These facts,

descriptive of the location and objective circumstances surrounding the operation of the gasoline station in question,

strengthen the presumption of negligence under the doctrine of res ipsa loquitur, since on their face they called for more

stringent measures of caution than those which would satisfy the standard of due diligence under ordinary circumstances.

There is no more eloquent demonstration of this than the statement of Leandro Flores before the police investigator.

Flores was the driver of the gasoline tank wagon who, alone and without assistance, was transferring the contents thereof

into the underground storage when the fire broke out. He said: "Before loading the underground tank there were no

people, but while the loading was going on, there were people who went to drink coca-cola (at the coca-cola stand) which

is about a meter from the hole leading to the underground tank." He added that when the tank was almost filled he went to

the tank truck to close the valve, and while he had his back turned to the "manhole" he, heard someone shout "fire."

Even then the fire possibly would not have spread to the neighboring houses were it not for another negligent omission on

the part of defendants, namely, their failure to provide a concrete wall high enough to prevent the flames from leaping

over it. As it was the concrete wall was only 2-1/2 meters high, and beyond that height it consisted merely of galvanized

iron sheets, which would predictably crumple and melt when subjected to intense heat. Defendants' negligence, therefore,

was not only with respect to the cause of the fire but also with respect to the spread thereof to the neighboring houses.

There is an admission on the part of Boquiren in his amended answer to the second amended complaint that "the fire was

caused through the acts of a stranger who, without authority, or permission of answering defendant, passed through the

gasoline station and negligently threw a lighted match in the premises." No evidence on this point was adduced, but

assuming the allegation to be true — certainly any unfavorable inference from the admission may be taken against

Boquiren — it does not extenuate his negligence. A decision of the Supreme Court of Texas, upon facts analogous to

those of the present case, states the rule which we find acceptable here. "It is the rule that those who distribute a dangerous

article or agent, owe a degree of protection to the public proportionate to and commensurate with a danger involved ... we

think it is the generally accepted rule as applied to torts that 'if the effects of the actor's negligent conduct actively and

continuously operate to bring about harm to another, the fact that the active and substantially simultaneous operation of

the effects of a third person's innocent, tortious or criminal act is also a substantial factor in bringing about the harm, does

not protect the actor from liability.' (Restatement of the Law of Torts, vol. 2, p. 1184, #439). Stated in another way, "The

intention of an unforeseen and unexpected cause, is not sufficient to relieve a wrongdoer from consequences of

negligence, if such negligence directly and proximately cooperates with the independent cause in the resulting injury."

(MacAfee, et al. vs. Traver's Gas Corporation, 153 S.W. 2nd 442.)

The next issue is whether Caltex should be held liable for the damages caused to appellants. This issue depends on

whether Boquiren was an independent contractor, as held by the Court of Appeals, or an agent of Caltex. This question, in

the light of the facts not controverted, is one of law and hence may be passed upon by this Court. These facts are: (1)

Boquiren made an admission that he was an agent of Caltex; (2) at the time of the fire Caltex owned the gasoline station

and all the equipment therein; (3) Caltex exercised control over Boquiren in the management of the state; (4) the delivery

truck used in delivering gasoline to the station had the name of CALTEX painted on it; and (5) the license to store

gasoline at the station was in the name of Caltex, which paid the license fees. (Exhibit T-Africa; Exhibit U-Africa; Exhibit

X-5 Africa; Exhibit X-6 Africa; Exhibit Y-Africa).

117

In Boquiren's amended answer to the second amended complaint, he denied that he directed one of his drivers to remove

gasoline from the truck into the tank and alleged that the "alleged driver, if one there was, was not in his employ, the

driver being an employee of the Caltex (Phil.) Inc. and/or the owners of the gasoline station." It is true that Boquiren later

on amended his answer, and that among the changes was one to the effect that he was not acting as agent of Caltex. But

then again, in his motion to dismiss appellants' second amended complaint the ground alleged was that it stated no cause

of action since under the allegations thereof he was merely acting as agent of Caltex, such that he could not have incurred

personal liability. A motion to dismiss on this ground is deemed to be an admission of the facts alleged in the complaint.

Caltex admits that it owned the gasoline station as well as the equipment therein, but claims that the business conducted at

the service station in question was owned and operated by Boquiren. But Caltex did not present any contract with

Boquiren that would reveal the nature of their relationship at the time of the fire. There must have been one in existence at

that time. Instead, what was presented was a license agreement manifestly tailored for purposes of this case, since it was

entered into shortly before the expiration of the one-year period it was intended to operate. This so-called license

agreement (Exhibit 5-Caltex) was executed on November 29, 1948, but made effective as of January 1, 1948 so as to

cover the date of the fire, namely, March 18, 1948. This retroactivity provision is quite significant, and gives rise to the

conclusion that it was designed precisely to free Caltex from any responsibility with respect to the fire, as shown by the

clause that Caltex "shall not be liable for any injury to person or property while in the property herein licensed, it being

understood and agreed that LICENSEE (Boquiren) is not an employee, representative or agent of LICENSOR (Caltex)."

But even if the license agreement were to govern, Boquiren can hardly be considered an independent contractor. Under

that agreement Boquiren would pay Caltex the purely nominal sum of P1.00 for the use of the premises and all the

equipment therein. He could sell only Caltex Products. Maintenance of the station and its equipment was subject to the

approval, in other words control, of Caltex. Boquiren could not assign or transfer his rights as licensee without the consent

of Caltex. The license agreement was supposed to be from January 1, 1948 to December 31, 1948, and thereafter until

terminated by Caltex upon two days prior written notice. Caltex could at any time cancel and terminate the agreement in

case Boquiren ceased to sell Caltex products, or did not conduct the business with due diligence, in the judgment of

Caltex. Termination of the contract was therefore a right granted only to Caltex but not to Boquiren. These provisions of

the contract show the extent of the control of Caltex over Boquiren. The control was such that the latter was virtually an

employee of the former.

Taking into consideration the fact that the operator owed his position to the company and the latter could remove

him or terminate his services at will; that the service station belonged to the company and bore its tradename and

the operator sold only the products of the company; that the equipment used by the operator belonged to the

company and were just loaned to the operator and the company took charge of their repair and maintenance; that

an employee of the company supervised the operator and conducted periodic inspection of the company's gasoline

and service station; that the price of the products sold by the operator was fixed by the company and not by the

operator; and that the receipts signed by the operator indicated that he was a mere agent, the finding of the Court

of Appeals that the operator was an agent of the company and not an independent contractor should not be

disturbed.

To determine the nature of a contract courts do not have or are not bound to rely upon the name or title given it by

the contracting parties, should thereby a controversy as to what they really had intended to enter into, but the way

the contracting parties do or perform their respective obligations stipulated or agreed upon may be shown and

inquired into, and should such performance conflict with the name or title given the contract by the parties, the

former must prevail over the latter. (Shell Company of the Philippines, Ltd. vs. Firemens' Insurance Company of

Newark, New Jersey, 100 Phil. 757).

The written contract was apparently drawn for the purpose of creating the apparent relationship of employer and

independent contractor, and of avoiding liability for the negligence of the employees about the station; but the

company was not satisfied to allow such relationship to exist. The evidence shows that it immediately assumed

control, and proceeded to direct the method by which the work contracted for should be performed. By reserving

the right to terminate the contract at will, it retained the means of compelling submission to its orders. Having

118

elected to assume control and to direct the means and methods by which the work has to be performed, it must be

held liable for the negligence of those performing service under its direction. We think the evidence was sufficient

to sustain the verdict of the jury. (Gulf Refining Company v. Rogers, 57 S.W. 2d, 183).

Caltex further argues that the gasoline stored in the station belonged to Boquiren. But no cash invoices were presented to

show that Boquiren had bought said gasoline from Caltex. Neither was there a sales contract to prove the same.

As found by the trial court the Africas sustained a loss of P9,005.80, after deducting the amount of P2,000.00 collected by

them on the insurance of the house. The deduction is now challenged as erroneous on the ground that Article 2207 of the

New Civil Code, which provides for the subrogation of the insurer to the rights of the insured, was not yet in effect when

the loss took place. However, regardless of the silence of the law on this point at that time, the amount that should be

recovered be measured by the damages actually suffered, otherwise the principle prohibiting unjust enrichment would be

violated. With respect to the claim of the heirs of Ong P7,500.00 was adjudged by the lower court on the basis of the

assessed value of the property destroyed, namely, P1,500.00, disregarding the testimony of one of the Ong children that

said property was worth P4,000.00. We agree that the court erred, since it is of common knowledge that the assessment

for taxation purposes is not an accurate gauge of fair market value, and in this case should not prevail over positive

evidence of such value. The heirs of Ong are therefore entitled to P10,000.00.

Wherefore, the decision appealed from is reversed and respondents-appellees are held liable solidarily to appellants, and

ordered to pay them the aforesaid sum of P9,005.80 and P10,000.00, respectively, with interest from the filing of the

complaint, and costs.

119

G.R. No. 122544 January 28, 1999

REGINA P. DIZON, AMPARO D. BARTOLOME, FIDELINA D. BLAZA, ESTER ABAD DIZON and JOSEPH

ANTHONY DIZON, RAYMUND A. DIZON, GERARD A. DIZON, and JOSE A. DIZON, JR., petitioners,

vs.

COURT OF APPEALS and OVERLAND EXPRESS LINES, INC., respondents.

MARTINEZ, J.:

Two consolidated petitions were filed before us seeking to set aside and annul the decisions and resolutions of respondent

Court of Appeals. What seemed to be a simple ejectment suit was juxtaposed with procedural intricacies which finally

found its way to this Court.

G.R. No. 122544:

On May 23, 1974, private respondent Overland Express Lines, Inc. (lessee) entered into a Contract of Lease with Option

to Buy with petitioners 1 (lessors) involving a 1,755.80 square meter parcel of land situated at corner MacArthur Highway

and South "H" Street, Diliman, Quezon City. The term of the lease was for one (1) year commencing from May 16, 1974

up to May 15, 1975. During this period, private respondent was granted an option to purchase for the amount of P3,000.00

per square meter. Thereafter, the lease shall be on a per month basis with a monthly rental of P3,000.00.

For failure of private respondent to pay the increased rental of P8,000.00 per month effective June 1976, petitioners filed

an action for ejectment (Civil Case No. VIII-29155) on November 10, 1976 before the then City Court (now Metropolitan

Trial Court) of Quezon City, Branch VIII. On November 22, 1982, the City Court rendered judgment 2 ordering private

respondent to vacate the leased premises and to pay the sum of P624,000.00 representing rentals in arrears and/or as

damages in the form of reasonable compensation for the use and occupation of the premises during the period of illegal

detainer from June 1976 to November 1982 at the monthly rental of P8,000.00, less payments made, plus 12% interest per

annum from November 18, 1976, the date of filing of the complaint, until fully paid, the sum of P8,000.00 a month

starting December 1982, until private respondent fully vacates the premises, and to pay P20,000.00 as and by way of

attorney's fees.

Private respondent filed a certiorari petition praying for the issuance of a restraining order enjoining the enforcement of

said judgment and dismissal of the case for lack of jurisdiction of the City Court.

On September 26, 1984, the then Intermidiate Appellate Court 3 (now Court of Appeals) rendered a decision

4 stating that:

. . ., the alleged question of whether petitioner was granted an extension of the option to buy the property;

whether such option, if any, extended the lease or whether petitioner actually paid the alleged

P300,000.00 to Fidela Dizon, as representative of private respondents in consideration of the option and,

whether petitioner thereafter offered to pay the balance of the supposed purchase price, are all merely

incidental and do not remove the unlawful detainer case from the jurisdiction or respondent court. In

consonance with the ruling in the case of Teodoro, Jr. vs. Mirasol (supra), the above matters may be

raised and decided in the unlawful detainer suit as, to rule otherwise, would be a violation of the principle

prohibiting multiplicity of suits. (Original Records, pp. 38-39).

The motion for reconsideration was denied. On review, this Court dismissed the petition in a resolution dated June 19,

1985 and likewise denied private respondent's subsequent motion for reconsideration in a resolution dated September 9,

1985. 5

On October 7, 1985, private respondent filed before the Regional Trial Court (RTC) of Quezon City (Civil Case No. Q-

45541) an action for Specific Performance and Fixing of Period for Obligation with prayer for the issuance of a

120

restraining order pending hearing on the prayer for a writ of preliminary injunction. It sought to compel the execution of a

deed of sale pursuant to the option to purchase and the receipt of the partial payment, and to fix the period to pay the

balance. In an Order dated October 25, 1985, the trial court denied the issuance of a writ of preliminary injunction on the

ground that the decision of the then City Court for the ejectment of the private respondent, having been affirmed by the

then Intermediate Appellate Court and the Supreme Court, has become final and executory.

Unable to secure an injunction, private respondent also filed before the RTC of Quezon City, Branch 102 (Civil Case No.

Q-46487) on November 15, 1985 a complaint for Annulment of and Relief from Judgment with injunction and damages.

In its decision 6 dated May 12, 1986, the trial court dismissed the complaint for annulment on the ground of res judicata,

and the writ of preliminary injunction previously issued was dissolved. It also ordered private respondent to pay

P3,000.00 as attorney's fees. As a consequence of private respondent's motion for reconsideration, the preliminary

injunction was reinstated, thereby restraining the execution of the City Court's judgment on the ejectment case.

The two cases were the after consolidated before the RTC of Quezon City, Branch 77. On April 28, 1989, a decision 7 was

rendered dismissing private respondent's complaint in Civil Case No. Q-45541 (specific performance case) and denying

its motion for reconsideration in Civil Case No. 46487 (annulment of the ejectment case). The motion for reconsideration

of said decision was likewise denied.

On appeal, 8 respondent Court of Appeals rendered a decision

9 upholding the jurisdiction of the City Court of Quezon

City in the ejectment case. It also concluded that there was a perfected contract of sale between the parties on the leased

premises and that pursuant to the option to buy agreement, private respondent had acquired the rights of a vendee in a

contract of sale. It opined that the payment by private respondent of P300,000.00 on June 20, 1975 as partial payment for

the leased property, which petitioners accepted (through Alice A. Dizon) and for which an official receipt was issued, was

the operative act that gave rise to a perfected contract of sale, and that for failure of petitioners to deny receipt thereof,

private respondent can therefore assume that Alice A. Dizon, acting as agent of petitioners, was authorized by them to

receive the money in their behalf. The Court of Appeals went further by stating that in fact, what was entered into was a

"conditional contract of sale" wherein ownership over the leased property shall not pass to the private respondent until it

has fully paid the purchase price. Since private respondent did not consign to the court the balance of the purchase price

and continued to occupy the subject premises, it had the obligation to pay the amount of P1,700.00 in monthly rentals

until full payment of the purchase price. The dispositive portion of said decision reads:

WHEREFORE, the appealed decision in Case No. 46387 is AFFIRMED. The appealed decision in Case

No. 45541 is, on the other hand, ANNULLED and SET ASIDE. The defendants-appellees are ordered to

execute the deed of absolute sale of the property in question, free from any lien or encumbrance

whatsoever, in favor of the plaintiff-appellant, and to deliver to the latter the said deed of sale, as well as

the owner's duplicate of the certificate of title to said property upon payment of the balance of the

purchase price by the plaintiff-appellant. The plaintiff-appellant is ordered to pay P1,700.00 per month

from June 1976, plus 6% interest per annum, until payment of the balance of the purchase price, as

previously agreed upon by the parties.

SO ORDERED.

Upon denial of the motion for partil reconsideration (Civil Case No. Q-45541) by respondent Court of

Appeals, 10

petitioners elevated the case via petition for certiorari questioning the authority of Alice A. Dizon as agent of

petitioners in receiving private respondent's partial payment amounting to P300,000.00 pursuant to the Contract of Lease

with Option to Buy. Petitioner also assail the propriety of private respondent's exercise of the option when it tendered the

said amount on June 20, 1975 which purportedly resulted in a perfected contract of sale.

G.R. No. 124741:

Petitioners filed with respondent Court of Appeals a motion to remand the records of Civil Case No. 38-29155 (ejectment

case) to the Metropolitan Trial Court (MTC), then City Court of Quezon City, Branch 38, for execution of the

121

judgment 11

dated November 22, 1982 which was granted in a resolution dated June 29, 1992. Private respondent filed a

motion to reconsider said resolution which was denied.

Aggrieved, private respondent filed a petition for certiorari, prohibition with preliminary injunction and/or restraining

order with this Court (G.R. Nos. 106750-51) which was dismissed in a resolution dated September 16, 1992 on the ground

that the same was a refiled case previously dismissed for lack of merit. On November 26, 1992, entry of judgment was

issued by this Court.

On July 14, 1993, petitioners filed an urgent ex-parte motion for execution of the decision in Civil Case No. 38-29155

with the MTC of Quezon City, Branch 38. On September 13, 1993, the trial court ordered the issuance of a third alias writ

of execution. In denying private respondent's motion for reconsideration, it ordered the immediate implementation of the

third writ of execution without delay.

On December 22, 1993, private respondent filed with the Regional Trial Court (RTC) of Quezon City, Branch 104 a

petition for certiorari and prohibition with preliminary injunction/restraining order (SP. PROC. No. 93-18722)

challenging the enforceability and validity of the MTC judgment as well as the order for its execution.

On January 11, 1994, RTC of Quezon City, Branch 104 issued an

order 12

granting the issuance of a writ of preliminary injunction upon private respondent's' posting of an injunction bond

of P50,000.00.

Assailing the aforequoted order after denial of their motion for partial reconsideration, petitioners filed a

petition 13

for certiorari and prohibition with a prayer for a temporary restraining order and/or preliminary injunction with

the Court of Appeals. In its decision, 14

the Court of Appeals dismissed the petition and ruled that:

The avowed purpose of this petition is to enjoin the public respondent from restraining the ejectment of

the private respondent. To grant the petition would be to allow the ejectment of the private respondent.

We cannot do that now in view of the decision of this Court in CA-G.R. CV Nos. 25153-54. Petitioners'

alleged right to eject private respondent has been demonstrated to be without basis in the said civil case.

The petitioners have been shown, after all, to have no right to eject private respondents.

WHEREFORE, the petition is DENIED due course and is accordingly DISMISSED.

SO ORDERED. 15

Petitioners' motion for reconsideration was denied in a resolution 16

by the Court of Appeals stating that:

This court in its decision in CA-G.R. CV Nos. 25153-54 declared that the plaintiff-appellant (private

respondent herein) acquired the rights of a vendee in a contract of sale, in effect, recognizing the right of

the private respondent to possess the subject premises. Considering said decision, we should not allow

ejectment; to do so would disturb the status quo of the parties since the petitioners are not in possession of

the subject property. It would be unfair and unjust to deprive the private respondent of its possession of

the subject property after its rights have been established in a subsequent ruling.

WHEREFORE, the motion for reconsideration is DENIED for lack of merit.

SO ORDERED. 17

Hence, this instant petition.

We find both petitions impressed with merit.

122

First. Petitioners have established a right to evict private respondent from the subject premises for non-payment of rentals.

The term of the Contract of Lease with Option to Buy was for a period of one (1) year (May 16, 1974 to May 15, 1975)

during which the private respondent was given an option to purchase said property at P3,000.00 square meter. After the

expiration thereof, the lease was for P3,000.00 per month.

Admittedly, no definite period beyond the one-year term of lease was agreed upon by petitioners and private respondent.

However, since the rent was paid on a monthly basis, the period of lease is considered to be from month to month in

accordance with Article 1687 of the New Civil Code. 18

Where the rentals are paid monthly, the lease, even if verbal may

be deemed to be on a monthly basis, expiring at the end of every month pursuant to Article 1687, in relation to Article

1673 of the Civil Code. 19

In such case, a demand to vacate is not even necessary for judicial action after the expiration of

every month. 20

When private respondent failed to pay the increased rental of P8,000.00 per month in June 1976, the petitioners had a

cause of action to institute an ejectment suit against the former with the then City Court. In this regard, the City Court

(now MTC) had exclusive jurisdiction over the ejectment suit. The filing by private respondent of a suit with the Regional

Trial Court for specific performance to enforce the option to purchase did not divest the then City Court of its jurisdiction

to take cognizance over the ejectment case. Of note is the fact that the decision of the City Court was affirmed by both the

Intermediate Appellate Court and this Court.

Second. Having failed to exercise the option within the stipulated one-year period, private respondent cannot enforce its

option to purchase anymore. Moreover, even assuming arguendo that the right to exercise the option still subsists at the

time private respondent tendered the amount on June 20, 1975, the suit for specific performance to enforce the option to

purchase was filed only on October 7, 1985 or more than ten (10) years after accrual of the cause of action as provided

under Article 1144 of the New Civil Code. 21

In this case, there was a contract of lease for one (1) year with option to purchase. The contract of lease expired without

the private respondent, as lessee, purchasing the property but remained in possession thereof. Hence, there was an implicit

renewal of the contract of lease on a monthly basis. The other terms of the original contract of lease which are revived in

the implied new lease under Article 1670 of the New Civil Code 22

are only those terms which are germane to the lessee's

right of continued enjoyment of the property leased. 23

Therefore, an implied new lease does not ipso facto carry with it

any implied revival of private respondent's option to purchase (as lessee thereof) the leased premises. The provision

entitling the lessee the option to purchase the leased premises is not deemed incorporated in the impliedly renewed

contract because it is alien to the possession of the lessee. Private respondent's right to exercise the option to purchase

expired with the termination of the original contract of lease for one year. The rationale of this Court is that:

This is a reasonable construction of the provision, which is based on the presumption that when the lessor

allows the lessee to continue enjoying possession of the property for fifteen days after the expiration of

the contract he is willing that such enjoyment shall be for the entire period corresponding to the rent

which is customarily paid — in this case up to the end of the month because the rent was paid monthly.

Necessarily, if the presumed will of the parties refers to the enjoyment of possession the presumption

covers the other terms of the contract related to such possession, such as the amount of rental, the date

when it must be paid, the care of the property, the responsibility for repairs, etc. But no such presumption

may be indulged in with respect to special agreements which by nature are foreign to the right of

occupancy or enjoyment inherent in a contract of lease. 24

Third. There was no perfected contract of sale between petitioners and private respondent. Private respondent argued that

it delivered the check of P300,000.00 to Alice A. Dizon who acted as agent of petitioners pursuant to the supposed

authority given by petitioner Fidela Dizon, the payee thereof. Private respondent further contended that petitioners' filing

of the ejectment case against it based on the contract of lease with option to buy holds petitioners in estoppel to question

the authority of petitioner Fidela Dizon. It insisted that the payment of P300,000.00 as partial payment of the purchase

price constituted a valid exercise of the option to buy.

123

Under Article 1475 of the New Civil Code, "the contract of sale is perfected at the moment there is a meeting of minds

upon the thing which is the object of the contract and upon the price. From that moment, the parties may reciprocally

demand performance, subject to the provisions of the law governing the form of contracts." Thus, the elements of a

contract of sale are consent, object, and price in money or its equivalent. It bears stressing that the absence of any of these

essential elements negates the existence of a perfected contract of sale. Sale is a consensual contract and he who alleges it

must show its existence by competent proof. 25

In an attempt to resurrect the lapsed option, private respondent gave P300,000.00 to petitioners (thru Alice A. Dizon) on

the erroneous presumption that the said amount tendered would constitute a perfected contract of sale pursuant to the

contract of lease with option to buy. There was no valid consent by the petitioners (as co-owners of the leased premises)

on the supposed sale entered into by Alice A. Dizon, as petitioners' alleged agent, and private respondent. The basis for

agency is representation and a person dealing with an agent is put upon inquiry and must discover upon his peril the

authority of the agent. 26

As provided in Article 1868 of the New Civil Code, 27

there was no showing that petitioners

consented to the act of Alice A. Dizon nor authorized her to act on their behalf with regard to her transaction with private

respondent. The most prudent thing private respondent should have done was to ascertain the extent of the authority of

Alice A. Dizon. Being negligent in this regard, private respondent cannot seek relief on the basis of a supposed agency.

In Bacaltos Coal Mines vs. Court of Appeals, 28

we explained the rule in dealing with an agent:

Every person dealing with an agent is put upon inquiry and must discover upon his peril the authority of

the agent. If he does not make such inquiry, he is chargeable with knowledge of the agent's authority, and

his ignorance of that authority will not be any excuse. Persons dealing with an assumed agency, whether

the assumed agency be a general or special one, are bound at their peril, if they would hold the principal,

to ascertain not only the fact of the agency but also the nature and extent of the authority, and in case

either is controverted, the burden of proof is upon them to establish it.

For the long years that private respondent was able to thwart the execution of the ejectment suit rendered in favor of

petitioners, we now write finis to this controversy and shun further delay so as to ensure that this case would really attain

finality.

WHEREFORE, in view of the foregoing, both petitions are GRANTED. The decision dated March 29, 1994 and the

resolution dated October 19, 1995 in CA-G.R. CV No. 25153-54, as well as the decision dated December 11, 1995 and

the resolution dated April 23, 1997 in CA-G.R. SP No. 33113 of the Court of Appeals are hereby REVERSED and SET

ASIDE.

Let the records of this case be remanded to the trial court for immediate execution of the judgment dated November 22,

1982 in Civil Case No. VIII-29155 of the then City Court (now Metropolitan Trial Court) of Quezon City, Branch VIII as

affirmed in the decision dated September 26, 1984 of the then Intermediate Appellate Court (now Court of Appeals) and

in the resolution dated June 19, 1985 of this Court.

However, petitioners are ordered to REFUND to private respondent the amount of P300,000.00 which they received

through Alice A. Dizon on June 20, 1975.1âwphi1.nêt

124

G.R. No. L-9184 February 2, 1916

MACONDRAY & CO., INC., plaintiff-appellee,

vs.

GEORGE S. SELLNER, defendant-appellant.

CARSON, J.:

This action was brought to recover the sum of P17, 175 by way of damages alleged to have been suffered by the plaintiff

as a result of the sale of a parcel of land which it is alleged was made by the defendant for and on behalf of the plaintiff

after authority to make the sale had been revoked. Judgment was rendered in favor of the plaintiff for the sum of P3,435,

together with interest at 6 per cent per annum from the date of the institution of this action. From this judgment defendant

appealed, and brought the case have on his duly certified bill of exceptions.

Early in 1912 the defendant, a real estate broker, sold the parcel of land described in the complaint to the plaintiff

company for P17,175. The formal deed of sale was not executed and accepted until July 29, 1912, the agreement to

purchase being conditioned on the delivery of a Torrens title, which was not secured until early in that month. In the

meantime the land was flooded by high tides, and the plaintiff company became highly dissatisfied with its purchase.

When the final transfer was made the plaintiff company informed defendant that the land was wholly unsuited for use as a

coal-yard, for which it had been purchased, and requested him to find another purchaser. At that time it was expressly

understood and agreed that the plaintiff company was willing to dispose of the land for P17,175, and that defendant was to

have as his commission for securing a purchaser anything over that amount which he could get.

A short time thereafter, defendant reported to plaintiff that he had a purchaser for the land in the person of Antonio M.

Barretto, who was willing to pay P2.75 per square meter, or a total of P18,892.50. Plaintiff thereupon executed a formal

deed of conveyance which, together with the certificate of title (Torrens), was delivered to defendant, with the

understanding that he was to conclude the sale, deliver the title-deed and certificate to Barretto, and received from him the

purchase price. The deed was dated August 21, 1912. Thereafter defendant advised Barretto that plaintiff had executed the

title-deed and that he was ready to close the deal. Barretto agreed to accept the land if, upon examination, the title and the

deed should prove satisfactory; and defendant left the deed of conveyance with him, with the understanding that if the title

and the deed of conveyance were as represented, Barretto would give him his check for the amount of the purchase price.

Defendant retained possession of the Torrens certificate of title. A few days afterwards Barretto was compelled to go to

Tayabas on business and was detained by a typhoon which delayed his return until the 31st of August.

During Barretto's absence the plaintiff company advised defendant that he must consummate the sale and collect the

purchase money without delay upon Barretto's return to Manila. On the arrival of Barretto on Saturday, August 31st,

defendant called upon him and informed him that the plaintiff company desired to close up the transaction at once, and

Barretto, who was somewhat indisposed from his trip, promised to examine the papers as soon as he could get to them,

and assured the defendant that he would send his check for the purchased price in a day or two if he found the documents

in proper shape. These assurance were reported to Young, the plaintiff company's general manager and representative

throughout the transaction, on Monday morning, September 2d. Young then formally notified defendant that unless the

purchase price was paid before five o'clock of that same afternoon the deal would be off. Defendants again called upon

Barretto, who informed him that if he would turn over the Torrens certificate of title he would let him have a check for the

purchase price. Defendant sent the certificate as requested, but did not receive the check until thirty-six hours afterwards,

on Wednesday morning. On receipt of Barretto's check he immediately tendered plaintiff company a check for the agreed

selling price, P17,175. Plaintiff's manager refused to accept the check and soon thereafter filed this action, claiming that

the sale had been "cancelled" upon the failure of defendant to turn over the purchase price on the afternoon of Monday,

September 2nd.

The following is a copy of plaintiff company's letter to defendant advising him that the sale would be "cancelled" unless

the purchase price was paid at five o'clock of the day on which it was written.

125

SEPT. 2, 1912.

Mr. GEO. C. SELLNER, Manila.

DEAR SIR: In accordance with our conversation today, this is to notify you that we consider the sale of our lot in

Nagtajan to Antonio M. Barretto as cancelled in view of the nonpayment of the purchase price before five o'clock

this afternoon.

Please confirm.

Yours very truly,

MACONDRAY & CO., INC.,

(Sgd.) CARLOS YOUNG,

General Manager.

As to the facts just narrated there is practically no dispute, the only matters of facts as to which there is any real contention

in the record being limited to question as to the value of the land, and as to the original instructions to defendant in regard

to the delivery of the title deeds.

Plaintiffs' manager testified that as he had no confidence in Barretto, he expressly instructed defendant not to deliver the

title deeds until Barretto turned over the purchase price. Defendant swore that he had received no such instruction. Upon

this conflict of testimony we do not deem it necessary to make an express finding, because, as we view the transaction, it

could in no event affect our disposition of this appeal.

We are of opinion that the disputed evidence clearly discloses that on August 21st the plaintiff company, through the

defendant real estate broker, agreed to sell the land to Barretto for P18,892.50, and that Barretto agreed to buy the land at

that price on the usual condition precedent that before turning over the purchase price the title deeds and deed of transfer

from the company should be found to be in due and legal form. That for the purpose of consummating the sale the

plaintiff company turned over to the defendant a deed of transfer to Barretto, together with a Torrens title certificate to the

land, executed as of the day when the agreement to sell was entered into. That the defendant, with full authority from

plaintiff company, agreed to deliver the deed and certificate to Barretto on payment of the purchase price. That from the

very nature of the transaction it was understood that the purchaser should have a reasonable time in which to examine the

deed of transfer and the other documents of title, and that defendant exercising an authority impliedly if not expressly

conferred upon him, gave the purchaser a reasonable time in which to satisfy himself as to the legality and correctness of

the documents of title. That the company through its manager Young, acquiesced in and ratified what had been done by

defendant in this regard when, with full knowledge of all the facts, Young advised the defendant, during Barretto's

absence in Tayabas, that the deal must be closed up without delay on Barretto's return to Manila.

No reason appears, nor had any reason been assigned for the demand by the plaintiff company for the delivery of the

purchase price at the hour specified under threat in the event of failure to make payment at that hour it would decline to

carry out the agreement, other than that the manager of the plaintiff company had been annoyed by the delays which

occurred during the earlier stage of the negotiations, and had changed his mind as to the desirability of making the sale at

the price agreed upon, either because he believed that he could get a better price elsewhere, or that the land was worth

more to his company than the price he had agreed to take for it. It is very evident that plaintiff company's manager hoped

that by setting a limit of a few hours upon the time within which he would receive the money, his company would be

relieved of the obligation to carry out its contract.

126

Upon the question of the value of the land we think that the evidence clearly discloses that at the date of the sale its actual

and its true market value was not more than the amount paid for it by Barretto, that is to say, P18,892.50. The evidence

discloses that it had been in the hands of an expert real estate agent for many months prior to the sale, with every

inducement to him to secure the highest cash price which could be gotten for it. That he actually sold it to the plaintiff

company, a few months prior to the sale to Barretto, for P17,175. That the plaintiff company was highly dissatisfied with

its purchase, and readily agreed to resell at that price. That the defendant, in his company was highly dissatisfied with its

purchase, and readily agreed to resell at that price. That the defendant, in his capacity as a real estate agent, with a

personal and direct interest in securing the highest possible price for the land, sold it to Barretto for P18,892.50.

The only evidence in the record tending to prove that the land had a higher market value than the price actually paid for it

under such circumstances is the testimony of a rival real estate broker, who had never been on the land, but claimed that

he was familiar with its general location from maps and description, and asserted that in his opinion it was worth

considerably more than the price actually paid for it, and that he thought he could have sold the land for P3 a meter, or

approximately P20,610. Of course an expert opinion of this kind, however sincere and honest the witness may have been

in forming it, is wholly insufficient to maintain a finding that the land was worth any more than it actually brought when

sold under the conditions above set forth.

It may be that the land has a speculative value much higher than the actual market value at the time of the sale, so that if

held for an opportune turn in the market, or until a buyer of some special need for it happened to present himself, a price

approximating that indicated by this witness might be secured for it. But the question of fact ruled upon is the actual

market value of the land at the time of its sale to Barretto, and not any speculative value which might be assigned to it in

anticipation of unknown, indefinite and uncertain contingencies.

Among other definitions of "market value" to be found in "Words and Phrases," vol. 5, p. 4383, and supported by citation

of authority, are the following:

The "market value" of property is the price which the property will bring in a fair market after fair and reasonable

efforts have been made to find a purchaser who will give the highest price for it.

xxx xxx xxx

The market value of land is the price that would in all probability result form fair negotiations where the seller is

willing to sell and the buyer desires to buy.

Upon the foregoing statement of the facts disclosed by the record, we are of opinion that the judgment entered in the court

below should be reversed and the complaint dismissed without costs in this instance.

1. Even were we to admit, which we do not, that the plaintiff company had the right to terminate the negotiations at the

time indicated by its manager, and to direct its real estate not make the sale of Barretto after the hour indicated,

nevertheless we would be compelled to hold, upon the evidence before us, that the plaintiff company has no cause of

action for monetary damages against the defendant real estate agent.

The measure of the damages which the plaintiff would be entitled to recover from the real estate agent for the

unauthorized sale of its property would be the actual market value of the property, title to which had been lost as a result

of the sale. We are not now considering any question as to the right of the owner, under such circumstances, to recover the

property from the purchaser, or damages for its detention or like; but merely his right to recover monetary damages from

his agent should he elect, as the plaintiff company did in this case, to ratify the sale and recoup from the agent any loss

resulting from his alleged unauthorized consummation of the sale.

The market value of the land in question was P18,892.50. Of this the plaintiff company has received P17,175, leaving a

balance of P1,717.50 unpaid. But, whatever may be the view which should taken as to the right of the plaintiff company to

127

terminate the negotiations for the sale of the property to Barretto at the time fixed by it in its letter to the defendant real

estate agent, there can be no question as to the liability of the plaintiff company to the real estate agent, in the event that it

did so terminate the negotiations, for the amount of the commission which it agreed to pay him should he find a purchaser

for the land at the price agreed upon in his agency contract. The commission agreed upon was all over P17,175 which the

defendant could secure from the property, and it is clear that allowing the defendant this commission, and offsetting it

against the unpaid balance of the market value of the land, the plaintiff company is not entitled to a money judgment

against defendant.

We do not mean to question the general doctrine as to the power of a principal to revoke the authority of his agent at will,

in the absence of a contract fixing the duration of the agency (subject, however, to some well defined exceptions). Our

ruling is that at the time fixed by the manager of the plaintiff company for the termination of the negotiations, the

defendant real estate agent had already earned the commissions agreed upon, and could not be deprived thereof by the

arbitrary action of the plaintiff company in declining to execute the contract of sale for some reason personal to itself.

The question as to what constitutes a sale so as to entitle a real estate broker to his commissions is extensively annotated

in the case of Lunney vs. Healey (Nebraska) 56313 reported in 44 Law Rep. Ann., 593 [Note], and the long line of

authorities there cited support the following rule:

The business of a real estate broker or agent, generally, is only to find a purchaser, and the settled rule as stated by

the courts is that, in the absence of an express contract between the broker and his principal, the implication

generally is that the broker becomes entitled to the usual commissions whenever he brings to his principal a party

who is able and willing to take the property and enter into a valid contract upon the terms then named by the

principal, although the particulars may be arranged and the matter negotiated and completed between the principal

and the purchaser directly.

In the case of Watson vs. Brooks (17 Fed. Rep., 540; 8 Sawy., 316), it was held that a sale of real property entitling a

broker to his commissions, was an agreement by the vendor for a certain valuable consideration then or thereafter to be

paid, and was complete without conveyance, although the legal title remained in the vendor.

The rights of a real estate broker to be protected against the arbitrary revocation of his agency, without remuneration for

services rendered in finding a suitable purchaser prior to the revocation, are clearly and forcefully stated in the following

citation form the opinion in the case of Blumenthal vs. Goodall (89 Cal., 251).

The act of the agent in finding a purchaser required time and labor for its completion, and within three days of the

execution of the contract, and prior to its revocation, he had placed the matter in the position that success was

practically certain and immediate, and it would be the height of injustice to permit the principal then to withdraw

the authority and terminate the agency as against an express provision of the contract, and perchance reap the

benefit of the agent's labors, without being liable to him for his commissions. This would be to make the contract

an unconscionable one, and would offer a premium for fraud by enabling one of the parties to take advantage of

his own wrong and secure the labor of the other without remuneration.

2. We are of opinion that under all the circumstances surrounding the negotiations as disclosed by the practically

undisputed evidence of record, the plaintiff company could not lawfully terminate the negotiations at the time it attempted

to do so and thereafter decline to convey the land to Barretto, who had accepted an offer of sale made to him by the

plaintiff's duly authorized agent, subject only to an examination of the documents of title, and stood ready to pay the

purchase price upon the delivery of the duly executed deed of conveyance and other necessary documents of title. We are

not now considering the right or the power of the plaintiff company to terminate or revoke the agency of the defendant at

that time. The revocation of the agent's authority at that time could in no wise relieve the plaintiff company of its

obligation to sell the land to Barretto for the price and on the terms agreed upon before the agency was revoked.

128

If we are correct in our conclusions in this regard, it follows, of course that no matter hat was the actual value of the land,

the plaintiff company suffered no damage by the delivery of the title deeds to Barretto, and the consummation of the sale

by the defendant upon the terms and at the price agreed upon prior to the revocation of his agency.

Without considering any of the disputed questions of fact it clearly appears that before the manager of the plaintiff

company wrote the letter dated September 2, 1912, which is set forth in the foregoing statement of facts, and before the

conversation was had to which that letter refers, the defendant real estate agent had offered to sell the land to Barretto for

P18,892.50 and that he did so with the knowledge and consent, and under the authority of the plaintiff company. It further

clearly appears that this offer had been duly accepted by Barretto, who stood ready and willing to pay over the agreed

purchase price, upon the production and delivery of the necessary documents of title, should these documents be found,

upon examination, to be executed in due and legal form. The only question, then, which we need consider, is whether the

plaintiff company could lawfully "cancel" or rescind this agreement for the sale and purchase of the land, on the sole

ground that the purchase price was not paid at the hour designated in the letter to the defendant.

The only reasons assigned for the sudden and arbitrary demand for the payment of the purchase price which was made

with the manifest hope that it would defeat the agent's deal with Barretto, are that the plaintiff company's manager had

become satisfied that the land was worth more than he had agreed to accept for it; and that he was piqued and annoyed at

the delays which marked the earlier stages of the negotiations.

Time does not appear to have been of the essence of the contract. The agreement to sell was made without any express

stipulation as to the time within which the purchase price was to be paid, except that the purchaser reserved the right to

examine the documents of title before making payment of the purchase price, though it was understood that the sale was

for cash upon the delivery of the documents of title executed in due form. Under the agreement with the agent of the

plaintiff company, the purchaser had a perfect right to examine the documents of title; and in the absence of an express

agreement fixing the time to be allowed therefore, he was clearly entitled to such time as might be reasonably necessary

for that purpose.

The plaintiff company, through its agent, had given Barretto an opportunity to examine the documents of title, with the

express understanding that if they were satisfactory he would hand the agent his check for the purchase price, and it is

very clear that the plaintiff company could not arbitrarily, and for its own convenience, deprive Barretto of this

opportunity to make such examination of the documents as might be reasonably necessary.

Of course we are not to be understood as denying the right of the vendor to couple his agreement to sell with a stipulation

that the purchase price must be paid at a specific day, hour and minute; nor that the obligation to pay over the purchase

price forthwith may not be inferred from all the circumstances surrounding the transaction in a particular case. Time may

be, and often is of the very essence of the contract. But in a contract for the sale of real estate, where no agreement to the

contrary appears, it may fairly be assumed that it was the intention of the parties to allow a reasonable time for the

examination of the documents of title; and in any case in which time has been expressly allowed for that purpose, the

vendor cannot arbitrarily demand the payment of the purchase price before the expiration of the time reasonably necessary

therefor.

The doctrine supported by citation of authority is set forth as follows on page 165, "Maupin on Marketable Title to Real

Estate:"

The contract of sale usually specifies a time in which the purchaser may examine the title before completing the

purchase. If no time be specified, he will be entitled to a reasonable time for that purpose, but cannot keep the

contract open indefinitely so as to avail himself of a rise in the value of the property or escape loss in case of

depreciation. He cannot be required to pay the purchase money before he has examined the abstract, unless he has

expressly stipulated so to do. It has been held that if the contract provide that the purchaser shall be furnished an

abstract of title, and shall have a specified time in which to examine the title and pay the purchase money, the

purchaser must determine in that time whether he will take the title, and that he cannot tender the purchase money

after that time, even though no abstract of the title was furnished.

129

The purchaser is entitled to a reasonable time within which to determine by investigation the validity of apparent

liens disclosed by the record. After the purchaser has examined the abstract, or investigated the title in the time

allowed for that purpose, it is his duty to point out or make known his objections to the title, if any, so as to give

the vendor an opportunity to remove them.

In the case of Hoyt vs. Tuxbury (70 Ill., 331, 332), the rule is stated as follows:

Where the purchase of land is made upon condition the title is found good, the purchaser is only entitled to a

reasonable time in which to determine whether he will take the title the vendor has, or reject it. He cannot keep

the contract open indefinitely, so as to avail of a rise in the value of the property, or relieve himself in case of a

depreciation.

In the case of Easton vs. Montgomery (90 Cal., 307), the rule is set forth as follows:

A contract for the sale of land which provides "title to prove good or no sale," without specifying the time within

which the examination is to be made, implies a reasonable time.

In 39 Cyc., 1332, the general rule, supported by numerous citations, is set forth as follows:

If the contract of sale does not specify the time of performance, a reasonable time will be implied. In other words

a reasonable time for performance will be allowed, and performance within a reasonable time will be required.

What is a reasonable time necessarily depends upon the facts and circumstances of the particular case. The rule

permitting and requiring performance within a reasonable time applies both to the time for making and executing

the conveyance by the vendor, and to the time for making or tendering payment by the purchaser; and where some

precedent act or demand is necessary, the rule applies to the time of performance after such act is done, or after

such demand has been made. It also applies to the time within which any conditions precedent is to be performed,

or within which a contingency upon which the transaction depends is to happen, and to the performance of

various acts by the parties such as the furnishing of an abstract of title, or making a survey, or any act which is to

precede or may affect the time of conveyance or payment, or which one of the parties may do at his option which

may affect the rights of the parties under the contract. If the purchaser is entitled to an examination of the title a

reasonable time therefor will be implied.

Under all the circumstances surrounding the transaction in the case at bar, as they appear from the evidence of record, we

have no hesitation in holding that the plaintiff company's letter of September 2, 1912 demanding payment before five

o'clock of the afternoon of that day, under penalty of the cancellation of its agreement to sell, was an arbitrary

unreasonable attempt to deny to the purchaser the reasonable opportunity to inspect the documents of title, to which he

was entitled by virtue of the express agreement of the plaintiff company's agent before any attempt was made to revoke

his agency. It follows that Barretto's right to enforce the agreement to sell was in no wise affected by the attempt of the

plaintiff company to "cancel" the agreement; and that the plaintiff company suffered no damage by the consummation of

the agreement by the acceptance of the stipulated purchase price by the defendant real estate agent.

Perhaps we should indicate that in arriving at these conclusions we have not found it necessary to pass upon the disputed

question of fact, as to whether or not the plaintiff company's manager instructed the defendant not to deliver the title-deed

until he had received the purchase price. On this point there is a direct conflict of evidence. But as we understand the

transaction, it was clearly understood that the purchaser would have a reasonable opportunity to inspect and examine the

documents of title before paying over a large sum of money in exchange therefor, whether the agent did or did not have

the authority to make actual delivery of the title deed for that purpose.

Twenty days hereafter let judgment be entered reversing the judgment entered in the court below without costs in this

instance, and directing the dismissal of the complaint with the costs in first instance against the plaintiff company, and ten

days thereafter let the record be returned to the court wherein it originated. So ordered.

130

G.R. No. 15823 September 12, 1921

JULIO DANON, plaintiff-appellee,

vs.

ANTONIO A. BRIMO & CO., defendant-appellant.

JOHNSON, J.:

This action was brought to recover the sum of P60,000, alleged to be the value of services rendered to the defendant by

the plaintiff as a broker. The plaintiff alleges that in the month of August, 1918, the defendant company, through its

manager, Antonio A. Brimo, employed him to look for a purchaser of its factory known as "Holland American Oil Co.,"

for the sum of P1,200,000, payable in cash; that the defendant promised to pay the plaintiff, as compensation for his

services, a commission of five per cent on the said sum of P1,200,000, if the sale was consummated, or if the plaintiff

should find a purchaser ready, able and willing to buy said factory for the said sum of P1,200,000; that subsequently the

plaintiff found such a purchaser, but that the defendant refused to sell the said factory without any justifiable motive or

reason therefor and without having previously notified the plaintiff of its desistance or variation in the price and terms of

the sale.

To that complaint the defendant interposed a general denial. Upon the issue thus presented, the Honorable Simplicio del

Rosario, judge, after hearing and considering the evidence adduced during the trial of the cause, rendered a judgment in

favor of the plaintiff and against the defendant for the sum of P60,000, with costs. From that judgment the defendant

appealed to this court.

The proof with regard to the authority of the plaintiff to sell the factory in question for the defendant, on commission, is

extremely unsatisfactory. It consists solely of the testimony of the plaintiff, on the one hand, and of the manager of the

defendant company, Antonio A. Brimo, on the other. From a reading of their testimony we believe that neither of them

has been entirely free from prevarications. However, after giving due weight to the finding of the trial court in this regard

and after carefully considering the inherent probability or improbability of the testimony of each of said witnesses, we

believe we are approximating the truth in finding: (1) That Antonio A. Brimo, in a conversation with the plaintiff, Julio

Danon, about the middle of August, 1918, informed the latter that he (Brimo) desired to sell his factory, the Holland

American Oil Co., for the sum of P1,200,000; (2) that he agreed and promised to pay to the plaintiff a commission of 5

per cent provided the latter could sell said factory for that amount; and (3) that no definite period of time was fixed within

which the plaintiff should effect the sale. It seems that another broker, Sellner, was also negotiating the sale, or trying to

find a purchaser for the same property and that the plaintiff was informed of the fact either by Brimo himself or by

someone else; at least, it is probable that the plaintiff was aware that he was not alone in the field, and his whole effort

was to forestall his competitor by being the first to find a purchaser and effect the sale. Such, we believe. was the contract

between the plaintiff and the defendant, upon which the present action is based.

The next question to determine is whether the plaintiff had performed all that was required of him under that contract to

entitle him to recover the commission agreed upon. The proof in this regard is no less unsatisfactory. It seems that

immediately after having an interview with Mr. Brimo, as above stated, the plaintiff went to see Mr. Mauro Prieto,

president of the Santa Ana Oil Mill, a corporation, and offered to sell to him the defendant's property at P1,200,000. The

said corporation was at that time in need of such a factory as the plaintiff was offering for sale, and Mr. Prieto, its

president, instructed the manager, Samuel E. Kane, to see Mr. Brimo and ascertain whether he really wanted to sell said

factory, and, if so, to get permission from him to inspect the premises. Mr. Kane inspected the factory and, presumably,

made a favorable report to Mr. Prieto. The latter asked for an appointment with Mr. Brimo to perfect the negotiation. In

the meantime Sellner, the other broker referred to, had found a purchaser for the same property, who ultimately bought it

for P1,300,000. For that reason Mr. Prieto, the would be purchaser found by the plaintiff, never came to see Mr. Brimo to

perfect the proposed negotiation.

Under the proofs in this case, the most that can be said as to what the plaintiff had accomplished is, that he had found a

person who might have bought the defendant's factory if the defendant had not sold it to someone else. The evidence does

131

not show that the Santa Ana Oil Mill had definitely decided to buy the property in question at the fixed price of

P1,200,000. The board of directors of said corporation had not resolved to purchase said property; and even if its president

could legally make the purchase without previous formal authorization of the board of directors, yet said president does

not pretend that he had definitely and formally agreed to buy the factory in question on behalf of his corporation at the

price stated. On direct examination he testified for the plaintiff as follows:

Q. You say that we were going to accept or that it was beneficial for us; will you say to whom your refer,

when you say "we?" —

A. Our company, the Santa Ana Oil Mill.

Q. And is that company able to pay the sum of P1,200,000? —

A. Yes, sir.

Q. And you accepted it at that price of P1,200.000? —

A. Surely, because as I already said before, we were in the difficult position of not being able to operate

our factory, because of the obstacle placed by the Government.

Q. And did you inform Mr. Danon of this acceptance? —

A. I did not explain to Mr. Danon.

On cross-examination the same witness testified:

Q. What actions did the board of directors of the Santa Ana Oil Mill take in order to acquire or to make an

offer to Mr. Brimo of the Holland American Oil Company? —

A. But nothing was effected, because Mr. Danon stated that the property had been sold when I was going

to deal with him.

Q. But do you not say that you made an offer of P1,200,000? —

A. No; it was Mr. Danon who made the offer and we were sure to put the deal through because we have

bound ourselves.

The plaintiff claims that the reasons why the sale to the Santa Ana Mill was not consummated was because Mr. Brimo

refused to sell to a Filipino firm and preferred an American buyer; that upon learning such attitude of the defendant the

plaintiff endeavored to procure another purchaser and found a Mr. Leas, who delivered to the plaintiff a letter addressed to

Mr. Brimo, offering to buy the factory in question at P1,200,000. the offer being good for twenty-four; that said offer was

not accepted by Brimo because while he was reading the letter of Leas, Sellner came in, drew Brimo into another room,

and then and there closed the deal at P1,300,000. The last statement is admitted by the defendant.

Such are the facts in this case, as nearly accurate as we can gather them from the conflicting evidence before us. Under

those facts, is the plaintiff entitled to recover the sum of P60,000, claimed by him as compensation for his services? It will

be noted that, according to the plaintiff's own testimony, the defendant agreed and promised to pay him a commission of 5

per cent provided he (the plaintiff) could sell the factory at P1,200.000 ("con tal que V. me venda la fabrica en

P1,200.000"). It will also be noted that all that the plaintiff had accomplished by way of performance of his contract was,

that he had found a person who might have bought the factory in question had not the defendant sold it to someone else.

(Beaumont vs. Prieto, 41 Phil., 670; 249 U.S., 554.)

132

Under these circumstances it is difficult to see how the plaintiff can recover anything in the premises. The plaintiff's

action is not one for damages for breach of contract; it is an action to recover "the reasonable value" of services rendered.

this is unmistakable both from the plaintiff's complaint and his testimony as a witness during the trial.

Q. And what is the reasonable value of the services you rendered to Mr. Brimo? —

A. Five per cent of the price at which it was sold.

Q. Upon what do you base your qualification that those services were reasonable? —

A. First, because that is the common rate in the city, and, secondly, because of the big gain that he obtained

from the sale.

What benefit did the plaintiff, by his "services," bestow upon the defendant to entitle him to recover from the latter the

sum of P60,000? It is perfectly clear and undisputed that his "services" did not any way contribute towards bringing about

the sale of the factory in question. He was not "the efficient agent or the procuring cause of the sale."

The broker must be the efficient agent or the procuring cause of sale. The means employed by him and his efforts

must result in the sale. He must find the purchaser, and the sale must proceed from his efforts acting as broker.

(Wylie vs. Marine National Bank, 61 N. Y., 414; 416; citing: McClure vs. Paine, 49 N. Y., 561;

Lloyd vs. Mathews, 51 id., 124; Lyon vs. Mitchell, 36 id., 235; Briggs vs. Rowe, 4 Keyes, 424; Murrayvs. Currie,

7 Carr. and Payne, 584; Wilkinson vs. Martin, 8 id., 5.)

A leading case on the subject is that of Sibbald vs. Bethlehem Iron Co. (83 N. Y., 378; 38 Am. Rep., 441). In the case,

after an exhaustive review of various cases, the Court of Appeals of New York stated the rule as follows:

In all the cases, under all and varying forms of expression, the fundamental and correct doctrine, is, thatthe duty

assumed by the broker is to bring the minds of the buyer and seller to an agreement for a sale, and the price and

terms on which it is to be made, and until that is done his right to commissions does not accrue.

(McGavock vs. Woodlief, 20 How., 221; Barnes vs. Roberts, 5 Bosw., 73; Holly vs. Gosling, 2 E. D., Smith, 262;

Jacobs vs. Kolff, 2 Hilt., 133; Kock vs. Emmerling, 22 How., 72; Corning vs. Calvert, 2 Hilt., 56; Trundy vs. N.Y.

and Hartf. Steamboat Co., 6 Robt., 312; Van Lien vs. Burns, 1 Hilt., 134.)

xxx xxx xxx

It follows, as a necessary deduction from the established rule, that a broker is never entitled to commissions for

unsuccessful efforts. The risk of a failure is wholly his. The reward comes only with his success. That is the plain

contract and contemplation of the parties. The broker may devote his time and labor, and expend his money with

ever so much of devotion to the interest of his employer, and yet if he fails, if without effecting an agreement or

accomplishing a bargain, he abandons the effort, or his authority is fairly and in good faith terminated, he gains no

right to commissions. He loses the labor and effort which was staked upon success. And in such event it matters

not that after his failure, and the termination of his agency, what he has done proves of use and benefit to the

principal. In a multitude of cases that must necessarily result. He may have introduced to each other parties who

otherwise would have never met; he may have created impressions, which under later and more favorable

circumstances naturally lead to and materially assist in the consummation of a sale; he may have planted the very

seed from which others reap the harvest; but all that gives him no claim. It was part of his risk that failing himself,

not successful in fulfilling his obligation, others might be left to some extent to avail themselves of the fruit of his

labors. As we said in Wylie vs. Marine National Bank (61 N.Y., 416), in such a case the principal violates no right

of the broker by selling to the first party who offers the price asked, and it matters not that sale is to the very party

with whom the broker had been negotiating. He failed to find or produce a purchaser upon the terms prescribed in

his employment, and the principal was under no obligation to wait longer that he might make further efforts. The

133

failure therefore and its consequences were the risk of the broker only. This however must be taken with one

important and necessary limitation. If the efforts of the broker are rendered a failure by the fault of the employer;

if capriciously he changes his mind after the purchaser, ready and willing, andconsenting to the prescribed terms,

is produced; or if the latter declines to complete the contract because of some defect of title in the ownership of

the seller, some unremoved incumbrance, some defect which is the fault of the latter, then the broker does not lose

his commissions. And that upon the familiar principle that no one can avail himself of the nonperformance of a

condition precedent, who has himself occasioned its nonperformance. But this limitation is not even an exception

to the general rule affecting the broker's right for it goes on the ground that the broker has done his duty, that he

has brought buyer and seller to an agreement, but that the contract is not consummated and fails though the after-

fault of the seller. The cases are uniform in this respect. (Moses vs. Burling, 31 N.Y., 462; Glentworth vs. Luther,

21 Barb., 147; Van Lien vs. Burns, 1 Hilt., 134.)

One other principle applicable to such a contract as existed in the present case needs to be kept in view.Where no

time for the continuance of the contract is fixed by its terms either party is at liberty to terminate it at will, subject

only to the ordinary requirements of good faith. Usually the broker is entitled to a fair and reasonable opportunity

to perform his obligation, subject of course to the right of the seller to sell independently. But having been granted

him, the right of the principal to terminate his authority is absoluteand unrestricted, except only that he may not

do it in bad faith, and as a mere device to escape the payment of the broker's commissions. Thus, if in the midst of

negotiations instituted by the broker, and which were plainly and evidently approaching success, the seller should

revoke the authority of the broker,with the view of concluding the bargain without his aid, and avoiding the

payment of commission about to be earned, it might be well said that the due performance his obligation by the

broker was purposely prevented by the principal. But if the latter acts in good faith, not seeking to escape the

payment of commissions, but moved fairly by a view of his own interest, he has the absolute right before a

bargain is made while negotiations remain unsuccessful, before commissions are earned, to revoke the broker's

authority, and the latter cannot thereafter claim compensation for a sale made by the principal, even though it be

to a customer with whom the broker unsuccessfully negotiated, and even though, to some extent, the seller might

justly be said to have availed himself of the fruits of the broker's labor. (Ibid. pp. 444, 445 and 446.)

The rule laid down in the foregoing case was adopted and followed in the cases of Zeimer vs. Antisell (75 Cal. 509), and

Ayres vs. Thomas (116 Cal., 140).

The undertaking to procure a purchaser requires of the party so undertaking, not simply to name or introduce a

person who may be willing to make any sort of contract in reference to the property, but to produce a party

capable, and who ultimately becomes the purchaser. (Kimberly vs. Henderson and Lupton, 29 Md., 512, 515,

citing: Keener vs. Harrod and Brooke, 2 Md. 63; McGavock vs. Woodlief, 20 How., 221. See also Richards,

Executor, vs. Jackson, 31 Md., 250.)

The defendant sent a proposal to a broker in these words: If you send or cause to be sent to me, by advertisement

or otherwise, any party with whom I may see fit and proper to effect a sale or exchange of my real estate, above

described I will pay you the sum of $200. The broker found a person who proposed to purchase the property, but

the sale was not affected. Held: That the broker was not entitled to compensation. (Walker vs. Tirrel, 3 Am. Rep.,

352.)

It is clear from the foregoing authorities that, although the present plaintiff could probably have effected the sale of the

defendant's factory had not the defendant sold it to someone else, he is not entitled to the commissions agreed upon

because he had no intervention whatever in, and much sale in question. It must be borne in mind that no definite period

was fixed by the defendant within which the plaintiff might effect the sale of its factory. Nor was the plaintiff given by the

defendant the exclusive agency of such sale. Therefore, the plaintiff cannot complaint of the defendant's conduct in selling

the property through another agent before the plaintiff's efforts were crowned with success. "One who has employed a

broker can himself sell the property to a purchaser whom he has procured, without any aid from the broker."

(Hungerford vs. Hicks, 39 Conn., 259; Wylie vs. Marine National Bank, 61 N.Y., 415, 416.)

134

G.R. No. L-58794 August 24, 1984

SPOUSES LYDIA TERRADO & MARTIN ROSARIO, and DOMINGO FERNANDEZ, petitioners,

vs.

HON. COURT OF APPEALS, HON. FELICIDAD CARANDANG VILLALON, Judge, CFI of Pangasinan,

Deputy Sheriff OSCAR SIBUNA of Pangasinan, and GERUNCIO LACUESTA, respondents.

GUERRERO, J.:

Pursuant to Act No. 4041 of the Philippine Legislature approved January 21, 1983, the Fisheries situated in the locality

known as Mangabul, Bayambang, Pangasinan, and falling within Plan No. Ipd Ninety-two of the Bureau of Lands and

recently declared by the courts as public land was reserved and the usufruct thereof ceded to the municipality of

Bayambang, Province of Pangasinan, to be used or disposed of in accordance with the general municipal law relative to

the letting of fisheries in municipal waters: Provided, That the timber and other forest products therein shall be placed

under the administration and control of the forest service; Provided further, that the cession shall not be interpreted as

limiting the power of the Secretary of Agriculture and Natural Resources to prescribe rules and regulations for the

protection of game birds, mammals or fish within the area ceded to the municipality of Bayambang. (Section 1, Act 4041.

This Act was declared enforced by Proclamation No. 545 (1933).

On May 15, 1974, the Sanggunian Bayan of Bayambang, Pangasinan passed Resolution No. 35 enacting Ordinance NO.

8, series of 1974, establishing the Bayambang Fishery and Hunting Park and Municipal Water Shed embracing all the vast

area of the Mangabul Fisheries consisting of about 2,061 hectares with 19 fishponds and not less than 1,500 hectares of

watershed area. In the said ordinance, the municipality designated appointed and constituted private respondent Geruncio

Lacuesta as Manager-Administrator for a period of 25 years, renewable for another 25 years, under the condition that said

respondent shall pay the municipality. a sum equivalent to 10% of the annual gross income that may be derived from the

sale of forest products, wild game and fish, which amount shall not be less than P200,000.00 annually. He was further

required to post a bond in the amount of P200,000.00 to guaranty payment of the 10% due the municipality.

Municipal Ordinance No. 8 was approved by the Provincial Board of Pangasinan on October 11, 1974 and thereafter was

forwarded to the then Secretary of Agriculture and Natural Resources for approval pursuant to the provisions of the

Fisheries Act, Act No. 4003.

On April 4, 1975, the Secretary disapproved the Ordinance because it grants fishery privileges to respondent Lacuesta

without the benefit of competitive public hearing in contravention of the provisions of Act 4003 as amended.

Respondent Lacuesta interposed an appeal from the disapproval by the Secretary of Agriculture and Natural Resources to

the Office of the President but the appeal was withdrawn by said respondent in his letter dated July 14, 1977.

The Municipality then informed respondent Lacuesta of the disapproval of the Ordinance by the Secretary of Agriculture

& Natural Resources and directed him to refrain and desist from acting as Administrator-Manager under the contract but

the latter refused and insisted in maintaining possession of the fisheries. Inspite of such refusal, the Sanggunian Bayan of

Bayambang, Pangasinan passed Resolution No. 31, series of 1977, resolving to advertise for public bidding all fisheries at

the Mangabul area for four years and to direct the Municipal Treasurer to prepare the necessary notices of public bidding,

and accordingly, the Municipal Mayor and the Municipal Treasurer caused to issue a Notice of Public Bidding scheduled

July 5, 6, and 7, 1977. Among the winning bidders were the petitioners herein, the spouses Lydia Terrado and Martin

Rosario and Domingo Fernandez who were immediately placed in possession of the Mangabul fisheries as of July 6,

1977.

Private respondent Geruncio Lacuesta immediately filed on July 8, 1977 a petition for prohibition and mandamus with

damages with the Court of First Instance of Pangasinan, Branch IX in San Carlos City, presided by Judge Augusto Saroca

against the Municipal Mayor, the Municipal Treasurer, the Sanggunian Bayan and the members thereof, praying that the

135

respondent municipal officials named therein be prohibited from executing any contract of lease with the winning bidders

and from enforcing Resolution No. 31, series of 1977, and further asked that a temporary restraining order be issued

against said respondent officials from performing the acts enjoined.

Pursuant to the prayer in the petition for prohibition in Civil Case No. 516, Judge Saroca issued a restraining order

enjoining and prohibiting all the respondents, their agents, representatives and/or anybody acting for and on their own

behalf, from executing any contract of lease with the winning bidders in the biddings conducted on July 5, 6, and 7, 1977

and from enforcing Resolution No. 31, series of 1977 until further orders from the court. Respondents in this Civil Case

No. 516 filed a motion to dissolve the temporary restraining order but was denied on August 17, 1977.

Upon ex-parte motion by Lacuesta asking that the Sheriff of the court be authorized to enforce the restraining order of

July 11, 1977 and to arrest and keep in his custody all persons violating the same, Judge Saroca issued on October 7, 1977

an order directing Deputy Sheriff Alberto V. Soriano to proceed to the Mangabul fisheries and enforce the restraining

order of July 11, 1977 against the respondent municipal officials, their agents and representatives and to arrest and keep in

custody any and - all persons found to be violating said order. Thereafter, the Deputy Sheriff informed the court on

October 26, 1977 that he served copies of the restraining order dated July 11, 1977 on all parties concerned and that they

peacefully vacated and gave the possession of the fisheries without interposing any formal objection, to the plaintiffs,

Geruncio Lacuesta, et al.

Still in Civil Case No. 516, Lacuesta filed a petition dated September 16, 1977 asking that the defendants named in said

petition including the spouses Lydia Terrado Rosario and Martin Rosario and others be ordered to explain why they

should not be punished for contempt and that they be arrested immediately and kept in custody until they stop violating

the restraining order of July 11, 1977, further alleging that said spouses employing misrepresentation, strategies, deceit,

threat and force took over the Mayor fishery and illegally fished therein and are continuing to fish the same including the

Manansan Alangigan, Tubor and Banawang na Dueg Fisheries which they had previously took over from the movant

Lacuesta.

The situation became serious as on October 10, 1977 the Sanggunian Bayan passed Resolution No. 34, series of 1977

"requesting the assistance from the Department of Natural Resources, the Philippine Constabulary, Department of Justice,

the Provincial Fiscal, the Provincial Governor and other agencies, for them to enjoin respondent from disturbing and

interfering with the administration by the Municipality of Mangabul Fisheries and other areas."

In the meantime that these incidents were pending before Judge Saroca, the members of the Sanggunian Bayan as

petitioners filed on November 15, 1977 a petition for certiorari with the defunct Court of Appeals against Judge Saroca,

the INP Station Commander, Deputy Sheriff Soriano, and Geruncio Lacuesta and others assailing the order issued on July

11, 1977 as well as the order issued October 7, 1977 as null and void, the same having been issued without jurisdiction

and with grave abuse of discretion, the case docketed as CA-G.R. No. SP-07252-R. The appellate court denied the petition

for certiorari and held that Judge Saroca did not act without or in excess of jurisdiction or with grave abuse of discretion

in issuing the restraining order of July 11, 1977. The Sanggunian Bayan members elevated the case on a petition for

review on certiorari, G.R. No. 49064 but was denied for lack of merit per Our resolution dated October 16, 1978.

While the certiorari proceeding was pending before the Court of Appeals, the resolution on the motion for contempt

before Judge Saroca was held in abeyance but upon final decision by the court, Lacuesta moved the court on July 15, 1979

to resolve the contempt motion as well as for the order of their arrest. After hearing, Judge Saroca issued the order dated

August 30, 1979 holding that the continued possession of the spouses Lydia Terrado Rosario and Martin Rollo Rosario as

winning bidders constituted disobedience to and unlawful interference with the temporary restraining order of July 11,

1977 and directed Deputy Sheriff Soriano to enforce the July 11 and October 7, 1977 orders, to cause the arrest of said

Rosario spouses including their agents and representatives and any and all person representing themselves as winning

bidders in the public bidding held on July v, 1977 and to hold them in custody until further orders of the court, unless said

spouses and their agents and the winning bidders voluntarily refrain from disobeying and interfering with the process of

the court, in which case they may be discharged from custody. In the same order, Judge Saroca set a pre-trial conference

and hearing on the merits on September 25, 26, and 27, 1979.

136

Having been adjudged in contempt of court and their immediate arrest ordered by Judge Saroca in the order mentioned

above dated August 30, 1979, the spouses Lydia Terrado Rosario and Martin Rosario filed the petition for prohibition

with the prayer for a writ of preliminary mandatory injunction assailing the questioned order as null and void, having been

issued in grave abuse of discretion amounting to lack of jurisdiction and praying that respondent Judge Saroca be

restrained from implementing the same, the petition docketed as CA-G.R. No. SP-09724.

Resolving the petition (CA-G.R. No. SP-09724), the Court of Appeals, acting through the Former Eleventh Division with

Justices Victoriano, J., ponente, and Reyes and Nocon, JJ., concurring, ruled and set aside the assailed order of August 30,

1979, holding that the Rosario spouses were not parties to the case, hence, they could not be bound by the restraining

order of July 11, 1977 which enjoined and prohibited the parties: "(1) from executing any contract of lease with the

winning bidders in the bidding conducted on July 5, 6, and 7, 1977; and/or (2) from enforcing resolution No. 31, series of

1977 of the Sangguniang Bayan of Bayambang, Pangasinan, until further orders from this court." The order of Judge

Saroca dated August 30, 1979 was, therefore, ordered set aside as having been issued in excess of jurisdiction and with

grave abuse of discretion. The decision of the Court of Appeals in CA-G.R. No. SP-09724 was promulgated January 24,

1980 thereby upholding the possession of the spouses Lydia Terrado and Martin Rosario.

Meanwhile, the Municipality of Bayambang, represented by Mayor Jaime P. Junio and the Sangguniang Bayan of

Bayambang represented by the members thereof, filed on September 5, 1979 Civil Case no. SCC-648 in the Court of First

Instance of Pangasinan, Branch X, San Carlos City against Geruncio Lacuesta for annulment of the contract entered into

between the Municipality and Lacuesta under Ordinance No. 8 hereinbefore mentioned, injunction and damages with

prayer for the issuance of a writ of preliminary injunction. After the hearing of the incident for the issuance of the writ of

preliminary injunction, Judge Saroca issued an order dated November 15, 1979 granted the writ as prayed for and ordered

the defendant Lacuesta, his agents, lawyers, representatives, laborers and other person or persons under his employ to

refrain and desist from interfering with and molesting the plaintiffs in the use of and in the exercise of plaintiffs'

usufructury rights until further orders from the court. On November 16, 1979, the day Judge Saroca retired from the

service, he issued another order to the sheriff to cause defendant Lacuesta to refrain from and desist from enforcing and

implementing Resolution No. 35 enacting Ordinance No. 8, series of 1974 and the contract of management and

administration, restraining them further from interfering with and molesting the plaintiffs in the use of and in the exercise

of the latters' usufructuary rights until further orders from the court.

On November 23, 1979, Lacuesta elevated to the Supreme Court the November 15 and 16 orders of Judge Saroca in a

petition for certiorari with prayer for preliminary injunction docketed as G.R. No. 51984. In Our resolution of January 14,

1980, the petition for certiorari was denied for lack of merit. His motion for reconsideration was also denied in Our

resolution of February 18, 1980.

With the retirement of Judge Saroca, the case was transferred to Branch III, Court of First Instance of Pangasinan,

Dagupan City, presided over by Judge Felicidad Carandang-Villalon, the case now docketed and numbered as D-5118.

Lacuesta then filed a Motion to Dissolve the Injunction and to Order Plaintiffs to Vacate and Turn All the Fisheries to

Defendants (the injunction previously issued by Judge Saroca dated November 15, 1979). The Motion was granted by

Judge Carandang-Villalon on the ground that 6 4 after the plaintiffs have recognized and confirmed the validity of the

resolution and the contract, and after the defendant had started to perform his duties and obligations under the contract, the

legal and factual ground which led the court to issue the writ has ceased to exist, and consequently, the dissolution of the

writ of preliminary mandatory injunction dated November 15, 1979 appears warranted by prevailing circumstances."

Plaintiff Municipality moved for reconsideration which was denied in the court's order of March 9, 1981 which also

ordered the issuance of the writ of execution after the approval of defendant Lacuesta's bond of P200,000.00.

The plaintiff Municipality thereafter assailed the above orders of Judge Carandang-Villalon dated November 8, 1981 and

March 9, 1981 in the former's petition for certiorari with prayer for writ of preliminary injunction, the petition filed in the

Court of Appeals and docketed as CA-G.R. 12586, dated June 16, 1981.

In the decision of the Court of Appeals, Seventh Division, promulgated September 29, 1981, the court held that "being

bereft of merit, as shown above, the instant petition is hereby denied due course and outrightly dismissed. Accordingly,

137

the temporary restraining order heretofore issued is hereby lifted and the urgent motion to lift restraining order filed on

August 19, 1981 and on August 27, 1981 are hereby left unconsidered for having been rendered moot and academic by

the resolution." The motion for reconsideration of the decision was denied by resolution of the appellate court on

November 11, 1981.

Meanwhile, when the Court of First Instance of Pangasinan, Branch III, Judge Carandang-Villalon presiding, received

copy of the decision in SP-12586 promulgated September 29, 1981, the court issued an order on October 5, 1981 for the

ex-prosecution of its previous order to dissolve the preliminary injunction and place Lacuesta in possession of the

contested fisheries and accordingly, a writ of execution was issued on October 7, 1981.

Another petition for certiorari was filed by the spouses Lydia Terrado and Martin Rosario and Domingo Fernandez

docketed as CA-G.R. No. SP-13175, assailing the issuance of the order and writ dated October 5 and 7, 1981 respectively

for allegedly violating due process as they were issued before the lapse of the 15-day reglementary period. In this petition,

SP-3175, the court required respondent Judge and Lacuesta to comment, the same time issuing a temporary restraining

order against the assailed order and writ of October 5 and 7, 1981 of the respondent court.

On November 7, 1981, the appellate court (through the Seventh Division and ponente who handled both SP-12586 and

SP-13175), rendered its resolution in SP-13175 dismissing the petition for lack of merit and setting aside the order of

October 14, 1981 to include the lifting of the restraining order of even date. The appellate court ruled that:

Our decision in said CA-G.R. No. SP-12586 held in effect that the impugned orders (like the order of

January 8, 1981), were properly issued by the respondent court. Hence, those interlocutory orders, the

effectivity of which were suspended by the certiorari proceedings in CA-G.R. No. SP-12586, presumed to

be immediately executory upon the lifting of the restraining order as done in the decision of September

29, 1981. This must be so, notwithstanding the filing on October 21, 1981 of an "Urgent Ex-Parte Motion

For Extension" to file motion for reconsideration of said decision because an injunction, once dissolved,

cannot be revived except by a new exercise of judicial power, and no appeal by a dissatisfied party can of

itself revive it. (Watcon vs. Enriquez, 1 Phil. 480; Sitia Teco vs. Venture, 9 Phil. 497; II Martin, Rules of

Court, 1969 Ed., p. 84).

Thus, when respondent court issued its herein impugned order of October 5, 1981 and the Writ of

Execution pursuant thereto on October 7, 1981, it was merely putting into effect the immediately

operative interlocutory order dissolving the injunction. There was therefore, no abuse of discretion.

When the resolution in SP-13175 was received in the lower court, Judge Villalon issued on November 6, 1981 an "Alias

Writ of Execution and Possession" which reiterated its writ of October 7, 1981. The alias writ was received by the

Municipality, through counsel, on November 12, 1981.

On November 16, 1981, the Municipality of Bayambang, represented by its Mayor, filed another certiorari petition to

annul the alias writ of November 6, 1981, in CA-G.R. No. 13353 against Judge Carandang-Villalon and Geruncio

Lacuesta, the petition being signed by Atty. Oliver O. Lozano.

Since CA-G.R. No. SP-12586 and CA-G.R. No. SP-13353 involve the same subject matter, the Special Sixth Division of

the Court of Appeals to which CA-G.R. No. SP-13353 was assigned or raffled, resolved in its Resolution of November

27, 1981 to consolidate the case with CA-G.R. No. SP-12586 then pending with the Seventh Division of the Court of

Appeals as to the plaintiff Municipality's motion for reconsideration.

The two certiorari petitions, CA-G.R. No. 12586 and CA G.R. No. SP-13353, now consolidated in the Seventh Division,

were resolved in the Resolution dated December 4, 1981, thus: "WHEREFORE, the foregoing considered, the petition in

13353 is hereby dismissed for being a scrap of paper, the temporary restraining order heretofore issued is hereby lifted,

138

and the scheduled hearing on December 10, 1981 hereby discontinued. The motion for reconsideration in SP-12586 is

hereby denied for lack of merit.

Since the Court of Appeals, Seventh Division, dismissed the petition in CA-G.R. No. SP-13353 as a mere scrap of paper

because Atty. Oliver O. Lozano was not authorized to represent the petitioner Municipality, Atty. Lozano submitted the

required authority in his Motion for Reconsideration of the resolution dismissing the petition, further praying that the

resolution of the Sixth Division giving due course to the petition as well as the temporary restraining order issued therein

be reinstated or restored.

Acting on the motion of the Municipality entitled "Ex-Parte Reiteration of Motion for Restoration of Temporary

Restraining Order" filed on December 22, 1981 and the "Urgent Ex-Parte Motion to Stop Arrest of Petitioner's Laborers"

filed on December 23, 198 1, the court in its Resolution of December 24, 1981 set the hearing of the first motion on

January 15, 1982 and as to the second motion, the court deemed "it wise and proper in the spirit of love and compassion

this Christmas time, to order that no arrests be ordered by the respondent court against persons involved in 'those fisheries

in areas covered by existing lease contracts executed by plaintiff Municipality in favor of entities and/or persons before

November 15, 1979' until after the results of the November 15 hearing are received. ... In effect, therefore, we are

ordering, as it is hereby ordered that a partial temporary restraining order be issued only as involved the areas with

existing lease contract entered into by the Municipality prior to November 15, 1979.

After the hearing on January 15, 1982 as alluded to above, the court promulgated its Resolution dated January 28, 1982,

holding that the pleadings signed by Atty. Oliver O. Lozano are deemed valid for purposes of considering the incidents

therein and that the impugned alias writ of execution issued by respondent court on November 6, 1981 is hereby declared

void only insofar as it has deleted the exception involving "those fisheries and areas covered by existing lease contract

executed by the plaintiff Municipality in favor of entities and/or persons before November 15, 1979. Further, the

respondent court was directed to conduct a factual determination of (a) who are the persons or what are the entities

involved, and (b) the clearly specified areas covered by their contracts, and that prior to the holding of such factual

determination however, the respondent court was ordered to settle the nature of those "lease contracts" — i.e., whether

ordinary lease contract over a fishery area or contract of lease of services. Finally, the Court of Appeals ordered that "in

case the respondent court finds, after putting to rest the nature of those lease contracts referred to in the original order of

dissolution and after making the factual determination herein ordered, that such contracts no longer exist, then the Partial

Temporary Restraining Order above mentioned shall be deemed ineffective for having then become moot and academic

The Motion for Contempt of Court filed by Lacuesta on January 13, 1982 was also denied by the court.

Pursuant to the resolution of the Court of Appeals dated January 28, 1982 and in compliance therewith in conducting a

factual determination of who are the persons or what are the entities involved and the clearly specified areas covered by

their contracts, Judge Villalon, after conducting hearings, submitted to the appellate court in her Ist Indorsement dated

April 30, 1982, stating that "it is definite that there are admittedly no areas covered by any existing lease contract executed

by the plaintiff Municipality in favor of entities and/or persons before November 15, 1979 within the contemplation of the

Order dated January 8, 1981 which order has ordered the dissolution of the writ of preliminary mandatory injunction dated

November 15, 1979 issued by then retired Hon. Judge Augusto Saroca for reasons set forth in the Order.

Acting upon the above report of Judge Villalon, the Court of Appeals promulgated its Resolution dated July 7, 1982,

resolving that "in view of the above, the partial temporary restraining order has become ineffective for having then

become moot and academic. WHEREFORE, the motion filed by private respondent is hereby granted (Motion Ex-Parte

for Total Lifting of Partial Restraining Order). The Partial Temporary Restraining Order issued on December 24, 1981 is

hereby lifted and set aside.

Two other petitions for certiorari were also filed with the Court of Appeals assailing the October 8, 1982 Order of Judge

Villalon which ordered the issuance of a writ of execution and implementation of the Order of January 8, 1981, the first

being CA-G.R. No. 15033 entitled "Spouses Lydia Terrado and Martin Rosario, et al. vs. Hon. Felicidad Carandang-

Villalon, et al.," filed October 18, 1982 and the second, CA-G.R. No. 13175, "Spouses Lydia Terrado, et al. vs. Hon.

139

Felicidad Carandang-Villalon, et al." dated October 9, 1981. CA-G.R. No. 15033 was dismissed on March 22, 1983,

while CA-G.R. G.R. No. 1317 5 on November 5, 1981.

The five (5) cases relating to the same subject matter, which are CA-G.R. No. 15033-SP, CA-G.R. 14501-SP, CA-G.R.

13353- SP CA-G.R. No. 13175-SP and CA-G.R. No. 12586-SP, were then consolidated in the decision of the Court of

Appeals promulgated March 22,1983.

The dismissal of the petition in CA-G.R. No. 13175 and the issuance of the alias writ of execution and possession issued

by respondent Judge Villalon in Civil Case No. D-5118 is now elevated to Us in G.R. No. 58794.

Likewise, the decision of the appellate court dismissing the petition in CA-G.R. No. 15033-SP and the Order issued by the

trial court dated January 8, 1981 have been raised to Us in G.R. No. 64489. Both petitions at bar, G.R. No. 58794 and

G.R. No. 64489, have been consolidated per Our Resolution of August 24, 1983.

The records of the petition before Us in G.R. No. 64489 disclose that upon written request of Judge Felicidad Carandang-

Villalon that she be relieved from taking further cognizance of Civil Case No. SCC-648 (D-5118) entitled "Geruncio

Lacuesta, et al. vs. The Municipality of Bayambang, the Supreme Court in its Resolution en banc dated June 7, 1983

granted the request of the Judge and directed the Clerk of Court of the Regional Trial Court of Dagupan to transfer the

records of the case to the Clerk of the Regional Trial Court of San Carlos City for raffling among the two branches

thereat. Accordingly, Judge Carandang-Villalon issued an Order dated June 17, 1983 directing the Stenographer who took

the proceedings 30 days to make complete transcript of the same and the Officer-in-Charge of the court to prepare the

voluminous exhibits and thereafter effect the transmittal of the full records of the case. Notwithstanding her relief, the

same Judge issued a further order dated September 2, 1983 commanding the Sheriff and the Commanding Officer of the

153rd PC Company to restore defendant Lacuesta and his men to possession of all the fisheries and areas covered by his

contract pursuant to the Order of the court dated October 8, 1982. This Order was implemented according to the Sheriff's

Return dated September 20, 1983.

Through the maze and muddle of this protracted legal controversy, it is plain and clear that the complaints and petitions

including all legal incidents and motions filed in the trial court, the appellate court and before this Tribunal are traceable.

in origin to the enactment and implementation of Municipal Ordinance No. 8, series of 1974, of the Municipality of

Bayambang, Pangasinan, establishing the Bayambang Fishery & Hunting Park and Municipal Watershed coveting the so-

called Mangabul Fisheries. As stated in Section of the Ordinance, the purposes of the Park are: 1. To attract tourists to

Bayambang and thus increase the income of the municipality and create new employment and new sources of income for

the people; 2. To restore and conserve the natural environment of the area by means of reforestation of the forest or

timberland reserved, thru engineering works, and other means within the Ipd-92 area; 3. To restore or improve, conserve

and develop the fisheries, zones, and exploit the fish resources of all the fisheries therein; 4. To supply agro-industrial

enterprises that may be established in Bayambang with raw materials from the area; and 5. To provide sports and

recreation facilities and wholesome sports and recreational activities for the people.

Further, under the Ordinance, the Municipality designated, appointed and constituted private respondent Lacuesta as

Manager-Administrator for a period of twenty-five (25) years, renewable for another twenty-five (25) years upon mutual

agreement (Section 4). Among the powers, duties and obligations of the Manager-Administrator are: 1. To reforest with

woods or economic value all the timberland portions indicated in Plan Ipd-92 and those that need to be reforested for

ecological purposes; 2. To stock the forest with wildlife or economic value, protect the forest products and wildlife and

regulate their multiplication in accordance with existing laws; 3. To deepen the fisheries, swamps and tributary streams by

dredging, employing modern scientific and technological methods to restore or improve and develop the fisheries to

increase the fees yield; 4. To conduct and regulate sports fishing and hunting in the park and collect fees therefrom; 5. To

use or dispose of the fisheries portion in accordance with the general law on municipal waters; 6. To establish in a suitable

site within the park a fishing and hunting camp to be called "Camp Imelda." In Section 7 of the Ordinance, the Manager-

Administrator shall pay to the municipal government the sum equivalent to ten (10%) percent of the annual gross income

derived from an fees charged for fishing and hunting in the park and entry into Camp Imelda, from the sale of forest

products, wild games and fish from the area, but not less than P200,000.00.

140

In accordance with the Ordinance, a Contract of Management and Administration was executed by the Municipality,

represented by its Municipal Mayor as the Usufructuary and Atty. Geruncio Lacuesta as the Manager-Administrator,

setting forth therein the terms and conditions laid down in the Ordinance as well as the mode and manner of the payment

of the sum of P200,000.00 annually due to the Municipality including the posting of a surety bond and other details of the

management and administration of the fisheries by the Manager-Administrator, which contract was executed on January

28, 1975 at Bayambang, Pangasinan.

Thus, the validity or legality of the Municipal Ordinance in question is the crucial and vital issue that must be resolved

once and for all to put an end to this raging litigation that has become the tug-of-war between the Municipality and

Lacuesta, together with other interested parties, over the vast and rich fishing grounds. In resolving said issue and

ultimately the very root of the conflict, the following undisputed facts are controlling and decisive: 1. That Municipal

Ordinance No. 8 has been disapproved by the Secretary of Agriculture and Natural Resources; and 2. That private

respondent has since died as shown in the Return of the Postmaster of Bayambang as noted in Our Resolution of July 2,

1984.

1. Ordinance No. 8, having been submitted to the Provincial Board of Pangasinan and approved by it by virtue of

Resolution No. 171 dated October 11, 1974, the same was submitted to the Secretary of Agriculture & Natural Resources

as required by Section 4 of Act No. 4003, The Fisheries Act, as amended by Commonwealth Act No. 471 passed June 16,

1939, and further amended by RA No. 659 approved June 16, 1951, thus:

Sec. 4. Instructions, orders, rules and regulations. The Secretary of Agriculture and Commerce shall from

time to time issue instructions, orders, rules and regulations consistent with this Act, as may be necessary

and proper to carry into effect the provisions thereof and for the conduct of proceedings arising under

such provisions; and all licenses, permits, leases and contracts issued, granted or made herein shall be

subject to the same.

All ordinances, rules or regulations pertaining to fishing or fisheries promulgated or enacted by provincial

boards, municipal boards or councils, or municipal district councils shall be submitted to the Secretary of

Agriculture and Commerce for approval and shag have full force and effect unless notice in writing of

their disapproval is communicated by the secretary to the board or council concerned within thirty days

after submission of the ordinance, rule, or regulation.

From the evidence on record, it appears that a Master Plan for the Bayambang Fishing and Hunting Park and Municipal

Watershed (Mangabul Fisheries Reservation) of Atty. Geruncio Lacuesta, Manager-Administrator of the said park, was

submitted to the Bureau of Fisheries and Aquatic Resources. In the Indorsement of the Director of Fisheries & Aquatic

Resources to the Secretary, Department of Natural Resources, the Comments, among others, state: "2. Records of this

bureau show that Resolution No. 171, s. 174 of the Provincial Board of Pangasinan, embodying Resolution No. 35, s.

1974, enacting Ordinance No. 8, s. 1974 of the Municipal Council of Bayambang, Pangasinan and Resolution No. 24, s.

1975 of the same council requesting reconsideration and rectification of the 5th Indorsement of that department dated

April 4, 1975, were returned DISAPPROVED and denied, respectively, by the Secretary of Natural Resources to the

Municipal Council of Bayambang, Pangasinan .

Upon the recommendation of the Director of Fisheries and Aquatic Resources that "In the light, therefore, of the

foregoing, the Master Plan for the Bayambang Fishing and Hunting Park and Municipal Watershed (Mangabul Fisheries

Reservation), insofar as fishing and fisheries thereat are concerned should not be given due course and should be

DISAPPROVED in the absence of adequate provisions thereon to the effect that the grant of the exclusive fishery

privileges within its municipal waters shag be granted by the municipal council (now sangguniang bayan) to the highest

bidder conformable with a fishery ordinance duly approved by the Secretary of Natural Resources, pursuant to Sections 5,

67 and 69 of Act No. 4003, as amended (now sections 4, 29 and 30 of Presidential Decree No. 704)," the Secretary of the

Department of Natural Resources disapproved the Master Plan.

141

The legal basis for the disapproval of the Ordinance No. 8 and the Master Plan mentioned above is clear and explicit in

Sections 4, 67 and 69 of Act No. 4003 as amended by PD 704, Revising and Consolidating All Laws and Decrees

Affecting Fishing and Fisheries. These Sections provide:

Sec. 4. Jurisdiction of the Bureau. — The Bureau shall have jurisdiction and responsibility in the

management, conservation, development, protection, utilization and disposition of an fishery and aquatic

resources of the country except municipal waters which shall be under the municipal or city government

concerned: Provided, That fish pens and seaweed culture in municipal centers shall be under the

jurisdiction of the Bureau: Provided, further, That all municipal or city ordinances and resolutions

affecting fishing and fisheries and any disposition thereunder shall be submitted to the Secretary for

appropriate action and shall have full force and effect only upon his approval. The Bureau shall also have

the authority to regulate and supervise the production, capture and gathering of fish and fishery/aquatic

products.

The Bureau shall prepare and implement, upon approval of the Fishery Industry Development Council, a

Fishery Industry Development Program.

Section 29. Grant of Fishery Privileges. — A municipal or city council, conformably with an ordinance

duly approved by the Secretary pursuant to section 4 hereof, may: (a) grant to the highest qualified bidder

the exclusive privilege of construction and operating fish corrals, oyster culture beds, or of gathering

"bangus" fry, or the fry of other species in municipal waters for a period not exceeding five (5) years: ...

Section 30. Municipal concessions and leases concerning fisheries. — lease or concession granted by a

municipal or city council under authority of an ordinance approved pursuant to section 4 hereof,

concerning fishing or fisheries in streams, lakes, rivers, in land and/or municipal waters, shall be valid and

enforceable unless the Secretary, upon recommendation of the Director, approves the same.

Indeed, the Ordinance is clearly against the provisions of the law for it granted exclusive fishery privileges to the private

respondent without benefit of public bidding. Under the Fisheries Act, the Municipality may not delegate to a private

individual as Manager-Administrator to "use or dispose of the fisheries portion in accordance with the general law on

municipal waters" nor to charge foes for fishing and hunting in the park, much less sell forest products, wild games and

fish from the area.

Neither can the Municipality grant the exclusive privilege of fishing for a period more than five (5) years, whereas in the

instant case, the period granted the Manager-Administrator was for twenty-five (25) years, renewable for another twenty-

five years.

Moreover, under the specific provision of Act No. 4041, there is the proviso that the timber and other forest products

therein shall be placed under the administration and control of the forest service so that insofar as the ordinance relates to

the timber and other forest products and the reforestation of the timberland portions indicated in Plan Ipd-92 including the

powers, duties and responsibilities of the Manager-Administrator affecting the forestry portions are violative of Act No.

4041.

It is of no moment that at the pre-trial hearing of Civil Case No. SCC-648 (which was transferred to Branch 111, CFI

Dagupan and docketed as D-5118) the parties had admitted the legality of Ordinance No. 8. The issue as to the legality of

Ordinance No. 8 is not a question of fact that the parties may stipulate and agree at the pre-trial hearing of the case which

is for annulment of the contract under Ordinance No. 8. Such is a question of law for if the Ordinance is illegal and

contrary to law, the contract executed in pursuance thereto is consequently illegal. Acts executed against the provisions of

mandatory or prohibitory laws shall be void, except when the law itself authorizes their validity. (Art. 5, New Civil Code).

142

From Our jurisprudence, We cite a number of cases ruling that a public bidding is essential to the validity of the grant of

exclusive privilege of fishery to a private party, thus:

The law (Sec. 2323 of the Revised Administrative Code) requires that when the exclusive privilege of

fishery or the right to conduct a fish-b reeding ground is granted to a private party, the same shall be let to

the highest bidder in the same manner as is being done in exploiting a ferry, a market or a slaughter house

belonging to the municipality (See Municipality of San Luis vs. Venture, et all 56 Phil. 329). The

requirement of competitive bidding is for the purpose of inviting competition and to guard against

favoritism, fraud and corruption in letting of fishery privileges (See 3 McQuillin, Municipal Corporations,

2nd Ed., p. 1170; Harles Gaslight Co. vs. New York, 83 N.Y. 309; and 2 Dillon, Municipal Corporations,

p. 1219) (San Diego vs. The Municipality of Naujan Province of Mindoro, 107 Phil. 118).

It may thus be restated that the law that governs the award of fishery privileges in municipal waters is the

provisions of Section 67 and 69 of Act No. 4003, as amended by Commonwealth Acts Nos. 115 and 471.

The provisions of Sections 2321, 2323 and 2319 of the Revised Administrative Code of 1917 have

thereby been modified by Act 4003, as amended. Under the applicable law the Municipal Council may

lease fishery privileges for a period not exceeding five years to the highest bidder in a public bidding

held, where the call for bid had specified the period for the lease. (San Buenaventura vs. Municipality of

San Jose, Camarines Sur, et al, 121 Phil. 101, 114).

The Municipal Council cannot extend the period of lease once it had been fixed on the basis of the period

provided in the call for bids. In the lease of fishery privileges for a period not exceeding five years the

previous approval of the provincial Board is not necessary. If the lease is for a period of more than five

years, but not exceeding ten years, the previous approval of the Provincial Board is necessary. If the lease

is for a period exceeding ten years, but not more than twenty years, the prior approval of the Secretary of

Agriculture and Natural Resources is necessary. In all cases the lease must be based on a competitive

public bidding. (San Buenaventura vs. Municipality of San Jose, Camarines Sur, et all supra p. 115).

While the respondent appellate court in CA-G.R. No. 12586-SP made the pronouncement that:

Besides, Sec. 4, Act No. 4003 (which was then the law in force before being superseded by PD 704 on

May 16, 1975) provides that an ordinance affecting fishing and fisheries "shall have full force and effect

unless notice in writing of (its) disapproval is communicated by the Secretary to the Board of council

concerned, within thirty days after submission of the ordinance." The ordinance was submitted for

approval on January 2, 1975 and the disapproval came only 102 days after such submission, on April 14,

1975. Paragraph (a) of the pretrial stipulation (Annex "6" of Respondent's Comment) states that "the said

ordinance was submitted to the then Secretary of Natural Resources who disapproved the ordinance,

insofar as fishing and fisheries are concerned after 30 days from submission."

We cannot sustain the above holding in view of Our holding in the case of Nepomuceno, et al. vs. Ocampo, et

al.,supra, wherein We held that the only purpose in the enactment of Republic Act 659 which required the Secretary of

Agriculture and Natural Resources to approve municipal ordinances pertaining to fishing or fisheries within 30 days after

submission of the ordinance, rule or regulation is simply to expedite prompt action by the Department Chief concerned.

Since Ordinance No. 8 granted fishery privileges exclusively to the private respondent without benefit of public bidding

and for a period exceeding five (5) years, the said ordinance and the contract of management executed in accordance

therewith were null and void ab initio, such that the failure of the Secretary of Agriculture & Natural Resources to

disapprove the same within 30 days from its submission does not render validity to the illegal legislation of the municipal

council nor to the contract executed under the same.

From the foregoing conclusion that the ordinance is illegal and void, per force the contract of management and

administration between the Municipality and Lacuesta is likewise null and void. It also follows that the complaint filed by

Lacuesta for prohibition in Civil Case No. 516 to enjoin the Municipal Council of Bayambang from leasing the Mangabul

143

Fisheries upon public bidding as authorized in its Resolution' No. 31, series of 1977 is without legal basis and merit for

Lacuesta has no right or interest under the void ordinance and contract. The suit must be dismissed and We hereby order

its immediate dismissal.

2. We have noted earlier the death of Lacuesta in Our Resolution of July 2, 1984. His death is an irreversible fact that

throws an entirely new bearing on the legal controversy at hand. For essentially, the contract of management and

administration between the Municipality and Lacuesta is one of agency whereby a person binds himself to render some

service or to do something in representation or on behalf of another, with the consent or authority of the latter. (Article

1868, New Civil Code). Here in the case at bar, Lacuesta bound himself as Manager-Administrator of the Bayambang

Fishing & Hunting Park and Municipal Watershed to render service or perform duties and responsibilities in

representation or on behalf of the Municipality of Bayambang, with the consent or authority of the latter pursuant to

Ordinance No. 8. Under Article 1919, New Civil Code, agency is extinguished by the death of the agent. His rights and

obligations arising from the contract are not transmittable to his heirs. (Art. 1311 , New Civil Code).

3. Petitioners in both cases before Us, G.R. No. 58794 and G.R. No. 64489, anchor their claims to certain portions of the

Mangabul Fisheries which they allege to have won in public bidding under the authority of Resolution No. 31, series of

1977 of the Municipal Council of Bayambang which leased the fisheries for a four-year period. The period has already

lapsed, hence their fishing privilege is no longer effective as of June 30, 1981. To restore and place petitioners in

possession of the fisheries would be an extension of their four-year period lease which is not authorized under the

ordinance cited above.

Nonetheless, the assailed order of Judge Villalon dated September 3, 1983 restoring possession of the fisheries to

Lacuesta and his men which was issued after her relief from the case upon her own request is clearly irregular and without

authority. There should be and there ought to be full obedience and compliance by a subordinate court of the orders and

resolutions of this Court. There cannot be any iota of discipline much less efficiency in the administration of justice if the

lower echelons in the judicial hierarchy can freely act as they wish inspire of their relief. This should be a stem warning to

all judges and personnel in all the courts.

We brush aside the procedural aspects raised in the petitions before Us and in the interest of public welfare and speedy

administration of justice, avoiding further multiplicity of suits, We consider the intrinsic merits of the controversy which

as We pointed out previously, rest on the validity of the Municipal Ordinance in question. Thus, in sum and substance,

We hereby pronounce the nullity of Ordinance No. 8, series of 1974 of the Municipal Council of Bayambang, Pangasinan

and the contract of management and supervision executed between the Municipality of Bayambang and Geruncio

Lacuesta as Manager-Administrator of the Bayambang Fishery & Hunting Park and Municipal Watershed.

Since Ordinance No. 8 and the contract of management and supervision are both null and void, the Alias Writ of

Execution and Possession dated November 6, 1981 and the Order of October 8, 1982 for the issuance of writ of execution

and possession to place and restore possession of the Mangabul Fisheries, of portions thereof or fisheries therein to

Geruncio Lacuesta, his agents, men and/or representatives under the said contract and by virtue of the ordinance are,

including the writ also issued on October 8, 1982, without legal force and effect.

WHEREFORE, IN VIEW OF ALL THE FOREGOING, the Alias Writ of Execution and Possession issued November 6,

1981 and assailed in G.R. No. 58794, as well as the Order and Writ dated October 8, 1982 raised in G.R. No. 64489, are

hereby NULLIFIED and SET ASIDE. No costs.

144

G.R. No. L-11437 January 16, 1917

BENITO LEGARDA Y TUASON, plaintiff-appellant,

vs.

MARIANO B. ZARATE, defendant-appellant.

TORRES, J.:

This appeal by bill of exceptions was raised by counsel for the plaintiff and counsel for the defendant, from the judgment

of October 15, 1915, in which the court held that the defendant lessee, Mariano B. Zarate, is liable only for the payment of

the rents at the rate of 5 per cent per annum of the assessed valuation of the leased properties, which is equivalent to

P583.32 for the period from January, 1914, to May, 1915, inclusive and sentenced the defendant to pay this sum to the

administrator of the estate of the plaintiff, Benito Legarda y Tuason, deceased, without special finding as to costs.

On June 4, 1915, counsel for Benito Legarda y Tuason filed a written complaint in the Court of First Instance of this city

against Mariano B. Zarate, alleging as a cause of action that on April 23, 1910, the plaintiff's attorney in fact leased to the

women Kami Yunioka, Turu Kaneko, and Lamasta Kima lots Nos. 9, 25, and 23, respectively (Exhibits A, B, and C

attached to the complaint), of Parcel F of the lands belonging to the plaintiff and which formed a part of the Nagtajan

Hacienda; that each of the said lots contained an area of 600 square meters; that the annual rental of the property that was

the subject matter of each contract, was 10 per cent of the assessed valuation thereof; that subsequently, to wit, on

September 5, 1910, the said lessees, with the plaintiff's consent and approval, conveyed to the defendant, Mariano B.

Zarate their respective rights derived from the said contracts of lease, and all their interests in the buildings erected on the

said lots; that since that date the defendant had been paying the rents due, within the periods stipulated, always on the

basis of 10 per cent of the assessed valuation of the property, with exception of the rents corresponding to the whole of the

year 1914 and to the months from January to May, 1915, which he had refused to pay. Therefore the plaintiff's counsel

prayed the court to enter judgment by sentencing the defendant to pay to the plaintiff to rents in arrears amounting to

P1,166.65, in addition to those that might be owing by him subsequently and up to the time decision be rendered, on the

basis of 10 per cent per annum of the present assessed valuation of the property, and to pay the costs of the suit.

On June 29, 1915, counsel for the defendant filed his written answer to the above mentioned complaint; he denied the

essential parts thereof and added that on the date of the transfer of the said contracts of lease to the defendant, on

September 5, 1910, no building of any kind stood on the land in question. In special defense he alleged that prior to and at

the time of the execution of the contracts Exhibits A. B, and C, by and between the plaintiff and the original lessees, it had

been decided and stipulated that the 10 per cent of the assessed valuation which these latter should pay as annual rental

should be based on an assessment not in excess of one peso per square meter; that at the time the leases were transferred

to the defendant the land was used solely for raising rice-grass, and that it was agreed between the contracting parties that

the defendant should spend labor and money in the improvement of the said land; that the defendant filled in this land and

erected buildings thereon, but that he did this only after it had been clearly agreed between himself and the plaintiff that

the rental of the said properties should be based on their assessed valuation which should not exceed one pesos per square

meter, for, were it not for this agreement, the defendant would not have accepted such a contract; that in 1911, even after

the opening of a street through the lands in question, these properties were assessed only at one peso per square meter,

which valuation was raised to P2 in 1914, when the plaintiff, without notifying the defendant, protested against the said

increased valuation and appealed before the board of tax revision, which saw fit to fix the valuation of the said properties

at P4 per square meter, which facts became known to the defendant for the first time when the plaintiff tried to collect

from him the annual rental on the basis of 10 per cent of P4 per square meter, which the defendant refused to pay; that, by

reason of the protest made by the lessees and the owners of properties comprised within the said lands, the tax valuation

corresponding to the year 1915 was reduced to P3 per square meter; that, notwithstanding the plaintiff's claim that he was

entitled to collect from the defendant 10 per cent of the assessed valuation of P4 per square meter, in 1913 and 1914 the

plaintiff accepted rents for similar lands leased by other persons, under contracts identical to that made with the defendant,

at the rate of 10 per cent of the assessed valuation of P1 per square meter; and, finally, that the defendant is willing at any

time to pay to the plaintiff the rents for the said lands at the rate of 10 per cent of the assessed valuation of P1 per square

meter, as was stipulated between the parties, but that the plaintiff, notwithstanding the several tenders of payment made by

145

the defendant, had refused and still refused to accept the same. Therefore said counsel prayed the court to absolve the

defendant from the complaint, with the costs against the plaintiff.

After the hearing of the case and the introduction of evidence by both parties, the court rendered the decision

aforementioned, to which both the plaintiff and the defendant excepted and in writing moved for a reopening of the

proceedings and a new trial. These motions were overruled, exception was taken by the appellants, and, upon presentation

of a single bill of exceptions, in accordance with a stipulation made between both parties, the same was approved and

forwarded to the clerk of this court.

The point at issue in this suits is in regard to the amount of the rents that the defendant, Mariano B. Zarate, should be

obliged to pay to the administrators of the estate that belonged to the owner of the three parcels of land occupied by the

defendant's buildings on Plaza Gardenia, of the district of Sampaloc, Manila.

For the proper determination of this suit, it is necessary to declare what construction must be given to paragraph 3 of the

contracts of lease A, B, and C, of the date of April 23, 1910, all of the same tenor, by virtue of which three Japanese

women leased for a term of 25 years, extendible for an equal length of time at the will of the parties, the lots of land

described in the complaint. This paragraph 3 of the contract reads as follows:

The price of the lease shall be ten per cent (10%) per annum, net, of the assessed valuation of the property

specified in this contract. These rentals shall be payable monthly, in advance and within the first ten (10) days of

each month, at the domicile of the lessor or in any other place he may designate, and such payments shall be made

in Philippine currency.

The contract was executed by Dr. Benito Valdez, who, on the said date, was the attorney in fact and general administrator

of the entire estate of the deceased Benito Legarda y Tuason (Exhibit A), but the person who negotiated directly with the

prospective lessees of the lands was a man named Ramon Gavito, a subagent or administrator of the said lands. On the

date of the contracts, the assessed valuation of the leased lands was six centavos and a half per square meter (record, p.

54) and this valuation continued in force until 1911, when it was raised to P1 per square meter (record, p. 55). A few

months subsequent to the execution of the said contracts, to wit, on September 5, 1910, the original lessees, with the

consent of the attorney in fact, Valdez ceded and transferred their interests in the said parcels of land to the defendant

Mariano B. Zarate, who constructed houses thereon, and, by reason thereof and because of the opening of streets in that

locality, the assessed valuation of the Legarda lots was increased from year to year until in 1914 it was P4 per square

meter (record, p. 58), and as the rental price of the properties had thus considerably increased, the defendant refused to

pay the rents on the basis of the new assessment rate.

In effect, the defendant lessee refused to pay the rents corresponding to the year 1914 and the following years, if the rate

on which they were to be computed should be greater than P1 for each square meter. The defendant alleged that at the

time he accepted the transfer of the contracts by the Japanese women, the administrator of thehacienda, Ramon Gavito,

and Tomas Arguelles, who took part in the transaction, assured him that the amount of 10 per cent of the "assessed

valuation" of the said properties, which he was to pay as rent, would be computed on a valuation not in excess of P1 for

each square meter.

However, the plaintiff contends that paragraph 3 of the contracts under discussion clearly enough signifies the intention of

the parties that the lessee should pay as an annual rent 10 per cent of the valuation for which the said properties be

assessed, whether such valuation be increased or decreased, and that no limitations whatever were set on the valuation and

the amount that should be paid as rental.

Such was the testimony of Dr. Benito Valdez, who executed the said contracts. This witness stated that "the expression 10

per cent referred to the assessed valuation of the land in any period of time;" that he was the general administrator of the

state of the deceased Legarda and was vested with the exclusive right to make contracts in regard to that estate, wherefore

Ramon Gavito was not authorized to enter into any contract with regard thereto, as he was a mere agent of the witness and

only executed the orders the latter gave him, Valdez further testified that the construction of the defendant's houses on the

146

Nagtajan Hacienda was detrimental to the interests of the Legarda estate in that locality, inasmuch as, by reason of the few

improvements on a small part of the hacienda, the whole of the latter was obliged to bear an increase in tax, which would

not have been the case had it not been for the houses that stood there; and that the said hacienda was then assessed at

more than P300,000 (Record, pp. 56-57) and produced in rentals no more than about P12,000 per annum.

Laureano Benavides, a clerk in the service of the administrator of the Legarda estate, testified that the defendant Zarate

paid the rents pertaining to the months from April to December, 1910, on the basis of 6 1/2 centavos per square meter;

that he paid those pertaining to the years 1911, 1912, and 1913 on the basis of P1 per square meter, for this was the

assessed valuation of the property at that time; and that when, in 1914 and 1915, the assessment rate was raised to P4 and

P3, respectively, per square meter, the defendant failed to pay the said rents.

Tomas Arguelles, who, in representation of the member of the municipal board, McDonald, had taken a hand in the laying

out of the new barrio of Gardenia and in the transfers of the contracts of lease from the Japanese women to the defendant,

testified that the meaning of the said paragraph 3 in the contracts aforementioned did not seem clear to him, for if the 10

per cent mentioned in this paragraph referred to the assessed valuation of the land at any period, the amount required as

rent was excessive; that, consequently, he consulted Ramon Gavito, who stated to him that the land "is assessed at one

peso per square meter," and hence that the rent to be paid would be only P6 or P7 per annum — a price which appeared

reasonable to witness — but the latter did not understand that the rate of the lease price was to be modified in accordance

with the increase or decrease in the assessed valuation of the land, and added that when it was raised to P2 per square

meter, in 1914, Gavito filed a protest with the board of tax revision, requesting a reduction, and that this board, by

resolution of March 17th of the same year, 1914, deciding the protest, raised the valuation of said lands to P4 per square

meter, and that the defendant was not informed of these steps nor of the increase until the board had unfavorably decided

the protest, about the month of March, 1914.

The defendant testified that he had availed himself of the services of Arguelles in the transactions carried on with the

administrator of the estate, for the transfer of the contracts held by the Japanese women and that he had gleaned therefrom

that the defendant would be obliged to pay a rent of only 10 centavos for each square meter of land occupied by him

(record, p. 70), although the assessed valuation should be greater than P1 per square meter (record, pp. 72-73). The

defendant added that he was ever willing to pay to the plaintiff the amount of the rentals in arrears, provided that the rate

of payment did not exceed 10 centavos for each square meter of land occupied by him.

S. C. Choy, a Chinaman, another owner of houses in the same district where those that belong to defendant are situated,

and who also had obtained by transfer the lease rights of a Japanese woman in a certain lot of land pertaining to the

Nagtajan Hacienda, testified at the trial that he had dealth exclusively with Ramon Gavito, who was in charge of the

said hacienda, and that from the conversations he had had with the said Gavito before accepting the transfer he, the

witness, was convinced that he would have to pay rent only at the rate of 10 per cent on an assessed valuation of P1 and

that if the cost of the lease had exceeded this amount, he would not have accepted the transfer of the contract.

In rebuttal Mauro Prieto, another of the administrator of the estate of the deceased Benito Legarda, testifying with respect

to the allegations made in the defendant's answer, in regard to the payment of the rent on the 10 per cent basis, stated that

it was true, as aforesaid, that the administration of the estate had received from the lessees S. C. Choy and Go Chioco

payments of rentals pertaining to the year 1914 at the rate of 10 per cent on an assessed valuation of one peso, but that this

was done through an oversight, and that afterwards a claim, was made on these lessees for payment of the difference

(record, p. 81).

The record also discloses that on December 28, 1905, Ramon S. Gavito was appointed administrator of the Nagtajan

Hacienda, by the late Benito Legarda, according to the notarial instrument Exhibit 8 (record, p. 87), with right to lease

parcels of land pertaining to that hacienda, for such rentals, and on such terms and conditions as he might deem proper,

but with a proviso that all the contracts of lease executed by him should produce no effect whatever until they had been

approved by the signature of the lessor Legarda. That the said Gavito continued to act in such capacity and with that

power appears to be proven by the fact that the receipts for rentals paid for the lands pertaining to the Nagtajan Hacienda

were signed by Ramon Gavito, as may be seen by the receipts 1, 2, 3, 5, 6, and 7 (record, pp. 23-32) in which Gavito

147

styles himself "administrator," and the most recent of them bears the date of May 7, 1914, as corroborated by Valdez

(record, p. 53). However this power and authority granted to Gavito in the document of December 28, 1905, should be

deemed to be revoked by reason of the full and unlimited power conferred by the said Benito Legarda upon his son Benito

Legarda y de la Paz and his sons-in-law Mauro Prieto y Gorricho and Benito Valdez, by means of the notarial document

of December 20, 1907, which was amplified by another such instrument of November 12, 1909 (record, pp. 99-107).

Similar contracts, copied into the bill of exceptions as Exhibits A, B, and C (as assigned and transferred, without any

modification, by the lessees, the Japanese women Kami Yunioka, Turu Kaneko, and Lamasta Kima, to Mariano B. Zarate,

who substituted these lessees, with the knowledge and consent of Dr. Benito Valdez in his capacity of attorney in fact for

Benito Legarda y Tuason) were not challenged by the defendant, and remain in full force and effect; consequently

paragraph 3 of the said contracts, which specifies the rental for each of the three lots 9, 23, and 25 of parcel F of the

Nagtajan Hacienda, which are now occupied by the substituted lessee Mariano B. Zarate, produces its due effects and

natural consequences originating from the stipulated agreements; and as the words and terms employed in the said

paragraph 3 of the said contracts of lease, are clear and positive, their phraseology cannot be charged wit being

unintelligible, ambiguous or doubtful, nor as precluding a true and right understanding of the true meaning intended to be

conveyed by the said paragraph 3.

It was understood by both contracting parties, as recognized by the trial court in the judgment appealed from, that the

rents of the lands occupied by the lessee would have to be paid in the future, not on the basis of the assessed valuation of

the property on the date of the contract, but on the basis of such valuation as might be fixed by the Government in

accordance with appraisements made from time to time during the course of the 25 years stipulated as the term of the

lease. This fact is corroborated by the further fact that on the date of the contract the property was appraised at 6 ½

centavos per square meter, and when this valuation was raised to P1 per square meter the defendant Zarate,

notwithstanding that no stipulation was made in regard to the said basis of 10 per cent of P1, did not protest against the

payment of the taxes pertaining to the years 1911, 1912 and 1913, on the basis of 10 per cent on a valuation of P1 per

square meter. This acquiescence on the defendant's part shows that he was informed and knew that the rental of the land

occupied by him was 10 per cent of the assessed valuation of the property as fixed by the Government for the payment of

the land tax.

The defendant lessee was not ignorant of the fact that the assessment rate was raised proportionally as the property

acquired greater value, and he must have taken these circumstances into consideration when he substituted himself for the

three Japanese lessees in the contracts of lease of the three lots now occupied by him, for, as it appears to have been

stipulated in paragraph 3 of the three said contracts of lease, the rental was to be 10 per cent, payable annually, of the

assessed valuation of the property, that is, of the valuation which each year might be given to the leased property on its

appraisement for the purpose of taxation, and it can not be understood that the 10 per cent of the assessed valuation of the

land on the date of the contract, April 23, 1910, was fixed as the rate of the lease price, inasmuch as this was not so

stipulated by and between the contracting parties.

The words used in the said paragraph 3 demonstrate that the intention of the parties was that the rental of the leased lands

should be 10 per cent per annum of the assessed valuation of the property, and as this valuation might be increased or

decreased during the 25 years of the life of the contract, it is evident that the stipulation made was that the rental should be

10 per cent of such valuation as on assessment might be given to the leased property. Furthermore, it does not appear to

have been stipulated that this 10 per cent per annum was to be a fixed amount in the contract, nor that the rental was not to

be affected by the natural fluctuations in the appraisement of the property, according to the rate of assessment. Therefore,

it is undeniable that the defendant, in accepting the contracts executed by and between the plaintiff and the said three

Japanese women, and in assuming the liabilities contracted therein by these latter, bound himself to pay 10 per cent per

annum of the assessed valuation of the leased lands in accordance with the assessment rate in force each year.

Article 1281 of Civil Code prescribes that, "If the terms of a contract are clear and leave no doubt as to the intentions of

the contracting parties, the literal sense of its stipulation shall be observed."

148

The phraseology employed in paragraph 3 of the said contracts is explicit and positive; it reveals precisely and clearly the

respective, and, at the same time, unanimous intention of the contracting parties to the effect that the rental of each one of

the leased portions of land should be 10 per cent of the assessed valuation of the property, and that if during the course of

the stipulated twenty-five years the valuation of the land should be raised the said 10 per cent should be computed on the

basis of the valuation fixed on assessment. No other construction outside of the proper and genuine meaning of the words

used in the said paragraph 3 of the three contracts aforementioned may be understood.

Besides, it can not be deduced from the said paragraph 3 that the words therein employed do not convey the intention of

the contracting parties, inasmuch as it does not appear in this paragraph, or in the others contained in the said contracts,

that any agreement whatever was made that the 10 per cent per annum was to be calculated on any fixed amount other

than the fixed assessed valuation of the property; if its valuation, as determined by its assessment, had decreased, the price

of the lease would also have decreased, and the defendant has acquired no right to refuse to pay the rent which the

plaintiff is entitled to collect from him pursuant to the terms of the contract, simply because the assessed valuation of the

leased property was increased.

Article 1278 of the Civil Code says: "Contracts shall be binding, whatever may be the form in which they may have been

entered into, provided that the essential conditions required for their validity exist."

The three contracts aforementioned contain the three requisites prescribed by article 1261 of the Civil Code, and if the

defendant lessee bound himself to pay 10 per cent per annum of the assessed valuation of the lands occupied by him, and

if this valuation has been increased, he can find no valid reason in support of his contention that he should pay only 10 per

cent per annum on an assessed valuation of P1 per square meter, which was not the assessed valuation per square meter of

the leased property in 1914 and 1915. The defendant lessee is obliged, pursuant to the contract, to pay 10 per cent per

annum of the assessed valuation of the properties according to the respective appraisements made by the Government in

each of those two years, or according to such appraisement as may be made in the future, during the course of the

stipulated contract.

The validity and fulfillment of contracts can not be left to the will of one of the contracting parties. (Art. 1256,

Civ. Code.)

Section 285 of the Code of Civil Procedure prescribes, "When the terms of an agreement have been reduced to writing by

the parties, it is to be considered as containing all those terms, and therefore there can be, between the parties and their

representatives or successors in interest, no evidence of the terms of agreement other than the contents of the writing,

except in the following cases."

None of the cases mentioned in the section just cited are applicable to the contracts, which have not been assailed as false,

either criminally or civilly.

For the foregoing reasons the judgment appealed from should be reversed and the defendant, Mariano B. Zarate, should

be, as he is hereby, sentenced to pay to the plaintiff the sum of P1,166.65, as rentals owing, and to pay those he may owe

in the future on the basis of 10 per cent per annum of the assessed valuation of the land occupied by him. No special

finding is made in respect to the costs of both instances. So ordered.

149

G.R. No. L-8190 May 28, 1958

GONZALO GARCIA, plaintiff-appellant,

vs.

CONSOLACION MANZANO, defendant-appellee.

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

This is an action filed by husband Gonzalo Garcia against his wife Consolacion Manzano for the judicial declaration of

the separation of their conjugal partnership property (Civil Case No. 23099, Court of First Instance of Manila).

Plaintiff Gonzalo Garcia alleged in his complaint that he and defendant are husband and wife but they have been living

separately from each other since 1948, all attempts at reconciliation between them having failed; that plaintiff, a duly

licensed doctor of veterinary science, used to be employed in the slaughter-house of the City of Manila, while defendant,

with plaintiff's knowledge and consent, engaged in the business of slaughtering large cattle and selling the fresh meat in

the city; that as a result of their joint efforts, plaintiff and defendant acquired and accumulated real and personal

properties; that upon the separation of the spouses, the defendant assumed the complete management and administration

of the conjugal partnership property, has been enjoying said property as well as its accessions and fruits to the exclusion

and prejudice of plaintiff, and has even fictitiously transferred or alienated a majority of said property in favor of third

persons; that since defendant assumed the management and administration of the conjugal partnership property, she has

neglected to file any income tax returns; at defendant has failed and refused to turn over and deliver to plaintiff his rightful

share and participation in the conjugal partnership property and its fruits. Wherefore, plaintiff prayed that judgment be

rendered ordering defendant to render a complete accounting of the conjugal partnership property and its fruits, that

judicial pronouncement be made ordering the separation of the conjugal partnership property of the spouses, and that the

rightful share therein of each of them be adjudicated pursuant to law.

Upon receipt copy of the complaint and summons, defendant filed a motion to dismiss the complaint on the ground of

failure to state a cause of action because "it does not allege any of the grounds recognized by Article 191 of the new Civil

Code for decreeing a judicial separation of properties". Plaintiff vigorously opposed the motion to dismiss, claiming that

he is entitled to some relief, legal or equitable, under the allegations of his complaint, and that Article 191 of the new Civil

Code may also be availed of by the husband where the administration of the conjugal partnership property has been

forcibly taken from him by his wife and she abuses the management thereof. Acting on the motion to dismiss, the lower

court held that plaintiff's complaint is not included under the provisions of Articles 190 and 191 of the new Civil Code

providing for judicial separation of the conjugal partnership property, and that the husband being the legal administrator

of the partnership, he "continuo consuficientes remedios legales para asegurar y reafirmar su autoridad en cuanto al

manejo de log bienes gan anciales dentro de la sociedad conyugal," and ordered the dismissal of the complaint without

prejudice. Plaintiff moved for reconsideration, which was denied. Hence, his present appeal.

We agree with the court below that the complaint does not establish a case for separation of property. Consistent with its

policy of discouraging a regime of separation and not in harmony with the unity of the family and the mutual affection

and help expected of the spouses, the Civil Codes (both old and new) require that separation of property shall not prevail

unless expressly stipulated in marriage settlements before the union is solemnized or by formal judicial decree during the

existence of the marriage (Article 190, new Civil Code; Article 1432, old Code); and in the latter case, it may only be

ordered by the court for causes specified in Article 191 of the new Civil Code:

ART. 191. The husband or the wife way ask for the separation of property, and it shall be decreed when the

spouse of the petitioner; has been sentenced to a penalty which carries with it civil interdiction, or has been

declared absent, or when legal separation has been granted.

In case of abuse of powers of administration of the conjugal partnership property of the husband, or in case of

abandonment by the husband, separation of property may also be ordered by the court according to the provisions

of articles 167 and 173, No. 3.

150

In all these cases, it is sufficient to present the final judgment which has been entered against the guilty or absent

spouse.

The husband and the wife may agree upon the dissolution of the conjugal partnership during the marriage, subject

to judicial approval. All the creditors of the husband and of the wife, as well as of the conjugal partnership, shall

be notified of any petition for judicial approval of the voluntary dissolution of the conjugal partnership, so that

any such creditors may appear at the hearing to safeguard his interests. Upon approval of the petition for

dissolution of the conjugal partnership, the court shall take such measures as may protect the creditors and other

third persons.

After dissolution of the conjugal partnership, the provisions of Arts 214 and 215 shall apply. The provisions of

this Code concerning the effect of partition stated in Arts. 498 to 501 shall be applicable.

This enumeration must be regarded as limitative, in view of the Code's restrictive policy. The appellant recognizes that his

case does not come within the purview of the first paragraph of the Article quoted; but vigorously contends that the

provisions of the second paragraph, like those of Articles 167 and 178, should be interpreted as applicable, mutatis

matandis, to the husband, even if the letter of the statute refers to the wife exclusively.

ART. 167. In case of abuse of powers of administration of the conjugal partnership property by the husband, the

courts, on petition of the wife, may provide for a receivership, or administration by the wife, or separation of

property.

ART. 178. The separation in fact between husband and wife without judicial approval, shall not affect the

conjugal partnership, except that:

(1) In the spouse who leaves the conjugal home or refuses to live therein without just cause, shall not have a right

to be supported;

(2) When the consent of one spouse to any transaction of the other is required by law, judicial authorization shall

be necessary;

(3) If the husband has abandoned the wife without just cause for at least one year, she may petition the court for a

receivership or administration by her of the conjugal partnership property, or separation of property.

In support of his thesis, appellant argues that in case of mismanagement and maladministration by the wife, the husband

should be entitled to the same relief as the wife, otherwise there would be a void in the law. This contention ignores the

philosophy underlying the provisions in question. The wife is granted a remedy against the mismanagement or

maladministration of the husband because by express provision of law, it is the husband who has the administration of the

conjugal partnership.

ART. 165. The husband is the administrator of the conjugal partnership.

ART. 172. The wife cannot bind the conjugal partnership without the husband's consent, except in cases provided

by law.

In the system established by the Code the wife does not administer the conjugal partnership unless with the consent of the

husband, or by decree of court and under its supervision (Arts. 168, 196) "with such limitations as they (the courts) may

deem advisable" (Art. 197 in relation to Article 196). Legally, therefore, the wife can not mismanage the conjugal

partnership property or affairs, unless the husband or the courts tolerate it. In the event of such maladministration by the

wife (and disregarding the case of judicial authorization to have the wife manage the partnership, since such a case is not

involved), the remedy of the husband does not lie in a judicial separation of property but in revoking the power granted to

151

the wife and resume the administration of the community property and the conduct of the affairs of the conjugal

partnership. He may enforce his right of possession and control of the conjugal property against his wife (Perkins vs.

Perkins, 57 Phil., 205) and seek such ancillary remedies as may be required by the circumstances, even to the extent of

annulling or rescinding any unauthorized alienations or incumbrances, upon proper action filed for that purpose. For this

reason, the articles above quoted contemplate exclusively the remedies available to the wife (who is not the legal

administrator of the partnership) against the abuses of her husband because normally only the latter can commit such

abuses.

Appellant avers that even if separation of property is not available, the allegations of his complaint entitle him to

accounting and other relief. Unfortunately, the complaint not only expressly pleads the nature of the action as one for

separation of property, but its allegations clearly proceed on the theory that the plaintiff is entitled to such separation.

Thus, the averments regarding fictitious or fraudulent transfers are incompatible with an action between wife and husband

alone, for it is elementary that the legality of sigh transfers can not be passed upon without giving the transferees an

opportunity to be heard. .

Everything considered, we believe that the action of the court a quo in dismissing the action in view of the impropriety of

the principal remedy sought, but without prejudice to proper proceedings, would better suit the interests of equity and

justice, facilitating the clarification and simplification of the issues involved.

Wherefore, the judgment appealed from is affirmed, with costs against appellant. So ordered.

152

G.R. No. L-14248 April 28, 1960

NEW MANILA LUMBER COMPANY, INC., plaintiff-appellant,

vs.

REPUBLIC OF THE PHILIPPINES, defendant-appellee.

GUTIERREZ DAVID, J.:

Appeal from an order of dismissal of the Court of First Instance of Manila.

On May 8, 1958, the plaintiff lumber company filed in the court below a complaint against the defendant Republic of the

Philippines for the recovery of a sum of money. The complaint alleges, among other things, that defendant, thru the

Director of Schools, entered into a contract with one Alfonso Mendoza to build two school houses; that plaintiff furnished

the lumber materials in the construction of the said buildings; that prior to the payment by defendant of any amount due

the contractor, the latter executed powers of attorney in favor of the plaintiff "constituting it as his sole, true and lawful

attorney-in-fact with specific and exclusive authority to collect and receive from the defendant any and all amounts due or

may be due to said contractor from the defendant in connection with the construction of the aforesaid school buildings, as

may be necessary to pay materials supplied by the plaintiff"; and that originals of the powers of attorney were received by

defendant (thru the Director of Public Schools) who promised to pay plaintiff, but that it, nevertheless, paid the contractor

several amounts on different occasions without first making payment to plaintiff. The complaint, therefore, prays that

defendant be ordered to pay plaintiff the sum of P18,327.15, the unpaid balance of the cost of lumber supplied and used in

the construction of the school buildings, with interest at the legal rate from the date same was due, plus attorney's fees and

costs.

Served with a copy of the complaint, the defendant Republic of the Philippines, through the Solicitor General, moved to

dismiss the same on the grounds (1) that it does not allege a sufficient cause of action, (2) that plaintiff has no right to

institute the action under Act No. 3688, and (3) that the court is without jurisdiction to entertain the same against the

defendant.

The motion was opposed by plaintiff, but after hearing, the court below — holding that "there is no juridical tie between

plaintiff-supplier and defendant-owner — sustained the motion to dismiss on the first ground, and on June 23, 1958 issued

an order dismissing plaintiff's complaint. Its motion for reconsideration having been denied, plaintiff took the present

appeal.

The appeal is without merit.

Briefly stated, plaintiff's complaint seeks to enforce against the Republic of the Philippines a money claim for the payment

of materials it furnished for the construction of two public school buildings undertaken by contractor Alfonso Mendoza,

on the basis of powers of attorney executed by the latter authorizing said plaintiff to collect and receive from defendant

Republic any amount due or may be due to said contractor as contract price for the payment of the materials so supplied.

Section one of Public Act No. 3688, entitled "An Act for the protection of persons furnishing material and labor for the

construction of public works", reads in part as follows:

SECTION 1. Any person, partnership or corporation entering into a formal contract with the Government of the

Philippine Islands for the construction of any public building, or the prosecution and completion of any public

work, or for repairs upon any public building or public work, shall be required, before commencing such work, to

execute the usual penal bond, with good and sufficient sureties, with the additional obligation that such contractor

or his or its sub-contractors shall promptly make payments to all persons supplying him or them with labor and

materials in the prosecution of the work provided for in such contract; and any person, company or corporation

who has furnished labor or materials in the construction or repair of any public building or public work, and

153

payment for which has not been made, shall have the right to intervene and be made a party to any action

instituted by the Government of the Philippine Islands on the bond of the contractor, and to have their rights and

claims adjudicated in such action and judgment rendered thereon, subject, however, to the priority of the claim

and judgment of the Government of the Philippine Islands. If the full amount of the liability of the surety on said

bond is insufficient to pay the full amount of said claims and demands, then, after paying the full amount due the

Government, the remainder shall be distributed pro rata among said intervenors. If no suit should be brought by

the Government of the Philippine Islands within six months from the completion and final settlement of said

contract, or if the Government expressly waives its right to institute action on the penal bond, then the person or

persons supplying the contractor with labor and materials shall, upon application therefor, and furnishing affidavit

to the department under the direction of which said work has been prosecuted, that labor or materials for the

prosecution of such work have been supplied by him or them, and payment for which has not been made, be

furnished with a certified copy of said contract and bond, upon which he or they shall have a right of action, and

shall be, and are hereby, authorized to bring suit in the name of the Government of the Philippine Islands in the

Court of First Instance in the district in which said contract was to be performed and executed, and not elsewhere,

for his or their use and benefit, against said contractor and his sureties, and to prosecute the same to final

judgment and execution, . . . .

In the case at bar, it is not disputed that defendant Republic has already instituted a suit against the contractor for the

forfeiture of the latter's bond posted to secure the faithful performance of stipulations in the construction contract with

regards to one of the two school buildings (Civil Case No. 26815, Court of First Instance of Manila). The contractor has a

similar bond with respect to the other school building. Pursuant to Act 3688, plaintiff's legal remedy is, not to bring suit

against the Government, there being no privity of contract between them, but to intervene in the civil case above-

mentioned as an unpaid supplier of materials to the contractor, or file an action in the name of the Republic against said

contractor on the latter's other bond.

Plaintiff argues that an implied contract between it and the defendant Republic arose, when the latter, thru the Director of

Public Schools, on being furnished copies of the powers of attorney executed by the contractor, promised to make

payment to plaintiff for the materials supplied for the construction of the school buildings. It will be observed, however,

that defendant was not a party to the execution of the powers of attorney. Besides, the Director of Public Schools had no

authority to bind defendant on the payment. While he was the official who entered into contract with the contractor for the

construction of the school buildings, payment of the contract price was not within his exclusive control but subject to

approval under existing laws not only by the Department Head (Sec. 568, Rev. Adm, Code), but also by the Auditor

General.

At any rate, under the facts alleged in the complaint, the powers of attorney in question made plaintiff the contractor's

agent in the collection of whatever amounts may be due the contractor from the defendant. And since it is also alleged

that, after the execution of the powers of attorney, the contractor (principal) demanded and collected from defendant the

money the collection of which he entrusted to plaintiff, the agency apparently has already been revoked. (Articles 1920

and 1924, new Civil Code.)

The point is made by plaintiff that the powers of attorney executed by the contractor in its favor are irrevocable and are

coupled with interest. But even supposing that they are, still their alleged irrevocability cannot affect defendant who is not

a party thereto. They are obligatory only on the principal who executed the agency.

Plaintiff also cites Article 1729 of the new Civil Code, which provides that —

Those who put their labor upon or furnish materials for a piece of work undertaken by the contractor have an

action against the owner up to the amount owing from the latter to the contractor at the time the claim is made. . . .

This article, however, as expressly provided in its last paragraph, "is subject to the provisions of special law." The special

law governing in the present case, as already seen, is Act No. 3688.

154

There is another reason for upholding the order of dismissal complained of. Plaintiff's action being a claim for sum of

money arising from an alleged implied contract between it and the Republic of the Philippines, the same should have been

lodged with the Auditor General. The state cannot be sued without its consent.

In view of the foregoing, the order of dismissal appealed from is affirmed, with costs against plaintiff-appellant.

155

G.R. No. L-41182-3 April 16, 1988

DR. CARLOS L. SEVILLA and LINA O. SEVILLA, petitioners-appellants,

vs.

THE COURT OF APPEALS, TOURIST WORLD SERVICE, INC., ELISEO S.CANILAO, and SEGUNDINA

NOGUERA, respondents-appellees.

SARMIENTO , J.:

The petitioners invoke the provisions on human relations of the Civil Code in this appeal by certiorari. The facts are

beyond dispute:

xxx xxx xxx

On the strength of a contract (Exhibit A for the appellant Exhibit 2 for the appellees) entered into on Oct.

19, 1960 by and between Mrs. Segundina Noguera, party of the first part; the Tourist World Service, Inc.,

represented by Mr. Eliseo Canilao as party of the second part, and hereinafter referred to as appellants, the

Tourist World Service, Inc. leased the premises belonging to the party of the first part at Mabini St.,

Manila for the former-s use as a branch office. In the said contract the party of the third part held herself

solidarily liable with the party of the part for the prompt payment of the monthly rental agreed on. When

the branch office was opened, the same was run by the herein appellant Una 0. Sevilla payable to Tourist

World Service Inc. by any airline for any fare brought in on the efforts of Mrs. Lina Sevilla, 4% was to go

to Lina Sevilla and 3% was to be withheld by the Tourist World Service, Inc.

On or about November 24, 1961 (Exhibit 16) the Tourist World Service, Inc. appears to have been

informed that Lina Sevilla was connected with a rival firm, the Philippine Travel Bureau, and, since the

branch office was anyhow losing, the Tourist World Service considered closing down its office. This was

firmed up by two resolutions of the board of directors of Tourist World Service, Inc. dated Dec. 2, 1961

(Exhibits 12 and 13), the first abolishing the office of the manager and vice-president of the Tourist

World Service, Inc., Ermita Branch, and the second,authorizing the corporate secretary to receive the

properties of the Tourist World Service then located at the said branch office. It further appears that on

Jan. 3, 1962, the contract with the appellees for the use of the Branch Office premises was terminated and

while the effectivity thereof was Jan. 31, 1962, the appellees no longer used it. As a matter of fact

appellants used it since Nov. 1961. Because of this, and to comply with the mandate of the Tourist World

Service, the corporate secretary Gabino Canilao went over to the branch office, and, finding the premises

locked, and, being unable to contact Lina Sevilla, he padlocked the premises on June 4, 1962 to protect

the interests of the Tourist World Service. When neither the appellant Lina Sevilla nor any of her

employees could enter the locked premises, a complaint wall filed by the herein appellants against the

appellees with a prayer for the issuance of mandatory preliminary injunction. Both appellees answered

with counterclaims. For apparent lack of interest of the parties therein, the trial court ordered the dismissal

of the case without prejudice.

The appellee Segundina Noguera sought reconsideration of the order dismissing her counterclaim which

the court a quo, in an order dated June 8, 1963, granted permitting her to present evidence in support of

her counterclaim.

On June 17,1963, appellant Lina Sevilla refiled her case against the herein appellees and after the issues

were joined, the reinstated counterclaim of Segundina Noguera and the new complaint of appellant Lina

Sevilla were jointly heard following which the court a quo ordered both cases dismiss for lack of merit,

on the basis of which was elevated the instant appeal on the following assignment of errors:

156

I. THE LOWER COURT ERRED EVEN IN APPRECIATING THE NATURE OF PLAINTIFF-

APPELLANT MRS. LINA O. SEVILLA'S COMPLAINT.

II. THE LOWER COURT ERRED IN HOLDING THAT APPELLANT MRS. LINA 0. SEVILA'S

ARRANGEMENT (WITH APPELLEE TOURIST WORLD SERVICE, INC.) WAS ONE MERELY OF

EMPLOYER-EMPLOYEE RELATION AND IN FAILING TO HOLD THAT THE SAID

ARRANGEMENT WAS ONE OF JOINT BUSINESS VENTURE.

III. THE LOWER COURT ERRED IN RULING THAT PLAINTIFF-APPELLANT MRS. LINA O.

SEVILLA IS ESTOPPED FROM DENYING THAT SHE WAS A MERE EMPLOYEE OF

DEFENDANT-APPELLEE TOURIST WORLD SERVICE, INC. EVEN AS AGAINST THE LATTER.

IV. THE LOWER COURT ERRED IN NOT HOLDING THAT APPELLEES HAD NO RIGHT TO

EVICT APPELLANT MRS. LINA O. SEVILLA FROM THE A. MABINI OFFICE BY TAKING THE

LAW INTO THEIR OWN HANDS.

V. THE LOWER COURT ERRED IN NOT CONSIDERING AT .ALL APPELLEE NOGUERA'S

RESPONSIBILITY FOR APPELLANT LINA O. SEVILLA'S FORCIBLE DISPOSSESSION OF THE

A. MABINI PREMISES.

VI. THE LOWER COURT ERRED IN FINDING THAT APPELLANT APPELLANT MRS. LINA O.

SEVILLA SIGNED MERELY AS GUARANTOR FOR RENTALS.

On the foregoing facts and in the light of the errors asigned the issues to be resolved are:

1. Whether the appellee Tourist World Service unilaterally disco the telephone line at the branch office on

Ermita;

2. Whether or not the padlocking of the office by the Tourist World Service was actionable or not; and

3. Whether or not the lessee to the office premises belonging to the appellee Noguera was appellees TWS

or TWS and the appellant.

In this appeal, appealant Lina Sevilla claims that a joint bussiness venture was entered into by and

between her and appellee TWS with offices at the Ermita branch office and that she was not an employee

of the TWS to the end that her relationship with TWS was one of a joint business venture appellant made

declarations showing:

1. Appellant Mrs. Lina 0. Sevilla, a prominent figure and wife of an eminent eye, ear and

nose specialist as well as a imediately columnist had been in the travel business prior to

the establishment of the joint business venture with appellee Tourist World Service, Inc.

and appellee Eliseo Canilao, her compadre, she being the godmother of one of his

children, with her own clientele, coming mostly from her own social circle (pp. 3-6 tsn.

February 16,1965).

2. Appellant Mrs. Sevilla was signatory to a lease agreement dated 19 October 1960

(Exh. 'A') covering the premises at A. Mabini St., she expressly warranting and holding

[sic] herself 'solidarily' liable with appellee Tourist World Service, Inc. for the prompt

payment of the monthly rentals thereof to other appellee Mrs. Noguera (pp. 14-15, tsn.

Jan. 18,1964).

157

3. Appellant Mrs. Sevilla did not receive any salary from appellee Tourist World Service,

Inc., which had its own, separate office located at the Trade & Commerce Building; nor

was she an employee thereof, having no participation in nor connection with said

business at the Trade & Commerce Building (pp. 16-18 tsn Id.).

4. Appellant Mrs. Sevilla earned commissions for her own passengers, her own bookings

her own business (and not for any of the business of appellee Tourist World Service, Inc.)

obtained from the airline companies. She shared the 7% commissions given by the airline

companies giving appellee Tourist World Service, Lic. 3% thereof aid retaining 4% for

herself (pp. 18 tsn. Id.)

5. Appellant Mrs. Sevilla likewise shared in the expenses of maintaining the A. Mabini

St. office, paying for the salary of an office secretary, Miss Obieta, and other sundry

expenses, aside from desicion the office furniture and supplying some of fice furnishings

(pp. 15,18 tsn. April 6,1965), appellee Tourist World Service, Inc. shouldering the rental

and other expenses in consideration for the 3% split in the co procured by appellant Mrs.

Sevilla (p. 35 tsn Feb. 16,1965).

6. It was the understanding between them that appellant Mrs. Sevilla would be given the

title of branch manager for appearance's sake only (p. 31 tsn. Id.), appellee Eliseo Canilao

admit that it was just a title for dignity (p. 36 tsn. June 18, 1965- testimony of appellee

Eliseo Canilao pp. 38-39 tsn April 61965-testimony of corporate secretary Gabino

Canilao (pp- 2-5, Appellants' Reply Brief)

Upon the other hand, appellee TWS contend that the appellant was an employee of the appellee Tourist

World Service, Inc. and as such was designated manager. 1

xxx xxx xxx

The trial court 2 held for the private respondent on the premise that the private respondent, Tourist World Service, Inc.,

being the true lessee, it was within its prerogative to terminate the lease and padlock the premises. 3 It likewise found the

petitioner, Lina Sevilla, to be a mere employee of said Tourist World Service, Inc. and as such, she was bound by the acts

of her employer. 4 The respondent Court of Appeal

5 rendered an affirmance.

The petitioners now claim that the respondent Court, in sustaining the lower court, erred. Specifically, they state:

I

THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN

HOLDING THAT "THE PADLOCKING OF THE PREMISES BY TOURIST WORLD SERVICE INC. WITHOUT

THE KNOWLEDGE AND CONSENT OF THE APPELLANT LINA SEVILLA ... WITHOUT NOTIFYING MRS.

LINA O. SEVILLA OR ANY OF HER EMPLOYEES AND WITHOUT INFORMING COUNSEL FOR THE

APPELLANT (SEVILIA), WHO IMMEDIATELY BEFORE THE PADLOCKING INCIDENT, WAS IN

CONFERENCE WITH THE CORPORATE SECRETARY OF TOURIST WORLD SERVICE (ADMITTEDLY THE

PERSON WHO PADLOCKED THE SAID OFFICE), IN THEIR ATTEMP AMICABLY SETTLE THE

CONTROVERSY BETWEEN THE APPELLANT (SEVILLA) AND THE TOURIST WORLD SERVICE ... (DID NOT)

ENTITLE THE LATTER TO THE RELIEF OF DAMAGES" (ANNEX "A" PP. 7,8 AND ANNEX "B" P. 2) DECISION

AGAINST DUE PROCESS WHICH ADHERES TO THE RULE OF LAW.

II

158

THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN

DENYING APPELLANT SEVILLA RELIEF BECAUSE SHE HAD "OFFERED TO WITHDRAW HER COMP

PROVIDED THAT ALL CLAIMS AND COUNTERCLAIMS LODGED BY BOTH APPELLEES WERE

WITHDRAWN." (ANNEX "A" P. 8)

III

THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN

DENYING-IN FACT NOT PASSING AND RESOLVING-APPELLANT SEVILLAS CAUSE OF ACTION FOUNDED

ON ARTICLES 19, 20 AND 21 OF THE CIVIL CODE ON RELATIONS.

IV

THE COURT OF APPEALS ERRED ON A QUESTION OF LAW AND GRAVELY ABUSED ITS DISCRETION IN

DENYING APPEAL APPELLANT SEVILLA RELIEF YET NOT RESOLVING HER CLAIM THAT SHE WAS IN

JOINT VENTURE WITH TOURIST WORLD SERVICE INC. OR AT LEAST ITS AGENT COUPLED WITH AN

INTEREST WHICH COULD NOT BE TERMINATED OR REVOKED UNILATERALLY BY TOURIST WORLD

SERVICE INC. 6

As a preliminary inquiry, the Court is asked to declare the true nature of the relation between Lina Sevilla and Tourist

World Service, Inc. The respondent Court of see fit to rule on the question, the crucial issue, in its opinion being "whether

or not the padlocking of the premises by the Tourist World Service, Inc. without the knowledge and consent of the

appellant Lina Sevilla entitled the latter to the relief of damages prayed for and whether or not the evidence for the said

appellant supports the contention that the appellee Tourist World Service, Inc. unilaterally and without the consent of the

appellant disconnected the telephone lines of the Ermita branch office of the appellee Tourist World Service, Inc. 7 Tourist

World Service, Inc., insists, on the other hand, that Lina SEVILLA was a mere employee, being "branch manager" of its

Ermita "branch" office and that inferentially, she had no say on the lease executed with the private respondent, Segundina

Noguera. The petitioners contend, however, that relation between the between parties was one of joint venture, but

concede that "whatever might have been the true relationship between Sevilla and Tourist World Service," the Rule of

Law enjoined Tourist World Service and Canilao from taking the law into their own hands, 8 in reference to the

padlocking now questioned.

The Court finds the resolution of the issue material, for if, as the private respondent, Tourist World Service, Inc.,

maintains, that the relation between the parties was in the character of employer and employee, the courts would have

been without jurisdiction to try the case, labor disputes being the exclusive domain of the Court of Industrial Relations,

later, the Bureau Of Labor Relations, pursuant to statutes then in force. 9

In this jurisdiction, there has been no uniform test to determine the evidence of an employer-employee relation. In general,

we have relied on the so-called right of control test, "where the person for whom the services are performed reserves a

right to control not only the end to be achieved but also the means to be used in reaching such end." 10

Subsequently,

however, we have considered, in addition to the standard of right-of control, the existing economic conditions prevailing

between the parties, like the inclusion of the employee in the payrolls, in determining the existence of an employer-

employee relationship. 11

The records will show that the petitioner, Lina Sevilla, was not subject to control by the private respondent Tourist World

Service, Inc., either as to the result of the enterprise or as to the means used in connection therewith. In the first place,

under the contract of lease covering the Tourist Worlds Ermita office, she had bound herself insolidum as and for rental

payments, an arrangement that would be like claims of a master-servant relationship. True the respondent Court would

later minimize her participation in the lease as one of mere guaranty, 12

that does not make her an employee of Tourist

World, since in any case, a true employee cannot be made to part with his own money in pursuance of his employer's

business, or otherwise, assume any liability thereof. In that event, the parties must be bound by some other relation, but

certainly not employment.

159

In the second place, and as found by the Appellate Court, '[w]hen the branch office was opened, the same was run by the

herein appellant Lina O. Sevilla payable to Tourist World Service, Inc. by any airline for any fare brought in on the effort

of Mrs. Lina Sevilla. 13

Under these circumstances, it cannot be said that Sevilla was under the control of Tourist World

Service, Inc. "as to the means used." Sevilla in pursuing the business, obviously relied on her own gifts and capabilities.

It is further admitted that Sevilla was not in the company's payroll. For her efforts, she retained 4% in commissions from

airline bookings, the remaining 3% going to Tourist World. Unlike an employee then, who earns a fixed salary usually,

she earned compensation in fluctuating amounts depending on her booking successes.

The fact that Sevilla had been designated 'branch manager" does not make her, ergo, Tourist World's employee. As we

said, employment is determined by the right-of-control test and certain economic parameters. But titles are weak

indicators.

In rejecting Tourist World Service, Inc.'s arguments however, we are not, as a consequence, accepting Lina Sevilla's own,

that is, that the parties had embarked on a joint venture or otherwise, a partnership. And apparently, Sevilla herself did not

recognize the existence of such a relation. In her letter of November 28, 1961, she expressly 'concedes your [Tourist

World Service, Inc.'s] right to stop the operation of your branch office 14

in effect, accepting Tourist World Service, Inc.'s

control over the manner in which the business was run. A joint venture, including a partnership, presupposes generally a

of standing between the joint co-venturers or partners, in which each party has an equal proprietary interest in the capital

or property contributed 15

and where each party exercises equal rights in the conduct of the business. 16

furthermore, the

parties did not hold themselves out as partners, and the building itself was embellished with the electric sign "Tourist

World Service, Inc. 17

in lieu of a distinct partnership name.

It is the Court's considered opinion, that when the petitioner, Lina Sevilla, agreed to (wo)man the private respondent,

Tourist World Service, Inc.'s Ermita office, she must have done so pursuant to a contract of agency. It is the essence of

this contract that the agent renders services "in representation or on behalf of another. 18

In the case at bar, Sevilla solicited

airline fares, but she did so for and on behalf of her principal, Tourist World Service, Inc. As compensation, she received

4% of the proceeds in the concept of commissions. And as we said, Sevilla herself based on her letter of November 28,

1961, pre-assumed her principal's authority as owner of the business undertaking. We are convinced, considering the

circumstances and from the respondent Court's recital of facts, that the ties had contemplated a principal agent

relationship, rather than a joint managament or a partnership..

But unlike simple grants of a power of attorney, the agency that we hereby declare to be compatible with the intent of the

parties, cannot be revoked at will. The reason is that it is one coupled with an interest, the agency having been created for

mutual interest, of the agent and the principal. 19

It appears that Lina Sevilla is a bona fidetravel agent herself, and as such,

she had acquired an interest in the business entrusted to her. Moreover, she had assumed a personal obligation for the

operation thereof, holding herself solidarily liable for the payment of rentals. She continued the business, using her own

name, after Tourist World had stopped further operations. Her interest, obviously, is not to the commissions she earned as

a result of her business transactions, but one that extends to the very subject matter of the power of management delegated

to her. It is an agency that, as we said, cannot be revoked at the pleasure of the principal. Accordingly, the revocation

complained of should entitle the petitioner, Lina Sevilla, to damages.

As we have stated, the respondent Court avoided this issue, confining itself to the telephone disconnection and padlocking

incidents. Anent the disconnection issue, it is the holding of the Court of Appeals that there is 'no evidence showing that

the Tourist World Service, Inc. disconnected the telephone lines at the branch office. 20

Yet, what cannot be denied is the

fact that Tourist World Service, Inc. did not take pains to have them reconnected. Assuming, therefore, that it had no hand

in the disconnection now complained of, it had clearly condoned it, and as owner of the telephone lines, it must shoulder

responsibility therefor.

The Court of Appeals must likewise be held to be in error with respect to the padlocking incident. For the fact that Tourist

World Service, Inc. was the lessee named in the lease con-tract did not accord it any authority to terminate that contract

without notice to its actual occupant, and to padlock the premises in such fashion. As this Court has ruled, the petitioner,

160

Lina Sevilla, had acquired a personal stake in the business itself, and necessarily, in the equipment pertaining thereto.

Furthermore, Sevilla was not a stranger to that contract having been explicitly named therein as a third party in charge of

rental payments (solidarily with Tourist World, Inc.). She could not be ousted from possession as summarily as one would

eject an interloper.

The Court is satisfied that from the chronicle of events, there was indeed some malevolent design to put the petitioner,

Lina Sevilla, in a bad light following disclosures that she had worked for a rival firm. To be sure, the respondent court

speaks of alleged business losses to justify the closure '21 but there is no clear showing that Tourist World Ermita Branch

had in fact sustained such reverses, let alone, the fact that Sevilla had moonlit for another company. What the evidence

discloses, on the other hand, is that following such an information (that Sevilla was working for another company),

Tourist World's board of directors adopted two resolutions abolishing the office of 'manager" and authorizing the

corporate secretary, the respondent Eliseo Canilao, to effect the takeover of its branch office properties. On January 3,

1962, the private respondents ended the lease over the branch office premises, incidentally, without notice to her.

It was only on June 4, 1962, and after office hours significantly, that the Ermita office was padlocked, personally by the

respondent Canilao, on the pretext that it was necessary to Protect the interests of the Tourist World Service. " 22

It is

strange indeed that Tourist World Service, Inc. did not find such a need when it cancelled the lease five months earlier.

While Tourist World Service, Inc. would not pretend that it sought to locate Sevilla to inform her of the closure, but

surely, it was aware that after office hours, she could not have been anywhere near the premises. Capping these series of

"offensives," it cut the office's telephone lines, paralyzing completely its business operations, and in the process, depriving

Sevilla articipation therein.

This conduct on the part of Tourist World Service, Inc. betrays a sinister effort to punish Sevillsa it had perceived to be

disloyalty on her part. It is offensive, in any event, to elementary norms of justice and fair play.

We rule therefore, that for its unwarranted revocation of the contract of agency, the private respondent, Tourist World

Service, Inc., should be sentenced to pay damages. Under the Civil Code, moral damages may be awarded for "breaches

of contract where the defendant acted ... in bad faith. 23

We likewise condemn Tourist World Service, Inc. to pay further damages for the moral injury done to Lina Sevilla from

its brazen conduct subsequent to the cancellation of the power of attorney granted to her on the authority of Article 21 of

the Civil Code, in relation to Article 2219 (10) thereof —

ART. 21. Any person who wilfully causes loss or injury to another in a manner that is contrary to morals,

good customs or public policy shall compensate the latter for the damage. 24

ART. 2219. Moral damages 25

may be recovered in the following and analogous cases:

xxx xxx xxx

(10) Acts and actions refered into article 21, 26, 27, 28, 29, 30, 32, 34, and 35.

The respondent, Eliseo Canilao, as a joint tortfeasor is likewise hereby ordered to respond for the same damages in a

solidary capacity.

Insofar, however, as the private respondent, Segundina Noguera is concerned, no evidence has been shown that she had

connived with Tourist World Service, Inc. in the disconnection and padlocking incidents. She cannot therefore be held

liable as a cotortfeasor.

The Court considers the sums of P25,000.00 as and for moral damages,24 P10,000.00 as exemplary damages,25

and

P5,000.00 as nominal 26

and/or temperate 27

damages, to be just, fair, and reasonable under the circumstances.

161

WHEREFORE, the Decision promulgated on January 23, 1975 as well as the Resolution issued on July 31, 1975, by the

respondent Court of Appeals is hereby REVERSED and SET ASIDE. The private respondent, Tourist World Service,

Inc., and Eliseo Canilao, are ORDERED jointly and severally to indemnify the petitioner, Lina Sevilla, the sum of

25,00.00 as and for moral damages, the sum of P10,000.00, as and for exemplary damages, and the sum of P5,000.00, as

and for nominal and/or temperate damages.

162

G.R. No. L-6626 October 6, 1911

JOSE DE LA PEÑA Y DE RAMON, administrator of the estate of the deceased Jose de la Peña y Gomiz; F.

GARFIELD WAIT, ET AL., interveners-appellants,

vs.

FEDERICO HIDALGO, defendant-appellant.

TORRES, J.:

This decision concerns the appeals entered under respective bills of exception by counsel for Jose de la Peña y de Ramon,

the administrator of the estate of the deceased Jose de la Peña y Gomiz, from the order of the 18th of the same month,

directing that the amount deposited as bond, by counsel for the intervening attorneys, Chicote & Miranda, Frederick G.

Waite, and C. W. O'Brien, from the said order of October 18, in so far as it declares that the counterclaim by the said

Hidalgo against de la Peña was presented in his capacity as administrator of the aforementioned estate and that the

intervener's lien could not avail to prevent the set-off decreed in the said first order appealed from.

After a regular trial in the Court of First Instance of this city of the case of Jose de la Peña y de Ramon, as administrator of

the estate of his deceased father, Jose de la Peña y Gomiz, vs. Federico Hidalgo, for the payment of a sum of money, the

record of the proceedings was forwarded to this court on appeal. By the decision rendered Hidalgo to pay to Jose de la

Peña y de Ramon, as administrator, the sum of P6,774.50 with legal interest from May 23, 1906, and, likewise, sentenced

the said Jose de la Peña y de Ramon to pay to Federico Hidalgo, as a counterclaim, the sum of P9,000, with legal interest

thereon from May 21, 1907, the date of the counterclaim; and affirmed the judgment appealed from in so far as it was in

agreement with the said decision, and reversed it in so far as it was not in accordance therewith. That decision became

final.

The record of proceedings having been remanded for execution to the Court of First Instance whence it originated, the

judge, by order of October 14, 1910, decreed that both amounts for which the defendant Hidalgo and the administrator

Peña were mutually liable in concurrent sums, should off-set each other, and that, consequently, the plaintiff, Peña y de

Ramon, in conformity with the final decision of this court, was liable for the payment of the difference between such

amounts, or P2,274.93, together with the interests at 6 per cent from the said date.

At this stage of the proceedings for the execution of the judgment that had become final, the attorneys for the said

plaintiff, Messrs. Chicote & Miranda, Frederick Garfield Waite, and C. W. O'Brien represented by C. A. DeWitt, asked

that they be permitted to intervene in the proceedings, as they held a lien upon the amount awarded in the said decision of

this court, rendered in favor of the plaintiff and against the defendant, and alleged that the lien which they held was upon

the judgment entered in favor of the plaintiff in his capacity as administrator, against the defendant; that the defendant was

entitled to the judgment awarded him by virtue of his counterclaim, yet, in consideration of the fact that their lien affected

the judgment of the lower court, which was in no wise reversed, the said lien was valid with respect to any judgment that

the plaintiff had obtained against the defendant, notwithstanding such counterclaim. In spite of the defendant's opposition,

the court, ruling on this incidental question raised, issued the aforecited order of October 18, 1910.

Counsel for the administrator Peña did not file a brief calculated to prove the soundness of his appeal from the order of

October 14, 1910, whereby there was declared a set-off between the amounts for which the plaintiff and the defendant

were liable, up to the sum where the liability of the one equaled that of the other, then latter to pay to the former the

difference, together with the interest. This order is pursuant to the law and in perfect harmony with the decision rendered

in the case by this court, and, though it was not duly impugned, its legality and correctness will be considered in this

decision in demonstrating that of the other order of the 18th of the same month, appealed from by the intervening

attorneys and by the counsel for Federico Hidalgo.

With respect to the said order of the 18th of October, the second of those appealed from in this incidental issue, it must be

borne in mind, for the proper determination of the pending appeals, that the main action, from which the said incidental

issue proceeded, was prosecuted in the Court of First Instance of this city by Jose de la Peña y de Ramon, in his capacity

163

as judicial administrator of the estate of his deceased father, Jose de la Peña y Gomiz, against Federico Hidalgo, for the

payment of various sums which the later was owing, with interest, to the estate; and that the defendant, in answering the

complaint with the costs against the plaintiff and that the latter be sentenced to the payment of P9,000 which the testator,

Jose de la Peña y Gomiz, owed to Hidalgo. So that if the complaint in the main action was filed by the administrator of the

estate of the deceased Peña y Gomiz, the counterclaim presented in the same suit by the defendant, Federico Hidalgo, in

answering the complaint of the administrator, during his lifetime, owed the said defendant.

The defendant may, pursuant to section 95 of the Code of Procedure in Civil Actions, set forth by answer as many

defenses and counterclaims as he may have, whatever their nature. Section 96 of the same code provides that a

counterclaim, to be available as a defense in an answer, must be one in favor of all the substantial defendants and against

all the substantial plaintiffs in the action.

A counterclaim is termed a mutual petition, because both parties sue each other mutually in the same action, each of them

assuming the double role of plaintiff and defendant, before the trial judge, and the two suits are brought under a single

proceedings where both actions are tried at the same time and finally determined in one and the same judgment.

The different amounts sought to be recovered by Jose de la Peña y de Ramon, as the administrator of the estate of the

deceased Jose de la Peña y Gomiz, from the defendant, Federico Hidalgo, constitute various separate obligations

contracted by the later, according to the complaint, in favor of the deceased, testator, Peña y Gomiz; and the amount of the

counterclaim was likewise a debt which the said testator at his death left unpaid and owing the defendant Hidalgo;

therefore, Jose de la Peña y de Ramon, as administrator, and Federico Hidalgo are the substantial plaintiffs and

defendants, reciprocally, in the aforementioned main action.

It is evident, by a simple perusal of the finding of facts an of the grounds of law of the final decision rendered in that

action, that the same was instituted by Jose de la Peña y de Ramon, not by himself and in his own representation, but in

his capacity as administrator of the estate of his deceased father, Jose de la Peña y Gomiz, demanding payment of certain

amounts which, according to his third mended complaint, the defendant Federico Hidalgo owed the latter; and it is none

the less evident that the counterclaim presented by the defendant Federico Hidalgo had for its sole object the collection of

a certain sum which was owing to him by the deceased testator, Jose de la Peña y Gomiz, and that the plaintiff, Jose de la

Peña y de Ramon, per se and personally, had nothing to do with this debt of the estate, which concerned him only as such

administrator. This is shown by the record and clearly appears in the said decision which disposed of the plaintiff-

administrator's complaint and the defendant-debtor's counterclaim. that decision, from the beginning to the end, evidence

without contradiction or proofs to the contrary, all that has been hereinbefore stated; it shows who were the contending

parties, the nature of the questions raised by complaint and counterclaim and the respective purposes sought by the one

and the other; it is therefore unreasonable to affirm that the counterclaim was made against Peña y de Ramon personally,

apart from his position as administrator.

If in any place or in any line of said decision mention was made of the name of the plaintiff Peña y de Ramon without the

title of his office as administrator of the estate, it probably was because the complaint was filed and the action was

brought by him in his capacity of administrator, and the counterclaim, also, was directed him as such administrator; and if

in any paragraph the said title of his office was omitted in designating him, such omission can not serve as a ground for

concluding that the counterclaim allowed and the sentence imposed in the said decision were against Jose de la Peña y de

Ramon as a private individual and not as the administrator of the aforementioned estate; and the sentence contained in the

decision referred to can in no wise be understood to have been made against Jose de la Peña y de Ramon personally, but

in his capacity of administrator of the estate, which alone was liable for the debt owing to the defendant; if mention was

therein made of the plaintiff by name, it is because he was the representative of the debtor estate.

The intervening attorneys allege that, in the aforesaid suit between the administrator Peña y de Ramon and Hidalgo, two

judgments were rendered, one against the defendant Hidalgo and the other against the administrator Peña y de Ramon.

This averment is incorrect, because, as has been seen and is obvious to all who intervened in the said suit, there was but

one judgment appealed from and but one decision rendered in second instance by this court, which in part modified the

prior judgment in first instance. A complaint and a counterclaim having been entered in the said suit, it logically follows

164

that the decision should contain a finding relative to the demand contained in the complaint and another finding

concerning the counterclaim. This separation of findings in one decision does not denote distinct judgments, but different

disposals of the several questions raised in the suit and comprised within a single decision, which alone terminated the

double litigation. Reason and justice will not support the claim that the sentence therein contained, directing Jose de la

Peña y de Ramon to pay to the defendant Hidalgo the sum of P9,000 and interest by virtue of the counterclaim, was

pronounced against the plaintiff in his personal capacity and not as administrator of the estate, inasmuch as Peña y de

Ramon did not initiate or prosecute his suit, in the said main action on his own account, but in his capacity as

administrator; and the debt demanded in the counterclaim was one owing by the estate, which he represented in that

action, and by his father, the testator Peña y Gomiz, as the judge of First Instance, in directing in his order of October 14,

1910, in fulfillment and execution of the decision of this court, so recognized such debt and declared in an unmistakable

manner that Hidalgo was entitled, as a result of the set-off between the two amounts specified in the decision of the

Supreme Court and which the administrator Peña y de Ramon and the defendant Hidalgo were mutually owing to each

other, to collect the sum of P2,274.93 with interest thereon at the rate of 6 per cent per annum, this amount being the

difference between the two debts set off against each other and which is owing to the defendant from the estate.

In the aforementioned decision of this court, by which the complaint and the counterclaim presented by the parties to the

said suit were disposed of, the amount which the defendant Hidalgo should pay to the administrator of the estate of the

deceased Peña y Gomiz and the sum which the said administrator, designated by his name of Jose de la Peña y de Ramon,

should, by virtue of the counterclaim, pay to the defendant, Federico Hidalgo, alone were specified; the resultant

difference, after the set-off should have been made, was not stated, as it was considered that this merely arithmetical

operation would necessarily be performed in the course of the execution proceedings by the judge of the Court of First

Instance charged with carrying out the final decision rendered in the case. This, in fact, he did do in his order of October

14, by directing that the plaintiff should pay the said sum, that it, the difference which was found to exist, after making the

set-off between the respective amounts the litigating parties were sentenced to pay. The failure to state in the said decision

that both debts were set off against each other up to a concurrent sum, can not avail as a ground for alleging that the

attorneys of the administrator Peña y de Ramon have acquired a lien on the amount which Hidalgo should pay to the

administrator Peña y de Ramon in preference to the creditor of the amount that is the subject of the counterclaim.

It is to be observed that, although counsel for the plaintiff Peña excepted to the order of October 14, 1910, by which the

judge of the Court of First Instance, following the final decisions of this court, declared a set-off between the amounts that

were owing reciprocally by both parties and directed the said plaintiff to pay to the defendant the difference of P2,274.93

with interest at the rate of 6 per cent per annum, he did not present any bill of exceptions nor any brief with the required

assignment of errors, doubtless because he was convinced that the appeal which we would have to maintained was

directed against a final decision of this court.

It is lawful and proper to allow the set-off between the two amounts specified in the said decision, in accordance with the

provisions of articles 1195, 1196, and 1202 of the Civil Code, because the credit of P6,774.50, together with the legal

interest thereon, to the payment of which the defendant Hidalgo was sentenced, belongs to the estate of the deceased Peña

y Gomiz, represented by the plaintiff, Peña y de Ramon, and the P9,000, with interest, which, in turn, the plaintiff-

administrator was sentenced to pay to the said defendant, was a debt of the testator which it is now incumbent upon his

estate to repay to his creditor; therefore, as the trial judge very well says in the order of October 18, appealed from, the

lien of the intervening attorneys can not serve to prevent the set-off, for the reason that interveners rendered their services

to Jose de la Peña y de Ramon as administrator of the said estate, and the credit by which the debt owing to this estate by

the defendant Hidalgo appears to be set-off consists of a debt of the estate in favor of its debtor, Hidalgo.

If it just be that the estate of the deceased Peña y Gomiz should collect the amount owing it by Hidalgo, as determined by

final decision, it is equally just that Hidalgo should have the same right to collect the sum which the said estate owes him,

according to the same decision; therefore, in order to comply with such decision, determining the two liabilities directly

opposed to each other, it consequently and logically follows that a set-off of both credits, up to a concurrent amount, must

be affected; and if the lien or the right to collect professional fees on the part of the attorneys were superior to the right of

the creditor of the estate, the result would be that the executory decision would not be complied with; there would then be

no set-off and the defendant would be compelled to pay to the said administrator his debt to the estate, through the

165

aforementioned lien of the intervening attorneys, but could not collect, nor apply to the payment of the credit owing him

by the same estate, the amount of his debt to the latter; this would be illegal and opposed to the most rudimentary

principles of justice and, furthermore, would be an absurdity and contrary to common sense.

Section 37 of the Code of Procedure in Civil Actions prescribes, among other provisions, that a lawyer shall have a lien

upon all judgments and decrees for the payment of money, and executions issued in pursuance of such judgments and

decrees which he has secured in a litigation of his client, from and after, but not before, the time when he shall have

caused to be entered upon the records of the court, . . . and shall have the same right and power over such judgments,

decrees and execution to enforce his lien as his client had or may have, to the extent that may be necessary for the

payment of his just fees and disbursements.

If it be taken into account that, while the administrator Peña y de Ramon is entitled to collect from Hidalgo the P6,774.50

which the later is owing to the estate left by the said Peña's father, this estate must, in turn, pay to the said Hidalgo P9,000;

and that, on comparing these two amounts with each other, in proceeding with the execution of the final judgment, it

would be necessarily be disclosed by the operation that the said estate or its administrator, far from collecting any sum or

whatever from its or his credit, would have to pay Hidalgo the difference resulting from the set-off between the one

amount and the other, up to a concurrent sum, it will be understood at once that the attorneys for the representative of that

estate can not collect any part whatever of the amount awarded in the executory decision, because tat sum was intended to

cover a large part of the debt of the testator and the later's testate succession will still have to pay the difference.

The lien or right to collect fees for professional service, which the appellant attorneys possess to the sum awarded in the

final decision, is equal to the right of their client, to that of the administrator Peña y de Ramon, recognized in the said

decision, pursuant to the provisions of the aforecited section 37 of the Code of Civil Procedure. The preference claimed by

these interveners over the creditors right, by virtue of the later's counterclaim, does not appear to be established by this

section; and if the estate of the deceased Peña is obliged to pay to Hidalgo P9,000, it is not entitled to collect from the

latter the said P6,774.50 by way of a set-off, unless it shall previously have satisfied the whole amount of its debt, which it

has done; therefore the attorneys of the representative of the said estate are not entitled to collect their fees out of the said

amount recognized by decision to being to their client, but subject to a set-off by virtue of a counterclaim, as their rights

are no better than those of the creditor Hidalgo.

The judgment appealed from having been reversed with respect to that portion thereof relative to the liability asked by the

administrator of the estate to be laid against Federico Hidalgo, the sole judgment to be executed is that contained in the

decision rendered in second instance and in this decision, as has been shown; and the result, in short, has been in no wise

favorable to the plaintiff because, instead of being able to collect the amount of his credit owing by Hidalgo to the estate,

he still finds himself obliged to pay the defendant the difference resulting from the set-off to which the counterclaim,

made by the latter for a greater sum, gave rise; and therefore, the right claimed by the appellant attorneys to collect their

fees out of the amount awarded to the said administrator, is in all respects unsustainable, inasmuch as, in consequence of

the counterclaim, there was a set-off against that amount and the plaintiff has nothing to collect, but, on the contrary, is

still liable for the difference which was found to exist after the reciprocal debts of both parties had been set off against

each other.

The right of attorneys for the administrator Peña y de Ramon, to collect fees for professional service, under section 37 of

the Code of Civil Procedure, is restricted to the personal founds of their client, to amounts awarded to the latter by final

decision, but does not comprise sums of money which, according to the same decision, must be applied to be made in

such decision by virtue of a prior counterclaim.1awphil.net

We know of no legal provision which grants to the attorneys for the losing party in a suit, or who has not obtained a

judgment authorizing him to collect money from the adverse party, the privilege of collecting their professional fees with

preference over, and better right then, the said adverse party, the legitimate creditor of the said attorneys' client.

The suit was prosecuted for the collection of amounts which both parties reciprocally were owing each other, and a

decision was rendered deciding the complaint and the counterclaim and determining the sums which the litigating parties

166

must mutually pay; therefore, the final judgment must be executed, as provided by the trial judge, pursuant to its terms,

and no impediment to such execution can be had in the improper contention made by the appellant attorneys, who can

invoke no law or just reason which authorizes them to collect their professional fees out of the bond given by Hidalgo,

once the same was not deposited as security for the payment of the said fees.

For the foregoing reasons, whereby the errors attributed by the appellant attorneys to the trial judge have been duly

refuted, it is our opinion and we hold that we should and hereby do affirm the order of October 14, 1910, and also the

order of the 18th of the same month, with the exception of the final provision of this last order, of October 18, which we

reversed and direct tat return be made to Federico Hidalgo of the sum of P8,500 retained by the clerk of the court below as

a result of the motion of intervention herein concerned. No spe

167

G.R. No. 31057 September 7, 1929

ADRIANO ARBES, ET AL., plaintiffs-appellees,

vs.

VICENTE POLISTICO, ET AL., defendants-appellants.

VILLAMOR, J.:

This is an action to bring about liquidation of the funds and property of the association called "Turnuhan Polistico & Co."

The plaintiffs were members or shareholders, and the defendants were designated as president-treasurer, directors and

secretary of said association.

It is well to remember that this case is now brought before the consideration of this court for the second time. The first one

was when the same plaintiffs appeared from the order of the court below sustaining the defendant's demurrer, and

requiring the former to amend their complaint within a period, so as to include all the members of "Turnuhan Polistico &

Co.," either as plaintiffs or as a defendants. This court held then that in an action against the officers of a voluntary

association to wind up its affairs and enforce an accounting for money and property in their possessions, it is not

necessary that all members of the association be made parties to the action. (Borlasa vs. Polistico, 47 Phil., 345.) The case

having been remanded to the court of origin, both parties amend, respectively, their complaint and their answer, and by

agreement of the parties, the court appointed Amadeo R. Quintos, of the Insular Auditor's Office, commissioner to

examine all the books, documents, and accounts of "Turnuhan Polistico & Co.," and to receive whatever evidence the

parties might desire to present.

The commissioner rendered his report, which is attached to the record, with the following resume:

Income:

Member's shares............................ 97,263.70

Credits paid................................ 6,196.55

Interest received........................... 4,569.45

Miscellaneous............................... 1,891.00

P109,620.70

Expenses:

Premiums to members....................... 68,146.25

Loans on real-estate....................... 9,827.00

Loans on promissory notes.............. 4,258.55

Salaries.................................... 1,095.00

Miscellaneous............................... 1,686.10

85,012.90

Cash on hand........................................ 24,607.80

168

The defendants objected to the commissioner's report, but the trial court, having examined the reasons for the objection,

found the same sufficiently explained in the report and the evidence, and accepting it, rendered judgment, holding that the

association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants jointly and severally to return the

amount of P24,607.80, as well as the documents showing the uncollected credits of the association, to the plaintiffs in this

case, and to the rest of the members of the said association represented by said plaintiffs, with costs against the

defendants.

The defendants assigned several errors as grounds for their appeal, but we believe they can all be reduced to two points, to

wit: (1) That not all persons having an interest in this association are included as plaintiffs or defendants; (2) that the

objection to the commissioner's report should have been admitted by the court below.

As to the first point, the decision on the case of Borlasa vs. Polistico, supra, must be followed.

With regard to the second point, despite the praiseworthy efforts of the attorney of the defendants, we are of opinion that,

the trial court having examined all the evidence touching the grounds for the objection and having found that they had

been explained away in the commissioner's report, the conclusion reached by the court below, accepting and adopting the

findings of fact contained in said report, and especially those referring to the disposition of the association's money,

should not be disturbed.

In Tan Dianseng Tan Siu Pic vs. Echauz Tan Siuco (5 Phil., 516), it was held that the findings of facts made by a referee

appointed under the provisions of section 135 of the Code of Civil Procedure stand upon the same basis, when approved

by the Court, as findings made by the judge himself. And in Kriedt vs. E. C. McCullogh & Co.(37 Phil., 474), the court

held: "Under section 140 of the Code of Civil Procedure it is made the duty of the court to render judgment in accordance

with the report of the referee unless the court shall unless for cause shown set aside the report or recommit it to the

referee. This provision places upon the litigant parties of the duty of discovering and exhibiting to the court any error that

may be contained therein." The appellants stated the grounds for their objection. The trial examined the evidence and the

commissioner's report, and accepted the findings of fact made in the report. We find no convincing arguments on the

appellant's brief to justify a reversal of the trial court's conclusion admitting the commissioner's findings.

There is no question that "Turnuhan Polistico & Co." is an unlawful partnership (U.S. vs. Baguio, 39 Phil., 962), but the

appellants allege that because it is so, some charitable institution to whom the partnership funds may be ordered to be

turned over, should be included, as a party defendant. The appellants refer to article 1666 of the Civil Code, which

provides:

A partnership must have a lawful object, and must be established for the common benefit of the partners.

When the dissolution of an unlawful partnership is decreed, the profits shall be given to charitable institutions of

the domicile of the partnership, or, in default of such, to those of the province.

Appellant's contention on this point is untenable. According to said article, no charitable institution is a necessary party in

the present case of determination of the rights of the parties. The action which may arise from said article, in the case of

unlawful partnership, is that for the recovery of the amounts paid by the member from those in charge of the

administration of said partnership, and it is not necessary for the said parties to base their action to the existence of the

partnership, but on the fact that of having contributed some money to the partnership capital. And hence, the charitable

institution of the domicile of the partnership, and in the default thereof, those of the province are not necessary parties in

this case. The article cited above permits no action for the purpose of obtaining the earnings made by the unlawful

partnership, during its existence as result of the business in which it was engaged, because for the purpose, as Manresa

remarks, the partner will have to base his action upon the partnership contract, which is to annul and without legal

existence by reason of its unlawful object; and it is self evident that what does not exist cannot be a cause of action.

Hence, paragraph 2 of the same article provides that when the dissolution of the unlawful partnership is decreed, the

profits cannot inure to the benefit of the partners, but must be given to some charitable institution.

169

We deem in pertinent to quote Manresa's commentaries on article 1666 at length, as a clear explanation of the scope and

spirit of the provision of the Civil Code which we are concerned. Commenting on said article Manresa, among other

things says:

When the subscriptions of the members have been paid to the management of the partnership, and employed by

the latter in transactions consistent with the purposes of the partnership may the former demand the return of the

reimbursement thereof from the manager or administrator withholding them?

Apropos of this, it is asserted: If the partnership has no valid existence, if it is considered juridically non-existent,

the contract entered into can have no legal effect; and in that case, how can it give rise to an action in favor of the

partners to judicially demand from the manager or the administrator of the partnership capital, each one's

contribution?

The authors discuss this point at great length, but Ricci decides the matter quite clearly, dispelling all doubts

thereon. He holds that the partner who limits himself to demanding only the amount contributed by him need not

resort to the partnership contract on which to base his action. And he adds in explanation that the partner makes

his contribution, which passes to the managing partner for the purpose of carrying on the business or industry

which is the object of the partnership; or in other words, to breathe the breath of life into a partnership contract

with an objection forbidden by law. And as said contrast does not exist in the eyes of the law, the purpose from

which the contribution was made has not come into existence, and the administrator of the partnership holding

said contribution retains what belongs to others, without any consideration; for which reason he is not bound to

return it and he who has paid in his share is entitled to recover it.

But this is not the case with regard to profits earned in the course of the partnership, because they do not

constitute or represent the partner's contribution but are the result of the industry, business or speculation which is

the object of the partnership, and therefor, in order to demand the proportional part of the said profits, the partner

would have to base his action on the contract which is null and void, since this partition or distribution of the

profits is one of the juridical effects thereof. Wherefore considering this contract asnon-existent, by reason of its

illicit object, it cannot give rise to the necessary action, which must be the basis of the judicial complaint.

Furthermore, it would be immoral and unjust for the law to permit a profit from an industry prohibited by it.

Hence the distinction made in the second paragraph of this article of this Code, providing that the profits obtained

by unlawful means shall not enrich the partners, but shall upon the dissolution of the partnership, be given to the

charitable institutions of the domicile of the partnership, or, in default of such, to those of the province.

This is a new rule, unprecedented by our law, introduced to supply an obvious deficiency of the former law,

which did not describe the purpose to which those profits denied the partners were to be applied, nor state what to

be done with them.

The profits are so applied, and not the contributions, because this would be an excessive and unjust sanction for,

as we have seen, there is no reason, in such a case, for depriving the partner of the portion of the capital that he

contributed, the circumstances of the two cases being entirely different.

Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to

be returned by the partners, because it only deals with the disposition of the profits; but the fact that said

contributions are not included in the disposal prescribed profits, shows that in consequences of said exclusion, the

general law must be followed, and hence the partners should reimburse the amount of their respective

contributions. Any other solution is immoral, and the law will not consent to the latter remaining in the possession

of the manager or administrator who has refused to return them, by denying to the partners the action to demand

them. (Manresa, Commentaries on the Spanish Civil Code, vol. XI, pp. 262-264)

170

.

G.R. No. L-35469 March 17, 1932

E. S. LYONS, plaintiff-appellant,

vs.

C. W. ROSENSTOCK, Executor of the Estate of Henry W. Elser, deceased, defendant-appellee.

STREET, J.:

This action was institute in the Court of First Instance of the City of Manila, by E. S. Lyons against C. W. Rosenstock, as

executor of the estate of H. W. Elser, deceased, consequent upon the taking of an appeal by the executor from the

allowance of the claim sued upon by the committee on claims in said estate. The purpose of the action is to recover four

hundred forty-six and two thirds shares of the stock of J. K. Pickering & Co., Ltd., together with the sum of about

P125,000, representing the dividends which accrued on said stock prior to October 21, 1926, with lawful interest. Upon

hearing the cause the trial court absolved the defendant executor from the complaint, and the plaintiff appealed.

Prior to his death on June 18, 1923, Henry W. Elser had been a resident of the City of Manila where he was engaged

during the years with which we are here concerned in buying, selling, and administering real estate. In several ventures

which he had made in buying and selling property of this kind the plaintiff, E. S. Lyons, had joined with him, the profits

being shared by the two in equal parts. In April, 1919, Lyons, whose regular vocation was that of a missionary, or

missionary agent, of the Methodist Episcopal Church, went on leave to the United States and was gone for nearly a year

and a half, returning on September 21, 1920. On the eve of his departure Elser made a written statements showing that

Lyons was, at that time, half owner with Elser of three particular pieces of real property. Concurrently with this act Lyons

execute in favor of Elser a general power of attorney empowering him to manage and dispose of said properties at will

and to represent Lyons fully and amply, to the mutual advantage of both. During the absence of Lyons two of the pieces

of property above referred to were sold by Elser, leaving in his hands a single piece of property located at 616-618 Carried

Street, in the City of Manila, containing about 282 square meters of land, with the improvements thereon.

In the spring of 1920 the attention of Elser was drawn to a piece of land, containing about 1,500,000 square meters, near

the City of Manila, and he discerned therein a fine opportunity for the promotion and development of a suburban

improvement. This property, which will be herein referred to as the San Juan Estate, was offered by its owners for

P570,000. To afford a little time for maturing his plans, Elser purchased an option on this property for P5,000, and when

this option was about to expire without his having been able to raise the necessary funds, he paid P15,000 more for an

extension of the option, with the understanding in both cases that, in case the option should be exercised, the amounts thus

paid should be credited as part of the first payment. The amounts paid for this option and its extension were supplied by

Elser entirely from his own funds. In the end he was able from his own means, and with the assistance which he obtained

from others, to acquire said estate. The amount required for the first payment was P150,000, and as Elser had available

only about P120,000, including the P20,000 advanced upon the option, it was necessary to raise the remainder by

obtaining a loan for P50,000. This amount was finally obtained from a Chinese merchant of the city named Uy Siuliong.

This loan was secured through Uy Cho Yee, a son of the lender; and in order to get the money it was necessary for Elser

not only to give a personal note signed by himself and his two associates in the projected enterprise, but also by the

Fidelity & Surety Company. The money thus raised was delivered to Elser by Uy Siuliong on June 24, 1920. With this

money and what he already had in bank Elser purchased the San Juan Estate on or about June 28, 1920. For the purpose of

the further development of the property a limited partnership had, about this time, been organized by Elser and three

associates, under the name of J. K. Pickering & Company; and when the transfer of the property was effected the deed

was made directly to this company. As Elser was the principal capitalist in the enterprise he received by far the greater

number of the shares issued, his portion amount in the beginning to 3,290 shares.

While these negotiations were coming to a head, Elser contemplated and hoped that Lyons might be induced to come in

with him and supply part of the means necessary to carry the enterprise through. In this connection it appears that on May

20, 1920, Elser wrote Lyons a letter, informing him that he had made an offer for a big subdivision and that, if it should be

171

acquired and Lyons would come in, the two would be well fixed. (Exhibit M-5.) On June 3, 1920, eight days before the

first option expired, Elser cabled Lyons that he had bought the San Juan Estate and thought it advisable for Lyons to

resign (Exhibit M-13), meaning that he should resign his position with the mission board in New York. On the same date

he wrote Lyons a letter explaining some details of the purchase, and added "have advised in my cable that you resign and I

hope you can do so immediately and will come and join me on the lines we have so often spoken about. . . . There is

plenty of business for us all now and I believe we have started something that will keep us going for some time." In one or

more communications prior to this, Elser had sought to impress Lyons with the idea that he should raise all the money he

could for the purpose of giving the necessary assistance in future deals in real estate.

The enthusiasm of Elser did not communicate itself in any marked degree to Lyons, and found him averse from joining in

the purchase of the San Juan Estate. In fact upon this visit of Lyons to the United States a grave doubt had arisen as to

whether he would ever return to Manila, and it was only in the summer of 1920 that the board of missions of his church

prevailed upon him to return to Manila and resume his position as managing treasurer and one of its trustees. Accordingly,

on June 21, 1920, Lyons wrote a letter from New York thanking Elser for his offer to take Lyons into his new project and

adding that from the standpoint of making money, he had passed up a good thing.

One source of embarrassment which had operated on Lyson to bring him to the resolution to stay out of this venture, was

that the board of mission was averse to his engaging in business activities other than those in which the church was

concerned; and some of Lyons' missionary associates had apparently been criticizing his independent commercial

activities. This fact was dwelt upon in the letter above-mentioned. Upon receipt of this letter Elser was of course informed

that it would be out of the question to expect assistance from Lyons in carrying out the San Juan project. No further efforts

to this end were therefore made by Elser.

When Elser was concluding the transaction for the purchase of the San Juan Estate, his book showed that he was indebted

to Lyons to the extent of, possibly, P11,669.72, which had accrued to Lyons from profits and earnings derived from other

properties; and when the J. K. Pickering & Company was organized and stock issued, Elser indorsed to Lyons 200 of the

shares allocated to himself, as he then believed that Lyons would be one of his associates in the deal. It will be noted that

the par value of these 200 shares was more than P8,000 in excess of the amount which Elser in fact owed to Lyons; and

when the latter returned to the Philippine Islands, he accepted these shares and sold them for his own benefit. It seems to

be supposed in the appellant's brief that the transfer of these shares to Lyons by Elser supplies some sort of basis for the

present action, or at least strengthens the considerations involved in a feature of the case to be presently explained. This

view is manifestly untenable, since the ratification of the transaction by Lyons and the appropriation by him of the shares

which were issued to him leaves no ground whatever for treating the transaction as a source of further equitable rights in

Lyons. We should perhaps add that after Lyons' return to the Philippine Islands he acted for a time as one of the members

of the board of directors of the J. K. Pickering & Company, his qualification for this office being derived precisely from

the ownership of these shares.

We now turn to the incident which supplies the main basis of this action. It will be remembered that, when Elser obtained

the loan of P50,000 to complete the amount needed for the first payment on the San Juan Estate, the lender, Uy Siuliong,

insisted that he should procure the signature of the Fidelity & Surety Co. on the note to be given for said loan. But before

signing the note with Elser and his associates, the Fidelity & Surety Co. insisted upon having security for the liability thus

assumed by it. To meet this requirements Elser mortgaged to the Fidelity & Surety Co. the equity of redemption in the

property owned by himself and Lyons on Carriedo Street. This mortgage was executed on June 30, 1920, at which time

Elser expected that Lyons would come in on the purchase of the San Juan Estate. But when he learned from the letter from

Lyons of July 21, 1920, that the latter had determined not to come into this deal, Elser began to cast around for means to

relieve the Carriedo property of the encumbrance which he had placed upon it. For this purpose, on September 9, 1920, he

addressed a letter to the Fidelity & Surety Co., asking it to permit him to substitute a property owned by himself at 644 M.

H. del Pilar Street, Manila, and 1,000 shares of the J. K. Pickering & Company, in lieu of the Carriedo property, as

security. The Fidelity & Surety Co. agreed to the proposition; and on September 15, 1920, Elser executed in favor of the

Fidelity & Surety Co. a new mortgage on the M. H. del Pillar property and delivered the same, with 1,000 shares of J. K.

Pickering & Company, to said company. The latter thereupon in turn executed a cancellation of the mortgage on the

Carriedo property and delivered it to Elser. But notwithstanding the fact that these documents were executed and

172

delivered, the new mortgage and the release of the old were never registered; and on September 25, 1920, thereafter, Elser

returned the cancellation of the mortgage on the Carriedo property and took back from the Fidelity & Surety Co. the new

mortgage on the M. H. del Pilar property, together with the 1,000 shares of the J. K. Pickering & Company which he had

delivered to it.

The explanation of this change of purpose is undoubtedly to be found in the fact that Lyons had arrived in Manila on

September 21, 1920, and shortly thereafter, in the course of a conversation with Elser told him to let the Carriedo

mortgage remain on the property ("Let the Carriedo mortgage ride"). Mrs. Elser testified to the conversation in which

Lyons used the words above quoted, and as that conversation supplies the most reasonable explanation of Elser's recession

from his purpose of relieving the Carriedo property, the trial court was, in our opinion, well justified in accepting as a

proven fact the consent of Lyons for the mortgage to remain on the Carriedo property. This concession was not only

reasonable under the circumstances, in view of the abundant solvency of Elser, but in view of the further fact that Elser

had given to Lyons 200 shares of the stock of the J. K. Pickering & Co., having a value of nearly P8,000 in excess of the

indebtedness which Elser had owed to Lyons upon statement of account. The trial court found in effect that the excess

value of these shares over Elser's actual indebtedness was conceded by Elser to Lyons in consideration of the assistance

that had been derived from the mortgage placed upon Lyon's interest in the Carriedo property. Whether the agreement was

reached exactly upon this precise line of thought is of little moment, but the relations of the parties had been such that it

was to be expected that Elser would be generous; and he could scarcely have failed to take account of the use he had made

of the joint property of the two.

As the development of the San Juan Estate was a success from the start, Elser paid the note of P50,000 to Uy Siuliong on

January 18, 1921, although it was not due until more than five months later. It will thus be seen that the mortgaging of the

Carriedo property never resulted in damage to Lyons to the extent of a single cent; and although the court refused to allow

the defendant to prove the Elser was solvent at this time in an amount much greater than the entire encumbrance placed

upon the property, it is evident that the risk imposed upon Lyons was negligible. It is also plain that no money actually

deriving from this mortgage was ever applied to the purchase of the San Juan Estate. What really happened was the Elser

merely subjected the property to a contingent liability, and no actual liability ever resulted therefrom. The financing of the

purchase of the San Juan Estate, apart from the modest financial participation of his three associates in the San Juan deal,

was the work of Elser accomplished entirely upon his own account.

The case for the plaintiff supposes that, when Elser placed a mortgage for P50,000 upon the equity of redemption in the

Carriedo property, Lyons, as half owner of said property, became, as it were, involuntarily the owner of an undivided

interest in the property acquired partly by that money; and it is insisted for him that, in consideration of this fact, he is

entitled to the four hundred forty-six and two-thirds shares of J. K. Pickering & Company, with the earnings thereon, as

claimed in his complaint.

Lyons tells us that he did not know until after Elser's death that the money obtained from Uy Siuliong in the manner

already explained had been used to held finance the purchase of the San Juan Estate. He seems to have supposed that the

Carried property had been mortgaged to aid in putting through another deal, namely, the purchase of a property referred to

in the correspondence as the "Ronquillo property"; and in this connection a letter of Elser of the latter part of May, 1920,

can be quoted in which he uses this language:

As stated in cablegram I have arranged for P50,000 loan on Carriedo property. Will use part of the money for

Ronquillo buy (P60,000) if the owner comes through.

Other correspondence shows that Elser had apparently been trying to buy the Ronquillo property, and Lyons leads us to

infer that he thought that the money obtained by mortgaging the Carriedo property had been used in the purchase of this

property. It doubtedless appeared so to him in the retrospect, but certain consideration show that he was inattentive to the

contents of the quotation from the letter above given. He had already been informed that, although Elser was angling for

the Ronquillo property, its price had gone up, thus introducing a doubt as to whether he could get it; and the quotation

above given shows that the intended use of the money obtained by mortgaging the Carriedo property was that only part of

the P50,000 thus obtained would be used in this way, if the deal went through. Naturally, upon the arrival of Lyons in

173

September, 1920, one of his first inquiries would have been, if he did not know before, what was the status of the

proposed trade for the Ronquillo property.

Elser's widow and one of his clerks testified that about June 15, 1920, Elser cabled Lyons something to this effect;: "I

have mortgaged the property on Carriedo Street, secured by my personal note. You are amply protected. I wish you to join

me in the San Juan Subdivision. Borrow all money you can." Lyons says that no such cablegram was received by him, and

we consider this point of fact of little moment, since the proof shows that Lyons knew that the Carriedo mortgage had

been executed, and after his arrival in Manila he consented for the mortgage to remain on the property until it was paid

off, as shortly occurred. It may well be that Lyons did not at first clearly understand all the ramifications of the situation,

but he knew enough, we think, to apprise him of the material factors in the situation, and we concur in the conclusion of

the trial court that Elser did not act in bad faith and was guilty of no fraud.

In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. If Elser had used any

money actually belonging to Lyons in this deal, he would under article 1724 of the Civil Code and article 264 of the Code

of Commerce, be obligated to pay interest upon the money so applied to his own use. Under the law prevailing in this

jurisdiction a trust does not ordinarily attach with respect to property acquired by a person who uses money belonging to

another (Martinez vs. Martinez, 1 Phil., 647; Enriquez vs. Olaguer, 25 Phil., 641.). Of course, if an actual relation of

partnership had existed in the money used, the case might be difference; and much emphasis is laid in the appellant's brief

upon the relation of partnership which, it is claimed, existed. But there was clearly no general relation of partnership,

under article 1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate, was not acting for any

partnership composed of himself and Lyons, and the law cannot be distorted into a proposition which would make Lyons

a participant in this deal contrary to his express determination.

It seems to be supposed that the doctrines of equity worked out in the jurisprudence of England and the United States with

reference to trust supply a basis for this action. The doctrines referred to operate, however, only where money belonging

to one person is used by another for the acquisition of property which should belong to both; and it takes but little

discernment to see that the situation here involved is not one for the application of that doctrine, for no money belonging

to Lyons or any partnership composed of Elser and Lyons was in fact used by Elser in the purchase of the San Juan Estate.

Of course, if any damage had been caused to Lyons by the placing of the mortgage upon the equity of redemption in the

Carriedo property, Elser's estate would be liable for such damage. But it is evident that Lyons was not prejudice by that

act.

The appellee insist that the trial court committed error in admitting the testimony of Lyons upon matters that passed

between him and Elser while the latter was still alive. While the admission of this testimony was of questionable

propriety, any error made by the trial court on this point was error without injury, and the determination of the question is

not necessary to this decision. We therefore pass the point without further discussion.

The judgment appealed from will be affirmed, and it is so ordered, with costs against the appellant.

174

G.R. No. 126881 October 3, 2000

HEIRS OF TAN ENG KEE, petitioners,

vs.

COURT OF APPEALS and BENGUET LUMBER COMPANY, represented by its President TAN ENG

LAY,respondents.

DE LEON, JR., J.:

In this petition for review on certiorari, petitioners pray for the reversal of the Decision1 dated March 13, 1996 of the

former Fifth Division2 of the Court of Appeals in CA-G.R. CV No. 47937, the dispositive portion of which states:

THE FOREGOING CONSIDERED, the appealed decision is hereby set aside, and the complaint dismissed.

The facts are:

Following the death of Tan Eng Kee on September 13, 1984, Matilde Abubo, the common-law spouse of the decedent,

joined by their children Teresita, Nena, Clarita, Carlos, Corazon and Elpidio, collectively known as herein petitioners

HEIRS OF TAN ENG KEE, filed suit against the decedent's brother TAN ENG LAY on February 19, 1990. The

complaint,3 docketed as Civil Case No. 1983-R in the Regional Trial Court of Baguio City was for accounting, liquidation

and winding up of the alleged partnership formed after World War II between Tan Eng Kee and Tan Eng Lay. On March

18, 1991, the petitioners filed an amended complaint4 impleading private respondent herein BENGUET LUMBER

COMPANY, as represented by Tan Eng Lay. The amended complaint was admitted by the trial court in its Order dated

May 3, 1991.5

The amended complaint principally alleged that after the second World War, Tan Eng Kee and Tan Eng Lay, pooling their

resources and industry together, entered into a partnership engaged in the business of selling lumber and hardware and

construction supplies. They named their enterprise "Benguet Lumber" which they jointly managed until Tan Eng Kee's

death. Petitioners herein averred that the business prospered due to the hard work and thrift of the alleged partners.

However, they claimed that in 1981, Tan Eng Lay and his children caused the conversion of the partnership "Benguet

Lumber" into a corporation called "Benguet Lumber Company." The incorporation was purportedly a ruse to deprive Tan

Eng Kee and his heirs of their rightful participation in the profits of the business. Petitioners prayed for accounting of the

partnership assets, and the dissolution, winding up and liquidation thereof, and the equal division of the net assets of

Benguet Lumber.

After trial, Regional Trial Court of Baguio City, Branch 7 rendered judgment6 on April 12, 1995, to wit:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered:

a) Declaring that Benguet Lumber is a joint venture which is akin to a particular partnership;

b) Declaring that the deceased Tan Eng Kee and Tan Eng Lay are joint adventurers and/or partners in a business

venture and/or particular partnership called Benguet Lumber and as such should share in the profits and/or losses

of the business venture or particular partnership;

c) Declaring that the assets of Benguet Lumber are the same assets turned over to Benguet Lumber Co. Inc. and as

such the heirs or legal representatives of the deceased Tan Eng Kee have a legal right to share in said assets;

d) Declaring that all the rights and obligations of Tan Eng Kee as joint adventurer and/or as partner in a particular

partnership have descended to the plaintiffs who are his legal heirs.

175

e) Ordering the defendant Tan Eng Lay and/or the President and/or General Manager of Benguet Lumber

Company Inc. to render an accounting of all the assets of Benguet Lumber Company, Inc. so the plaintiffs know

their proper share in the business;

f) Ordering the appointment of a receiver to preserve and/or administer the assets of Benguet Lumber Company,

Inc. until such time that said corporation is finally liquidated are directed to submit the name of any person they

want to be appointed as receiver failing in which this Court will appoint the Branch Clerk of Court or another one

who is qualified to act as such.

g) Denying the award of damages to the plaintiffs for lack of proof except the expenses in filing the instant case.

h) Dismissing the counter-claim of the defendant for lack of merit.

SO ORDERED.

Private respondent sought relief before the Court of Appeals which, on March 13, 1996, rendered the assailed decision

reversing the judgment of the trial court. Petitioners' motion for reconsideration7 was denied by the Court of Appeals in a

Resolution8 dated October 11, 1996.

Hence, the present petition.

As a side-bar to the proceedings, petitioners filed Criminal Case No. 78856 against Tan Eng Lay and Wilborn Tan for the

use of allegedly falsified documents in a judicial proceeding. Petitioners complained that Exhibits "4" to "4-U" offered by

the defendants before the trial court, consisting of payrolls indicating that Tan Eng Kee was a mere employee of Benguet

Lumber, were fake, based on the discrepancy in the signatures of Tan Eng Kee. They also filed Criminal Cases Nos.

78857-78870 against Gloria, Julia, Juliano, Willie, Wilfredo, Jean, Mary and Willy, all surnamed Tan, for alleged

falsification of commercial documents by a private individual. On March 20, 1999, the Municipal Trial Court of Baguio

City, Branch 1, wherein the charges were filed, rendered judgment9 dismissing the cases for insufficiency of evidence.

In their assignment of errors, petitioners claim that:

I

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP

BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE: (A) THERE WAS

NO FIRM ACCOUNT; (B) THERE WAS NO FIRM LETTERHEADS SUBMITTED AS EVIDENCE; (C)

THERE WAS NO CERTIFICATE OF PARTNERSHIP; (D) THERE WAS NO AGREEMENT AS TO

PROFITS AND LOSSES; AND (E) THERE WAS NO TIME FIXED FOR THE DURATION OF THE

PARTNERSHIP (PAGE 13, DECISION).

II

THE HONORABLE COURT OF APPEALS ERRED IN RELYING SOLELY ON THE SELF-SERVING

TESTIMONY OF RESPONDENT TAN ENG LAY THAT BENGUET LUMBER WAS A SOLE

PROPRIETORSHIP AND THAT TAN ENG KEE WAS ONLY AN EMPLOYEE THEREOF.

III

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE FOLLOWING FACTS

WHICH WERE DULY SUPPORTED BY EVIDENCE OF BOTH PARTIES DO NOT SUPPORT THE

176

EXISTENCE OF A PARTNERSHIP JUST BECAUSE THERE WAS NO ARTICLES OF PARTNERSHIP

DULY RECORDED BEFORE THE SECURITIES AND EXCHANGE COMMISSION:

a. THAT THE FAMILIES OF TAN ENG KEE AND TAN ENG LAY WERE ALL LIVING AT THE

BENGUET LUMBER COMPOUND;

b. THAT BOTH TAN ENG LAY AND TAN ENG KEE WERE COMMANDING THE EMPLOYEES

OF BENGUET LUMBER;

c. THAT BOTH TAN ENG KEE AND TAN ENG LAY WERE SUPERVISING THE EMPLOYEES

THEREIN;

d. THAT TAN ENG KEE AND TAN ENG LAY WERE THE ONES DETERMINING THE PRICES OF

STOCKS TO BE SOLD TO THE PUBLIC; AND

e. THAT TAN ENG LAY AND TAN ENG KEE WERE THE ONES MAKING ORDERS TO THE

SUPPLIERS (PAGE 18, DECISION).

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP

JUST BECAUSE THE CHILDREN OF THE LATE TAN ENG KEE: ELPIDIO TAN AND VERONICA CHOI,

TOGETHER WITH THEIR WITNESS BEATRIZ TANDOC, ADMITTED THAT THEY DO NOT KNOW

WHEN THE ESTABLISHMENT KNOWN IN BAGUIO CITY AS BENGUET LUMBER WAS STARTED AS

A PARTNERSHIP (PAGE 16-17, DECISION).

V

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THERE WAS NO PARTNERSHIP

BETWEEN THE LATE TAN ENG KEE AND HIS BROTHER TAN ENG LAY BECAUSE THE PRESENT

CAPITAL OR ASSETS OF BENGUET LUMBER IS DEFINITELY MORE THAN P3,000.00 AND AS SUCH

THE EXECUTION OF A PUBLIC INSTRUMENT CREATING A PARTNERSHIP SHOULD HAVE BEEN

MADE AND NO SUCH PUBLIC INSTRUMENT ESTABLISHED BY THE APPELLEES (PAGE 17,

DECISION).

As a premise, we reiterate the oft-repeated rule that findings of facts of the Court of Appeals will not be disturbed on

appeal if such are supported by the evidence.10

Our jurisdiction, it must be emphasized, does not include review of factual

issues. Thus:

Filing of petition with Supreme Court. — A party desiring to appeal by certiorari from a judgment or final order

or resolution of the Court of Appeals, the Sandiganbayan, the Regional Trial Court or other courts whenever

authorized by law, may file with the Supreme Court a verified petition for review on certiorari. The petition shall

raise only questions of law which must be distinctly set forth.11

[emphasis supplied]

Admitted exceptions have been recognized, though, and when present, may compel us to analyze the evidentiary basis on

which the lower court rendered judgment. Review of factual issues is therefore warranted:

(1) when the factual findings of the Court of Appeals and the trial court are contradictory;

(2) when the findings are grounded entirely on speculation, surmises, or conjectures;

177

(3) when the inference made by the Court of Appeals from its findings of fact is manifestly mistaken, absurd, or

impossible;

(4) when there is grave abuse of discretion in the appreciation of facts;

(5) when the appellate court, in making its findings, goes beyond the issues of the case, and such findings are

contrary to the admissions of both appellant and appellee;

(6) when the judgment of the Court of Appeals is premised on a misapprehension of facts;

(7) when the Court of Appeals fails to notice certain relevant facts which, if properly considered, will justify a

different conclusion;

(8) when the findings of fact are themselves conflicting;

(9) when the findings of fact are conclusions without citation of the specific evidence on which they are based;

and

(10) when the findings of fact of the Court of Appeals are premised on the absence of evidence but such findings

are contradicted by the evidence on record.12

In reversing the trial court, the Court of Appeals ruled, to wit:

We note that the Court a quo over extended the issue because while the plaintiffs mentioned only the existence of

a partnership, the Court in turn went beyond that by justifying the existence of a joint venture.

When mention is made of a joint venture, it would presuppose parity of standing between the parties, equal

proprietary interest and the exercise by the parties equally of the conduct of the business, thus:

xxx xxx xxx

We have the admission that the father of the plaintiffs was not a partner of the Benguet Lumber before the war.

The appellees however argued that (Rollo, p. 104; Brief, p. 6) this is because during the war, the entire stocks of

the pre-war Benguet Lumber were confiscated if not burned by the Japanese. After the war, because of the

absence of capital to start a lumber and hardware business, Lay and Kee pooled the proceeds of their individual

businesses earned from buying and selling military supplies, so that the common fund would be enough to form a

partnership, both in the lumber and hardware business. That Lay and Kee actually established the Benguet

Lumber in Baguio City, was even testified to by witnesses. Because of the pooling of resources, the post-war

Benguet Lumber was eventually established. That the father of the plaintiffs and Lay were partners, is obvious

from the fact that: (1) they conducted the affairs of the business during Kee's lifetime, jointly, (2) they were the

ones giving orders to the employees, (3) they were the ones preparing orders from the suppliers, (4) their families

stayed together at the Benguet Lumber compound, and (5) all their children were employed in the business in

different capacities.

xxx xxx xxx

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm account, no firm

letterheads submitted as evidence, no certificate of partnership, no agreement as to profits and losses, and no time

fixed for the duration of the partnership. There was even no attempt to submit an accounting corresponding to the

period after the war until Kee's death in 1984. It had no business book, no written account nor any memorandum

for that matter and no license mentioning the existence of a partnership [citation omitted].

178

Also, the exhibits support the establishment of only a proprietorship. The certification dated March 4, 1971,

Exhibit "2", mentioned co-defendant Lay as the only registered owner of the Benguet Lumber and Hardware. His

application for registration, effective 1954, in fact mentioned that his business started in 1945 until 1985

(thereafter, the incorporation). The deceased, Kee, on the other hand, was merely an employee of the Benguet

Lumber Company, on the basis of his SSS coverage effective 1958, Exhibit "3". In the Payrolls, Exhibits "4" to

"4-U", inclusive, for the years 1982 to 1983, Kee was similarly listed only as an employee; precisely, he was on

the payroll listing. In the Termination Notice, Exhibit "5", Lay was mentioned also as the proprietor.

xxx xxx xxx

We would like to refer to Arts. 771 and 772, NCC, that a partner [sic] may be constituted in any form, but when

an immovable is constituted, the execution of a public instrument becomes necessary. This is equally true if the

capitalization exceeds P3,000.00, in which case a public instrument is also necessary, and which is to be recorded

with the Securities and Exchange Commission. In this case at bar, we can easily assume that the business

establishment, which from the language of the appellees, prospered (pars. 5 & 9, Complaint), definitely exceeded

P3,000.00, in addition to the accumulation of real properties and to the fact that it is now a compound. The

execution of a public instrument, on the other hand, was never established by the appellees.

And then in 1981, the business was incorporated and the incorporators were only Lay and the members of his

family. There is no proof either that the capital assets of the partnership, assuming them to be in existence, were

maliciously assigned or transferred by Lay, supposedly to the corporation and since then have been treated as a

part of the latter's capital assets, contrary to the allegations in pars. 6, 7 and 8 of the complaint.

These are not evidences supporting the existence of a partnership:

1) That Kee was living in a bunk house just across the lumber store, and then in a room in the bunk house in

Trinidad, but within the compound of the lumber establishment, as testified to by Tandoc; 2) that both Lay and

Kee were seated on a table and were "commanding people" as testified to by the son, Elpidio Tan; 3) that both

were supervising the laborers, as testified to by Victoria Choi; and 4) that Dionisio Peralta was supposedly being

told by Kee that the proceeds of the 80 pieces of the G.I. sheets were added to the business.

Partnership presupposes the following elements [citation omitted]: 1) a contract, either oral or written. However,

if it involves real property or where the capital is P3,000.00 or more, the execution of a contract is necessary; 2)

the capacity of the parties to execute the contract; 3) money property or industry contribution; 4) community of

funds and interest, mentioning equality of the partners or one having a proportionate share in the benefits; and 5)

intention to divide the profits, being the true test of the partnership. The intention to join in the business venture

for the purpose of obtaining profits thereafter to be divided, must be established. We cannot see these elements

from the testimonial evidence of the appellees.

As can be seen, the appellate court disputed and differed from the trial court which had adjudged that TAN ENG KEE and

TAN ENG LAY had allegedly entered into a joint venture. In this connection, we have held that whether a partnership

exists is a factual matter; consequently, since the appeal is brought to us under Rule 45, we cannot entertain inquiries

relative to the correctness of the assessment of the evidence by the court a quo.13

Inasmuch as the Court of Appeals and

the trial court had reached conflicting conclusions, perforce we must examine the record to determine if the reversal was

justified.

The primordial issue here is whether Tan Eng Kee and Tan Eng Lay were partners in Benguet Lumber. A contract of

partnership is defined by law as one where:

. . . 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.

179

Two or more persons may also form a partnership for the exercise of a profession.14

Thus, in order to constitute a partnership, it must be established that (1) two or more persons bound themselves to

contribute money, property, or industry to a common fund, and (2) they intend to divide the profits among

themselves.15

The agreement need not be formally reduced into writing, since statute allows the oral constitution

of a partnership, save in two instances: (1) when immovable property or real rights are contributed,16

and (2) when

the partnership has a capital of three thousand pesos or more.17

In both cases, a public instrument is required.18

An

inventory to be signed by the parties and attached to the public instrument is also indispensable to the validity of

the partnership whenever immovable property is contributed to the partnership.19

The trial court determined that Tan Eng Kee and Tan Eng Lay had entered into a joint venture, which it said is akin to a

particular partnership.20

A particular partnership is distinguished from a joint adventure, to wit:

(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no

firm name and no legal personality. In a joint account, the participating merchants can transact business under

their own name, and can be individually liable therefor.

(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business

of pursuing to a successful termination may continue for a number of years; a partnership generally relates to a

continuing business of various transactions of a certain kind.21

A joint venture "presupposes generally a parity of standing between the joint co-ventures or partners, in which each party

has an equal proprietary interest in the capital or property contributed, and where each party exercises equal rights in the

conduct of the business."22

Nonetheless, in Aurbach, et. al. v. Sanitary Wares Manufacturing Corporation, et. al.,23

we

expressed the view that a joint venture may be likened to a particular partnership, thus:

The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been

generally understood to mean an organization formed for some temporary purpose. (Gates v. Megargel, 266 Fed.

811 [1920]) It is hardly distinguishable from the partnership, since their elements are similar — community of

interest in the business, sharing of profits and losses, and a mutual right of control. (Blackner v. McDermott, 176

F. 2d. 498, [1949]; Carboneau v. Peterson, 95 P.2d., 1043 [1939]; Buckley v. Chadwick, 45 Cal. 2d. 183, 288

P.2d. 12 289 P.2d. 242 [1955]). The main distinction cited by most opinions in common law jurisdiction is that

the partnership contemplates a general business with some degree of continuity, while the joint venture is formed

for the execution of a single transaction, and is thus of a temporary nature. (Tufts v. Mann. 116 Cal. App. 170, 2

P. 2d. 500 [1931]; Harmon v. Martin, 395 Ill. 595, 71 NE 2d. 74 [1947]; Gates v. Megargel 266 Fed. 811 [1920]).

This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be

particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783,

Civil Code). It would seem therefore that under Philippine law, a joint venture is a form of partnership and should

thus be governed by the law of partnerships. The Supreme Court has however recognized a distinction between

these two business forms, and has held that although a corporation cannot enter into a partnership contract, it may

however engage in a joint venture with others. (At p. 12, Tuazon v. Bolaños, 95 Phil. 906 [1954]) (Campos and

Lopez-Campos Comments, Notes and Selected Cases, Corporation Code 1981).

Undoubtedly, the best evidence would have been the contract of partnership itself, or the articles of partnership but there

is none. The alleged partnership, though, was never formally organized. In addition, petitioners point out that the New

Civil Code was not yet in effect when the partnership was allegedly formed sometime in 1945, although the contrary may

well be argued that nothing prevented the parties from complying with the provisions of the New Civil Code when it took

effect on August 30, 1950. But all that is in the past. The net effect, however, is that we are asked to determine whether a

partnership existed based purely on circumstantial evidence. A review of the record persuades us that the Court of

Appeals correctly reversed the decision of the trial court. The evidence presented by petitioners falls short of the quantum

of proof required to establish a partnership.

180

Unfortunately for petitioners, Tan Eng Kee has passed away. Only he, aside from Tan Eng Lay, could have expounded on

the precise nature of the business relationship between them. In the absence of evidence, we cannot accept as an

established fact that Tan Eng Kee allegedly contributed his resources to a common fund for the purpose of establishing a

partnership. The testimonies to that effect of petitioners' witnesses is directly controverted by Tan Eng Lay. It should be

noted that it is not with the number of witnesses wherein preponderance lies;24

the quality of their testimonies is to be

considered. None of petitioners' witnesses could suitably account for the beginnings of Benguet Lumber Company, except

perhaps for Dionisio Peralta whose deceased wife was related to Matilde Abubo.25

He stated that when he met Tan Eng

Kee after the liberation, the latter asked the former to accompany him to get 80 pieces of G.I. sheets supposedly owned by

both brothers.26

Tan Eng Lay, however, denied knowledge of this meeting or of the conversation between Peralta and his

brother.27

Tan Eng Lay consistently testified that he had his business and his brother had his, that it was only later on that

his said brother, Tan Eng Kee, came to work for him. Be that as it may, co-ownership or co-possession (specifically here,

of the G.I. sheets) is not an indicium of the existence of a partnership.28

Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng

Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses.29

Each

has the right to demand an accounting as long as the partnership exists.30

We have allowed a scenario wherein "[i]f

excellent relations exist among the partners at the start of the business and all the partners are more interested in seeing the

firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible."31

But in the

situation in the case at bar, the deferment, if any, had gone on too long to be plausible. A person is presumed to take

ordinary care of his concerns.32

As we explained in another case:

In the first place, plaintiff did not furnish the supposed P20,000.00 capital. In the second place, she did not furnish

any help or intervention in the management of the theatre. In the third place, it does not appear that she has even

demanded from defendant any accounting of the expenses and earnings of the business. Were she really a partner,

her first concern should have been to find out how the business was progressing, whether the expenses were

legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts that a

partner should have done; all that she did was to receive her share of P3,000.00 a month, which cannot be

interpreted in any manner than a payment for the use of the premises which she had leased from the owners.

Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"),

which shows that both parties considered this offer as the real contract between them.33

[emphasis supplied]

A demand for periodic accounting is evidence of a partnership.34

During his lifetime, Tan Eng Kee appeared never to have

made any such demand for accounting from his brother, Tang Eng Lay.

This brings us to the matter of Exhibits "4" to "4-U" for private respondents, consisting of payrolls purporting to show that

Tan Eng Kee was an ordinary employee of Benguet Lumber, as it was then called. The authenticity of these documents

was questioned by petitioners, to the extent that they filed criminal charges against Tan Eng Lay and his wife and

children. As aforesaid, the criminal cases were dismissed for insufficiency of evidence. Exhibits "4" to "4-U" in fact

shows that Tan Eng Kee received sums as wages of an employee. In connection therewith, Article 1769 of the Civil Code

provides:

In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third

persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-

possessors do or do not share any profits made by the use of the property;

(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them

have a joint or common right or interest in any property which the returns are derived;

181

(4) The receipt by a person of a share of the profits of a business is a prima facie evidence that he is a partner in

the business, but no such inference shall be drawn if such profits were received in payment:

(a) As a debt by installment or otherwise;

(b) As wages of an employee or rent to a landlord;

(c) As an annuity to a widow or representative of a deceased partner;

(d) As interest on a loan, though the amount of payment vary with the profits of the business;

(e) As the consideration for the sale of a goodwill of a business or other property by installments or

otherwise.

In the light of the aforequoted legal provision, we conclude that Tan Eng Kee was only an employee, not a partner. Even

if the payrolls as evidence were discarded, petitioners would still be back to square one, so to speak, since they did not

present and offer evidence that would show that Tan Eng Kee received amounts of money allegedly representing his share

in the profits of the enterprise. Petitioners failed to show how much their father, Tan Eng Kee, received, if any, as his

share in the profits of Benguet Lumber Company for any particular period. Hence, they failed to prove that Tan Eng Kee

and Tan Eng Lay intended to divide the profits of the business between themselves, which is one of the essential features

of a partnership.

Nevertheless, petitioners would still want us to infer or believe the alleged existence of a partnership from this set of

circumstances: that Tan Eng Lay and Tan Eng Kee were commanding the employees; that both were supervising the

employees; that both were the ones who determined the price at which the stocks were to be sold; and that both placed

orders to the suppliers of the Benguet Lumber Company. They also point out that the families of the brothers Tan Eng

Kee and Tan Eng Lay lived at the Benguet Lumber Company compound, a privilege not extended to its ordinary

employees.

However, private respondent counters that:

Petitioners seem to have missed the point in asserting that the above enumerated powers and privileges granted in

favor of Tan Eng Kee, were indicative of his being a partner in Benguet Lumber for the following reasons:

(i) even a mere supervisor in a company, factory or store gives orders and directions to his subordinates. So long,

therefore, that an employee's position is higher in rank, it is not unusual that he orders around those lower in rank.

(ii) even a messenger or other trusted employee, over whom confidence is reposed by the owner, can order

materials from suppliers for and in behalf of Benguet Lumber. Furthermore, even a partner does not necessarily

have to perform this particular task. It is, thus, not an indication that Tan Eng Kee was a partner.

(iii) although Tan Eng Kee, together with his family, lived in the lumber compound and this privilege was not

accorded to other employees, the undisputed fact remains that Tan Eng Kee is the brother of Tan Eng Lay.

Naturally, close personal relations existed between them. Whatever privileges Tan Eng Lay gave his brother, and

which were not given the other employees, only proves the kindness and generosity of Tan Eng Lay towards a

blood relative.

(iv) and even if it is assumed that Tan Eng Kee was quarreling with Tan Eng Lay in connection with the pricing

of stocks, this does not adequately prove the existence of a partnership relation between them. Even highly

confidential employees and the owners of a company sometimes argue with respect to certain matters which, in

no way indicates that they are partners as to each other.35

182

In the instant case, we find private respondent's arguments to be well-taken. Where circumstances taken singly may be

inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these circumstances may be such

as to support a finding of the existence of the parties' intent.36

Yet, in the case at bench, even the aforesaid circumstances

when taken together are not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in

the operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a member of

the family, he occupied a niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable

were he not kin, such as his residence in the Benguet Lumber Company compound. He would have moral, if not actual,

superiority over his fellow employees, thereby entitling him to exercise powers of supervision. It may even be that among

his duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical

nexus to the conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a business

organized and run as informally as Benguet Lumber Company.

There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the

petition must fail.

WHEREFORE, the petition is hereby denied, and the appealed decision of the Court of Appeals is

herebyAFFIRMED in toto. No pronouncement as to costs.

183

G.R. No. 44119 March 30, 1937

SHARRUF & CO., known also as SHARRUF & ESKENAZI, SALOMON SHARRUF and ELIAS

ESKENAZI,plaintiffs-appellees,

vs.

BALOISE FIRE INSURANCE CO., SUN INSURANCE OFFICE, LTD., and SPRINGFIELD INSURANCE CO.,

represented by KUENZLE & STREIFF, INC., defendants-appellants.

VILLA-REAL, J.:

This is an appeal taken by the defendant companies Baloise Fire Insurance Co., Sun Insurance Office Ltd., and

Springfield Insurance Co., represented by Kuenzle & Streiff, Inc., from the judgment of the Court of First instance of

Manila, the dispositive part of which reads as follows:

Wherefore, judgment is rendered ordering the defendant insurance companies to pay to the plantiffs Salomon

Sharruf and Elias Eskenazi the total amount of P40,000 plus interest thereon at 8 per cent per annum from the date

of the filing of the complaint, with the costs of the trial. The defendants shall pay this judgment jointly in

proportion to the respective policies issued by them. The plaintiffs Salomon Sharruf and Elias Eskenazi shall

recover the judgment share and share alike, deducting from the portion of the plaintiff Elias Eskenazi the sum of

P3,000 which belongs and shall turned over to the intervenor E. Awad & Co., Inc. It is so ordered.

In support of their appeal the appellants assign the following alleged errors as committed by the court a quo in its decision

in question, to wit:

1. the lower court erred in holding, that Salomon Sharruf and Elias Eskenazi had personality to sue, either as a

partnership or individually, and therefore, an insurable interest.

2. The lower court erred in holding, that the fire that broke out in the premises at Nos. 299-301 Muelle de la

Industria of this city, occupied by the alleged plaintiffs, was not of incendiary origin.

3. The lower court erred in holding, that the "idea of using petroleum in the fire in question, surged after the fire

for the purpose of making it appear as a part of the evidence."

4. The lower court erred in holding, that the claim of loss filed by the alleged plaintiffs was not fraudulent, but

merely inaccurate, due to the peculiar circumstances of the case, such as the loss of invoices and sales-slips.

5. The lower court erred in sentencing the defendants to pay jointly to the alleged plaintiffs the sum of P40,000,

with interest thereon at the rate of 8 per cent year and costs.

6. The lower court erred in overruling defendants' motion for new trial and in failing to dismiss the case

altogether, with costs against the alleged plaintiffs.

The preponderance of the evidence shows the existence of the following facts:.

In the months of June and July 1933, the plaintiffs Salomon Sharruf and Elias Eskenazi were doing business under the

firm name of Sharruf & Co. As they had applied to the defendant companies for insurance of the merchandise they had in

stock, the latter sent their representative P. E. Schiess to examine and asses it. On July 25, 1933, the defendant insurance

companies issued insurance policies Exhibits D, E, and F in the total amount of P25,000 in the name of Sharruf & Co.

issued an additional policy (Exhibit G) in the sum of P15,000 in favor of said firm Sharruf & Co., raising the total amount

of the insurance on said merchandise to P40,000. On August 26, 1933, the plaintiffs executed a contract of partnership

between themselves (Exhibit A) wherein they substituted the name of Sharruf & Co. with the Sharruf & Eskenazi, stating

184

that Elias Eskenazi contributed to the partnership, as his capital, goods valued at P26,299.94 listed in an inventory Exhibit

B. It was likewise stated in said contract that Salomon Sharruf brought to said partnership, as his capital, goods valued at

P24,205.10, appearing in the inventories Exhibit C and C-1. The total value of the merchandise contributed by both

partners amounted to P50,505.04. Part of said merchandise, most of which were textiles, was sold for P8,000, leaving

goods worth P43,000. In all there were from 60 to 70 bolts of silk. All the goods, most of which were aluminum kitchen

utensils, various porcelain and glass wares, and other articles of stucco, were contained in about 39 or 40 cases. The last

time the plaintiffs were in the building was on September 19, 1933, at 4 o'clock in the afternoon. Up to the month of

September 1933, about 30 or 40 cases of merchandise belonging to the plaintiffs were in Robles' garage at No. 1012

Mabini Street.

At about 12.41 o'clock on the morning of September 22, 1933, the fire alarm bell rang in the different fire stations of the

city. The firemen of the San Nicolas Fire Station, headed by Captain Charles A. Baker, were the first to arrive at the scene

of the fire, followed by Captain Thomas F. McIntyre of the Santa Cruz Fire Station, who arrived at 12.44 o'clock. Having

found the door at No. 301, Muelle de la Industria Street, where the building was in flames, locked, the firemen pumped

water on the upper part of the building and later broke open the door through which they an entered the premises. They

then saw an inflamed liquid flowing towards the sidewalk, the flames thereon blazing more intensely every time water fell

on them. The liquid apparently came from under the staircase of said floor. They likewise noted that the entire space

occupied by the staircase was in flames except the adjoining room. After the fire had been extinguished, an earthen pot

(Exhibit 15) containing ashes and the residue of a certain substance, all of which smelled of petroleum, was found by

detective Manalo near the railing of the stairway of the second floor. At about 8.30 o'clock that same morning, detective

Irada found nother earthen pot (Exhibit 16), one-fourth full of water smelled of petroleum, under the staircase of the first

floor; straw and excelsior, that also smelled of petroleum, around said pot, a red rag (Exhibit 18) in front of the toilet, and

a towel which also smelled of petroleum can, Exhibit 21. On the following day, September 23, 1933, photographs were

taken of the condition of the different parts of the building and of the goods found therein. Said photographs are: Exhibit

1, showing the interior of the first floor partially burned, with the staircase, the doorway, the wooden partition wall and

pieces of wood scattered on the floor supposed to be from the door that was demolished; Exhibit 2, showing about 8 or 9

scorched cases, some closed and others open; Exhibit 3, showing the space or hall of the upper floor partially damaged by

the fire at the place occupied by the staircase, with chairs piled up and unburnt, pieces of wood and debris apparently from

the cement partition wall beside the staircase and the attic; Exhibit 4, showing the same space taken from another angle,

with the partition wall of cement and stone and some broken railings of the stairways; Exhibit 5, showing a room with

partially burnt partition wall, with a wardrobe and a table in the background, another table in the center, a showcase near

the wall with porcelain and iron articles on top thereof and fallen and burnt window shutters on the floor; Exhibit 6,

showing an open unburnt showcase containing necklaces with limitation stones and other jewelry; Exhibit 7, showing

piled up chairs and boxes and the burned and destroyed upper part of the partition wall and attic; Exhibit 8, presenting a

showcase with a burnt top, containing kitchen utensils, tableware, dinner pails and other articles; Exhibit 9, presenting a

half-open trunk with protruding ends of cloth, other pieces of cloth scattered on the floor, a step of the staircase and a

bench; Exhibit 10, showing the partially destroyed attic and wires wound around the beams; Exhibit 11, presenting

another view of the same attic from another angle. On the 27th of said month and year, the following photographs were

taken: Exhibit 12, presenting a close-up of the beams and electric wiring on September 25, 1933, was of the opinion that

the wires wound around the beam and a nail might have caused the fire, but he could not assure whether any of the wires

was burned due to an electrical discharge the passed through it, or whether or not the fire started from the lighting system.

In the burned building the plaintiffs kept petroleum used for cleaning the floor.

The first question to be decided in the present appeal, which is raised in the first assignment of alleged error, is whether or

not Salomon Sharruf and Elias Eskenazi had juridical personality to bring this action, either individually or collectively,

and whether or not they had insurable interest.

As already seen, Salomon Sharruf and Elias Eskenazi were doing business under the firm name of Sharruf & Co. in whose

name the insurance policies were issued, Elias Eskenazi having paid the corresponding premiums.

In the case of Lim Cuan Sy vs. Northern Assurance Co. (55 Phil., 248), this court said:

185

A policy insuring merchandise against fire is not invalidated by the fact that the name of the insured in the policy

is incorrectly written "Lim Cuan Sy" instead of "Lim Cuan Sy & Co.", the latter being the proper legal

designation of the firm, where it appears that the designation "Lim Cuan Sy" was commonly used as the name of

the firm in its business dealings and that the error in the designation of the insured in the policy was not due to

any fraudulent intent on the part of the latter and did not mislead the insurer as to the extent of the liability

assumed.

In the present case, while it is true that at the beginning the plaintiffs had been doing business in said name of "Sharruf &

Co.", insuring their business in said name, and upon executing the contract of partnership (exhibit A) on August 26, 1933,

they changed the title thereof to "Sharruf & Eskenazi," the membership of the partnership in question remained

unchanged, the same and only members of the former, Salomon Sharruf and Elias Eskenazi, being the ones composing the

latter, and it does not appear that in changing the title of the partnership they had the intention of defrauding the herein

defendant insurance companies. Therefore, under the above-cited doctrine the responsibility of said defendants to the

plaintiffs by virtue of the respective insurance policies has not been altered. If this is true, the plaintiffs have juridical

personality to bring this action.

The second question to be decided is that raised in the second assignment of alleged error, which consists in whether or

not the fire which broke out in the building at Nos. 299-301 Muelle de la Industria, occupied by the plaintiffs, is of

incentiary origin.

In maintaining the affirmative, the appellants call attention to the earthen pots Exhibits 15 and 16, the first found by

detective Manalo beside the railing of the stairways of the upper floor and the second found by detective Irada on the first

floor, both containing liquid, ashes and other residues which smelled of petroleum; a red rag (Exhibit 18) found by

detective Irada in front of the toilet; the partially burnt box (Exhibit 20); and the old can (Exhibit 21) containing garbage.

The fact that the liquid found by the detectives in the earthen jars smelled of petroleum, does not constitute conclusive

evidence that they had been used as containers for petroleum to burn the house. Said smell could have very well come the

strips of China wood of which boxes from abroad are made, the resin of which smells of petroleum, or from the rags

found therein which might have been used to clean the floor by saturating them with petroleum. There being petroleum

for cleaning the floor in the building, it is not strange that when the house caught fire the petroleum also caught fire, the

flames floating on the water coming out from under the door from the pumps. There is neither direct nor strong

circumstantial evidence that the plaintiffs personally or through their agents placed petroleum in the building in order to

burn it, because it was locked on the outside and nobody was staying therein. As it cannot be assumed that the petroleum

might have burned by itself, it is probable that the fire might have originated from the electric wiring, although electrical

engineer Mora stated that he could not assure whether any of the wires was burned due to an electric discharge passing

through it, or whether or not the fire was caused by the lighting system.

Upon consideration of all the evidence and circumstances surrounding the fire, this court finds no evidence sufficient to

warrant a finding that the plaintiffs are responsible for the fire.

With respect to the question whether or not the claim of loss filed by the plaintiffs is fraudulent, it is alleged by them that

the total value of the textiles contained in cases deposited inside the building when the partnership Sharruf & Eskenazi

was formed was P12,000; that of the fancy jewelry with imitation stones from P15,000 to P17,000, and that of the kitchen

utensils and tableware made of aluminum, bronze and glass P10,676 (Exhibits B, C, and C-1). If, as said plaintiffs claim,

they had already sold articles, mostly textiles, valued at P8,000, a small quantity of cloth must have been left at the time

the fire occured. In their claim, however, the textiles allegedly consumed by fire and damaged by water are assessed by

them at P12,000. The claim of P12,000 is certainly not attributable to a mere mistake in estimate and counting because if

they had textiles worth only P12,000 before the fire and they sold goods, mostly textiles, worth P8,000, surely textiles in

the same amount of P12,000 could not have been burned and damaged after the fire. Of the kitchen utensils and tableware

made of aluminum, bronze and glass, of which, according to the evidence for the plaintiffs, they had a stock valued at

P10,676 (Exhibit B), there were found after the fire articles worth only P1,248.80 (Exhibit K). Therefore, utensils valued

at P9,427.20 were lacking. A considerable amount of kitchen utensils made of noninflammable and fire-proof material

could not, by the very nature of things have been totally consumed by the fire. At most, said articles would have been

186

damaged, as the rest, and would have left traces of their existence. The same may be said of the fancy jewels with

imitation stones, and others of which the fancy jewels with imitation stones, and others of which the plaintiffs claim to

have had a stock worth from P15,000 to P17,000 at the time of the fire, of which only a few valued at P3,471.16, were left

after the fire (Exhibit K). According to said plaintiffs, all the articles, for the alleged loss of which indemnity is sought,

were contained in about 40 showcases and wardrobes. According to the testimony of the fire station chiefs, corrobarated

by the photographs of record, the flames caused more damage in the upper part of the rooms than in the lower part

thereof; since, of the ten or eleven cases found inside the building after the fire, only a few were partially burned and

others scorched judging from their appearance, the goods were damaged more by water than by fire. According to the

inventory made by White & Page, adjusters of the insurance companies, in the presence of the plaintiffs themselves and

according to data supplied by the latter, the total value thereof, aside, from the articles not included in the inventories

Exhibits B, C, and C-1, assessed at P744.50, amounts to only P8,077.35. If the plaintiffs' claim that at time of the fire

there were about 40 cases inside the burnt building were true, a ten or eleven of them were found after the fire, traces of

the thirty or twenty-nine cases allegedly burnt would be found, since experience has shown that during the burning of a

building all the cases deposited therein are not so reduced to ashes that the least vestige thereof cannot be found. In the

case of Go Lu vs. Yorkshire Insurance Co. (43 Phil., 633), this court laid down the following doctrine:

This court will legally presume that in an ordinary fire fifty bales or boxes of bolt goods of cloth cannot be wholly

consumed or totally destroyed, and that in the very nature of things some trace or evidence will be left remaining

of their loss or destruction.

The plaintiffs, upon whom devolve the legal obligation to prove the existence, at the time of the fire, of the articles and

merchandise for the destruction of which they claim indemnity from the defendant companies, have not complied with

their duty because they have failed to prove by a preponderance of evidence that when the fire took place there where in

the burnt building articles and merchandise in the total amount of the insurance policies or that the textiles and other

damaged and undamaged goods found in the building after the fire were worth P40,000. On the contrary, their own

witness, Robles, testified that up to the month of September, 1933, there were about 39 or 40 cases belonging to the

plaintiffs in his garage on Mabini Street, indicating thereby that the cases of merchandise examined by the agent of the

insurance companies on July 25 and August 15, 1933, and for which the insurance policies were issued, were taken from

the burned building where they were found. So great is the difference between the amount of articles insured, which the

plaintiffs claim to have been in the building before the fire, and the amount thereof shown by the vestige of the fire to

have been therein, that the most liberal human judgment can not attribute such difference to a mere innocent error in

estimate or counting but to a deliberate intent to demand of the insurance companies payment of an indemnity for goods

not existing at the time of the fire, thereby constituting the so-called "fraudulent claim" which, by express agreement

between the insurers and the insured, is a ground for exemption of the insurers from civil liability.

Therefore, as the herein plaintiffs-appellees have acted in bad faith in presenting a fraudulent claim, they are not entitled

to the indemnity claimed by them by virtue of the insurance policies issued by the defendant-appellant companies in their

favor.

For the foregoing considerations, this court is of the opinion and so holds: (1) that when the partners of a general

partnership doing business under the firm name of "Sharruf & Co." obtain insurance policies issued to said firm and the

latter is afterwards changed to "Sharruf & Eskenazi", which are the names of the same and only partners of said firm

"Sharruf & Co.", continuing the same business, the new firm acquires the rights of the former under the same policies; (2)

that when the evidence relative to the cause of a fire and the author thereof is so vague and doubtful, the insured cannot be

attributed incendiary intervention therein for the mere fact that he had the keys to the unoccupied building in his

possession; (3) that a person who presents a claim for damages caused by fire to articles and goods not existing at the time

of the fire does so fradulently and his claim is fraudulent, and (4) that when immediately after a fire that broke out inside a

completely locked building, lasting scarcely 27 minutes, only about ten or eleven partly burned and scorched cases, some

containing textiles and wrapping paper and others, statutes of saints, have been found without any trace of the destruction

of other cases by said fire, it can neither logically nor reasonably be inferred that 40 of said cases were inside the building

when the fire broke out.

187

G.R. No. L-14617 February 18, 1920

R. Y. HANLON, plaintiff-appellee,

vs.

JOHN W. HAUSSERMANN and A. W. BEAM, defendants-appellants.

GEORGE C. SELLNER, intervener.

STREET, J.:

This action was originally instituted by R. Y. Hanlon to compel the defendants, John W. Haussermann and A. W. Beam,

to account for a share of the profits gained by them in rehabilitating the plant of the Benguet Consolidated Mining

Company and in particular to compel them to surrender to the plaintiff 50,000 shares of the stock of said company, with

dividends paid thereon. A few days after the action was begun G. C. Sellner was permitted to intervene in like interest

with Hanlon and to the same extent. Thereafter the case was conducted in all respects as if Hanlon and Sellner had been

co-plaintiffs from the beginning. At the hearing judgment was rendered requiring the defendants to surrender to Hanlon

and Sellner respectively 24,000 shares each of the stock of said company, and to pay the dividends declared and paid on

said stock for the years 1916 and 1917. From this judgment the defendants appealed.

The controlling features of this controversy are disclosed in documentary evidence, and the other facts necessary to a

proper understanding of the case are stated in the narrative part of the opinion of the trial judge. As both parties to the

appeal agree that his statement of facts is substantially correct, we adopt his findings of fact as the basis of our own

statement, with such transposition, omissions, and additions as seen desirable for the easier comprehension of the case.

The Benguet Consolidated Mining Company is a corporation which was organized in 1903 with an authorized capital

stock of one million dollars, of the par value of one dollar per share, of which stock 499,000 shares had been issued prior

to November 1913, and 501,000 shares then remained in the treasury as unissued stock. The par value of the shares was

changed to one peso per share after the organization of the corporation.

In the year 1909 the milling plant of said company, situated near Baguio in the subprovince of Benguet, Philippine Islands

upon a partially developed quartz mine, was badly damaged and partly destroyed by high water, and in 1911 it was

completely destroyed by like causes. The company was thereafter without working capital, and without credit, and

therefore unable to rebuild the plant.

In October and November 1913, and for a long time prior thereto, the defendant John W. Haussermann and A. W. Beam

were shareholders in said mining company and members of its board of directors, and were at said time vice-president and

secretary-treasurer, respectively, of said company.

In October, 1913, the plaintiff R. Y. Hanlon, an experienced mining engineer, upon the solicitation of the defendant

Beam, presented to the board of directors of the Benguet Consolidated Mining Company a proposition for the

rehabilitation of the company, and asked an option for thirty days within which to thoroughly examine the property; which

proposition, with certain amendments, was finally accepted by said company; and thereafter, on November 6, 1913,

within the option period, the terms of that proposition and acceptance were incorporated in a written contract between the

plaintiff and the company, in which the said company acted by and through the defendant John W. Haussermann as vice-

president and the defendant A. W. Beam as secretary. In this contract it appears that for and in consideration of the

issuance and delivery to said Hanlon or to his order of the 501,000 shares of the unissued capital stock of said mining

company, the said Hanlon undertook, promised, and agreed to do or cause to be done sufficient development work on the

mining properties of said company to enable the company to mine and take out not less than sixty tons of ore per day, and

to give an extraction of not less than 85 per cent of the gold content of the ore; and the terms and conditions upon which

said undertaking was based may be briefly stated as follows: (1) said Hanlon was to pay into the treasury of the mining

company the sum of P75,000 in cash within six months from that date; (2) upon the payment of said P75,000 in cash there

was to be issued and delivered to said Hanlon or to his order 250,000 shares of said unissued stock; (3) prescribing the

purposes for which said P75,000 should be disbursed by said mining company upon the order of said Hanlon; (4)

188

providing for raising an additional sum of P75,000 by obtaining a loan in the name of said mining company upon the

security of its properties and assets, such additional indebtedness to be paid and discharged within eighteen months from

date of said agreement; (5) providing for the payment of the then indebtedness of said mining company amounting to

P13,105.08; (6) providing for the distribution of the net earnings after the payment of the indebtedness mentioned in

paragraphs 4 and 5; (7) providing that, for the purpose of securing and guaranteeing the faithful performance of each and

every undertaking in said agreement mentioned to be fulfilled by said Hanlon, 250,000 of said 501,000 shares should

remain on deposit with said mining company, to be released, surrendered and delivered to said Hanlon or to his order, as

follows: "151,000 shares to be released, surrendered and delivered to the said party of the first part, or his order, when said

milling plant shall have been duly completed and the operation thereof commenced; the balance of said shares to wit:

100,000, shall remain on deposit with the party of the second part until the above mentioned loan to be secured by the

assets of the company shall have been fully paid and discharged, in which event said shares shall be released, surrendered

and delivered to the party of the first part, or his order;" (8) providing that in the event the earnings of the company should

be insufficient to pay all indebtedness within the time provided in paragraphs 4 and 6, the balance remaining due thereon

was to be paid by said Hanlon, and if he neglected to pay off and discharge the balance due, then the said mining company

was to have the right and authority to sell and dispose of the 100,000 shares of stock remaining in its possession at public

or private sale at the prevailing market price, or as many of said shares as might be necessary to fully liquidate and

discharge the balance of said indebtedness remaining unpaid; (9) providing for taking out insurance by said mining

company for the protection of said Hanlon, to cover the full value of said plant during its erection and after the completion

thereof for a period of not less than eighteen months after the same shall have been placed in operation.

As was at the time well known to all parties concerned herein the plaintiff Hanlon was personally without the financial

resources necessary to enable him to contribute P75,000 towards the project indicated in the contract Exhibit B, above set

forth; and in order to overcome this obstacle he was compelled to seek the assistance of others. Haussermann and Beam,

being cognizant of this necessity, agreed to find P25,000 of the necessary capital, and for the remainder the plaintiff relied

upon G. C. Sellner, a business man of the city of Manila, who, upon being approached, agreed to advance P50,000. A

verbal understanding with reference to his matter had been attained by the four parties to this litigation before the contract

Exhibit B between Hanlon and the mining company had been formally executed, and this agreement was in fact reduced

to writing and signed on November 5, 1913, one day prior to the execution of the contract between Hanlon and the mining

company.

In this contract of November 5, 1913, (Exhibit A), the four parties, to wit: Hanlon, Sellner, Haussermann, and Beam,

agreed to collaborate in the flotation of the project outlined in the contract Exhibit B, and defined the manner in which the

necessary capital of P75,000 was to be raised. As this contract is absolutely vital in the present litigation its provisions are

set out in full:

Whereas, R. Y. Hanlon has submitted a proposition to the Benguet Consolidated Mining Co., a copy of which is

hereto attached for reference; and

Whereas, the Board of Directors of the Benguet Consolidated Mining Co., has accepted such proposition as

amended; and

Whereas, said parties have agreed to cooperate and assist the said Hanlon in the flotation of said proposition;

Now, therefore, this agreement made by and between the undersigned as follows:

I.

It is mutually agreed by and between the parties hereto that each shall do all in his power to float said proposition

and make the same a success.

II.

189

It is mutually agreed that said proposition shall be floated in the following manner, to wit:

(a) That 301,000 shares of the Benguet Consolidated Mining Company shall be set aside and offered for sale for

the purpose of raising the sum of P75,000 required to be paid to the Benguet Consolidated Mining Company in

accordance with said proposition.

(b) That of said sum of P75,000, the said George Seller agrees and undertakes to secure and obtain subscriptions

for the sum of P50,000.

(c) That John W. Haussermann and A. W. Beam undertake and agree to secure and obtain subscriptions for the

sum of P25,000.

(d) The said Sellner, Haussermann and Beam hereby guarantee that the subscriptions to be obtained by them as

hereinabove stated shall be fully paid within six (6) months from the date of the acceptance on the part of the said

Hanlon of the option granted by said company; it being understood and agreed that if for any cause the said

Sellner shall fail to obtain subscriptions and payment thereof to the amount of P50,000 within the time herein

specified, then and in that event the obligation of said Haussermann and Beam shall be discharged; and, on the

other hand, if for any cause said Haussermann and Beam shall fail to obtain subscriptions for the P25,000 and

payment thereof within the time herein mentioned, then and in that event, the said Sellner shall be released from

his obligation.

It is mutually understood and agreed that each of the parties mentioned in this paragraph shall from time to time

advise the other parties as to the number of subscriptions obtained and the amount of payments thereon.

III.

That out of the remaining 200,000 shares of the Benguet Consolidated Mining Co., to be issued under said

proposition each of said parties hereto, that is to say: George Sellner, John W. Haussermann, A. W. Beam and R.

Y. Hanlon shall be entitled to receive one-fourth thereof, or 50,000 shares, as compensation for the services

rendered in the flotation of this proposition.

IV.

They necessary funds to cover preliminary expenses, such as expenses to examining the properties of the Benguet

Consolidated Mining Co., freight charges and other charges on ore samples, costs of testing same, etc., shall be

supplied by Messrs. Sellner, Haussermann and Beam, which said sum shall be reimbursed to said parties out of

the P75,000 fund raised by the sale of the P301,000 shares of stock hereinabove in Paragraph II, Subsection A,

hereof, mentioned.

V.

Cash for the loan of P5,000 to be made to the Benguet Consolidated Mining Co., as provided in the proposition of

the said Hanlon, shall be furnished by Messrs. Sellner, Haussermann and Beam, in equal proportions as needed by

the company.

In witness whereof, the respective parties hereto have hereunto set their hands at Manila, P. I., this 5th day of

November, 1913.

(Sgd.) R. Y. HANLON,

(Sgd.)GEORGE C. SELLER,

190

(Sgd.)JOHN W. HAUSSERMANN,

(Sgd.)A. W. BEAM.

During the period which intervened between the making of the preliminary verbal agreement and the final

execution of this contract, the plaintiff, Hanlon, at the expenses of the joint adventure went from Manila to the

Benguet Consolidated mining properties, near Baguio, accompanied by the defendant Beam at the expense of said

mining company, and said Hanlon made a preliminary investigation and examination of the properties, selected

and surveyed a suitable mill site and took out about half a ton of ore samples which it had been agreed were to be

forwarded to the United States for tests for use by him in the selection of the machinery best suited for the

treatment of such ore; and said Hanlon reported to his coadventurers that it was a very feasible scheme, and that

there was enough ore in sight to well repay the investment of P125,000, which was the sum estimated by said

Hanlon to be necessary to equip the property.

Soon after the contract Exhibits B and A were made the plaintiff Hanlon departed for the United States, in

contemplation of which event he executed a special power of attorney, on November 10, 1913, constituting and

appointing Beam his special agent and attorney in fact, for and in his name, to do and perform the following acts:

To vote at the meetings of any company or companies, and otherwise to act as my proxy or

representative, in respect of any shares of stock now held, or which may hereafter be acquired by me

therein, and for that purpose to sign and execute any proxy or other instrument in my name and on my

behalf;

To secure subscriptions in my name for the shares of the Benguet Consolidated Mining Co., to be issued

to me under and by virtue of an agreement entered into with said company on November 6, 1013, and to

enter into the necessary agreements for the same of said shares.

To demand, sue for, and receive all debts, moneys, securities for money, goods, chattels or other personal

property to which I am now or may hereafter become entitled, or which are now or may become due,

owing or payable to me from any person or persons whomsoever, and in my name to give effectual

receipts and discharges for the same.

Prior to that time, on May 27, 1913, the plaintiff Hanlon had given one A. Gnandt of the city of Manila a power of

attorney with general and comprehensive powers, and "with full power of substitution and revocation;" and

thereafter on March 14, 1914, said Gnandt, owing to his intended departure from the Philippine Islands, executed

a power of attorney in favor of said A. W. Beam, with the same general powers which had been conferred upon

him, and Beam became Hanlon's sole agent in the Philippine Islands. Said original power of attorney had no

special relation to the substitute specifically authorized the attorney in fact:

To make, sign, execute and deliver any and all contracts, agreements, receipts and documents of any

nature and kind whatsoever.

After the enumeration of other general and specific powers, Beam was finally authorized:

To do any and all things necessary or proper for the due performance and execution of the foregoing

powers.

By reference to the contract of November 5, 1913, (Exhibit A), it will be seen that 301,000 shares of the stock of

the Benguet Consolidated Mining Company were to be used to raise the P75,000 which Hanlon was bound to

supply to the mining company; and the contract contemplated that these shares should be disposed of at 25

centavos per share. As Sellner had agreed to raise P50,000, it resulted that 200,000 shares had to be allocated to

him; while Haussermann and Beam had at their disposal 100,000 shares, with which to raise P25,000. Sellner,

191

Haussermann, and Beam furthermore guaranteed that the subscriptions to be obtained by them should be fully

paid within six months from the date of the acceptance by Hanlon of the contract with the mining company, that

is, from November 6, 1913.

In prosecution of the common purpose, Haussermann and Beam proceeded, after the departure of Hanlon, to

procure subscriptions upon the stock at their disposal, part being subscribed by themselves severally and part sold

upon subscription to outsiders; and during the next two or three months the block of shares allotted to them was

subscribed. As a consequence of this they were thereafter prepared to pay in, or to cause to be paid in, the entire

amount which they were obligated to raise. Doubts, however, presently arose as to the ability of Sellner to obtain

subscriptions or produce the P75,000, which he obligated to bring in; and as early as in February of 1914, Beam

cabled to Hanlon in America "Sellner unable to pay. Have you any instructions?" Upon receipt of this cablegram,

Hanlon cabled Sellner to use every effort to raise the money and also cable Beam to obtain the money elsewhere

if Sellner could not supply it. Furthermore, in order to be prepared against the contingency of Sellner's ultimate

inability to respond, Hanlon attempted to enlist the interest of capitalists in San Francisco but in this was

unsuccessful. It will be observed that, although by the exact letter of the contract, Sellner was obligated to obtain

subscriptions for the sum of P50,000, he nevertheless desired to keep the entire 200,000 shares assigned to him

exclusively for himself, and proceeding on the assumption that he had in effect underwritten a subscription for the

whole block of shares, he made no effort to obtain subscriptions from anybody else for any part of these shares.

Meanwhile Haussermann and Beam were in touch with Sellner, urging him to action but without avail, Sellner

being in fact wholly unable to fulfill his undertaking. In this condition of affairs the period of six months specified

in the contracts of November 5 and 6 for the raising of the sum of P75,000 passed.

Thereafter Haussermann and Beam assumed that they were absolved from the obligations of their contract of

November 5, 1913, with Hanlon and Sellner, and that the mining company was no longer bound by its contract of

November 6, 1913, with Hanlon. They therefore proceeded, as parties interest in the rehabilitation of the mining

company, to make other arrangements for financing the project. They found it possible to effectuate this through

the offices of Sendres of the Bank of the Philippine Islands, and in order to do so, a new contract was made

between the mining company and Beam, with Haussermann as silent partner of the latter, whereby a bonus of

96,000 shares was conceded to the promoter instead of the 100,000 shares which would have accrued to

Haussermann and Beam if the Hanlon project had gone through. As a result of this, the profits of each were

reduced by the amount of 2,000 shares below what they might have realized under the Hanlon contract of

November 5. Another feature of the new project was that some of those who had subscribed to the stock of the

mining company through Beam under the Hanlon project were retained as stockholders in the new scheme of

flotation. Some, however, dropped out, with the result that Haussermann and Beam were compelled to increase

their subscriptions materially.

As preliminary to the new scheme of financing the corporation, the board of directors of the mining company,

composed of Haussermann Beam, and Sendres, saw fit at a special meeting on June 19, 1914, to adopt a

resolution declaring the contract of November 6, 1913, between Hanlon and the company to be cancelled by

reason of the failure of Hanlon to pay in the sum of P75,000 in cash on or before May 6, 1914.

Immediately after the adoption of this resolution, the new plan for financing the mining company was unfolded by

Mr. Beam to the Board in a letter, addressed by him to the Directors. In its parts relating to financial arrangements

said letter is as follows:

MANILA, P. I., June 17, 1914.

To the DIRECTORS OF THE BENGUET CONSOLIDATED MINING

CO.,

Manila, P. I.

192

GENTLEMEN:

The undersigned hereby applies for an option for 30 days over 501,000 shares of unissued stock of your corporation. . . .

I have canvassed the local field for capital and am reasonably assured that the required capital will be available as follows:

405,000 shares have been subscribed for at 20 and 25 cents per share, making up a total of P86,000, which sums is

payable to the company in four equal monthly installments commencing July 15, 1914. . . . . Arrangements have been

made whereby the Bank of Philippine Islands will grant the company an overdraft to the extent of P50,000, thus affording

P136,000. . . .

The balance of the 501,000 shares of unissued stock, or 96,000 shares, are to be issued to my order when the total sum of

86,000 subscribed as above stated shall have been paid to the company. The said shares are to be placed in the hands of

the Bank of the Philippine Islands in escrow to be held by the said bank and delivered to my order as soon as the overdraft

hereinbefore mentioned shall be fully paid and liquidated.

It is further understood that the bank shall have full power and authority to vote said shares until such time as said

overdraft is repaid to the company.

For the payment of the overdraft guaranteed by the Bank of the Philippine Islands, it is understood that the total net

earning of the company shall be used, and the term "net earnings" shall be understood to mean the gross value of gold

recovered less actual operation expense.

Trusting that the foregoing may meet with your approval and acceptance, I am

Yours very truly,

(Sgd.) A. W. BEAM.

Upon motion of Senders, the proposition of Beam was accepted; Sendres and Haussermann voting in favor of the same.

At the same special meeting it was moved and seconded and unanimously carried that a meeting of the shareholders of the

company be called for the purpose of passing upon the action of the directors in accepting the proposition made by Beam.

At this special meeting of the shareholders, held at 4:30 p. m., June 29, 1914, there were 310,405 shares of the 499,000

shares of issued stock represented at the meeting. The stockholders personally present were A. W. Beam, E. Sendres, and

O. M. Shuman; and various other shareholders were represented by Beam as proxy, and the Bank of the Philippine Islands

was represented by Sendres as proxy. It appears from the minutes of said special meeting that Beam's proposition, which

had been accepted by the board of directors, as above stated, was submitted to the meeting and after being read was

ordered to be attached to the minutes. After due discussion by the shareholders present, Shuman moved that the action of

the board of directors accepting Beam's proposition be approved, and this motion was duly seconded and unanimously

carried.

The Beam project was carried out, and the mining company was brought to a dividend-paying basis, paying a quarterly

dividend of five per cent; and at the time of the trial of this case the shares of stock in the market had risen from twenty

centavos to P1.50 or higher. The defendants about 1916 received 48,000 shares each as their profits. It is stated in the

appellants' brief, without denial from the appellee, that said shares have appreciated subsequently to the trial below to the

value of P2 each. The trial court held that the plaintiffs, as coadventurers with the defendants in the project for the

rehabilitation of the mining company, are each entitled to recover the one-fourth part of the 96,000 shares obtained from

the mining company by the defendants, or 24,000 shares, with dividends paid, and to be paid beginning with the year

1916. It is thus apparent that the value of the interest awarded to each of the plaintiffs is considerably in excess of $25,000

(U. S. currency).

193

So far as Beam's material scheme for the improvement of the mining property is concerned it followed the same lines and

embodied the same ideas as had been entertained while the Hanlon project was in course of promotion; and it is contended

for the plaintiffs that there was an unfair appropriation by Beam of the labors and ideas of Hanlon. This is denied by the

defendants, whose testimony tends to minimize the extent of Hanlon's contribution to the project in labor and ideas. We

believe it unnecessary to enter into the merits of this contention, as in our opinion the solution of the case must be

determined by other considerations.

An examination of the rights of the parties to this litigation must begin with the interpretation of the contract of November

5, 1913. Some discussion is indulged in the briefs of counsel upon the question whether that contract constitutes a

partnership among the four signatories or a mere enterprise upon joint account (cuenta en participacion) under the Code

of Commerce. This question seems to us of academy rather than practical importance; for whatever be the character of the

relation thus created, each party was undoubtedly bound to use good faith towards the other, so long as the relation

subsisted.

In paragraph I of said contract each party obligates himself to do all in his power to "float" the Hanlon proposition, i. e., as

indicated in the contract of November 6, between Hanlon and the mining company. This means of course that each was to

do what he could to make that project for the rehabilitation of the mining company a success. The word flotation,

however, points more particularly to the effort to raise money, since, as all man know, it takes capital to make any

enterprise of this kind go. In paragraph II of the same contract the manner in which the flotation is to be effected is

described, namely, that Sellner is to obtain subscriptions for P50,000 and Haussermann and Beam for P25,000. This

involved, as we have already stated, the allocation of 200,000 shares to Sellner and 100,000 to Hanlon and Beam.

Now the two paragraphs of the contract to which reference has been made must be construed together, and it is entirely

clear that the general language used in the first paragraph is limited by that used in the second paragraph. In other words,

though in the first paragraph the parties agree to help float the project, they are tied up, in regard to the manner of

effecting the flotation, to the method agreed upon in the second. We can by no means lend our assent to the proposition

that the first paragraph created an obligation, independent of the provisions of paragraph II, which continued to subsist

after the method of flotation described in paragraph II became impossible of fulfillment. It is a rudimentary canon of

interpretation that all parts of a writing are to be construed together (6 R. C. L., p. 837) and that the particular controls the

general. (Art. 1283, Civ. Code; 13 C. J., p. 537.)

It seems too plain for argument that so long as that contract was in force, Sellner did not have any right to inter-meddle

with the 100,000 shares allotted to Haussermann and Beam. Neither could the latter dispose of the 200,000 shares allotted

to Sellner. Indeed, Sellner, by reserving to himself all of these 200,000 shares and sitting tightly, as he did, on this block

of stock, made it impossible for Haussermann, Beam, or anybody else, to raise money by selling those shares within the

period fixed as the limit of his guaranty. There was absolutely, as everybody knew, no other means to raise money except

by the sale of stock; and when Hanlon cabled to Beam in February to obtain the money elsewhere if Sellner could not

supply it, he was directing the impossible, unless Sellner should release the block of shares assigned to him, which he

never did. As a matter of fact it appears that this quantity of the stock of the mining company could not then have been

sold at 25 cents per share in the Manila market to anybody; and in the end in order to get Sendres and the Bank of the

Philippine Islands to take part in the Beam project 260,000 shares had to go at 20 centavos per share.

By referring to subsection (d) to paragraph II of the contract of November 5, 1913, it will be seen that the promises with

reference to the obtaining of subscriptions are mutual concurrent conditions; and it is expressly declared in the contract

that upon the default of either party the obligation of the other shall be discharged. From this it is clear that upon the

happening of the condition which occurred in this case, i.e., the default of Sellner to pay to the mining company on or

before May 6, 1914, the sum of money which he had undertaken to find, Haussermann and Beam were discharged.

This is a typical case of a resolutory condition under the civil law. The contract expressly provides that upon the

happening of a future and uncertain negative event, the obligation created by the agreement shall cease to exist.

194

In conditional obligations the acquisition of rights as well as the extinction of those already acquired shall depend

upon the event constituting the condition. (Civ. Code, art. 1114.)

If the condition consists in the happening of an event within a fixed period the obligation shall be extinguished

from the time the period elapses or when it becomes certain that the event will not take place. (Civ. code, art.

1117.)

The right of Hanlon to require any further aid or assistance from these defendants after May 6, 1914, was expressly

subordinated to a resolutory condition, and the contract itself declares in precise language that the effect of the non-

fulfillment of the condition shall be precisely the same as that which the statute attaches to it — the extinction of the

obligation.

In the argument of the plaintiffs at this point a distinction is drawn between the discharge from the guaranty to raise

money at the stated time and the discharge from the contract as an entirety; and it is insisted that while the defendants

were discharged from liability to Sellner on their guaranty to have the money forthcoming on May 6, they were not

discharged from their liability on the contract, considered in its broader features, and especially were not discharged with

reference to their obligation to Hanlon. This argument proceeds on the erroneous assumption that the defendants were

bound to discover some other method of flotation after the plan prescribed in the contract had become impossible of

fulfillment and to proceeds therewith for the benefit of all four of the parties. Furthermore, this conception of the case is

apparently over-refined and not in harmony with the common-sense view of the situation as it must have presented itself

to the contracting parties at the time. The obtaining of capital was fundamentally necessary before the project could be

proceeded with; and it was obvious enough that, if the parties should fail to raise the money, the whole scheme must

collapse like a stock of cards. The provisions relative to the getting in of capital are the principal features of the contract,

other matters being of subordinate importance. In our opinion the contracting parties must have understood and intended

that Haussermann and Beam would be discharged from the contract in its entirety by the failure of Sellner to comply with

his obligation. This is the plainest, simplest, and most obvious meaning of which the words used are capable and we

believe it to be their correct interpretation. We are not to suppose that either of the signatories intended for those words to

operate as a trap for the others; and such would certainly be the effect of the provision in question if the words are to be

understood as referring to a discharge from the guaranty merely, leaving the contract intact in other respects.

It is insisted in behalf of the plaintiffs that Haussermann and Beam, as well as Sellner, defaulted in the performance of the

contract of November 5, 1913, and that not having performed their obligation to obtain subscriptions for the sum of

P25,000 and to cause payment to be made into the company's treasury on or before May 6, 1914, they cannot take

advantage of the similar default of Sellner. This suggestion is irrelevant to the fundamental issue. The question here is not

whether Haussermann and Beam have a right of action for damaged against Sellner. If they were suing him, it would be

pertinent to say that they could not maintain the action because they themselves had not caused the money to be paid in

which they had agreed to raise. The question here is different, namely, whether Haussermann and Beam have been

discharged from the contract of November 5, 1913, by the default of Sellner; and this question must, under the contract,

be answered by reference to the acts of Sellner. Upon this point it is irrelevant to say that the discharged was mutual as

between the two parties and not merely one-sided.

The interpretation which we have placed upon the contract of November 5, 1913, exerts a decisive influence upon this

litigation, and makes a reversal of the appealed judgment inevitable. There are, however, certain subordinate features of

the case which, as disposed in the appellee's brief, appear to justify the conclusion of the trial judge; and we deem it

desirable to say something with reference to the questions thus presented.

It will be noted that there is no resolutory provision in the contract of November 6, 1913, between Hanlon and the mining

company, declaring that said contract would be discharged or abrogated upon the failure of Hanlon to supply, within the

period specified, the money which he had obligated himself to raise. In other words, time is not expressly made of the

essence of this contract. From this it is argued for the plaintiffs that this contract remained in force after May 6, 1914,

notwithstanding the failure of Hanlon to supply the funds which he had agreed to find, and indeed it is insisted upon the

authority of Ocejo, Perez & Co. vs. International Banking Corporation (37 Phil. Rep., 631), that the mining company

195

could not be relieved from that contract without obtaining a judicial rescission in an action specially brought for that

purpose. The reply to this is two-fold.

In the first place the present action is not based upon the contract between Hanlon and the mining company; and it is clear

that if Hanlon had sued the mining company, as for example, in an action seeking to recover damages for breach of its

contract with him, he would have been confronted by the insuperable obstacle that he had never supplied, nor offered to

supply, one penny of the P75,000, which he had obligated himself to bind, and which was absolutely necessary to the

rehabilitation of the company. The benefits of a contract are not for him who has failed to comply with its obligations. It

may be admitted that the resolution of the Board of Directors of the mining company, on June 19, 1914, declaring the

contract of November 6, 1913, with Hanlon to be cancelled, considered alone, was without legal effect, since one party to

a contract cannot absolve himself from its obligations without the consent of the other.

With reference to the second point, namely, that a judicial rescission was necessary to absolve the mining company from

its obligations to Hanlon under the contract of December 6, 1913, we will say that we consider the doctrine of Ocejo,

Perez & Co., vs. International Banking Corporation (37 Phil. Rep., 631), to be inapplicable. The contract there in

question was one relating to a sale of goods, and it had been fully performed on the part of the vendor by delivery. This

court held that delivery had the effect of passing title, and that while the failure of the purchaser to pay the price gave the

seller a right to sue for a rescission of the contract, the failure of the buyer to pay the purchase price did not ipso

facto produce a reversion of title to the vendor, or authorize him, upon his election to rescind, to treat the goods as his own

property and retake them by writ of replevin. In the present case the contract between Hanlon and the mining company

was executory as to both parties, and the obligation of the company to deliver the shares could not arise until Hanlon

should pay or tender payment of the money. The situation is similar to that which arises every day in business transactions

in which the purchaser of goods upon an executory contract fails to take delivery and pay the purchase price. The vendor

in such case is entitled to resell the goods. If he is obliged to sell for less than the contract price, he holds the buyer for the

difference; if he sells for as much as or more than the contract price, the breach of the contract by the original buyer

is damnum absque injuria. But it has never been held that there is any need of an action of rescission to authorize the

vendor, who is still in possession, to dispose of the property where the buyer fails to pay the price and take delivery. Of

course no judicial proceeding could be necessary to rescind a contract which, like that of November 5, 1913, contains a

resolutory provision by virtue of which the obligation is already extinguished.

Much reliance is placed by counsel for the plaintiffs upon certain American decisions holding that partners, agents, joint

adventurers, and other persons occupying similar fiduciary relations to one another, must not be allowed to obtain any

undue advantage of their associates or to retain any profit which others do not share. We have no criticism to make against

this salutary doctrine when properly applied and would be slow to assume that our civil law requires any less degree of

good faith between parties so circumstanced than is required by the courts of equity in other countries. For instance, we

feel quite sure that this Court would have no difficulty in subscribing to the doctrine which is stated in Lind vs.

Webber (36 Nev., 623; 50 L. R. A. [N. S.], 1046}, with reference to joint adventurers as follows:

We further find that the law is well established that the relation between joint adventurers is fiduciary in its

character and the utmost good faith is required of the trustee, to whom the deal or property may be instrusted, and

such trustee will be held strictly to account to his co-adventurers, and that he will not be permitted, by reason of

the possession of the property or profits whichever the case may be to enjoy an unfair advantage, or have any

greater rights in the property or profits as trustee, than his co-adventurers are entitled to. The mere fact that he is

intrusted with the rights of his co-adventurers imposes upon him the sacred duty of guarding their rights equally

with his own, and he is required to account strictly to his co-adventurers, and, if he is recreant to his trust, any

rights they may be denied are recoverable.

In Flagg vs. Mann (9 Fed. Cas., 202; Fed. Case No. 4847), it appeared that Flagg and Mann had an agreement to purchase

a tract of land on joint account. The court held that where parties are interested together by mutual agreement, and a

purchase is made agreeably thereto, neither party can excuse the other from what was intended to be for the common

benefit; and any private benefit, touching the common right, which is secured by either party must be shared by both.

Justice Story, acting as Circuit Justice, said that the doctrine in question was "a wholesome and equitable principle, which

196

by declaring the sole purchase to be for the joint benefit, takes away the temptation to commit a dishonest act, founded in

the desire of obtaining a selfish gain to the injury of a co-contractor, and thus adds strength to wavering virtue, by making

good faith an essential ingredient in the validity of the purchase. There is not, therefore, any novelty in the doctrine of Mr.

Chancellor Kent, notwithstanding the suggestion at the bar to the contrary; and it stands approved equally by ancient and

modern authority, by the positive rule of the Roman Law, the general recognition of continental Europe, and the actual

jurisprudence of England and America."

We deem it unnecessary to proceed to an elaborate analysis of the array of cases cited by the appellee as containing

applications of the doctrine above stated. Suffice it to say that, upon examination, such of these decisions as have

reference to joint adventures will be found to deal with the situation where the associates are not only joint adventurers

but are joint adventurers merely. In the present case Haussermann and Beam were stockholders and officials in the mining

company from a time long anterior to the beginning of their relations with Hanlon. They were not merely co-adventurers

with Hanlon, but in addition were in a fiduciary relation with the mining company and its other shareholders, to whom

they owned duties as well as to Hanlon. It does not appear that the defendants acquired any special knowledge of the mine

or of the feasibility of its reconstruction by reason of their relation with Hanlon which they did not already have; and they

probably were in no better situation as regards the facts relating to the mine after the failure of the Hanlon contract than

they were before. The fact of their having been formerly associated with Hanlon certainly did not preclude them from

making use of the information which they possessed as stockholders and officers of the mining company long before they

came into contact with him.

After the termination of an agency, partnership, or joint adventure, each of the parties is free to act in his own interest,

provided he has done nothing during the continuance of the relation to lay a foundation for an undue advantage to himself.

To act as agent for another does not necessarily imply the creation of a permanent disability in the agent to act for himself

in regard to the same subject-matter; and certainly no case has been called to our attention in which the equitable doctrine

above referred to has been so applied as to prevent an owner of property from doing what he pleased with his own after

such a contract as that of November 5, 1913, between the parties to this lawsuit had lapsed.

In the present case so far as we can see, the defendants acted in good faith for the accomplishment of the common purpose

and to the full extent of their obligation during the continuance of their contract; and if Sellner had not defaulted, or if

Hanlon had been able to produce the necessary capital from some other source, during the time set for raising the money,

the original project would undoubtedly have proceeded to its consummation. Certainly, no act of the defendants can be

pointed to which prevented or retarded its realization; and we are of the opinion that, under the circumstances, nothing

more could be required of the defendants than a full and honest compliance with their contract. As this had been discharge

through the fault of another they can not be held liable upon it. Certainly, we cannot accede to the proposition that the

defendants by making the contracts in question had discapacitated themselves and their company for an indefinite period

from seeking other means of financing the company's necessities, save only upon the penalty of surrendering a share of

their ultimate gain to the two adventurers who are plaintiffs in this action.

The power of attorney which Hanlon left with Beam upon departing for America was executed chiefly to enable

Haussermann and Beam to comply with their obligation to raise P25,000 by the sale of shares. This feature of the power

of attorney was manifestly subordinate to the purpose of the joint agreement of November 5, 1913. Certainly, under that

power, Beam could not have disposed of any of the stock allotted to Sellner; neither was he bound, or even authorized,

after the joint agreement was at an end, to use the power for Hanlon's benefit, even supposing — contrary to the proven

fact — that purchasers to the necessary extent could have been found for the shares at 25 centavos per share.

As we have already stated, some of the individuals who originally subscribed to the Hanlon project were carried as

stockholders into the new project engineered by Beam, being credited with any payments previously made by them. In

other words, the mining company honored these subscriptions, although the Hanlon project on which they were based had

fallen through. This circumstance cannot in our opinion alter the fundamental features of the case. Taken all together these

subscriptions were for only a part of the P25,000 which the defendants had undertaken to raise and were by no means

sufficient to finance the Hanlon project without the assistance which Sellner had agreed to give. Of course if Beam, acting

as attorney in fact of Hanlon, had obtained a sufficient number of subscriptions to finance the Hanlon project, and

197

concealing this fact, had subsequently utilized the same subscriptions to finance his own scheme, the case would be

different. But the revealed facts do not bear out this imputation.

It should be noted in this connection that the mining company had approved the subscriptions obtained by Haussermann

and Beam and had, prior to May 6, 1914, accepted part payment of the amount due upon some of them. It is not at all

clear that, under these circumstances, the company could have repudiated these subscriptions, even if its officers had

desired to do so; and if the mining company was bound either legally ormorally to recognize them, if cannot be imputed

to the defendants as an act of bad faith that such subscriptions were so recognized.

The trial court held that Haussermann, by reason of his interest in the Beam project, was disqualified to act as a director of

the mining company upon the resolution accepting that project; and it was accordingly declared that said resolution was

without legal effect. We are of the opinion that the circumstance referred to could at the most have had no further effect

than to render the contract with Beam voidable and not void; and the irregularity involved in Haussermann's participation

in that resolution was doubtless cured by the later ratification of the contract at a meeting of the stockholders. However

this may be, the plaintiffs are not in a position to question the validity of the contract of the mining company with Beam

since the purpose of the action is to secure a share in the gains acquired under that contract.

In the course of the preceding discussion we have already noted the fact that no resolutory provision contemplating the

possible failure of Hanlon to supply the necessary capital within the period of six months is found in the contract of

November 6, 1913, between Hanlon and the mining company. In other words, time was not expressly made of the essence

of that contract. It should not be too hastily inferred from this that the mining company continued to be bound by that

contract after Hanlon dad defaulted in procuring the money which he had obligated himself to supply. Whether that

contract continued to be binding after the date stated is a question which does not clearly appear to be necessary to the

decision of this case, but the attorneys for Hanlon earnestly insist that said contract did in fact continue to be binding upon

the mining company after May 6, 1914; and upon this assumption taken in connection with the power held by Beam as

attorney in fact of Hanlon, It is argued that the right of action of Hanlon is complete, as against Beam and Haussermann,

even without reference to the profit-sharing agreement of November 5. We consider this contention to be unsound; and

the correctness of our position on this point can, we think, be clearly demonstrated by considering for a moment the

question whether time was in fact of the essence of the contract of November 6, 1913, in other words, Was the mining

company discharged by the default of Hanlon in the performance of that agreement?

Whether a party to a contract is impliedly discharged by the failure of the other to comply with a certain stipulation on or

before the time set for performance, must be determined with reference to the intention of the parties as deduced from the

contract itself in relation with the circumstances under which the contract was made.

Upon referring to the contract now in question — i. e., the contract of November 6, 1913 — it will be seen that the leading

stipulation following immediately after the general paragraph at the beginning of the contract, is that which relates to the

raising of capital by Hanlon. It reads as follows:

1. Said party of the first part agrees to pay into the treasury of the party of the second part the sum of Seventy-five

Thousand Pesos ( P75,000) in cash within six (6) months from the date of this agreement.

Clearly, all the possibilities and potentialities of the situation with respect to the rehabilitation of the Benguet mining

property, depended upon the fulfillment of that stipulation; and in fact nearly all the other subsequent provisions of the

contract are concerned in one way or another with the acts and things that were contemplated to be done with that money

after it should be paid into the company's treasury. Only in the event of such payment were shares to be issued to Hanlon,

and it was stipulated that the money so to be paid in should be disbursed to pay the expenses of the very improvements

which Hanlon had agreed to make. There can then be no doubt that compliance on the part of Hanlon with this stipulation

was viewed by the parties as the pivotal fact in the whole scheme.

Again, it will be recalled that this contract (Exhibit B) between Hanlon and the mining company was not in fact executed

until the day following that on which the profit-sharing agreement (Exhibit A) was executed by the four parties to this

198

lawsuit. In other words, Haussermann and Beam, as officials of the mining company, refrained from executing the

company's contract until Hanlon had obligated himself by the profit-sharing agreement. Indeed, these two contracts should

really be considered as constituting a single transaction; and it is obvious enough that the prime motive which induced

Haussermann and Beam to place their signature upon the contract of November 6 was that they already had the profit-

sharing agreement securely in their hands. Therefore, when the contract of November 6, between Hanlon and the mining

company was signed, all the parties who participated therein acted with full knowledge of the provisions contained in the

profit-sharing agreement; and in particular the minds of all must have riveted upon the provisions of paragraph II of the

profit-sharing agreement, wherein is described the manner in which the project to which the parties were then affixing

their signatures should be financially realized ("floated"). In subsection (d) of the same paragraph II, as will be

remembered, are found the words which declare that Haussermann and Beam would be discharged if Sellner should fail to

pay into the company's treasury on or before the expiration of the prescribed period the money which he had agreed to

raise. Under these conditions it is apparent enough that the parties to the later contract treated time as of the essence of the

agreement and intended that the failure of Hanlon to supply the necessary capital within the time stated should put an end

to the whole project. In view of the fact that an express resolutory provision had been inserted in the profit-sharing

agreement, it must have seemed superfluous to insert such express clause in the later contract. Any extension of time,

therefore, that the mining company might have made after May 6, 1914, with respect to the date of performance by

Hanlon would have been purely a matter of grace, and not demandable by Hanlon as of absolute right. It is needless to say

in this connection that the default of Sellner was the default of Hanlon.

An examination of the decisions of the American and English courts reveals a great mass of material devoted to the

discussion of the question whether in a given case time is of the essence of a contract. As presented in those courts, the

question commonly arises where a contracting party, who has himself failed to comply with some agreement, tenders

performance after the stipulated time has passed, and upon the refusal of the other party to accept the delayed performance

the delinquent party resorts to the court of equity to compel the other party to proceed. The equitable doctrine there

recognized as applicable in such situation is that if the contracting parties have treated time as of the essence of the

contract, the delinquency will not be excused and specific performance will not be granted; but on the other hand, if it

appears that time has not been made of the essence of the contract, equity will relieve from the delinquency and specific

performance may be granted, due compensation being made for the damage caused by the delay. In such cases the courts

take account of the difference between that which is matter of substance and that which is matter of mere form.

To illustrate: the rule has been firmly established from an early date in courts of equity that in agreements for the sale of

land, time is not ordinarily of the essence of the contract; that is to say, acts which one of the parties has stipulated to

perform on a given date may be performed at a later date. Delay in the payment of the purchase money, for instance, does

not necessarily result in the forfeiture of the rights of the purchaser under the contract, since mere delay in the payment of

money may be compensated by the allowance of interest. (36 Cyc., 707-708.) In discussing this subject, Pomeroy says:

"Time may be essential. It is so whenever the intention of the parties is clear that the performance of its terms shall be

accomplished exactly at the stipulated day. The intention must then govern. A delay cannot be excused. A performance at

the time is essential; any default will defeat the right to specific enforcement." (4 Pomeroy Eq. Jur., 3rd ed., sec. 1408.)

Again, says the same writer: "It is well settled that where the parties have so stipulated as to make the time of payment of

the essence of the contract, within the view of equity as well as of the law, a court of equity cannot relieve a vendee who

has made default. With respect to this rule there is no doubt; the only difficulty is in determining when time has thus been

made essential. It is also equally certain that when the contract is made to depend upon a condition precedent — in other

words, when no right shall vest until certain acts have been done, as, for example, until the vendee has paid certain sums

at certain specified times — then, also a court of equity will not relieve the vendee against the forfeiture incurred by a

breach of such condition precedent." (1 Pomeroy Eq. Jur., 3rd ed., sec. 455.)

As has been determined in innumerable cases it is not necessary, in order to make time of the essence of a contract, that

the contract should expressly so declare. Words of this import need not to be used. It is sufficient that the intention to this

effect should appear; and there are certain situations wherein it is held, from the nature of the agreement itself, that time is

of the essence of the contract.

199

Time may be of the essence, without express stipulation to that effect, by implication from the nature of the

contract itself, or of the subject-matter, or of the circumstances under which the contract is made. (36 Cyc., 709.)

In agreements which are executed in the form of options, time is always held to be of the essence of the contract; and it is

well recognized that in such contracts acceptance of the option and payment of the purchase price constitute conditions

precedent to specific enforcement. The same is true generally of all unilateral contracts. (36 Cyc., 711.) In mercantile

contracts for the manufacture and sale of goods time is also held to be of the essence of the agreement. (13 C. J., 688.)

Likewise, where the subject-matter of a contract is of speculative or fluctuating value it is held that the parties must have

intended time to be of the essence (13 C. J., 668.) Most conspicuous among all the situations where time is presumed to be

of the essence of a contract from the mere nature of the subject-matter is that where the contract relates to mining

property. As has been well said by the Supreme Court of the United States, such property requires, and of all properties

perhaps the most requires, the persons interested in it to be vigilant and active in asserting their rights.

(Waterman vs. Banks, 144 U. S., 394; 36 L. ed., 479, 483.) Hence it is uniformly held that time is of the essence of the

contract for the sale of an option on mining property, or a contract for the sale thereof, even though there is no express

stipulation to that effect. (27 Cyc., 675). The same idea is clearly applicable to a contract like that now under

consideration which provides for the rehabilitation of a mining plant with funds to be supplied by the contractor within a

limited period.

Under the doctrine above expounded it is evident that Hanlon would be entitled to no relief against the mining company in

an action of specific performance, even if he had been prepared and had offered, after May 6, 1914, to advance the

requisite money and proceed with the performance of the contract. Much less can he be considered entitled to relief where

he has remained in default throughout and has at no time offered to comply with the obligations incumbent upon himself.

Our conclusion, upon a careful examination of the whole case, is that the action cannot be maintained. The judgment is

accordingly reversed and the defendants are absolved from the complaint. No express pronouncement will be made as to

costs of either instance.

200

G.R. No. L-25007 March 2, 1926

PACIFIC COMMERCIAL COMPANY, plaintiff-appellee,

vs.

ABOITIZ & MARTINEZ, ET AL., defendants.

JOSE MARTINEZ, defendant-appellant.

OSTRAND, J.:

In April, 1919 Arnaldo F. de Silva, Guillermo Aboitiz, Vidal Aboitiz and Jose Martinez formed a "regular, collective,

merchantile partnership" with a capital of P40,000 of which each of the partners Aboitiz and De Silva furnished one-third.

The partner Jose Martinez was an industrial partner and furnished no capital; it was provided in the partnership article that

he was to receive 30 per cent of the profits and that his responsibility for losses should not exceed the amount of the

profits received by him.

On April 27, 1922, the partnership, through its duly authorized representative, Guillermo Aboitiz, executed a promissory

note in favor of the plaintiff the Pacific Commercial Company for the sum of P23,168.71, with interest at 12 per cent per

annum until fully paid as additional sum of 10 per cent as attorney's fees and costs of collection in the event it became

necessary to resort to judicial proceedings. As security for the payment of the note, the partnership executed a chattel

mortgage in favor of the plaintiff on certain personal property therein described.

For failure of the partnership to pay the debt the chattel mortgage was foreclosed the mortgages property sold and the

proceeds of the sale, P2,000 was paid over to the plaintiff on December 28, 1923. No further payment on the note appears

to have been made and January 4, 1924, the present action was brought for the recovery of the unpaid balance with

interest. Upon trial the court below rendered judgment in favor of the plaintiff and against the partnership for the sum of

P27,951.68 and for the payment of interest on the capital of P21,168.71 at the rate of 10 per cent per annum from the 31st

October, 1924, until paid, together with 10 per cent on the amount due for fees for collection in accordance with the terms

of the aforesaid note. The judgment further provided that execution should first issue against the property of the

partnership should first issue against the insolvency of the partnership, it might issue against the property of the partners

De Silva and Aboitiz and in the event of their insolvency, then against the property of the industrial partner Jose Martinez.

From this judgment Martinez appealed to this court and here maintains that under article 141 of the Code of Commerce

he, as a mere industrial partner, cannot be held responsible for the partnership's debt.

The case is practically identical with that of the Compania Maritima vs. Munoz (9 Phil., 326), in which this court held the

industrial partners secondarily liable for the debts of the partnership but on the strength of the vigorous dissenting opinion

of Chief Justice Arellano in that case, that appellant argues that the decision therein was erroneous and should now be

overruled. With all due respect for the legal acumen of the first Chief Justice of this Court, we are still of the opinion that

the case was correctly decided. Article 127 of the Code of Commerce reads as follows:

All the members of the general copartnership, be they or be they not managing partners of the same are liable

personally and in solidum with all their property for the results of the transaction made in the name and for the

account of the partnership, under the signature of the later, and by a person authorized to make use thereof.

The language of this article is clear and specific that all the members of a general copartnership are liable with all their

property for the results of the duly authorized transactions made in the name and for the account of the partnership. On the

other hand, article 141, upon which the appellants relies and which provides that "losses shall be computed in the same

proportion among the capitalist partners without including the industrial partners, unless by special agreement the latter

have been constituted as participants therein," is susceptible of two different interpretations of which that given it in the

Compania Maritima case, supra, i. e., that it relates merely to the distribution of losses among the partners themselves in

the settlement of the partnership affairs and has no reference to partnership obligations to third parties, appears to us to be

the more logical.

201

There is a marked distinction between a liability and a loss and the inability of a partnership to pay a debt to a third party

at a particular time does not necessarily mean that the partnership business as a whole, has been operated at a loss. The

partnership may have outstanding credits which for the moment may have be unavailable for the payment of debts, but

which eventually may be realized upon and yield profits more than sufficient to cover all losses. Bearing this in mind it

will be found that there in reality is no conflict between the two articles quoted; one speaks of liabilities, the other of

losses.

The judgment appealed from is affirmed with the costs against the appellant. So ordered.

202

G.R. No. 136448 November 3, 1999

LIM TONG LIM, petitioner,

vs.

PHILIPPINE FISHING GEAR INDUSTRIES, INC., respondent.

PANGANIBAN, J.:

A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the

profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a

"common fund." Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets. Being

partner, they are all liable for debts incurred by or on behalf of the partnership. The liability for a contract entered into on

behalf of an unincorporated association or ostensible corporation may lie in a person who may not have directly transacted

on its behalf, but reaped benefits from that contract.

The Case

In the Petition for Review on Certiorari before us, Lim Tong Lim assails the November 26, 1998 Decision of the Court of

Appeals in CA-GR CV

41477, 1 which disposed as follows:

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

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

follows:

WHEREFORE, the Court rules:

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

1990;

2. That defendants are jointly liable to plaintiff for the following amounts, subject to the modifications as

hereinafter made by reason of the special and unique facts and circumstances and the proceedings that

transpired during the trial of this case;

a. P532,045.00 representing [the] unpaid purchase price of the fishing nets covered by the

Agreement plus P68,000.00 representing the unpaid price of the floats not covered by

said Agreement;

b. 12% interest per annum counted from date of plaintiff's invoices and computed on

their respective amounts as follows:

i. Accrued interest of P73,221.00 on Invoice No. 14407 for P385,377.80

dated February 9, 1990;

ii. Accrued interest for P27,904.02 on Invoice No. 14413 for

P146,868.00 dated February 13, 1990;

iii. Accrued interest of P12,920.00 on Invoice No. 14426 for P68,000.00

dated February 19, 1990;

203

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

appearance in court;

d. P65,000.00 representing P5,000.00 monthly rental for storage charges on the nets

counted from September 20, 1990 (date of attachment) to September 12, 1991 (date of

auction sale);

e. Cost of suit.

With respect to the joint liability of defendants for the principal obligation or for the unpaid price

of nets and floats in the amount of P532,045.00 and P68,000.00, respectively, or for the total

amount P600,045.00, this Court noted that these items were attached to guarantee any judgment

that may be rendered in favor of the plaintiff but, upon agreement of the parties, and, to avoid

further deterioration of the nets during the pendency of this case, it was ordered sold at public

auction for not less than P900,000.00 for which the plaintiff was the sole and winning bidder. The

proceeds of the sale paid for by plaintiff was deposited in court. In effect, the amount of

P900,000.00 replaced the attached property as a guaranty for any judgment that plaintiff may be

able to secure in this case with the ownership and possession of the nets and floats awarded and

delivered by the sheriff to plaintiff as the highest bidder in the public auction sale. It has also been

noted that ownership of the nets [was] retained by the plaintiff until full payment [was] made as

stipulated in the invoices; hence, in effect, the plaintiff attached its own properties. It [was] for

this reason also that this Court earlier ordered the attachment bond filed by plaintiff to guaranty

damages to defendants to be cancelled and for the P900,000.00 cash bidded and paid for by

plaintiff to serve as its bond in favor of defendants.

From the foregoing, it would appear therefore that whatever judgment the plaintiff may be

entitled to in this case will have to be satisfied from the amount of P900,000.00 as this amount

replaced the attached nets and floats. Considering, however, that the total judgment obligation as

computed above would amount to only P840,216.92, it would be inequitable, unfair and unjust to

award the excess to the defendants who are not entitled to damages and who did not put up a

single centavo to raise the amount of P900,000.00 aside from the fact that they are not the owners

of the nets and floats. For this reason, the defendants are hereby relieved from any and all

liabilities arising from the monetary judgment obligation enumerated above and for plaintiff to

retain possession and ownership of the nets and floats and for the reimbursement of the

P900,000.00 deposited by it with the Clerk of Court.

SO ORDERED. 3

The Facts

On behalf of "Ocean Quest Fishing Corporation," Antonio Chua and Peter Yao entered into a Contract dated February 7,

1990, for the purchase of fishing nets of various sizes from the Philippine Fishing Gear Industries, Inc. (herein

respondent). They claimed that they were engaged in a business venture with Petitioner Lim Tong Lim, who however was

not a signatory to the agreement. The total price of the nets amounted to P532,045. Four hundred pieces of floats worth

P68,000 were also sold to the Corporation. 4

The buyers, however, failed to pay for the fishing nets and the floats; hence, private respondents filed a collection suit

against Chua, Yao and Petitioner Lim Tong Lim with a prayer for a writ of preliminary attachment. The suit was brought

against the three in their capacities as general partners, on the allegation that "Ocean Quest Fishing Corporation" was a

nonexistent corporation as shown by a Certification from the Securities and Exchange Commission. 5 On September 20,

1990, the lower court issued a Writ of Preliminary Attachment, which the sheriff enforced by attaching the fishing nets on

board F/B Lourdes which was then docked at the Fisheries Port, Navotas, Metro Manila.

204

Instead of answering the Complaint, Chua filed a Manifestation admitting his liability and requesting a reasonable time

within which to pay. He also turned over to respondent some of the nets which were in his possession. Peter Yao filed an

Answer, after which he was deemed to have waived his right to cross-examine witnesses and to present evidence on his

behalf, because of his failure to appear in subsequent hearings. Lim Tong Lim, on the other hand, filed an Answer with

Counterclaim and Crossclaim and moved for the lifting of the Writ of Attachment.6 The trial court maintained the Writ,

and upon motion of private respondent, ordered the sale of the fishing nets at a public auction. Philippine Fishing Gear

Industries won the bidding and deposited with the said court the sales proceeds of P900,000. 7

On November 18, 1992, the trial court rendered its Decision, ruling that Philippine Fishing Gear Industries was entitled to

the Writ of Attachment and that Chua, Yao and Lim, as general partners, were jointly liable to pay respondent. 8

The trial court ruled that a partnership among Lim, Chua and Yao existed based (1) on the testimonies of the witnesses

presented and (2) on a Compromise Agreement executed by the three 9 in Civil Case No. 1492-MN which Chua and Yao

had brought against Lim in the RTC of Malabon, Branch 72, for (a) a declaration of nullity of commercial documents; (b)

a reformation of contracts; (c) a declaration of ownership of fishing boats; (d) an injunction and (e) damages.10

The

Compromise Agreement provided:

a) That the parties plaintiffs & Lim Tong Lim agree to have the four (4) vessels sold in

the amount of P5,750,000.00 including the fishing net. This P5,750,000.00 shall be

applied as full payment for P3,250,000.00 in favor of JL Holdings Corporation and/or

Lim Tong Lim;

b) If the four (4) vessel[s] and the fishing net will be sold at a higher price than

P5,750,000.00 whatever will be the excess will be divided into 3: 1/3 Lim Tong Lim; 1/3

Antonio Chua; 1/3 Peter Yao;

c) If the proceeds of the sale the vessels will be less than P5,750,000.00 whatever the

deficiency shall be shouldered and paid to JL Holding Corporation by 1/3 Lim Tong Lim;

1/3 Antonio Chua; 1/3 Peter Yao. 11

The trial court noted that the Compromise Agreement was silent as to the nature of their obligations, but that joint liability

could be presumed from the equal distribution of the profit and loss. 21

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

Ruling of the Court of Appeals

In affirming the trial court, the CA held that petitioner was a partner of Chua and Yao in a fishing business and may thus

be held liable as a such for the fishing nets and floats purchased by and for the use of the partnership. The appellate court

ruled:

The evidence establishes that all the defendants including herein appellant Lim Tong Lim undertook a

partnership for a specific undertaking, that is for commercial fishing . . . . Oviously, the ultimate

undertaking of the defendants was to divide the profits among themselves which is what a partnership

essentially is . . . . By a contract of partnership, two or more persons bind themselves to contribute money,

property or industry to a common fund with the intention of dividing the profits among themselves

(Article 1767, New Civil Code). 13

Hence, petitioner brought this recourse before this Court. 14

The Issues

205

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

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

THAT CHUA, YAO AND PETITIONER LIM ENTERED INTO IN A SEPARATE CASE, THAT A

PARTNERSHIP AGREEMENT EXISTED AMONG THEM.

II SINCE IT WAS ONLY CHUA WHO REPRESENTED THAT HE WAS ACTING FOR OCEAN

QUEST FISHING CORPORATION WHEN HE BOUGHT THE NETS FROM PHILIPPINE FISHING,

THE COURT OF APPEALS WAS UNJUSTIFIED IN IMPUTING LIABILITY TO PETITIONER LIM

AS WELL.

III THE TRIAL COURT IMPROPERLY ORDERED THE SEIZURE AND ATTACHMENT OF

PETITIONER LIM'S GOODS.

In determining whether petitioner may be held liable for the fishing nets and floats from respondent, the Court must

resolve this key issue: whether by their acts, Lim, Chua and Yao could be deemed to have entered into a partnership.

This Court's Ruling

The Petition is devoid of merit.

First and Second Issues:

Existence of a Partnership

and Petitioner's Liability

In arguing that he should not be held liable for the equipment purchased from respondent, petitioner controverts the CA

finding that a partnership existed between him, Peter Yao and Antonio Chua. He asserts that the CA based its finding on

the Compromise Agreement alone. Furthermore, he disclaims any direct participation in the purchase of the nets, alleging

that the negotiations were conducted by Chua and Yao only, and that he has not even met the representatives of the

respondent company. Petitioner further argues that he was a lessor, not a partner, of Chua and Yao, for the "Contract of

Lease " dated February 1, 1990, showed that he had merely leased to the two the main asset of the purported partnership

— the fishing boat F/B Lourdes. The lease was for six months, with a monthly rental of P37,500 plus 25 percent of the

gross catch of the boat.

We are not persuaded by the arguments of petitioner. The facts as found by the two lower courts clearly showed that there

existed a partnership among Chua, Yao and him, pursuant to Article 1767 of the Civil Code which provides:

Art. 1767 — By the contract of partnership, two or more persons bind themselves to contribute money,

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

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

(1) That Petitioner Lim Tong Lim requested Peter Yao who was engaged in commercial fishing to join

him, while Antonio Chua was already Yao's partner;

(2) That after convening for a few times, Lim, Chua, and Yao verbally agreed to acquire two fishing

boats, the FB Lourdes and the FB Nelson for the sum of P3.35 million;

206

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

venture.

(4) That they bought the boats from CMF Fishing Corporation, which executed a Deed of Sale over these

two (2) boats in favor of Petitioner Lim Tong Lim only to serve as security for the loan extended by Jesus

Lim;

(5) That Lim, Chua and Yao agreed that the refurbishing, re-equipping, repairing, dry docking and other

expenses for the boats would be shouldered by Chua and Yao;

(6) That because of the "unavailability of funds," Jesus Lim again extended a loan to the partnership in

the amount of P1 million secured by a check, because of which, Yao and Chua entrusted the ownership

papers of two other boats, Chua's FB Lady Anne Mel and Yao's FB Tracy to Lim Tong Lim.

(7) That in pursuance of the business agreement, Peter Yao and Antonio Chua bought nets from

Respondent Philippine Fishing Gear, in behalf of "Ocean Quest Fishing Corporation," their purported

business name.

(8) That subsequently, Civil Case No. 1492-MN was filed in the Malabon RTC, Branch 72 by Antonio

Chua and Peter Yao against Lim Tong Lim for (a) declaration of nullity of commercial documents; (b)

reformation of contracts; (c) declaration of ownership of fishing boats; (4) injunction; and (e) damages.

(9) That the case was amicably settled through a Compromise Agreement executed between the parties-

litigants the terms of which are already enumerated above.

From the factual findings of both lower courts, it is clear that Chua, Yao and Lim had decided to engage in a fishing

business, which they started by buying boats worth P3.35 million, financed by a loan secured from Jesus Lim who was

petitioner's brother. In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the

proceeds of the sale of the boats, and to divide equally among them the excess or loss. These boats, the purchase and the

repair of which were financed with borrowed money, fell under the term "common fund" under Article 1767. The

contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties

agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows

that they had indeed formed a partnership.

Moreover, it is clear that the partnership extended not only to the purchase of the boat, but also to that of the nets and the

floats. The fishing nets and the floats, both essential to fishing, were obviously acquired in furtherance of their business. It

would have been inconceivable for Lim to involve himself so much in buying the boat but not in the acquisition of the

aforesaid equipment, without which the business could not have proceeded.

Given the preceding facts, it is clear that there was, among petitioner, Chua and Yao, a partnership engaged in the fishing

business. They purchased the boats, which constituted the main assets of the partnership, and they agreed that the

proceeds from the sales and operations thereof would be divided among them.

We stress that under Rule 45, a petition for review like the present case should involve only questions of law. Thus, the

foregoing factual findings of the RTC and the CA are binding on this Court, absent any cogent proof that the present

action is embraced by one of the exceptions to the rule. 16

In assailing the factual findings of the two lower courts,

petitioner effectively goes beyond the bounds of a petition for review under Rule 45.

Compromise Agreement

Not the Sole Basis of Partnership

207

Petitioner argues that the appellate court's sole basis for assuming the existence of a partnership was the Compromise

Agreement. He also claims that the settlement was entered into only to end the dispute among them, but not to adjudicate

their preexisting rights and obligations. His arguments are baseless. The Agreement was but an embodiment of the

relationship extant among the parties prior to its execution.

A proper adjudication of claimants' rights mandates that courts must review and thoroughly appraise all relevant facts.

Both lower courts have done so and have found, correctly, a preexisting partnership among the parties. In implying that

the lower courts have decided on the basis of one piece of document alone, petitioner fails to appreciate that the CA and

the RTC delved into the history of the document and explored all the possible consequential combinations in harmony

with law, logic and fairness. Verily, the two lower courts' factual findings mentioned above nullified petitioner's argument

that the existence of a partnership was based only on the Compromise Agreement.

Petitioner Was a Partner,

Not a Lessor

We are not convinced by petitioner's argument that he was merely the lessor of the boats to Chua and Yao, not a partner in

the fishing venture. His argument allegedly finds support in the Contract of Lease and the registration papers showing that

he was the owner of the boats, including F/B Lourdes where the nets were found.

His allegation defies logic. In effect, he would like this Court to believe that he consented to the sale of his own boats to

pay a debt of Chua and Yao, with the excess of the proceeds to be divided among the three of them. No lessor would do

what petitioner did. Indeed, his consent to the sale proved that there was a preexisting partnership among all three.

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

undertaken in order to finance the acquisition and the upgrading of the vessels which would be used in their fishing

business. The sale of the boats, as well as the division among the three of the balance remaining after the payment of their

loans, proves beyond cavil that F/B Lourdes, though registered in his name, was not his own property but an asset of the

partnership. It is not uncommon to register the properties acquired from a loan in the name of the person the lender trusts,

who in this case is the petitioner himself. After all, he is the brother of the creditor, Jesus Lim.

We stress that it is unreasonable — indeed, it is absurd — for petitioner to sell his property to pay a debt he did not incur,

if the relationship among the three of them was merely that of lessor-lessee, instead of partners.

Corporation by Estoppel

Petitioner argues that under the doctrine of corporation by estoppel, liability can be imputed only to Chua and Yao, and

not to him. Again, we disagree.

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

Sec. 21. Corporation by estoppel. — All persons who assume to act as a corporation knowing it to be

without authority to do so shall be liable as general partners for all debts, liabilities and damages incurred

or arising as a result thereof: Provided however, That when any such ostensible corporation is sued on any

transaction entered by it as a corporation or on any tort committed by it as such, it shall not be allowed to

use as a defense its lack of corporate personality.

One who assumes an obligation to an ostensible corporation as such, cannot resist performance thereof on

the ground that there was in fact no corporation.

208

Thus, even if the ostensible corporate entity is proven to be legally nonexistent, a party may be estopped from denying its

corporate existence. "The reason behind this doctrine is obvious — an unincorporated association has no personality and

would be incompetent to act and appropriate for itself the power and attributes of a corporation as provided by law; it

cannot create agents or confer authority on another to act in its behalf; thus, those who act or purport to act as its

representatives or agents do so without authority and at their own risk. And as it is an elementary principle of law that a

person who acts as an agent without authority or without a principal is himself regarded as the principal, possessed of all

the right and subject to all the liabilities of a principal, a person acting or purporting to act on behalf of a corporation

which has no valid existence assumes such privileges and obligations and becomes personally liable for contracts entered

into or for other acts performed as such agent. 17

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

unincorporated association, which represented itself to be a corporation, will be estopped from denying its corporate

capacity in a suit against it by a third person who relied in good faith on such representation. It cannot allege lack of

personality to be sued to evade its responsibility for a contract it entered into and by virtue of which it received advantages

and benefits.

On the other hand, a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation

and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged

corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite

knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took advantage of.

There is no dispute that the respondent, Philippine Fishing Gear Industries, is entitled to be paid for the nets it sold. The

only question here is whether petitioner should be held jointly 18

liable with Chua and Yao. Petitioner contests such

liability, insisting that only those who dealt in the name of the ostensible corporation should be held liable. Since his name

does not appear on any of the contracts and since he never directly transacted with the respondent corporation, ergo, he

cannot be held liable.

Unquestionably, petitioner benefited from the use of the nets found inside F/B Lourdes, the boat which has earlier been

proven to be an asset of the partnership. He in fact questions the attachment of the nets, because the Writ has effectively

stopped his use of the fishing vessel.

It is difficult to disagree with the RTC and the CA that Lim, Chua and Yao decided to form a corporation. Although it was

never legally formed for unknown reasons, this fact alone does not preclude the liabilities of the three as contracting

parties in representation of it. Clearly, under the law on estoppel, those acting on behalf of a corporation and those

benefited by it, knowing it to be without valid existence, are held liable as general partners.

Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits

of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of

said association and is covered by the scope of the doctrine of corporation by estoppel. We reiterate the ruling of the Court

in Alonso v. Villamor: 19

A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art

of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending

party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and

indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the

merits. Lawsuits, unlike duels, are not to be won by a rapier's thrust. Technicality, when it deserts its

proper office as an aid to justice and becomes its great hindrance and chief enemy, deserves scant

consideration from courts. There should be no vested rights in technicalities.

Third Issue:

209

Validity of Attachment

Finally, petitioner claims that the Writ of Attachment was improperly issued against the nets. We agree with the Court of

Appeals that this issue is now moot and academic. As previously discussed, F/B Lourdes was an asset of the partnership

and that it was placed in the name of petitioner, only to assure payment of the debt he and his partners owed. The nets and

the floats were specifically manufactured and tailor-made according to their own design, and were bought and used in the

fishing venture they agreed upon. Hence, the issuance of the Writ to assure the payment of the price stipulated in the

invoices is proper. Besides, by specific agreement, ownership of the nets remained with Respondent Philippine Fishing

Gear, until full payment thereof.

WHEREFORE, the Petition is DENIED and the assailed Decision AFFIRMED. Costs against petitioner.

SO ORDERED.

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

Vitug, J., pls. see concurring opinion.

Separate Opinions

VITUG, J., concurring opinion;

I share the views expressed in the ponencia of an esteemed colleague, Mr. Justice Artemio V. Panganiban, particularly the

finding that Antonio Chua, Peter Yao and petitioner Lim Tong Lim have incurred the liabilities of general partners. I

merely would wish to elucidate a bit, albeit briefly, the liability of partners in a general partnership.

When a person by his act or deed represents himself as a partner in an existing partnership or with one or more persons

not actual partners, he is deemed an agent of such persons consenting to such representation and in the same manner, if he

were a partner, with respect to persons who rely upon the representation. 1 The association formed by Chua, Yao and Lim,

should be, as it has been deemed, a de facto partnership with all the consequent obligations for the purpose of enforcing

the rights of third persons. The liability of general partners (in a general partnership as so opposed to a limited

partnership) is laid down in Article 1816 2 which posits that all partners shall be liable pro rata beyond the partnership

assets for all the contracts which may have been entered into in its name, under its signature, and by a person authorized

to act for the partnership. This rule is to be construed along with other provisions of the Civil Code which postulate that

the partners can be held solidarily liable with the partnership specifically in these instances — (1) where, by any wrongful

act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his

co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the

partnership is liable therefor to the same extent as the partner so acting or omitting to act; (2) where one partner acting

within the scope of his apparent authority receives money or property of a third person and misapplies it; and (3) where

the partnership in the course of its business receives money or property of a third person and the money or property so

received is misapplied by any partner while it is in the custody of the partnership 3 — consistently with the rules on the

nature of civil liability in delicts and quasi-delicts.

210

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.

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 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

211

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 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.

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.

212

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 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).

213

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

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.

214

Rep. 12; Filipinos Industrial Corporation v. San Diego G.R. No. L- 22347,1968, 23

SCRA 706, 710-714.

The total amount paid by Pioneer to JDA is P299,666.29. Since Pioneer has collected P295,000.00 from

the reinsurers, the uninsured portion of what it paid to JDA is the difference between the two amounts, or

P3,666.28. This is the amount for which Pioneer may sue defendants, assuming that the indemnity

agreement is still valid and effective. But since the amount realized from the sale of the mortgaged

chattels are P35,000.00 for one of the airplanes and P2,050.00 for a spare engine, or a total of P37,050.00,

Pioneer is still overpaid by P33,383.72. Therefore, Pioneer has no more claim against defendants. (Record

on Appeal, pp. 360-363).

The payment to the petitioner made by the reinsurers was not disputed in the appellate court. Considering this admitted

payment, the only issue that cropped up was the effect of payment made by the reinsurers to the petitioner. Therefore, the

petitioner's argument that the respondents had no interest in the reinsurance contract as this is strictly between the

petitioner as insured and the reinsuring company pursuant to Section 91 (should be Section 98) of the Insurance Code has

no basis.

In general a reinsurer, on payment of a loss acquires the same rights by subrogation as are acquired in

similar cases where the original insurer pays a loss (Universal Ins. Co. v. Old Time Molasses Co. C.C.A.

La., 46 F 2nd 925).

The rules of practice in actions on original insurance policies are in general applicable to actions or

contracts of reinsurance. (Delaware, Ins. Co. v. Pennsylvania Fire Ins. Co., 55 S.E. 330,126 GA. 380, 7

Ann. Con. 1134).

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

Art. 2207. If the plaintiffs property has been insured, and he has received indemnity from the insurance

company for the injury or loss arising out of the wrong or breach of contract complained of, the insurance

company shall be subrogated to the rights of the insured against the wrongdoer or the person who has

violated the contract. If the amount paid by the insurance company does not fully cover the injury or loss,

the aggrieved party shall be entitled to recover the deficiency from the person causing the loss or injury.

Interpreting the aforesaid provision, we ruled in the case of Phil. Air Lines, Inc. v. Heald Lumber Co. (101 Phil. 1031

[1957]) which we subsequently applied in Manila Mahogany Manufacturing Corporation v. Court of Appeals(154 SCRA

650 [1987]):

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,

215

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.

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

216

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.

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).'

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.

217

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 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,

218

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 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 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

219

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.

220

G.R. No. L-4776 March 18, 1909

MANUEL ORMACHEA TIN-CONGCO, deceased, represented by the Chinaman Tiu Tusay, judicial

administrator of his estate, plaintiff-appellee,

vs.

SANTIAGO TRILLANA, defendant-appellant.

TORRES, J.:

On the 15th of January, 1904, Manuel Ormachea Tin-Congco, a Chinaman, presented an amended complaint against

Santiago Trillana, alleging that the plaintiff Ormachea and Luis Vizmanos Ong Queco were engaged in business in the

pueblos of Hagonoy, Malolos, and other places in the Province of Bulacan, and that in the course thereof the defendant

purchased from them merchandise to the value of 4,000 pesos, local currency; that two years prior to that date, a little

more or less, the partnership was dissolved and the business was divided up between the partners, all accounts and debts

of the defendant were alloted to the plaintiff, and became the individual property of Ormachea Tin-Congco; the

indebtedness is proven by the documents signed by the defendant or his agents in favor of Ormachea or of Vizmanos Ong

Queco or their agent named Lawa in charge of the business, The documents of indebtedness are inserted in the complaint

and duly numbered. They aggregate 135 documents, some of which are written in Tagalog with corresponding

translations; that the legal interest on the said 4,000 pesos is 1,500 pesos which makes the total debt amount to 5,500

pesos, and the same has not been paid by the defendant. Therefore, the plaintiff prays that judgment be entered ordering

the defendant, Santiago Trillana, to pay the said 5,500 pesos with costs.

The defendant filed a written answer on November 15, 1904, setting forth: That he admitted the first statement of the

complaint, but had no knowledge as to the second as it appears therein; that he did not admit the same, nor the other

allegations in the complaint in the sense in which they are set out; that as a special defense, the defendant alleges that he

had already settled his accounts and obligations contracted in the business to which the complaint refers, by means of

periodical payments in tuba or the liquor of the nipa palm, and that if any accounts are still pending, the same should,

owing to their character and the manner in which they were constituted, be paid in kind and not in money as the plaintiff

claims in his complaint, and should be paid at the time and under the circumstances which, as is customary in Hagonoy,

such class of obligations are settled; he therefore asked the court below to enter judgment absolving the defendant of the

complaint, with the costs against the plaintiff.

After hearing the evidence presented by the parties, the trial judge, on February 27, 1907, rendered judgment ordering the

defendant, Santiago Trillana, to pay to the Chinaman Florentino Tiu Tusay, the judicial administrator of the estate of the

deceased plaintiff, Ormachea Tin-Congco, the sum of P2,832.22, in tuba, under the same conditions stipulated between

the debtor and the copartnership for the working of the distillery of Luis Vizmanos and the late Chinaman Manuel

Ormachea, with costs.

The representative of the defendant excepted to the above judgment, and announced his intention to appeal by means of a

bill of exceptions; and by a writing dated March 22, 1907, he prayed the lower court to revoke or amend its former

decision of the 27th of February, and to order a new trial as the evidence adduced at the hearing was not sufficient to

justify said decision, because the vale No. 88 is subscribed by another person who is not the defendant, and for said reason

its value can not be demanded from him; that vales numbered 31, 87, 91, 93, 94, 96, and 97 are in the same condition; that

the vales Nos. 5, 6, 7, 32, 33, 35, 40, 41, 44, 48, 54, 63, 104, 105, 127, 132, and 133 offered by the plaintiff in evidence

and signed by the defendant, clearly express on whose account they were issued, and for said reason the obligations

contained in said vales are not those of the defendant, Santiago Trillana, and can not stand as evidence against him; that

the vales Nos. 109, 112, 113, 115, 116, 118, 12, and 15 by themselves do not prove, nor can they prove that the amount of

money which they represent should form part of the defendant's debt, because it does not appear that there was ever a

lawful transfer, cession or indorsement made between the person in whose favor they are made out and the so-called

creditor, nor between said person and the successor of the said entity, that is to say, the representative of the plaintiff;

that vale No. 113 is made out as a mere recommendation of the defendant, and for account of a third person; that vale No.

1 does not state the year, and No. 135 bears no date at all, therefore, they do not constitute sufficient proof to justify the

221

condemnatory judgment with respect to the amount which they represent because the time when said respective

obligations were contracted is not determined; that the vales which are date previously to vale No. 98 are invalidated by

the note of general liquidation between the creditor Manuel Ormachea, and the debtor Santiago Trillana written on the

back of the said vale No. 98 in Chinese characters and explained by the witness Jose R. Lopez Lawa, and, notwithstanding

said liquidation, the said vales are reputed as unpaid; and finally, that if the debt is payable in tuba, unless it is shown and

it does not so appear that the defendant refused to pay it in that manner or has failed to comply with his obligations, there

is no reason to compel him to pay, therefore he should not be ordered to do so, much less to pay the costs.

At the hearing, the trial judge, on the 7th of May, 1907, overruled the motion to modify his former decision as far as it

referred to the amount of the indebtedness found against the defendant and the said judgment was modified by adding the

provision that the defendant should make payment in tuba which he should deliver at the plaintiff's distillery in the town

of Hagonoy within the term of six months, but that, if said term should expire without such payment, whatever might be

the cause, he should be obliged to pay his debt in cash.

The defendant requested a decision in his motion for a new trial in which he contended that the evidence was not

sufficient to justify the judgment of February 27, and on the 12th of November the court below held that, by its order of

May 7, last, the motion for a new trial was denied, and said denial was reproduced as explanation of the ruling of May 7.

The defendant excepted to the foregoing decision and presented the corresponding amended bill of exceptions; when

approving the bill of exceptions, the court below ordered the suspension of the execution providing that the defendant

furnish bond in the sum of P4,000.

As Manuel Ormachea Tin-Congco claimed from Santiago Trillana the payment of the sum which, as capital and interest

thereon, he owed the former for amounts in cash and in goods which he took from the creditor and his partner, Luis

Vizmanos Ong Queco, as shown by the 135 vales which are attached to the complaint and which were admitted as

authentic by the defendant, with the exception of eight of them signed by the other persons, aggregating P173, the court

below, in view of the evidence, found that the debt which could be claimed from the defendant, after deducting the said

P173, amounted only to P2,832.22 4/8.

The record shows that the amounts advanced to the debtor, Santiago Trillana, and to the others by means of the said vales,

and most of which were addressed to Lopez Lawa, and some to other persons, were delivered by the said Lopez Lawa

who, from the years 1894 or by 1895 to 1901, was the manager of the distillery situated in the barrio of San Sebastian,

municipality of Hagonoy, Bulacan, and owned in partnership by Ormachea and Vizmanos, but the money furnished by the

manager to Trillana and to the others on account of the tuba or liquor of the nipa palm which the defendant had engaged

to supply to said distillery belonged to the two owners of the same, not to the manager, Jose Lopez Lawa.

It has also been fully proven that, when in June or July, 1901, the aforesaid Ormachea Tin-Congco and Vizmanos Ong

Queco withdrew from the business, Lawa ceased to act as manager of the distillery, and then, among other things that

belonged to the two partners, they divided between them the credits that they held against third persons, those that stood

against Santiago Trillana as evidenced by the said 135 vales, having gone to Manuel Ormachea Tin-Congco. This is

affirmed by Luis Vizmanos Ong Queco, Syo Bunchad, by Jose R. Lopez Lawa himself, and, as stipulated between the

parties, by Tiu Langco, a Chinaman who was at the time employed as mixer in said distillery. It should be noted that,

while this litigation was pending, the plaintiff, Manuel Ormachea, died, and Florentino Tiu Tusay was appointed

administrator of his estate; letters of administration in favor of the latter were issued on the 9th of October, 1905. (Folio

56.)

As has been seen, the defendant stated that he had already paid his accounts and obligations contracted in favor of the said

Ormachea and Vizmanos by means of periodical deliveries of tuba or liquor of the nipa palm, and alleged that, if any

amount was still pending payment, it should be paid not in money but in tuba, at such time and under such circumstances

as are customary in the town of Hagonoy. In evidence of this, while testifying under oath, he introduced the following

document marked "A" which appears at folio 248:

222

I, Jose R. Lopez (Lawa), a Christian Chinese, do hereby declare that D. Santiago Trillana has no outstanding debt

whatever with the distillery situated in the barrio of San Sebastian in this town, which in past times was under my

management. What I have stated is the truth. — Hagonoy, November 19, 1903. — Jose R. Lopez.

The debtor explained how and in what manner he obtained the foregoing document from Lawa, and stated: That in

November, 1903, he received a letter from Mr. McGirr, the plaintiff's attorney, requesting him to settle his account with

Lawa, for which reason he called on the latter and asked him whether he still owed him anything on account of the

distillery in San Sebastian; Lawa replied that he no longer owed anything; thereupon the requested Lawa to issue the said

document, and under Lawa's direction the debtor wrote out the document, and the former, upon being informed of its

contents, signed it; for said reason the witness believed that he no longer owed anything.

However, Lopez Lawa affirms that he gave the said document marked as Exhibit A" to the debtor, Santiago Trillana,

because the latter was indebted to him but to Manuel Ormachea, to whom the credits standing against Trillana were

transferred when Ormachea withdrew from the above-mentioned partnership with Vizmanos Ong Queco. When drawing

up the preinserted document, it was not his intention to annul and set aside the valeswhich represented the indebtedness of

the defendant, Trillana.

If the business jointly carried on by Ormachea and Vizmanos was dissolved, and its transactions ceased in 1901 Jose

Lopez Lawa, who managed the distillery on behalf of the owners of the same, also ceased to act as such manager in said

year, and for said reason the document Exhibit A, which he issued to the debtor on the 19th of November, 1903, two years

after ceasing to be manager, can not serve to relieve the debtor from paying what he owed by virtue of the documents

or vales that he had issued in order to obtain money from the owners of the said distillery; that is to say, as agreed upon by

them, the right to recover the debts of the defendant still belonged to Ormachea when the business was dissolved, as Lawa

was not authorized by Ormachea to deliver to the debtor an acquittance releasing him from the obligations that he had

contracted, to the prejudice of the real creditor, the only person entitled to condone a debt in the event of waiving the right

to recover the same.

If the document marked "A" had been issued by Jose Lopez Lawa while still at the head of the business of the distillery, as

representative of the owners thereof, the aforesaid Ormachea and Vizmanos, prior to their withdrawal from business,

perhaps it might have served as a foundation for the debtor to allege that his obligations evidenced by said vales had been

settled, although, if such was the case, the said vales should have been returned to him by Lawa, or by the owners of the

distillery; but, as the document was made out and issued two years afterwards, without a previous payment of the amounts

secured on the said vales, when the business no longer existed, when the owners had entirely withdrawn from it, and when

Lawa, who then acted as manager of the distillery, had no express authority to issue such a document, with the further

circumstance of its being written in Spanish, a language with which the Chinaman who signed it was probably not well

acquainted and the fact that it was written by the defendant, Santiago Trillana himself; it is not proper nor lawful to admit

the said document as possessing a force and effect that would fully exempt the defendant from the payment of his

obligation, and with greater reason if it is considered that it has not been shown that Lawa was authorized to liquidate

accounts, or issue an acquittance releasing the debtor from the payment of his debt. (Arts. 1714 and 1719, Civil Code.)

Article 1162 of said code reads:

Payment must be made to the person in whose favor an obligation is constituted, or to another authorized to

receive it in his name.

After the close of the business of the distillery owned by Ormachea and Vizmanos, and after Lawa had ceased for two

years to act in the administration and management thereof, he was not authorized to sign the document marked "A," made

out by the debtor, by which the credit of Ormachea should be considered as settled, and the obligation contracted by

Santiago Trillana, as shown by the vales which appear in the record, extinguished.

Since the vales existed, and were in the possession of the creditor, it was because the amounts they called for had not

presumed to have been fulfilled when the proofs of its existence have been returned to the debtor. (Sec. 334, par. 8, Code

223

of Civil Procedure.) Seeing that the amounts stated in the vales acknowledged by the debtor were advanced to him in part

payment of the price of certain quantities of tuba or liquor of the nipa palm which he had contracted to deliver at the

distillery, and as long as he is able to comply with these stipulations within a reasonable time, the defendant can not be

compelled to pay his debt in cash. The amounts stated in the valeswere advanced under the condition that the same would

be paid or satisfied with the value of the tuba received by the distillery; therefore, the decision of the court below, which

moreover appears to have been acquiesced in by the appellee for the reason that it was undoubtedly so stipulated, is in

accordance with the law. (Art. 1278, Civil Code.)

In view of the forgoing, and accepting the conclusions contained in the judgment of February 27, 1907, appealed from, it

is our opinion that the same should be affirmed, and we hereby affirm it, with the addition made in the order of May 7 of

the same year, with the costs against the appellant. So ordered.

224

G.R. No. L-20735 August 14, 1965

GLICERIA C. LIWANAG, Special Administratrix of the Estate of PIO D. LIWANAG, petitioner,

vs.

HON. COURT OF APPEALS, HON. JESUS DE VEYRA, as Judge of the Court of First Instance of Manila, and

MANUEL AGREGADO, respondents.

CONCEPCION, J.:

Appeal by certiorari from a decision of the Court of Appeals.

Petitioner Gliceria C. Liwanag is the special administratrix of the estate of Pio D. Liwanag, the settlement of which is the

subject of Special Proceeding No. 46599 of the Court of First Instance of Manila. On January 9, 1962 respondent Manuel

Agregado commenced against her as such special administratrix, Civil Case No. 50897 of the same court, for the

foreclosure of a real estate mortgage constituted in his favor by said Pio D. Liwanag during his lifetime. On July 18, 1962,

here petitioner moved to dismiss Agregado's complaint, upon the ground that as special administratrix she cannot be sued

by a creditor of the deceased. In an order dated August 1, 1962, respondent, Hon. Jesus de Veyra, as Judge of said court,

denied the motion, whereupon petitioner filed case CA-G.R. No. 31168-R of the Court of Appeals against respondent

Judge and Agregado, to annul said order by writ ofcertiorari and enjoin said Judge from entertaining said Case No.

50897. Upon petitioner's motion, the Court of Appeals issued a writ of preliminary injunction directing respondent Judge

to refrain from proceeding with the trial of that case, until further orders. However, subsequently, or on December 3,

1962, the Court of Appeals rendered a decision denying the writ prayed for and dissolving said writ of preliminary

injunction, with costs against the petitioner. Hence this appeal taken by petitioner upon the theory that, pursuant to Section

2, Rule 81 of the (old) Rules of Court, "a special administrator shall not be liable to pay any debts of the deceased," and

that, accordingly, Agregado has no cause of action against her as a special administratrix.

In as much, however, as the alleged absence of a cause of action does not affect respondent's jurisdiction to hear Case No.

50897, it follows that the denial of petitioner's motion to the same, even if it were erroneous, is reviewable, not by writ

of certiorari, but by appeal, after the rendition of judgment on the merits. Moreover, the theory that a mortgagee cannot

bring an action for foreclosure against the special administrator of the estate of a deceased person has already been

rejected by this Court. In Liwanag vs. Hon. Luis B. Reyes, G.R. No. L-19159 (September 29, 1964), involving the same

petitioner herein, the same estate of the deceased Pio D. Liwanag, a similar action for foreclosure, although of another

mortgage and an identical motion to dismiss and issue, we expressed ourselves as follows:

The defendant Gliceria Liwanag filed a motion to dismiss the complaint for foreclosure, on the theory that she

may not be sued as special administratrix.

x x x x x x x x x

Section 7 of Rule 86 of the New Rules of Court provides that a creditor holding a claim against the deceased,

secured by a mortgage or other collateral security, may pursue any of these remedies: (1) abandon his security and

prosecute his claim and share in the general distribution of the assets of the estate; (2) foreclose his mortgage or

realize upon his security by an action in court, making the executor or administrator a party defendant, and if there

is a deficiency after the sale of the mortgaged property, he may prove the same in the testate or intestate

proceedings; and (3) rely exclusively upon his mortgage and foreclose it any time within the ordinary period of

limitations, and if he relies exclusively upon the mortgage, he shall not...share in the distribution of the assets.

Obviously, the herein respondent has chosen the second remedy, having filed his action for foreclosure against the

administratrix of the property.

225

Now the question arises as to whether the petitioner herein can be sued as special administratrix. The Rules of

Court do not expressly prohibit making the special administratrix a defendant in a suit against the estate.

Otherwise, creditors would find the adverse effects of the statute of limitations running against them in cases

where the appointment of a regular administrator is delayed. So that if We are not to deny the present action on

this technical ground alone, and the appointment of a regular administrator will be delayed, the very purpose for

which the mortgage was constituted will be defeated.

WHEREFORE, the decision appealed from is hereby affirmed, with costs against the petitioner. It is so ordered.

226

G.R. No. 110782 September 25, 1998

IRMA IDOS, petitioner,

vs.

COURT OF APPEALS and PEOPLE OF THE PHILIPPINES, respondents.

QUISUMBING, J.:

Before this Court is the petition for review of the Decision of respondent Court of Appeals 1 dismissing petitioner's appeal

in CA-G.R. CR No. 11960; and affirming her conviction as well as the sentence imposed on her by the Regional Trial

Court of Malolos, Bulacan, in Criminal Case No. 1395-M-88 2 as follows:

WHEREFORE . . . the (c)ourt finds the accused Irma Idos guilty beyond reasonable doubt and is hereby

sentenced to suffer the penalty of imprisonment of six (6) months and to pay a fine of P135,000.00 and to

pay private complainant Eddie Alarilla the amount of the check in question of P135,000.00 at 12%

interest from the time of the filing of the (i)nformation (August 10, 1988) until said amount has been fully

paid.

Elevated from the Third Division 3 of this Court, the case was accepted for resolution en banc on the initial impression

that here, a constitutional question might be involved. 4 It was opined that petitioner's sentence, particularly six months'

imprisonment, might be in violation of the constitutional guarantee against imprisonment for non-payment of a debt. 5

A careful consideration of the issues presented in the petition as well as the comments thereon and the findings of fact by

the courts below in the light of applicable laws and precedents convinces us, however, that the constitutional dimension

need not be reached in order to resolve those issues adequately. For, as herein discussed, the merits of the petition could

be determined without delving into aspects of the cited constitutional guarantee vis-a-vis provisions of the Bouncing

Checks Law (Batas Pambansa Blg. 22). There being no necessity therefor, we lay aside discussions of the constitutional

challenge to said law in deciding this petition.

The petitioner herein, Irma L. Idos, is a businesswoman engaged in leather tanning. Her accuser for violation of B.P. 22 is

her erstwhile supplier and business partner, the complainant below, Eddie Alarilla.

As narrated by the Court of Appeals, the background of this case is as follows:

The complainant Eddie Alarilla supplied chemicals and rawhide to the accused-appellant Irma L. Idos for

use in the latter's business of manufacturing leather. In 1985, he joined the accused-appellant's business

and formed with her a partnership under the style "Tagumpay Manufacturing," with offices in Bulacan

and Cebu City.

However, the partnership was short lived. In January, 1986 the parties agreed to terminate their

partnership. Upon liquidation of the business the partnership had as of May 1986 receivables and stocks

worth P1,800,000.00. The complainant's share of the assets was P900,000.00 to pay for which the

accused-appellant issued the following postdated checks, all drawn against Metrobank Branch in

Mandaue, Cebu:

CHECK NO. DATE AMOUNT

1) 103110295 8-15-86 P135,828.87

2) 103110294 P135,828.87

227

3) 103115490 9-30-86 P135,828.87

4) 103115491 10-30-86 P126,656.01

The complainant was able to encash the first, second, and fourth checks, but the third check (Exh. A)

which is the subject of this case, was dishonored on October 14, 1986 for insufficiency of funds. The

complainant demanded payment from the accused-appellant but the latter failed to pay. Accordingly, on

December 18, 1986, through counsel, he made a formal demand for payment. (Exh. B) In a letter dated

January 2, 1987, the accused-appellant denied liability. She claimed that the check had been given upon

demand of complainant in May 1986 only as "assurance" of his share in the assets of the partnership and

that it was not supposed to be deposited until the stocks had been sold.

Complainant then filed his complaint in the Office of the Provincial Fiscal of Bulacan which on August

22, 1988 filed an information for violation of BP Blg. 22 against accused-appellant.

Complainant danied that the checks issued to him by accused-appellant were subject to the disposition of

the stocks and the collection of receivables of the business. But the accused-appellant insisted that the

complainant had known that the checks were to be funded from the proceeds of the sale of the stocks and

the collection of receivables. She claimed that the complainant himself asked for the checks because he

did not want to continue in the tannery business and had no use for a share of the stocks. (TSN, p. 7, April

14, 1991; id., pp. 8-9, Nov. 13, 1989; id., pp. 12, 16, 20, Feb. 14, 1990; id, p. 14, June 4, 1990).

On February 15, 1992, the trial court rendered judgment finding the accused-appellant guilty of the crime

charged. The accused-appellant's motion for annulment of the decision and for reconsideration was

denied by the trial court in its order dated April 12, 1991. 6

Herein respondent court thereafter affirmed on appeal the decision of the trial court. Petitioner timely moved for a

reconsideration, but this was subsequently denied by respondent court in its Resolution 7 dated June 11, 1993. Petitioner

has now appealed to us by way of a petition for certiorari under Rule 45 of the Rules of Court.

During the pendency of this petition, this Court by a resolutions 8 dated August 30, 1993, took note of the compromise

agreement executed between the parties, regarding the civil aspect of the case, as manifested by petitioner in a Motion to

Render Judgment based on Compromise Agreement 9 filed on August 5, 1993. After submission of the Comment

10 by the

Solicitor General, and the Reply 11

by petitioner, this case was deemed submitted for decision.

Contending that the Court of Appeals erred in its affirmance of the trial court's decision, petitioner cites the following

reasons to justify the review of her case:

1. The Honorable Court of Appeals has decided against the innocence of the accused

based on mere probabilities which, on the contrary, should have warranted her acquittal

on reasonable doubt. Even then, the conclusion of the trial court is contrary to the

evidence on record, including private complainant's judicial admission that there was no

consideration for the check.

2 The Honorable Court of Appeals has confused and merged into one the legal concepts

of dissolution, liquidation and termination of a partnership and on the basis of such

misconception of the law, disregarded the fact of absence of consideration of the check

and convicted the accused.

3 While this appeal was pending, the parties submitted for the approval of the Honorable

Court a compromise agreement on the civil liability. The accused humbly submits that

228

this supervening event, which by its terms puts to rest any doubt the Court of Appeals

had entertained against the defense of lack of consideration, should have a legal effect

favorable to the accused, considering that the dishonored check constitutes a private

transaction between partners which does not involve the public interest, and considering

further that the offense is not one involving moral turpitude.

4 The Honorable Court of Appeals failed to appreciate the fact that the accused had

warned private complainant that the check was not sufficiently funded, which should

have exonerated the accused pursuant to the ruling in the recent case of Magno vs. Court

of Appeals, 210 SCRA 471, which calls for a more flexible and less rigid application of

the Bouncing Checks law. 12

For a thorough consideration of the merits of petitioner's appeal, we find pertinent and decisive the following issues:

1. Whether respondent court erred in holding that the subject check was issued by petitioner to apply on account or for

value, that is, as part of the consideration of a "buy-out" of said complainant's interest in the partnership, and not merely

as a commitment on petitioner's part to return the investment share of complainant, along with any profit pertaining to said

share, in the partnership.

2. Whether the respondent court erred in concluding that petitioner issued the subject check knowing at the time of issue

that she did not have sufficient funds in or credit with the drawee bank and without communicating this fact of

insufficiency of funds to the complainant.

Both inquiries boil down into one ultimate issue: Did the respondent court err in affirming the trial court's judgment that

she violated Batas Pambansa Blg. 22?

Considering that penal statutes are strictly construed against the state and liberally in favor of the accused, it bears

stressing that for an act to be punishable under the B.P. 22, it "must come clearly within both the spirit and the letter of the

statue. 13

Otherwise, the act has to be declared outside the law's ambit and a plea of innocence by the accused must be

sustained.

The relevant provisions of B.P. 22 state that:

Sec. 1. Checks without sufficient funds. — Any person who makes or draws and issues any check to

apply on account or for value, knowing at the time of issue that he does not have sufficient funds in or

credit with the drawee bank for the payment of such check in full upon its presentment, which check is

subsequently dishonored by the drawee bank for insufficiency of funds or credit or would have been

dishonored for the same reason had not the drawer, without any valid reason, ordered the bank to stop

payment, shall be punished by imprisonment of not less than thirty days but not more than one (1) year or

by a fine of not less than but not more than double the amount of the check which fine shall in no case

exceed Two hundred thousand pesos, or both such fine and imprisonment at the discretion of the court.

The same penalty shall be imposed upon any person who having sufficient funds in or credit with the

drawee bank when he makes or draws and issues a check, shall fail to keep sufficient funds or to maintain

a credit or to cover the full amount of the check if presented within a period of ninety (90) days from the

date appearing thereon, for which reason it is dishonored by the drawee bank.

Where the check is drawn by a corporation, company or entity, the person or persons who actually signed

the check in behalf of such drawer shall be liable under this Act.

229

Sec. 2. Evidence of knowledge of insufficient funds. — The making, drawing and issuance of a check

payment of which is refused by the drawee because of insufficient funds in or credit with such bank,

when presented within ninety (90) days from the date of the check, shall be prima facie evidence of

knowledge of such insufficiency of funds or credit unless such maker or drawer pays the holder thereof

the amount due thereon or makes arrangements for payment in full by the drawee of such check within

five (5) banking days after receiving notice that such check has not been paid by the drawee. (Emphasis

supplied)

As decided by this Court, the elements of the offense penalized under B.P. 22, are as follows: "(1) the making, drawing

and issuance of any check to apply to account or for value; (2) the knowledge of the maker, drawer or issuer that at the

time of issue he does not have sufficient funds in or credit with the drawee bank for the payment of such check in full

upon its presentment; and (3) subsequent dishonor of the check by the drawee bank for insufficiency of funds or credit or

dishonor for the same reason had not the drawer, without any valid cause, ordered the bank to stop payment. 14

In the present case, with regard to the first issue, evidence on record would show that the subject check was to be funded

from receivables to be collected and goods to be sold by the partnership, and only when such collection and sale were

realized. 15

Thus, there is sufficient basis for the assertion that the petitioner issued the subject check (Metrobank Check

No. 103115490 dated October 30, 1986, in the amount of P135,828.87) to evidence only complainant's share or interest in

the partnership, or at best, to show her commitment that when receivables are collected and goods are sold, she would

give to private complainant the net amount due him representing his interest in the partnership. It did not involve a debt of

or any account due and payable by the petitioner.

Two facts stand out. Firstly, three of four checks were properly encashed by complainant; only one (the third) was not.

But eventually even this one was redeemed by petitioner. Secondly, even private complainant admitted that there was no

consideration whatsoever for the issuance of the check, whose funding was dependent on future sales of goods and

receipts of payment of account receivables.

Now, it could not be denied that though the parties — petitioner and complainant — had agreed to dissolve the

partnership, such ageement did not automatically put an end to the partnership, since they still had to sell the goods on

hand and collect the receivables from debtors. In short, they were still in the process of "winding up" the affairs of the

partnership, when the check in question was issued.

Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up; and (3) termination. These

stages are distinguished, to wit:

(1) Dissolution Defined

Dissolution is the change in the relation of the partners caused by any

partner ceasing to be associated in the carrying on of the business (Art.

1828). It is that point of time the time the partners cease to carry on the

business tonether. (Citation omitted).

(2) Winding Up Defined

Winding up is the process of settling business affairs of dissolution.

(NOTE: Examples of winding up: the paying of previous obligations; the

collecting of assets previously demandable; even new business if needed

to wind up, as the contracting with a demolition company for the

demolition of the garage used in a "used car" partnership.)

230

(3) Termination Defined

Termination is the point in time after all the partnership affairs have been wound up. 16

[Citation omitted] (Emphasis

supplied).

These final stages in the life of a partnership are recognized under the Civil Code that explicitly declares that upon

dissolution, the partnership is not terminated, to wit:

Art 1828. The dissolution of a partnership is the change in the relation of the partners caused by any

partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.

Art. 1829. On dissolution the partnership is not terminated, but continues until the winding up of

partnership affairs is completed. (Emphasis supplied.)

The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up stage), were

the unsold goods and uncollected receivables, which were presented to the trial court. Since the partnership has not been

terminated, the petitioner and private complainant remained as co-partners. The check was thus issued by the petitioner to

complainant, as would a partner to another, and not as payment from a debtor to a creditor.

The more tenable view, one in favor of the accused, is that the check was issued merely to evidence the complainant's

share in the partnership property, or to assure the latter that he would receive in time his due share therein. The alternative

view that the check was in consideration of a "buy out" is but a theory, favorable to the complainant, but lacking support

in the record; and must necessarily be discarded.

For there is nothing on record which even slightly suggest that petitioner ever became interested in acquiring, much less

keeping, the shares of the complainant. What is very clear therefrom is that the petitioner exerted her best efforts to sell

the remaining goods and to collect the receivables of the partnership, in order to come up with the amount necessary to

satisfy the value of complainant's interest in the partnership at the dissolution thereof. To go by accepted custom of the

trade, we are more inclined to the view that the subject check was issued merely to evidence complainant's interest in the

partnership. Thus, we are persuaded that the check was not intended to apply on account or for value; rather it should be

deemed as having been drawn without consideration at the time of issue.

Absent the first element of the offense penalized under B.P. 22, which is "the making, drawing and issuance of any check

to apply on account or for value", petitioner's issuance of the subject check was not an act contemplated in nor made

punishable by said statute.

As to the second issue, the Solicitor General contends that under the Bouncing Checks Law, the elements of deceit and

damage are not essential or required to constitute a violation thereof. In his view, the only essential element is the

knowledge on the part of the maker or drawer of the check of the insufficiency of his/her funds at the time of the issuance

of said check.

The Bouncing Checks Law makes the mere act of issuing a bad or worthless check a special offense punishable by law.

"Malice or intent in issuing the worthless check is immaterial, the offense being malum

prohibitum," 17

so goes the argument for the public respondents.

But of course this could not be an absolute proposition without descending to absurdity. For if a check were issued by a

kidnap victim to a kidnapper for ransom, it would be absurd to hold the drawer liable under B.P. 22, if the check is

dishonored and unpaid. That would go against public policy and common sense.

Public respondents further contend that "since petitioner issued the check in favor of complainant. Alarilla and when

notified that it was returned for insufficiency of funds, failed to make good the check, then petitioner is liable for violation

231

of B.P. 22. 18

Again, this matter could not be all that simple. For while "the maker's knowledge of the insufficiency of

funds is legally presumed from the dishonor of his checks for insufficiency of funds, 19

this presumption is rebuttable.

In the instant case, there is only a prima facie presumption which did not preclude the presentation of contrary

evidence. 20

In fact, such contrary evidence on two points could be gleaned from the record concerning (1) lack of actual

knowledge of insufficiency of funds; and (2) lack of adequate notice of dishonor.

Noteworthy for the defense, knowledge of insufficiency of funds or credit in the drawee bank for the payment of a check

upon its presentment is an essential element of the offense. 21

It must be proved, particularly where the prima

facie presumption of the existence of this element has been rebutted. The prima facie presumption arising from the fact of

drawing, issuing or making a check, the payment of which was subsequently refused for insufficiency of funds is,

moreover, not sufficient proof of guilt by the issuer.

In the case of Nieva v. Court of Appeals, 22

it was held that the subsequent dishonor of the subject check issued by accused

merely engendered the prima facie presumption that she knew of the insufficiency of funds, but did not render the accused

automatically guilty under B.P. 22. 23

The prosecution has a duty to prove all the elements of the crime, including the acts that give rise to

the prima facie presumption; petitioner, on the other hand, has a right to rebut the prima

faciepresumption. Therefore, if such knowledge of insufficiency of funds is proven to be actually absent

or non-existent, the accused should not be held liable for the offense defined under the first paragraph of

Section 1 of B.P. 22. Although the offense charged is a malum prohibitum, the prosecution is not thereby

excused from its responsibility of proving beyond reasonable doubt all the elements of the offense, one of

which is knowledge of the insufficiency of funds.

Sec. 1 of B.P. 22 specifically requires that the person in making, drawing or issuing the check, be shown that he knows at

the time of issue, that he does not have sufficient funds in or credit with the drawee bank for the payment of such check in

full upon its presentment.

In the case at bar, as earlier discussed, petitioner issued the check merely to evidence the proportionate share of

complainant in the partnership assets upon its dissolution. Payment of that share in the partnership was conditioned on the

subsequent realization of profits from the unsold goods and collection of the receivables of the firm. This condition must

be satisfied or complied with before the complainant can actually "encash" the check. The reason for the condition is that

petitioner has no independent means to satisfy or discharge the complainant's share, other than by the future sale and

collection of the partnership assets. Thus, prior to the selling of the goods and collecting of the receivables, the

complainant could not, as of yet, demand his proportionate share in the business. This situation would hold true until after

the winding up, and subsequent termination of the partnership. For only then, when the goods were already sold and

receivables paid that cash money could be availed of by the erstwhile partners.

Complainant did not present any evidence that petitioner signed and issued four checks actually knowing that funds

therefor would be insufficient at the time complainant would present them to the drawee bank. For it was uncertain at the

time of issuance of the checks whether the unsold goods would have been sold, or whether the receivables would have

been collected by the time the checks would be encashed. As it turned out, three were fully funded when presented to the

bank; the remaining one was settled only later on.

Since petitioner issued these four checks without actual knowledge of the insufficiency of funds, she could not be held

liable under B.P. 22 when one was not honored right away. For it is basic doctrine that penal statutes such as B.P. 22

"must be construed with such strictness as to carefully safeguard the rights of the defendant . . ." 24

The element of

knowledge of insufficiency of funds has to be proved by the prosecution; absent said proof, petitioner could not be held

criminally liable under that law. Moreover, the presumption of prima facie knowledge of such insufficiency in this case

was actually rebutted by petitioner's evidence.

232

Further, we find that the prosecution also failed to prove adequate notice of dishonor of the subject check on petitioner's

part, thus precluding any finding of prima facie evidence of knowledge of insufficiency of funds. There is no proof that

notice of dishonor was actually sent by the complainant or by the drawee bank to the petitioner. On this point, the record

is bereft of evidence to the contrary.

But in fact, while the subject check initially bounced, it was later made good by petitioner. In addition, the terms of the

parties' compromise agreement, entered into during the pendency of this case, effectively invalidates the allegation of

failure to pay or to make arrangement for the payment of the check in full. Verily, said compromise agreement constitutes

an arrangement for the payment in full of the subject check.

The absence of notice of dishonor is crucial in the present case. As held by this Court in prior cases:

Because no notice of dishonor was actually sent to and received by the petitioner, the prima

faciepresumption that she knew about the insufficiency of funds cannot apply. Section 2 of B.P. 22

clearly provides that this presumption arises not from the mere fact of drawing, making and issuing a bum

check; there must also be a showing that, within five banking days from receipt of the notice of dishonor,

such maker or drawer failed to pay the holder of the check the amount due thereon or to make

arrangement for its payment in full by the drawee of such check. 25

[Emphasis supplied.]

The absence of a notice of dishonor necessarily deprives an accused an opportunity to preclude a criminal

prosecution. Accordingly, procedural due process clearly enjoins that a notice of dishonor be actually

served on petitioner. Petitioner has a right to demand — and the basic postulates of fairness require —

that the notice of dishonor be actually sent to and received by her to afford her the opportunity to avert

prosecution under

B.P. 26

Further, what militates strongly against public respondents' stand is the fact that petitioner repeatedly notified the

complainant of the insufficiency of funds. Instructive is the following pronouncement of this Court in Magno v. Court of

Appeals:

Furthermore, the element of "knowing at the time of issue that he does not have sufficient funds in or

credit with the drawee bank for the payment of such check in full upon its presentment, which check is

subsequently dishonored by the drawee bank for insufficiency of funds or credit or would have been

dishonored for the same reason . . ." is inversely applied in this case. From the very beginning. petitioner

never hid the fact that he did not have the funds with which to put up the warranty deposit and as a matter

of fact, he openly intimated this to the vital conduit of the transaction, Joey Gomez, to whom petitioner

was introduced by Mrs. Teng. It would have been different if this predicament was not communicated to

all the parties he dealt with regarding the lease agreement the financing or which was covered by L.S.

Finance Management. " 27

In the instant case, petitioner intimated to private complainant the possibility that funds might be insufficient to cover the

subject check, due to the fact that the partnership's goods were yet to be sold and receivables yet to be collected.

As Magno had well observed:

For all intents and purposes, the law was devised to safeguard the interest of the banking system and the

legitimate public checking account user. It did not intend to shelter or favor nor encourage users of the

system to enrich themselves through manipulations and circumvention of the noble purpose and objective

of the law. Least should it be used also as a means of jeopardizing honest-to-goodness transactions with

some color of "get-rich" scheme to the prejudice of well-meaning businessmen who are the pillars of

society.

233

xxx xxx xxx

Thus, it behooves upon a court of law that in applying the punishment imposed upon the accused, the

objective of retribution of a wronged society, should be directed against the "actual and potential

wrongdoers". In the instant case, there is no doubt that petitioner's four (4) checks were used to

collateralize an accommodation, and not to cover the receipt of an actual "account or credit for value" as

this was absent, and therefore petitioner should not be punished for mere issuance of the checks in

question. Following the aforecited theory, in petitioner's stead the "potential wrongdoer," whose operation

could be a menace to society, should not be glorified by convicting the petitioner. 28

Under the circumstances obtaining in this case, we find the petitioner to have issued the check in good faith, with every

intention of abiding by her commitment to return, as soon as able, the investments of complainant in the partnership.

Evidently, petitioner issued the check with benign considerations in mind, and not for the purpose of committing fraud,

deceit, or violating public policy.

To recapitulate, we find the petition impressed with merit. Petitioner may not be held liable for violation of B.P. 22 for the

following reasons: (1) the subject check was not made, drawn and issued by petitioner in exchange for value received as

to qualify it as a check on account or for value; (2) there is no sufficient basis to conclude that petitioner, at the time of

issue of the check, had actual knowledge of the insufficiency of funds; and (3) there was no notice of dishonor of said

check actually served on petitioner, thereby depriving her of the opportunity to pay or make arrangements for the payment

of the check, to avoid criminal prosecution.

Having resolved the foregoing principal issues, and finding the petition meritorious, we no longer need to pass upon the

validity and legality or necessity of the purported compromise agreement on civil liability between the petitioner and the

complainant.

WHEREFORE, the instant petition is hereby GRANTED AND THE PETITIONER ACQUITTED. The Decision of the

respondent Court of Appeals in CA-G.R. CR No. 11960 is hereby REVERSED and the Decision of Regional Trial Court

in Criminal Case No. 1395-M-88 is hereby SET ASIDE.

234

G.R. No. 142293 February 27, 2003

VICENTE SY, TRINIDAD PAULINO, 6B’S TRUCKING CORPORATION, and SBT1 TRUCKING

CORPORATION,petitioners,

vs.

HON. COURT OF APPEALS and JAIME SAHOT, respondents.

QUISUMBING, J.:

This petition for review seeks the reversal of the decision2 of the Court of Appeals dated February 29, 2000, in CA-G.R.

SP No. 52671, affirming with modification the decision3 of the National Labor Relations Commission promulgated on

June 20, 1996 in NLRC NCR CA No. 010526-96. Petitioners also pray for the reinstatement of the decision4 of the Labor

Arbiter in NLRC NCR Case No. 00-09-06717-94.

Culled from the records are the following facts of this case:

Sometime in 1958, private respondent Jaime Sahot5 started working as a truck helper for petitioners’ family-owned

trucking business named Vicente Sy Trucking. In 1965, he became a truck driver of the same family business, renamed T.

Paulino Trucking Service, later 6B’s Trucking Corporation in 1985, and thereafter known as SBT Trucking Corporation

since 1994. Throughout all these changes in names and for 36 years, private respondent continuously served the trucking

business of petitioners.

In April 1994, Sahot was already 59 years old. He had been incurring absences as he was suffering from various ailments.

Particularly causing him pain was his left thigh, which greatly affected the performance of his task as a driver. He

inquired about his medical and retirement benefits with the Social Security System (SSS) on April 25, 1994, but

discovered that his premium payments had not been remitted by his employer.

Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was medically examined and treated for EOR,

presleyopia, hypertensive retinopathy G II (Annexes "G-5" and "G-3", pp. 48, 104, respectively),6 HPM, UTI,

Osteoarthritis (Annex "G-4", p. 105),7 and heart enlargement (Annex G, p. 107).

8 On said grounds, Belen Paulino of the

SBT Trucking Service management told him to file a formal request for extension of his leave. At the end of his week-

long absence, Sahot applied for extension of his leave for the whole month of June, 1994. It was at this time when

petitioners allegedly threatened to terminate his employment should he refuse to go back to work.

At this point, Sahot found himself in a dilemma. He was facing dismissal if he refused to work, But he could not retire on

pension because petitioners never paid his correct SSS premiums. The fact remained he could no longer work as his left

thigh hurt abominably. Petitioners ended his dilemma. They carried out their threat and dismissed him from work,

effective June 30, 1994. He ended up sick, jobless and penniless.

On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint for illegal dismissal, docketed

as NLRC NCR Case No. 00-09-06717-94. He prayed for the recovery of separation pay and attorneys fees against Vicente

Sy and Trinidad Paulino-Sy, Belen Paulino, Vicente Sy Trucking, T. Paulino Trucking Service, 6B’s Trucking and SBT

Trucking, herein petitioners.

For their part, petitioners admitted they had a trucking business in the 1950s but denied employing helpers and drivers.

They contend that private respondent was not illegally dismissed as a driver because he was in fact petitioner’s industrial

partner. They add that it was not until the year 1994, when SBT Trucking Corporation was established, and only then did

respondent Sahot become an employee of the company, with a monthly salary that reached P4,160.00 at the time of his

separation.

235

Petitioners further claimed that sometime prior to June 1, 1994, Sahot went on leave and was not able to report for work

for almost seven days. On June 1, 1994, Sahot asked permission to extend his leave of absence until June 30, 1994. It

appeared that from the expiration of his leave, private respondent never reported back to work nor did he file an extension

of his leave. Instead, he filed the complaint for illegal dismissal against the trucking company and its owners.

Petitioners add that due to Sahot’s refusal to work after the expiration of his authorized leave of absence, he should be

deemed to have voluntarily resigned from his work. They contended that Sahot had all the time to extend his leave or at

least inform petitioners of his health condition. Lastly, they cited NLRC Case No. RE-4997-76, entitled "Manuelito

Jimenez et al. vs. T. Paulino Trucking Service," as a defense in view of the alleged similarity in the factual milieu and

issues of said case to that of Sahot’s, hence they are in pari material and Sahot’s complaint ought also to be dismissed.

The NLRC NCR Arbitration Branch, through Labor Arbiter Ariel Cadiente Santos, ruled that there was no illegal

dismissal in Sahot’s case. Private respondent had failed to report to work. Moreover, said the Labor Arbiter, petitioners

and private respondent were industrial partners before January 1994. The Labor Arbiter concluded by ordering petitioners

to pay "financial assistance" of P15,000 to Sahot for having served the company as a regular employee since January 1994

only.

On appeal, the National Labor Relations Commission modified the judgment of the Labor Arbiter. It declared that private

respondent was an employee, not an industrial partner, since the start. Private respondent Sahot did not abandon his job

but his employment was terminated on account of his illness, pursuant to Article 2849 of the Labor Code. Accordingly, the

NLRC ordered petitioners to pay private respondent separation pay in the amount of P60,320.00, at the rate of P2,080.00

per year for 29 years of service.

Petitioners assailed the decision of the NLRC before the Court of Appeals. In its decision dated February 29, 2000, the

appellate court affirmed with modification the judgment of the NLRC. It held that private respondent was indeed an

employee of petitioners since 1958. It also increased the amount of separation pay awarded to private respondent to

P74,880, computed at the rate of P2,080 per year for 36 years of service from 1958 to 1994. It decreed:

WHEREFORE, the assailed decision is hereby AFFIRMED with MODIFICATION. SB Trucking Corporation is hereby

directed to pay complainant Jaime Sahot the sum of SEVENTY-FOUR THOUSAND EIGHT HUNDRED EIGHTY

(P74,880.00) PESOS as and for his separation pay.10

Hence, the instant petition anchored on the following contentions:

I

RESPONDENT COURT OF APPEALS IN PROMULGATING THE QUESTION[ED] DECISION AFFIRMING WITH

MODIFICATION THE DECISION OF NATIONAL LABOR RELATIONS COMMISSION DECIDED NOT IN

ACCORD WITH LAW AND PUT AT NAUGHT ARTICLE 402 OF THE CIVIL CODE.11

II

RESPONDENT COURT OF APPEALS VIOLATED SUPREME COURT RULING THAT THE NATIONAL LABOR

RELATIONS COMMISSION IS BOUND BY THE FACTUAL FINDINGS OF THE LABOR ARBITER AS THE

LATTER WAS IN A BETTER POSITION TO OBSERVE THE DEMEANOR AND DEPORTMENT OF THE

WITNESSES IN THE CASE OF ASSOCIATION OF INDEPENDENT UNIONS IN THE PHILIPPINES VERSUS

NATIONAL CAPITAL REGION (305 SCRA 233).12

III

PRIVATE RESPONDENT WAS NOT DISMISS[ED] BY RESPONDENT SBT TRUCKING CORPORATION.13

236

Three issues are to be resolved: (1) Whether or not an employer-employee relationship existed between petitioners and

respondent Sahot; (2) Whether or not there was valid dismissal; and (3) Whether or not respondent Sahot is entitled to

separation pay.

Crucial to the resolution of this case is the determination of the first issue. Before a case for illegal dismissal can prosper,

an employer-employee relationship must first be established.14

Petitioners invoke the decision of the Labor Arbiter Ariel Cadiente Santos which found that respondent Sahot was not an

employee but was in fact, petitioners’ industrial partner.15

It is contended that it was the Labor Arbiter who heard the case

and had the opportunity to observe the demeanor and deportment of the parties. The same conclusion, aver petitioners, is

supported by substantial evidence.16

Moreover, it is argued that the findings of fact of the Labor Arbiter was wrongly

overturned by the NLRC when the latter made the following pronouncement:

We agree with complainant that there was error committed by the Labor Arbiter when he concluded that complainant was

an industrial partner prior to 1994. A computation of the age of complainant shows that he was only twenty-three (23)

years when he started working with respondent as truck helper. How can we entertain in our mind that a twenty-three (23)

year old man, working as a truck helper, be considered an industrial partner. Hence we rule that complainant was only an

employee, not a partner of respondents from the time complainant started working for respondent.17

Because the Court of Appeals also found that an employer-employee relationship existed, petitioners aver that the

appellate court’s decision gives an "imprimatur" to the "illegal" finding and conclusion of the NLRC.

Private respondent, for his part, denies that he was ever an industrial partner of petitioners. There was no written

agreement, no proof that he received a share in petitioners’ profits, nor was there anything to show he had any

participation with respect to the running of the business.18

The elements to determine the existence of an employment relationship are: (a) the selection and engagement of the

employee; (b) the payment of wages; (c) the power of dismissal; and (d) the employer’s power to control the employee’s

conduct. The most important element is the employer’s control of the employee’s conduct, not only as to the result of the

work to be done, but also as to the means and methods to accomplish it.19

As found by the appellate court, petitioners owned and operated a trucking business since the 1950s and by their own

allegations, they determined private respondent’s wages and rest day.20

Records of the case show that private respondent

actually engaged in work as an employee. During the entire course of his employment he did not have the freedom to

determine where he would go, what he would do, and how he would do it. He merely followed instructions of petitioners

and was content to do so, as long as he was paid his wages. Indeed, said the CA, private respondent had worked as a truck

helper and driver of petitioners not for his own pleasure but under the latter’s control.

Article 176721

of the Civil Code states that in 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.22

Not one of

these circumstances is present in this case. No written agreement exists to prove the partnership between the parties.

Private respondent did not contribute money, property or industry for the purpose of engaging in the supposed business.

There is no proof that he was receiving a share in the profits as a matter of course, during the period when the trucking

business was under operation. Neither is there any proof that he had actively participated in the management,

administration and adoption of policies of the business. Thus, the NLRC and the CA did not err in reversing the finding of

the Labor Arbiter that private respondent was an industrial partner from 1958 to 1994.

On this point, we affirm the findings of the appellate court and the NLRC. Private respondent Jaime Sahot was not an

industrial partner but an employee of petitioners from 1958 to 1994. The existence of an employer-employee relationship

is ultimately a question of fact23

and the findings thereon by the NLRC, as affirmed by the Court of Appeals, deserve not

237

only respect but finality when supported by substantial evidence. Substantial evidence is such amount of relevant evidence

which a reasonable mind might accept as adequate to justify a conclusion.24

Time and again this Court has said that "if doubt exists between the evidence presented by the employer and the

employee, the scales of justice must be tilted in favor of the latter."25

Here, we entertain no doubt. Private respondent since

the beginning was an employee of, not an industrial partner in, the trucking business.

Coming now to the second issue, was private respondent validly dismissed by petitioners?

Petitioners contend that it was private respondent who refused to go back to work. The decision of the Labor Arbiter

pointed out that during the conciliation proceedings, petitioners requested respondent Sahot to report back for work.

However, in the same proceedings, Sahot stated that he was no longer fit to continue working, and instead he demanded

separation pay. Petitioners then retorted that if Sahot did not like to work as a driver anymore, then he could be given a

job that was less strenuous, such as working as a checker. However, Sahot declined that suggestion. Based on the

foregoing recitals, petitioners assert that it is clear that Sahot was not dismissed but it was of his own volition that he did

not report for work anymore.

In his decision, the Labor Arbiter concluded that:

While it may be true that respondents insisted that complainant continue working with respondents despite his alleged

illness, there is no direct evidence that will prove that complainant’s illness prevents or incapacitates him from performing

the function of a driver. The fact remains that complainant suddenly stopped working due to boredom or otherwise when

he refused to work as a checker which certainly is a much less strenuous job than a driver.26

But dealing the Labor Arbiter a reversal on this score the NLRC, concurred in by the Court of Appeals, held that:

While it was very obvious that complainant did not have any intention to report back to work due to his illness which

incapacitated him to perform his job, such intention cannot be construed to be an abandonment. Instead, the same should

have been considered as one of those falling under the just causes of terminating an employment. The insistence of

respondent in making complainant work did not change the scenario.

It is worthy to note that respondent is engaged in the trucking business where physical strength is of utmost requirement

(sic). Complainant started working with respondent as truck helper at age twenty-three (23), then as truck driver since

1965. Complainant was already fifty-nine (59) when the complaint was filed and suffering from various illness triggered

by his work and age.

x x x27

In termination cases, the burden is upon the employer to show by substantial evidence that the termination was for lawful

cause and validly made.28

Article 277(b) of the Labor Code puts the burden of proving that the dismissal of an employee

was for a valid or authorized cause on the employer, without distinction whether the employer admits or does not admit

the dismissal.29

For an employee’s dismissal to be valid, (a) the dismissal must be for a valid cause and (b) the employee

must be afforded due process.30

Article 284 of the Labor Code authorizes an employer to terminate an employee on the ground of disease, viz:

Art. 284. Disease as a ground for termination- An employer may terminate the services of an employee who has been

found to be suffering from any disease and whose continued employment is prohibited by law or prejudicial to his health

as well as the health of his co-employees: xxx

238

However, in order to validly terminate employment on this ground, Book VI, Rule I, Section 8 of the Omnibus

Implementing Rules of the Labor Code requires:

Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his continued employment is

prohibited by law or prejudicial to his health or to the health of his co-employees, the employer shall not terminate his

employment unless there is a certification by competent public health authority that the disease is of such nature or at such

a stage that it cannot be cured within a period of six (6) months even with proper medical treatment. If the disease or

ailment can be cured within the period, the employer shall not terminate the employee but shall ask the employee to take a

leave. The employer shall reinstate such employee to his former position immediately upon the restoration of his normal

health. (Italics supplied).

As this Court stated in Triple Eight integrated Services, Inc. vs. NLRC,31

the requirement for a medical certificate under

Article 284 of the Labor Code cannot be dispensed with; otherwise, it would sanction the unilateral and arbitrary

determination by the employer of the gravity or extent of the employee’s illness and thus defeat the public policy in the

protection of labor.

In the case at bar, the employer clearly did not comply with the medical certificate requirement before Sahot’s dismissal

was effected. In the same case of Sevillana vs. I.T. (International) Corp., we ruled:

Since the burden of proving the validity of the dismissal of the employee rests on the employer, the latter should likewise

bear the burden of showing that the requisites for a valid dismissal due to a disease have been complied with. In the

absence of the required certification by a competent public health authority, this Court has ruled against the validity of the

employee’s dismissal. It is therefore incumbent upon the private respondents to prove by the quantum of evidence

required by law that petitioner was not dismissed, or if dismissed, that the dismissal was not illegal; otherwise, the

dismissal would be unjustified. This Court will not sanction a dismissal premised on mere conjectures and suspicions, the

evidence must be substantial and not arbitrary and must be founded on clearly established facts sufficient to warrant his

separation from work.32

In addition, we must likewise determine if the procedural aspect of due process had been complied with by the employer.

From the records, it clearly appears that procedural due process was not observed in the separation of private respondent

by the management of the trucking company. The employer is required to furnish an employee with two written notices

before the latter is dismissed: (1) the notice to apprise the employee of the particular acts or omissions for which his

dismissal is sought, which is the equivalent of a charge; and (2) the notice informing the employee of his dismissal, to be

issued after the employee has been given reasonable opportunity to answer and to be heard on his defense.33

These, the

petitioners failed to do, even only for record purposes. What management did was to threaten the employee with

dismissal, then actually implement the threat when the occasion presented itself because of private respondent’s painful

left thigh.

All told, both the substantive and procedural aspects of due process were violated. Clearly, therefore, Sahot’s dismissal is

tainted with invalidity.

On the last issue, as held by the Court of Appeals, respondent Jaime Sahot is entitled to separation pay. The law is clear

on the matter. An employee who is terminated because of disease is entitled to "separation pay equivalent to at least one

month salary or to one-half month salary for every year of service, whichever is greater xxx."34

Following the formula set

in Art. 284 of the Labor Code, his separation pay was computed by the appellate court at P2,080 times 36 years (1958 to

1994) or P74,880. We agree with the computation, after noting that his last monthly salary was P4,160.00 so that one-half

thereof is P2,080.00. Finding no reversible error nor grave abuse of discretion on the part of appellate court, we are

constrained to sustain its decision. To avoid further delay in the payment due the separated worker, whose claim was filed

way back in 1994, this decision is immediately executory. Otherwise, six percent (6%) interest per annum should be

charged thereon, for any delay, pursuant to provisions of the Civil Code.

239

G.R. No. 127405 September 20, 2001

MARJORIE TOCAO and WILLIAM T. BELO, petitioners,

vs.

COURT OF APPEALS and NENITA A. ANAY, respondent.

YNARES-SANTIAGO, J.:

The inherent powers of a Court to amend and control its processes and orders so as to make them conformable to law and

justice includes the right to reverse itself, especially when in its honest opinion it has committed an error or mistake in

judgment, and that to adhere to its decision will cause injustice to a party litigant.1

On November 14, 2001, petitioners Marjorie Tocao and William T. Belo filed a Motion for Reconsideration of our

Decision dated October 4, 2000. They maintain that there was no partnership between petitioner Belo, on the one hand,

and respondent Nenita A. Anay, on the other hand; and that the latter being merely an employee of petitioner Tocao.

After a careful review of the evidence presented, we are convinced that, indeed, petitioner Belo acted merely as guarantor

of Geminesse Enterprise. This was categorically affirmed by respondent's own witness, Elizabeth Bantilan, during her

cross-examination. Furthermore, Bantilan testified that it was Peter Lo who was the company's financier. Thus:

Q - You mentioned a while ago the name William Belo. Now, what is the role of William Belo with

Geminesse Enterprise?

A - William Belo is the friend of Marjorie Tocao and he was the guarantor of the company.

Q - What do you mean by guarantor?

A - He guarantees the stocks that she owes somebody who is Peter Lo and he acts as guarantor for us. We can

borrow money from him.

Q - You mentioned a certain Peter Lo. Who is this Peter Lo?

A - Peter Lo is based in Singapore.

Q - What is the role of Peter Lo in the Geminesse Enterprise?

A - He is the one fixing our orders that open the L/C.

Q - You mean Peter Lo is the financier?

A - Yes, he is the financier.

Q - And the defendant William Belo is merely the guarantor of Geminesse Enterprise, am I correct?

A - Yes, sir2

The foregoing was neither refuted nor contradicted by respondent's evidence. It should be recalled that the business

relationship created between petitioner Tocao and respondent Anay was an informal partnership, which was not even

recorded with the Securities and Exchange Commission. As such, it was understandable that Belo, who was after all

petitioner Tocao's good friend and confidante, would occasionally participate in the affairs of the business, although never

240

in a formal or official capacity.3 Again, respondent's witness, Elizabeth Bantilan, confirmed that petitioner Belo's presence

in Geminesse Enterprise's meetings was merely as guarantor of the company and to help petitioner Tocao.4

Furthermore, no evidence was presented to show that petitioner Belo participated in the profits of the business enterprise.

Respondent herself professed lack of knowledge that petitioner Belo received any share in the net income of the

partnership.5 On the other hand, petitioner Tocao declared that petitioner Belo was not entitled to any share in the profits

of Geminesse Enterprise.6 With no participation in the profits, petitioner Belo cannot be deemed a partner since the

essence of a partnership is that the partners share in the profits and losses.7

Consequently, inasmuch as petitioner Belo was not a partner in Geminesse Enterprise, respondent had no cause of action

against him and her complaint against him should accordingly be dismissed.

As regards the award of damages, petitioners argue that respondent should be deemed in bad faith for failing to account

for stocks of Geminesse Enterprise amounting to P208,250.00 and that, accordingly, her claim for damages should be

barred to that extent. We do not agree. Given the circumstances surrounding private respondent's sudden ouster from the

partnership by petitioner Tocao, her act of withholding whatever stocks were in her possession and control was justified,

if only to serve as security for her claims against the partnership. However, while we do not agree that the same renders

private respondent in bad faith and should bar her claim for damages, we find that the said sum of P208,250.00 should be

deducted from whatever amount is finally adjudged in her favor on the basis of the formal account of the partnership

affairs to be submitted to the Regional Trial Court.

WHEREFORE, based on the foregoing, the Motion for Reconsideration of petitioners is PARTIALLY GRANTED. The

Regional Trial Court of Makati is hereby ordered to DISMISS the complaint, docketed as Civil Case No. 88-509, as

against petitioner William T. Belo only. The sum of P208,250.00 shall be deducted from whatever amount petitioner

Marjorie Tocao shall be held liable to pay respondent after the normal accounting of the partnership affairs.

241

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

COMMISSIONER OF INTERNAL REVENUE, petitioner,

vs.

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

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

A limited partnership, named "William J. Suter 'Morcoin' Co., Ltd.," was formed on 30 September 1947 by herein

respondent William J. Suter as the general partner, and Julia Spirig and Gustav Carlson, as the limited partners. The

partners contributed, respectively, P20,000.00, P18,000.00 and P2,000.00 to the partnership. On 1 October 1947, the

limited partnership was registered with the Securities and Exchange Commission. The firm engaged, among other

activities, in the importation, marketing, distribution and operation of automatic phonographs, radios, television sets and

amusement machines, their parts and accessories. It had an office and held itself out as a limited partnership, handling and

carrying merchandise, using invoices, bills and letterheads bearing its trade-name, maintaining its own books of accounts

and bank accounts, and had a quota allocation with the Central Bank.

In 1948, however, general partner Suter and limited partner Spirig got married and, thereafter, on 18 December 1948,

limited partner Carlson sold his share in the partnership to Suter and his wife. The sale was duly recorded with the

Securities and Exchange Commission on 20 December 1948.

The limited partnership had been filing its income tax returns as a corporation, without objection by the herein petitioner,

Commissioner of Internal Revenue, until in 1959 when the latter, in an assessment, consolidated the income of the firm

and the individual incomes of the partners-spouses Suter and Spirig resulting in a determination of a deficiency income

tax against respondent Suter in the amount of P2,678.06 for 1954 and P4,567.00 for 1955.

Respondent Suter protested the assessment, and requested its cancellation and withdrawal, as not in accordance with law,

but his request was denied. Unable to secure a reconsideration, he appealed to the Court of Tax Appeals, which court,

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

The present case is a petition for review, filed by the Commissioner of Internal Revenue, of the tax court's aforesaid

decision. It raises these issues:

(a) Whether or not the corporate personality of the William J. Suter "Morcoin" Co., Ltd. should be disregarded for income

tax purposes, considering that respondent William J. Suter and his wife, Julia Spirig Suter actually formed a single taxable

unit; and

(b) Whether or not the partnership was dissolved after the marriage of the partners, respondent William J. Suter and Julia

Spirig Suter and the subsequent sale to them by the remaining partner, Gustav Carlson, of his participation of P2,000.00 in

the partnership for a nominal amount of P1.00.

The theory of the petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their

subsequent acquisition of the interests of remaining partner Carlson in the partnership dissolved the limited partnership,

and if they did not, the fiction of juridical personality of the partnership should be disregarded for income tax purposes

because the spouses have exclusive ownership and control of the business; consequently the income tax return of

respondent Suter for the years in question should have included his and his wife's individual incomes and that of the

limited partnership, in accordance with Section 45 (d) of the National Internal Revenue Code, which provides as follows:

(d) Husband and wife. — In the case of married persons, whether citizens, residents or non-residents, only one

consolidated return for the taxable year shall be filed by either spouse to cover the income of both spouses; ....

242

In refutation of the foregoing, respondent Suter maintains, as the Court of Tax Appeals held, that his marriage with

limited partner Spirig and their acquisition of Carlson's interests in the partnership in 1948 is not a ground for dissolution

of the partnership, either in the Code of Commerce or in the New Civil Code, and that since its juridical personality had

not been affected and since, as a limited partnership, as contra distinguished from a duly registered general partnership, it

is taxable on its income similarly with corporations, Suter was not bound to include in his individual return the income of

the limited partnership.

We find the Commissioner's appeal unmeritorious.

The thesis that the limited partnership, William J. Suter "Morcoin" Co., Ltd., has been dissolved by operation of law

because of the marriage of the only general partner, William J. Suter to the originally limited partner, Julia Spirig one year

after the partnership was organized is rested by the appellant upon the opinion of now Senator Tolentino in Commentaries

and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th Ed., page 58, that reads as follows:

A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code, which

applies in the absence of express provision in the Code of Commerce, persons prohibited from making donations

to each other are prohibited from entering into universal partnerships. (2 Echaverri 196) It follows that the

marriage of partners necessarily brings about the dissolution of a pre-existing partnership. (1 Guy de Montella 58)

The petitioner-appellant has evidently failed to observe the fact that William J. Suter "Morcoin" Co., Ltd. was not a

universal partnership, but a particular one. As appears from Articles 1674 and 1675 of the Spanish Civil Code, of 1889

(which was the law in force when the subject firm was organized in 1947), a universal partnership requires either that the

object of the association be all the present property of the partners, as contributed by them to the common fund, or else

"all that the partners may acquire by their industry or work during the existence of the partnership". William J. Suter

"Morcoin" Co., Ltd. was not such a universal partnership, since the contributions of the partners were fixed sums of

money, P20,000.00 by William Suter and P18,000.00 by Julia Spirig and neither one of them was an industrial partner. It

follows that William J. Suter "Morcoin" Co., Ltd. was not a partnership that spouses were forbidden to enter by Article

1677 of the Civil Code of 1889.

The former Chief Justice of the Spanish Supreme Court, D. Jose Casan, in his Derecho Civil, 7th Edition, 1952, Volume

4, page 546, footnote 1, says with regard to the prohibition contained in the aforesaid Article 1677:

Los conyuges, segun esto, no pueden celebrar entre si el contrato de sociedad universal, pero o podran constituir

sociedad particular? Aunque el punto ha sido muy debatido, nos inclinamos a la tesis permisiva de los contratos

de sociedad particular entre esposos, ya que ningun precepto de nuestro Codigo los prohibe, y hay que estar a la

norma general segun la que toda persona es capaz para contratar mientras no sea declarado incapaz por la ley. La

jurisprudencia de la Direccion de los Registros fue favorable a esta misma tesis en su resolution de 3 de febrero de

1936, mas parece cambiar de rumbo en la de 9 de marzo de 1943.

Nor could the subsequent marriage of the partners operate to dissolve it, such marriage not being one of the causes

provided for that purpose either by the Spanish Civil Code or the Code of Commerce.

The appellant's view, that by the marriage of both partners the company became a single proprietorship, is equally

erroneous. The capital contributions of partners William J. Suter and Julia Spirig were separately owned and contributed

by them before their marriage; and after they were joined in wedlock, such contributions remained their respective

separate property under the Spanish Civil Code (Article 1396):

The following shall be the exclusive property of each spouse:

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

243

Thus, the individual interest of each consort in William J. Suter "Morcoin" Co., Ltd. did not become common property of

both after their marriage in 1948.

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own, distinct

and separate from that of its partners (unlike American and English law that does not recognize such separate juridical

personality), the bypassing of the existence of the limited partnership as a taxpayer can only be done by ignoring or

disregarding clear statutory mandates and basic principles of our law. The limited partnership's separate individuality

makes it impossible to equate its income with that of the component members. True, section 24 of the Internal Revenue

Code merges registered general co-partnerships (compañias colectivas) with the personality of the individual partners for

income tax purposes. But this rule is exceptional in its disregard of a cardinal tenet of our partnership laws, and can not be

extended by mere implication to limited partnerships.

The rulings cited by the petitioner (Collector of Internal Revenue vs. University of the Visayas, L-13554, Resolution of 30

October 1964, and Koppel [Phil.], Inc. vs. Yatco, 77 Phil. 504) as authority for disregarding the fiction of legal personality

of the corporations involved therein are not applicable to the present case. In the cited cases, the corporations were

already subject to tax when the fiction of their corporate personality was pierced; in the present case, to do so

would exempt the limited partnership from income taxation but would throw the tax burden upon the partners-spouses in

their individual capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the

stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is not true in the

present case. Here, the limited partnership is not a mere business conduit of the partner-spouses; it was organized for

legitimate business purposes; it conducted its own dealings with its customers prior to appellee's marriage, and had been

filing its own income tax returns as such independent entity. The change in its membership, brought about by the marriage

of the partners and their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from

the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the partners did not

enter into matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or design to

use the partnership as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed.

As the limited partnership under consideration is taxable on its income, to require that income to be included in the

individual tax return of respondent Suter is to overstretch the letter and intent of the law. In fact, it would even conflict

with what it specifically provides in its Section 24: for the appellant Commissioner's stand results in equal treatment, tax

wise, of a general copartnership (compañia colectiva) and a limited partnership, when the code plainly differentiates the

two. Thus, the code taxes the latter on its income, but not the former, because it is in the case of compañias colectivas that

the members, and not the firm, are taxable in their individual capacities for any dividend or share of the profit derived

from the duly registered general partnership (Section 26, N.I.R.C.; Arañas, Anno. & Juris. on the N.I.R.C., As Amended,

Vol. 1, pp. 88-89).lawphi1.nêt

But it is argued that the income of the limited partnership is actually or constructively the income of the spouses and

forms part of the conjugal partnership of gains. This is not wholly correct. As pointed out in Agapito vs. Molo 50 Phil.

779, and People's Bank vs. Register of Deeds of Manila, 60 Phil. 167, the fruits of the wife's parapherna become conjugal

only when no longer needed to defray the expenses for the administration and preservation of the paraphernal capital of

the wife. Then again, the appellant's argument erroneously confines itself to the question of the legal personality of the

limited partnership, which is not essential to the income taxability of the partnership since the law taxes the income of

even joint accounts that have no personality of their own. 1Appellant is, likewise, mistaken in that it assumes that the

conjugal partnership of gains is a taxable unit, which it is not. What is taxable is the "income of both spouses" (Section 45

[d] in their individual capacities. Though the amount of income (income of the conjugal partnership vis-a-vis the joint

income of husband and wife) may be the same for a given taxable year, their consequences would be different, as their

contributions in the business partnership are not the same.

The difference in tax rates between the income of the limited partnership being consolidated with, and when split from the

income of the spouses, is not a justification for requiring consolidation; the revenue code, as it presently stands, does not

authorize it, and even bars it by requiring the limited partnership to pay tax on its own income.

244

G.R. No. L-13260 October 31, 1960

LINO P. BERNARDO, petitioner,

vs.

EUFERMIA PASCUAL, ET AL., and WORKMEN'S COMPENSATION COMMISSION, respondents.

GUTIERREZ DAVID, J.:

This is a petition to review on certiorari a decision of the Workmen's Compensation Commission, awarding compensation

to the widow and children of the deceased Pedro Pascual who met death as a result of an accident while felling a tree in

petitioner's lumber concession.

The record shows that on March 9, 1955, the deceased Pedro Pascual was, together with Rogelio Bacane and Martin

Quinto, in the woods at Corona, San Miguel Bulacan. Bacane and Quinto, both loggers admittedly in the employ of herein

petitioner, were cutting timber, while fifty meter away from them the deceased was felling are which he had started

hewing three days before. When Bacane and Quinto heard the sound of the falling tree—and following the practice among

loggers—they shouted to Pascual to find out if he was alright. As the latter did not answer, they rushed to where he was

and there found him prostrate on the ground with blood tricking from his mouth. Shortly thereafter, he died from a

fractured skull and his companions took his body home in petitioner's truck.

On March 31, 1955, the widow of the deceased on behalf of herself and their children filed a claim for compensation with

the Workmen's Compensation Commission. Originally filed against the Bernardo Sawmill, the claim was on February 6,

1956 amended to include herein petitioner Lino P. Bernardo, the timber concessionaire and owner and operator of the

sawmill, as party respondent. In his answer, the latter denied that he was a timber concessionaire before October 13, 1955,

or that he had an employer-employee relationship with the deceased. He also objected to the claim on the ground of

prescription. The referee assigned to hear the case having denied the claim, the claimants petitioned for review. On

August 27, 1957, the reviewing commissioner reversed the referee's decision and ordered Lino P. Bernardo to pay

claimants P3,120.00 as compensation, to reimburse them P200.00 for burial expenses and to pay to the Workmen's

Compensation Fund P32.00 as fees. Reconsideration of this award having been denied, Lino P. Bernardo brought the

present petition for certiorari.

Petitioner first charged that the respondent Commissioner abused its discretion in reversing the decision of the referee and

finding that the deceased was his employee. Petitioner, however was failed to substantiate the charge. On the other,

Rogelio Bacane and Martin Quinto, whose employment with the petitioner was never denied and who were present and

were working together with deceased at the time the latter met his death, testified at the hearing of the case that the said

deceased was their co-laborer in the lumber concession of petitioner Lino P. Bernardo. Indeed, the respondent

Commission expressly found that their testimonies "clearly point to the existence of an employer-employee relation

between the respondent (herein petitioner) and the deceased." It also appear that the deceased, Bacane and Quinto used to

receive their wages from Emilio Bautista, petitioner's "Katiwala". As a matter of fact, the widow of the deceased received

from said Bautista the wages corresponding to services last rendered by her husband. Petitioner claims that Bautista was a

forest guard of the Government and was not his employee. This claim, however, loses its force when we consider the fact

that forest guards hired by lumber concessionaire, though appointed by the Department of Agriculture and Natural

Resources (under Forestry Order No. 11), are still deemed employees of the concessionaires. (See Martha Lumber

Mill vs. Lagradante, et al., 99 Phil., 434; 52 Off. Gaz. [9] 4230.)

In disclaiming employer-employee relationship with the deceased, petitioner has made the rather reckless accusation that

the said deceased was a "lumber smuggler" who had been stealing timber from the concession area. No explanation,

however, was given why the deceased at the time of his death was felling a tree in board daylight and in the presence of

petitioner's two loggers. In this connection, we might add that the finding of the respondent Commission that the deceased

was petitioner's employee at the time of his death is a finding of fact and there being no sufficient showing that the same is

unsupported by substantial evidence, the same should de deemed final and conclusive upon this Court. (Magdrigal

Shipping Co. vs. Del Rosario, et al., G.R. No. L-13130, October 31, 1959; NLU vs. Sta. Ana, 101 Phil., 297; 54 Off. Gaz.

245

[6] 1817; see also PAL vs. PAL Employees Association G.R. No. L-8197, October 31, 1958; Donato vs. Phil. Marine

Officers Association, G.R. No. L-12506, May 18, 1958; 15c and Up Employees' Association vs. Dept. and Bazaar Free

Workers' Union, G.R. No. L-9168, October 18, 1956; NLU vs. Dinglasan, 98 Phil., 649; 52 Off. Gaz. (4) 1933; Batangas

Transportation Co. vs.Rivera and WCC, supra, p. 175.).

Petitioner also argues that the claim was made out of time and therefore already barred because it was filed only on

February 6, 1956. It will be recalled that claimants fileds their original claim on March 31, 1955 against the Bernardo

Sawmill, and February 6, 1956, amended it to include petitioner Lino P. Bernardo as party respondent, it appearing that he

was the owner and operator of the sawmill. It will thus be seen that in amending the claim, claimants merely specified the

real party in interest in accordance with the rule that every action must be prosecuted in the name of such party in interest

(Section 2, Rule 3, Rules of Court). Since the amendments did not state a new cause of action but merely made more

determinate the real party respondent, it evidently relates back to the date of the original complaint or claim, which was

admittedly filed within the 3-months period from the death of the employee as fixed by section 24, of the Workmen's

Compensation Act.

With respect to petitioner's claim that he became a lumber concessionaire only on October 13, 1955, suffice it to say that

prior to the date, he was partner to several persons owning the concession in San Miguel, Bulacan, and subsequent thereto,

he acquired the interest of his partners and became the sole concessionaire. Under those circumstances he became liable to

the creditors of the partnership. (Art. 1840, new Civil Code.)

WHEREFORE, the decision of the Workmen's Compensation Commission sought to be reviewed is affirmed, with costs.

246

G.R. No. 126334 November 23, 2001

EMILIO EMNACE, petitioner,

vs.

COURT OF APPEALS, ESTATE OF VICENTE TABANAO, SHERWIN TABANAO, VICENTE WILLIAM

TABANAO, JANETTE TABANAO DEPOSOY, VICENTA MAY TABANAO VARELA, ROSELA TABANAO

and VINCENT TABANAO, respondents.

YNARES-SANTIAGO, J.:

Petitioner Emilio Emnace, Vicente Tabanao and Jacinto Divinagracia were partners in a business concern known as Ma.

Nelma Fishing Industry. Sometime in January of 1986, they decided to dissolve their partnership and executed an

agreement of partition and distribution of the partnership properties among them, consequent to Jacinto Divinagracia's

withdrawal from the partnership.1 Among the assets to be distributed were five (5) fishing boats, six (6) vehicles, two (2)

parcels of land located at Sto. Niño and Talisay, Negros Occidental, and cash deposits in the local branches of the Bank of

the Philippine Islands and Prudential Bank.

Throughout the existence of the partnership, and even after Vicente Tabanao's untimely demise in 1994, petitioner failed

to submit to Tabanao's heirs any statement of assets and liabilities of the partnership, and to render an accounting of the

partnership's finances. Petitioner also reneged on his promise to turn over to Tabanao's heirs the deceased's 1/3 share in

the total assets of the partnership, amounting to P30,000,000.00, or the sum of P10,000,000.00, despite formal demand for

payment thereof.2

Consequently, Tabanao' s heirs, respondents herein, filed against petitioner an action for accounting, payment of shares,

division of assets and damages.3 In their complaint, respondents prayed as follows:

1. Defendant be ordered to render the proper accounting of all the assets and liabilities of the partnership at bar;

and

2. After due notice and hearing defendant be ordered to pay/remit/deliver/surrender/yield to the plaintiffs the

following:

A. No less than One Third (1/3) of the assets, properties, dividends, cash, land(s), fishing vessels, trucks,

motor vehicles, and other forms and substance of treasures which belong and/or should belong, had

accrued and/or must accrue to the partnership;

B. No less than Two Hundred Thousand Pesos (P200,000.00) as moral damages;

C. Attorney's fees equivalent to Thirty Percent (30%) of the entire share/amount/award which the

Honorable Court may resolve the plaintiffs as entitled to plus P1,000.00 for every appearance in court.4

Petitioner filed a motion to dismiss the complaint on the grounds of improper venue, lack of jurisdiction over the nature of

the action or suit, and lack of capacity of the estate of Tabanao to sue.5 On August 30, 1994, the trial court denied the

motion to dismiss. It held that venue was properly laid because, while realties were involved, the action was directed

against a particular person on the basis of his personal liability; hence, the action is not only a personal action but also an

action in personam. As regards petitioner's argument of lack of jurisdiction over the action because the prescribed docket

fee was not paid considering the huge amount involved in the claim, the trial court noted that a request for accounting was

made in order that the exact value of the partnership may be ascertained and, thus, the correct docket fee may be paid.

Finally, the trial court held that the heirs of Tabanao had aright to sue in their own names, in view of the provision of

Article 777 of the Civil Code, which states that the rights to the succession are transmitted from the moment of the death

of the decedent.6

247

The following day, respondents filed an amended complaint,7 incorporating the additional prayer that petitioner be

ordered to "sell all (the partnership's) assets and thereafter pay/remit/deliver/surrender/yield to the plaintiffs" their

corresponding share in the proceeds thereof. In due time, petitioner filed a manifestation and motion to dismiss,8arguing

that the trial court did not acquire jurisdiction over the case due to the plaintiffs' failure to pay the proper docket fees.

Further, in a supplement to his motion to dismiss,9 petitioner also raised prescription as an additional ground warranting

the outright dismissal of the complaint.

On June 15, 1995, the trial court issued an Order,10

denying the motion to dismiss inasmuch as the grounds raised therein

were basically the same as the earlier motion to dismiss which has been denied. Anent the issue of prescription, the trial

court ruled that prescription begins to run only upon the dissolution of the partnership when the final accounting is done.

Hence, prescription has not set in the absence of a final accounting. Moreover, an action based on a written contract

prescribes in ten years from the time the right of action accrues.

Petitioner filed a petition for certiorari before the Court of Appeals,11

raising the following issues:

I. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in taking

cognizance of a case despite the failure to pay the required docket fee;

II. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in insisting to

try the case which involve (sic) a parcel of land situated outside of its territorial jurisdiction;

III. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in allowing

the estate of the deceased to appear as party plaintiff, when there is no intestate case and filed by one who was

never appointed by the court as administratrix of the estates; and

IV. Whether or not respondent Judge acted without jurisdiction or with grave abuse of discretion in not

dismissing the case on the ground of prescription.

On August 8, 1996, the Court of Appeals rendered the assailed decision,12

dismissing the petition for certiorari, upon a

finding that no grave abuse of discretion amounting to lack or excess of jurisdiction was committed by the trial court in

issuing the questioned orders denying petitioner's motions to dismiss.

Not satisfied, petitioner filed the instant petition for review, raising the same issues resolved by the Court of Appeals,

namely:

I. Failure to pay the proper docket fee;

II. Parcel of land subject of the case pending before the trial court is outside the said court's territorial

jurisdiction;

III. Lack of capacity to sue on the part of plaintiff heirs of Vicente Tabanao; and

IV. Prescription of the plaintiff heirs' cause of action.

It can be readily seen that respondents' primary and ultimate objective in instituting the action below was to recover the

decedent's 1/3 share in the partnership' s assets. While they ask for an accounting of the partnership' s assets and finances,

what they are actually asking is for the trial court to compel petitioner to pay and turn over their share, or the equivalent

value thereof, from the proceeds of the sale of the partnership assets. They also assert that until and unless a proper

accounting is done, the exact value of the partnership' s assets, as well as their corresponding share therein, cannot be

ascertained. Consequently, they feel justified in not having paid the commensurate docket fee as required by the Rules of

Court.1âwphi1.nêt

248

We do not agree. The trial court does not have to employ guesswork in ascertaining the estimated value of the

partnership's assets, for respondents themselves voluntarily pegged the worth thereof at Thirty Million Pesos

(P30,000,000.00). Hence, this case is one which is really not beyond pecuniary estimation, but rather partakes of the

nature of a simple collection case where the value of the subject assets or amount demanded is pecuniarily

determinable.13

While it is true that the exact value of the partnership's total assets cannot be shown with certainty at the

time of filing, respondents can and must ascertain, through informed and practical estimation, the amount they expect to

collect from the partnership, particularly from petitioner, in order to determine the proper amount of docket and other

fees.14

It is thus imperative for respondents to pay the corresponding docket fees in order that the trial court may acquire

jurisdiction over the action.15

Nevertheless, unlike in the case of Manchester Development Corp. v. Court of Appeals,16

where there was clearly an

effort to defraud the government in avoiding to pay the correct docket fees, we see no attempt to cheat the courts on the

part of respondents. In fact, the lower courts have noted their expressed desire to remit to the court "any payable balance

or lien on whatever award which the Honorable Court may grant them in this case should there be any deficiency in the

payment of the docket fees to be computed by the Clerk of Court."17

There is evident willingness to pay, and the fact that

the docket fee paid so far is inadequate is not an indication that they are trying to avoid paying the required amount, but

may simply be due to an inability to pay at the time of filing. This consideration may have moved the trial court and the

Court of Appeals to declare that the unpaid docket fees shall be considered a lien on the judgment award.

Petitioner, however, argues that the trial court and the Court of Appeals erred in condoning the non-payment of the proper

legal fees and in allowing the same to become a lien on the monetary or property judgment that may be rendered in favor

of respondents. There is merit in petitioner's assertion. The third paragraph of Section 16, Rule 141 of the Rules of Court

states that:

The legal fees shall be a lien on the monetary or property judgment in favor of the pauper-litigant.

Respondents cannot invoke the above provision in their favor because it specifically applies to pauper-litigants. Nowhere

in the records does it appear that respondents are litigating as paupers, and as such are exempted from the payment of

court fees.18

The rule applicable to the case at bar is Section 5(a) of Rule 141 of the Rules of Court, which defines the two kinds of

claims as: (1) those which are immediately ascertainable; and (2) those which cannot be immediately ascertained as to the

exact amount. This second class of claims, where the exact amount still has to be finally determined by the courts based

on evidence presented, falls squarely under the third paragraph of said Section 5(a), which provides:

In case the value of the property or estate or the sum claimed is less or more in accordance with the appraisal of

the court, the difference of fee shall be refunded or paid as the case may be. (Underscoring ours)

In Pilipinas Shell Petroleum Corporation v. Court of Appeals,19

this Court pronounced that the above-quoted provision

"clearly contemplates an Initial payment of the filing fees corresponding to the estimated amount of the claim subject to

adjustment as to what later may be proved."20

Moreover, we reiterated therein the principle that the payment of filing fees

cannot be made contingent or dependent on the result of the case. Thus, an initial payment of the docket fees based on an

estimated amount must be paid simultaneous with the filing of the complaint. Otherwise, the court would stand to lose the

filing fees should the judgment later turn out to be adverse to any claim of the respondent heirs.

The matter of payment of docket fees is not a mere triviality. These fees are necessary to defray court expenses in the

handling of cases. Consequently, in order to avoid tremendous losses to the judiciary, and to the government as well, the

payment of docket fees cannot be made dependent on the outcome of the case, except when the claimant is a pauper-

litigant.

249

Applied to the instant case, respondents have a specific claim - 1/3 of the value of all the partnership assets - but they did

not allege a specific amount. They did, however, estimate the partnership's total assets to be worth Thirty Million Pesos

(P30,000,000.00), in a letter21

addressed to petitioner. Respondents cannot now say that they are unable to make an

estimate, for the said letter and the admissions therein form part of the records of this case. They cannot avoid paying the

initial docket fees by conveniently omitting the said amount in their amended complaint. This estimate can be made the

basis for the initial docket fees that respondents should pay. Even if it were later established that the amount proved was

less or more than the amount alleged or estimated, Rule 141, Section 5(a) of the Rules of Court specifically provides that

the court may refund the 'excess or exact additional fees should the initial payment be insufficient. It is clear that it is only

the difference between the amount finally awarded and the fees paid upon filing of this complaint that is subject to

adjustment and which may be subjected to alien.

In the oft-quoted case of Sun Insurance Office, Ltd. v. Hon. Maximiano Asuncion,22

this Court held that when the specific

claim "has been left for the determination by the court, the additional filing fee therefor shall constitute a lien on the

judgment and it shall be the responsibility of the Clerk of Court or his duly authorized deputy to enforce said lien and

assess and collect the additional fee." Clearly, the rules and jurisprudence contemplate the initial payment of filing and

docket fees based on the estimated claims of the plaintiff, and it is only when there is a deficiency that a lien may be

constituted on the judgment award until such additional fee is collected.

Based on the foregoing, the trial court erred in not dismissing the complaint outright despite their failure to pay the proper

docket fees. Nevertheless, as in other procedural rules, it may be liberally construed in certain cases if only to secure a just

and speedy disposition of an action. While the rule is that the payment of the docket fee in the proper amount should be

adhered to, there are certain exceptions which must be strictly construed.23

In recent rulings, this Court has relaxed the strict adherence to the Manchester doctrine, allowing the plaintiff to pay the

proper docket fees within a reasonable time before the expiration of the applicable prescriptive or reglementary period.24

In the recent case of National Steel Corp. v. Court of Appeals,25

this Court held that:

The court acquires jurisdiction over the action if the filing of the initiatory pleading is accompanied by the

payment of the requisite fees, or, if the fees are not paid at the time of the filing of the pleading, as of the time of

full payment of the fees within such reasonable time as the court may grant, unless, of course, prescription has set

in the meantime.

It does not follow, however, that the trial court should have dismissed the complaint for failure of private

respondent to pay the correct amount of docket fees. Although the payment of the proper docket fees is a

jurisdictional requirement, the trial court may allow the plaintiff in an action to pay the same within a reasonable

time before the expiration of the applicable prescriptive or reglementary period. If the plaintiff fails to comply

within this requirement, the defendant should timely raise the issue of jurisdiction or else he would be considered

in estoppel. In the latter case, the balance between the appropriate docket fees and the amount actually paid by the

plaintiff will be considered a lien or any award he may obtain in his favor. (Underscoring ours)

Accordingly, the trial court in the case at bar should determine the proper docket fee based on the estimated amount that

respondents seek to collect from petitioner, and direct them to pay the same within a reasonable time, provided the

applicable prescriptive or reglementary period has not yet expired, Failure to comply therewith, and upon motion by

petitioner, the immediate dismissal of the complaint shall issue on jurisdictional grounds.

On the matter of improper venue, we find no error on the part of the trial court and the Court of Appeals in holding that

the case below is a personal action which, under the Rules, may be commenced and tried where the defendant resides or

may be found, or where the plaintiffs reside, at the election of the latter.26

250

Petitioner, however, insists that venue was improperly laid since the action is a real action involving a parcel of land that

is located outside the territorial jurisdiction of the court a quo. This contention is not well-taken. The records indubitably

show that respondents are asking that the assets of the partnership be accounted for, sold and distributed according to the

agreement of the partners. The fact that two of the assets of the partnership are parcels of land does not materially change

the nature of the action. It is an action in personam because it is an action against a person, namely, petitioner, on the basis

of his personal liability. It is not an action in rem where the action is against the thing itself instead of against the

person.27

Furthermore, there is no showing that the parcels of land involved in this case are being disputed. In fact, it is

only incidental that part of the assets of the partnership under liquidation happen to be parcels of land.

The time-tested case of Claridades v. Mercader, et al.,28

settled this issue thus:

The fact that plaintiff prays for the sale of the assets of the partnership, including the fishpond in question, did not

change the nature or character of the action, such sale being merely a necessary incident of the liquidation of the

partnership, which should precede and/or is part of its process of dissolution.

The action filed by respondents not only seeks redress against petitioner. It also seeks the enforcement of, and petitioner's

compliance with, the contract that the partners executed to formalize the partnership's dissolution, as well as to implement

the liquidation and partition of the partnership's assets. Clearly, it is a personal action that, in effect, claims a debt from

petitioner and seeks the performance of a personal duty on his part.29

In fine, respondents' complaint seeking the

liquidation and partition of the assets of the partnership with damages is a personal action which may be filed in the

proper court where any of the parties reside.30

Besides, venue has nothing to do with jurisdiction for venue touches more

upon the substance or merits of the case.31

As it is, venue in this case was properly laid and the trial court correctly ruled

so.

On the third issue, petitioner asserts that the surviving spouse of Vicente Tabanao has no legal capacity to sue since she

was never appointed as administratrix or executrix of his estate. Petitioner's objection in this regard is misplaced. The

surviving spouse does not need to be appointed as executrix or administratrix of the estate before she can file the action.

She and her children are complainants in their own right as successors of Vicente Tabanao. From the very moment of

Vicente Tabanao' s death, his rights insofar as the partnership was concerned were transmitted to his heirs, for rights to the

succession are transmitted from the moment of death of the decedent.32

Whatever claims and rights Vicente Tabanao had against the partnership and petitioner were transmitted to respondents by

operation of law, more particularly by succession, which is a mode of acquisition by virtue of which the property, rights

and obligations to the extent of the value of the inheritance of a person are transmitted.33

Moreover, respondents became

owners of their respective hereditary shares from the moment Vicente Tabanao died.34

A prior settlement of the estate, or even the appointment of Salvacion Tabanao as executrix or administratrix, is not

necessary for any of the heirs to acquire legal capacity to sue. As successors who stepped into the shoes of their decedent

upon his death, they can commence any action originally pertaining to the decedent.35

From the moment of his death, his

rights as a partner and to demand fulfillment of petitioner's obligations as outlined in their dissolution agreement were

transmitted to respondents. They, therefore, had the capacity to sue and seek the court's intervention to compel petitioner

to fulfill his obligations.

Finally, petitioner contends that the trial court should have dismissed the complaint on the ground of prescription, arguing

that respondents' action prescribed four (4) years after it accrued in 1986. The trial court and the Court of Appeals gave

scant consideration to petitioner's hollow arguments, and rightly so.

The three (3) final stages of a partnership are: (1) dissolution; (2) winding-up; and (3) termination.36

The partnership,

although dissolved, continues to exist and its legal personality is retained, at which time it completes the winding up of its

affairs, including the partitioning and distribution of the net partnership assets to the partners.37

For as long as the

partnership exists, any of the partners may demand an accounting of the partnership's business. Prescription of the said

right starts to run only upon the dissolution of the partnership when the final accounting is done.38

251

Contrary to petitioner's protestations that respondents' right to inquire into the business affairs of the partnership accrued

in 1986, prescribing four (4) years thereafter, prescription had not even begun to run in the absence of a final accounting.

Article 1842 of the Civil Code provides:

The right to an account of his interest shall accrue to any partner, or his legal representative as against the winding

up partners or the surviving partners or the person or partnership continuing the business, at the date of

dissolution, in the absence of any agreement to the contrary.

Applied in relation to Articles 1807 and 1809, which also deal with the duty to account, the above-cited provision states

that the right to demand an accounting accrues at the date of dissolution in the absence of any agreement to the contrary.

When a final accounting is made, it is only then that prescription begins to run. In the case at bar, no final accounting has

been made, and that is precisely what respondents are seeking in their action before the trial court, since petitioner has

failed or refused to render an accounting of the partnership's business and assets. Hence, the said action is not barred by

prescription.

In fine, the trial court neither erred nor abused its discretion when it denied petitioner's motions to dismiss. Likewise, the

Court of Appeals did not commit reversible error in upholding the trial court's orders. Precious time has been lost just to

settle this preliminary issue, with petitioner resurrecting the very same arguments from the trial court all the way up to the

Supreme Court. The litigation of the merits and substantial issues of this controversy is now long overdue and must

proceed without further delay.

WHEREFORE, in view of all the foregoing, the instant petition is DENIED for lack of merit, and the case

isREMANDED to the Regional Trial Court of Cadiz City, Branch 60, which is ORDERED to determine the proper

docket fee based on the estimated amount that plaintiffs therein seek to collect, and direct said plaintiffs to pay the same

within a reasonable time, provided the applicable prescriptive or reglementary period has not yet expired. Thereafter, the

trial court is ORDERED to conduct the appropriate proceedings in Civil Case No. 416-C.

252

G.R. No. 70926 January 31, 1989

DAN FUE LEUNG, petitioner,

vs.

HON. INTERMEDIATE APPELLATE COURT and LEUNG YIU, respondents.

GUTIERREZ, JR., J.:

The petitioner asks for the reversal of the decision of the then Intermediate Appellate Court in AC-G.R. No. CV-00881

which affirmed the decision of the then Court of First Instance of Manila, Branch II in Civil Case No. 116725 declaring

private respondent Leung Yiu a partner of petitioner Dan Fue Leung in the business of Sun Wah Panciteria and ordering

the petitioner to pay to the private respondent his share in the annual profits of the said restaurant.

This case originated from a complaint filed by respondent Leung Yiu with the then Court of First Instance of Manila,

Branch II to recover the sum equivalent to twenty-two percent (22%) of the annual profits derived from the operation of

Sun Wah Panciteria since October, 1955 from petitioner Dan Fue Leung.

The Sun Wah Panciteria, a restaurant, located at Florentino Torres Street, Sta. Cruz, Manila, was established sometime in

October, 1955. It was registered as a single proprietorship and its licenses and permits were issued to and in favor of

petitioner Dan Fue Leung as the sole proprietor. Respondent Leung Yiu adduced evidence during the trial of the case to

show that Sun Wah Panciteria was actually a partnership and that he was one of the partners having contributed P4,000.00

to its initial establishment.

The private respondents evidence is summarized as follows:

About the time the Sun Wah Panciteria started to become operational, the private respondent gave P4,000.00 as his

contribution to the partnership. This is evidenced by a receipt identified as Exhibit "A" wherein the petitioner

acknowledged his acceptance of the P4,000.00 by affixing his signature thereto. The receipt was written in Chinese

characters so that the trial court commissioned an interpreter in the person of Ms. Florence Yap to translate its contents

into English. Florence Yap issued a certification and testified that the translation to the best of her knowledge and belief

was correct. The private respondent identified the signature on the receipt as that of the petitioner (Exhibit A-3) because it

was affixed by the latter in his (private respondents') presence. Witnesses So Sia and Antonio Ah Heng corroborated the

private respondents testimony to the effect that they were both present when the receipt (Exhibit "A") was signed by the

petitioner. So Sia further testified that he himself received from the petitioner a similar receipt (Exhibit D) evidencing

delivery of his own investment in another amount of P4,000.00 An examination was conducted by the PC Crime

Laboratory on orders of the trial court granting the private respondents motion for examination of certain documentary

exhibits. The signatures in Exhibits "A" and 'D' when compared to the signature of the petitioner appearing in the pay

envelopes of employees of the restaurant, namely Ah Heng and Maria Wong (Exhibits H, H-1 to H-24) showed that the

signatures in the two receipts were indeed the signatures of the petitioner.

Furthermore, the private respondent received from the petitioner the amount of P12,000.00 covered by the latter's

Equitable Banking Corporation Check No. 13389470-B from the profits of the operation of the restaurant for the year

1974. Witness Teodulo Diaz, Chief of the Savings Department of the China Banking Corporation testified that said check

(Exhibit B) was deposited by and duly credited to the private respondents savings account with the bank after it was

cleared by the drawee bank, the Equitable Banking Corporation. Another witness Elvira Rana of the Equitable Banking

Corporation testified that the check in question was in fact and in truth drawn by the petitioner and debited against his

own account in said bank. This fact was clearly shown and indicated in the petitioner's statement of account after the

check (Exhibit B) was duly cleared. Rana further testified that upon clearance of the check and pursuant to normal

banking procedure, said check was returned to the petitioner as the maker thereof.

253

The petitioner denied having received from the private respondent the amount of P4,000.00. He contested and impugned

the genuineness of the receipt (Exhibit D). His evidence is summarized as follows:

The petitioner did not receive any contribution at the time he started the Sun Wah Panciteria. He used his savings from his

salaries as an employee at Camp Stotsenberg in Clark Field and later as waiter at the Toho Restaurant amounting to a little

more than P2,000.00 as capital in establishing Sun Wah Panciteria. To bolster his contention that he was the sole owner of

the restaurant, the petitioner presented various government licenses and permits showing the Sun Wah Panciteria was and

still is a single proprietorship solely owned and operated by himself alone. Fue Leung also flatly denied having issued to

the private respondent the receipt (Exhibit G) and the Equitable Banking Corporation's Check No. 13389470 B in the

amount of P12,000.00 (Exhibit B).

As between the conflicting evidence of the parties, the trial court gave credence to that of the plaintiffs. Hence, the court

ruled in favor of the private respondent. The dispositive portion of the decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant, ordering

the latter to deliver and pay to the former, the sum equivalent to 22% of the annual profit derived from the

operation of Sun Wah Panciteria from October, 1955, until fully paid, and attorney's fees in the amount of

P5,000.00 and cost of suit. (p. 125, Rollo)

The private respondent filed a verified motion for reconsideration in the nature of a motion for new trial and, as

supplement to the said motion, he requested that the decision rendered should include the net profit of the Sun Wah

Panciteria which was not specified in the decision, and allow private respondent to adduce evidence so that the said

decision will be comprehensively adequate and thus put an end to further litigation.

The motion was granted over the objections of the petitioner. After hearing the trial court rendered an amended decision,

the dispositive portion of which reads:

FOR ALL THE FOREGOING CONSIDERATIONS, the motion for reconsideration filed by the plaintiff,

which was granted earlier by the Court, is hereby reiterated and the decision rendered by this Court on

September 30, 1980, is hereby amended. The dispositive portion of said decision should read now as

follows:

WHEREFORE, judgment is hereby rendered, ordering the plaintiff (sic) and against the defendant,

ordering the latter to pay the former the sum equivalent to 22% of the net profit of P8,000.00 per day from

the time of judicial demand, until fully paid, plus the sum of P5,000.00 as and for attorney's fees and costs

of suit. (p. 150, Rollo)

The petitioner appealed the trial court's amended decision to the then Intermediate Appellate Court. The questioned

decision was further modified by the appellate court. The dispositive portion of the appellate court's decision reads:

WHEREFORE, the decision appealed from is modified, the dispositive portion thereof reading as

follows:

1. Ordering the defendant to pay the plaintiff by way of temperate damages 22% of the net profit of

P2,000.00 a day from judicial demand to May 15, 1971;

2. Similarly, the sum equivalent to 22% of the net profit of P8,000.00 a day from May 16, 1971 to August

30, 1975;

3. And thereafter until fully paid the sum equivalent to 22% of the net profit of P8,000.00 a day.

254

Except as modified, the decision of the court a quo is affirmed in all other respects. (p. 102, Rollo)

Later, the appellate court, in a resolution, modified its decision and affirmed the lower court's decision. The dispositive

portion of the resolution reads:

WHEREFORE, the dispositive portion of the amended judgment of the court a quo reading as follows:

WHEREFORE, judgment is rendered in favor of the plaintiff and against the defendant, ordering the

latter to pay to the former the sum equivalent to 22% of the net profit of P8,000.00 per day from the time

of judicial demand, until fully paid, plus the sum of P5,000.00 as and for attorney's fees and costs of suit.

is hereby retained in full and affirmed in toto it being understood that the date of judicial demand is July 13, 1978. (pp.

105-106, Rollo).

In the same resolution, the motion for reconsideration filed by petitioner was denied.

Both the trial court and the appellate court found that the private respondent is a partner of the petitioner in the setting up

and operations of the panciteria. While the dispositive portions merely ordered the payment of the respondents share, there

is no question from the factual findings that the respondent invested in the business as a partner. Hence, the two courts

declared that the private petitioner is entitled to a share of the annual profits of the restaurant. The petitioner, however,

claims that this factual finding is erroneous. Thus, the petitioner argues: "The complaint avers that private respondent

extended 'financial assistance' to herein petitioner at the time of the establishment of the Sun Wah Panciteria, in return of

which private respondent allegedly will receive a share in the profits of the restaurant. The same complaint did not claim

that private respondent is a partner of the business. It was, therefore, a serious error for the lower court and the Hon.

Intermediate Appellate Court to grant a relief not called for by the complaint. It was also error for the Hon. Intermediate

Appellate Court to interpret or construe 'financial assistance' to mean the contribution of capital by a partner to a

partnership;" (p. 75, Rollo)

The pertinent portions of the complaint state:

xxx xxx xxx

2. That on or about the latter (sic) of September, 1955, defendant sought the financial assistance of

plaintiff in operating the defendant's eatery known as Sun Wah Panciteria, located in the given address of

defendant; as a return for such financial assistance. plaintiff would be entitled to twenty-two percentum

(22%) of the annual profit derived from the operation of the said panciteria;

3. That on October 1, 1955, plaintiff delivered to the defendant the sum of four thousand pesos

(P4,000.00), Philippine Currency, of which copy for the receipt of such amount, duly acknowledged by

the defendant is attached hereto as Annex "A", and form an integral part hereof; (p. 11, Rollo)

In essence, the private respondent alleged that when Sun Wah Panciteria was established, he gave P4,000.00 to the

petitioner with the understanding that he would be entitled to twenty-two percent (22%) of the annual profit derived from

the operation of the said panciteria. These allegations, which were proved, make the private respondent and the petitioner

partners in the establishment of Sun Wah Panciteria because Article 1767 of the Civil Code provides that "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".

Therefore, the lower courts did not err in construing the complaint as one wherein the private respondent asserted his

rights as partner of the petitioner in the establishment of the Sun Wah Panciteria, notwithstanding the use of the term

financial assistance therein. We agree with the appellate court's observation to the effect that "... given its ordinary

255

meaning, financial assistance is the giving out of money to another without the expectation of any returns therefrom'. It

connotes an ex gratia dole out in favor of someone driven into a state of destitution. But this circumstance under which

the P4,000.00 was given to the petitioner does not obtain in this case.' (p. 99, Rollo) The complaint explicitly stated that

"as a return for such financial assistance, plaintiff (private respondent) would be entitled to twenty-two percentum (22%)

of the annual profit derived from the operation of the said panciteria.' (p. 107, Rollo) The well-settled doctrine is that the

'"... nature of the action filed in court is determined by the facts alleged in the complaint as constituting the cause of

action." (De Tavera v. Philippine Tuberculosis Society, Inc., 113 SCRA 243; Alger Electric, Inc. v. Court of Appeals, 135

SCRA 37).

The appellate court did not err in declaring that the main issue in the instant case was whether or not the private

respondent is a partner of the petitioner in the establishment of Sun Wah Panciteria.

The petitioner also contends that the respondent court gravely erred in giving probative value to the PC Crime Laboratory

Report (Exhibit "J") on the ground that the alleged standards or specimens used by the PC Crime Laboratory in arriving at

the conclusion were never testified to by any witness nor has any witness identified the handwriting in the standards or

specimens belonging to the petitioner. The supposed standards or specimens of handwriting were marked as Exhibits "H"

"H-1" to "H-24" and admitted as evidence for the private respondent over the vigorous objection of the petitioner's

counsel.

The records show that the PC Crime Laboratory upon orders of the lower court examined the signatures in the two

receipts issued separately by the petitioner to the private respondent and So Sia (Exhibits "A" and "D") and compared the

signatures on them with the signatures of the petitioner on the various pay envelopes (Exhibits "H", "H-1" to 'H-24") of

Antonio Ah Heng and Maria Wong, employees of the restaurant. After the usual examination conducted on the questioned

documents, the PC Crime Laboratory submitted its findings (Exhibit J) attesting that the signatures appearing in both

receipts (Exhibits "A" and "D") were the signatures of the petitioner.

The records also show that when the pay envelopes (Exhibits "H", "H-1" to "H-24") were presented by the private

respondent for marking as exhibits, the petitioner did not interpose any objection. Neither did the petitioner file an

opposition to the motion of the private respondent to have these exhibits together with the two receipts examined by the

PC Crime Laboratory despite due notice to him. Likewise, no explanation has been offered for his silence nor was any

hint of objection registered for that purpose.

Under these circumstances, we find no reason why Exhibit "J" should be rejected or ignored. The records sufficiently

establish that there was a partnership.

The petitioner raises the issue of prescription. He argues: The Hon. Respondent Intermediate Appellate Court gravely

erred in not resolving the issue of prescription in favor of petitioner. The alleged receipt is dated October 1, 1955 and the

complaint was filed only on July 13, 1978 or after the lapse of twenty-two (22) years, nine (9) months and twelve (12)

days. From October 1, 1955 to July 13, 1978, no written demands were ever made by private respondent.

The petitioner's argument is based on Article 1144 of the Civil Code which provides:

Art. 1144. The following actions must be brought within ten years from the time the right of action

accrues:

(1) Upon a written contract;

(2) Upon an obligation created by law;

(3) Upon a judgment.

256

in relation to Article 1155 thereof which provides:

Art. 1155. The prescription of actions is interrupted when they are filed before the court, when there is a

written extra-judicial demand by the creditor, and when there is any written acknowledgment of the debt

by the debtor.'

The argument is not well-taken.

The private respondent is a partner of the petitioner in Sun Wah Panciteria. The requisites of a partnership which are — 1)

two or more persons bind themselves to contribute money, property, or industry to a common fund; and 2) intention on

the part of the partners to divide the profits among themselves (Article 1767, Civil Code; Yulo v. Yang Chiao Cheng, 106

Phil. 110)-have been established. As stated by the respondent, a partner shares not only in profits but also in the losses of

the firm. If excellent relations exist among the partners at the start of business and all the partners are more interested in

seeing the firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible. It

would be incorrect to state that if a partner does not assert his rights anytime within ten years from the start of operations,

such rights are irretrievably lost. The private respondent's cause of action is premised upon the failure of the petitioner to

give him the agreed profits in the operation of Sun Wah Panciteria. In effect the private respondent was asking for an

accounting of his interests in the partnership.

It is Article 1842 of the Civil Code in conjunction with Articles 1144 and 1155 which is applicable. Article 1842 states:

The right to an account of his interest shall accrue to any partner, or his legal representative as against the

winding up partners or the surviving partners or the person or partnership continuing the business, at the

date of dissolution, in the absence or any agreement to the contrary.

Regarding the prescriptive period within which the private respondent may demand an accounting, Articles 1806, 1807,

and 1809 show that the right to demand an accounting exists as long as the partnership exists. Prescription begins to run

only upon the dissolution of the partnership when the final accounting is done.

Finally, the petitioner assails the appellate court's monetary awards in favor of the private respondent for being excessive

and unconscionable and above the claim of private respondent as embodied in his complaint and testimonial evidence

presented by said private respondent to support his claim in the complaint.

Apart from his own testimony and allegations, the private respondent presented the cashier of Sun Wah Panciteria, a

certain Mrs. Sarah L. Licup, to testify on the income of the restaurant.

Mrs. Licup stated:

ATTY. HIPOLITO (direct examination to Mrs. Licup).

Q Mrs. Witness, you stated that among your duties was that you were in charge of the

custody of the cashier's box, of the money, being the cashier, is that correct?

A Yes, sir.

Q So that every time there is a customer who pays, you were the one who accepted the

money and you gave the change, if any, is that correct?

A Yes.

257

Q Now, after 11:30 (P.M.) which is the closing time as you said, what do you do with the

money?

A We balance it with the manager, Mr. Dan Fue Leung.

ATTY. HIPOLITO:

I see.

Q So, in other words, after your job, you huddle or confer together?

A Yes, count it all. I total it. We sum it up.

Q Now, Mrs. Witness, in an average day, more or less, will you please tell us, how much

is the gross income of the restaurant?

A For regular days, I received around P7,000.00 a day during my shift alone and during

pay days I receive more than P10,000.00. That is excluding the catering outside the place.

Q What about the catering service, will you please tell the Honorable Court how many

times a week were there catering services?

A Sometimes three times a month; sometimes two times a month or more.

xxx xxx xxx

Q Now more or less, do you know the cost of the catering service?

A Yes, because I am the one who receives the payment also of the catering.

Q How much is that?

A That ranges from two thousand to six thousand pesos, sir.

Q Per service?

A Per service, Per catering.

Q So in other words, Mrs. witness, for your shift alone in a single day from 3:30 P.M. to

11:30 P.M. in the evening the restaurant grosses an income of P7,000.00 in a regular day?

A Yes.

Q And ten thousand pesos during pay day.?

A Yes.

(TSN, pp. 53 to 59, inclusive, November 15,1978)

xxx xxx xxx

258

COURT:

Any cross?

ATTY. UY (counsel for defendant):

No cross-examination, Your Honor. (T.S.N. p. 65, November 15, 1978). (Rollo, pp. 127-

128)

The statements of the cashier were not rebutted. Not only did the petitioner's counsel waive the cross-examination on the

matter of income but he failed to comply with his promise to produce pertinent records. When a subpoena duces

tecum was issued to the petitioner for the production of their records of sale, his counsel voluntarily offered to bring them

to court. He asked for sufficient time prompting the court to cancel all hearings for January, 1981 and reset them to the

later part of the following month. The petitioner's counsel never produced any books, prompting the trial court to state:

Counsel for the defendant admitted that the sales of Sun Wah were registered or recorded in the daily

sales book. ledgers, journals and for this purpose, employed a bookkeeper. This inspired the Court to ask

counsel for the defendant to bring said records and counsel for the defendant promised to bring those that

were available. Seemingly, that was the reason why this case dragged for quite sometime. To bemuddle

the issue, defendant instead of presenting the books where the same, etc. were recorded, presented

witnesses who claimed to have supplied chicken, meat, shrimps, egg and other poultry products which,

however, did not show the gross sales nor does it prove that the same is the best evidence. This Court

gave warning to the defendant's counsel that if he failed to produce the books, the same will be considered

a waiver on the part of the defendant to produce the said books inimitably showing decisive records on

the income of the eatery pursuant to the Rules of Court (Sec. 5(e) Rule 131). "Evidence willfully

suppressed would be adverse if produced." (Rollo, p. 145)

The records show that the trial court went out of its way to accord due process to the petitioner.

The defendant was given all the chance to present all conceivable witnesses, after the plaintiff has rested

his case on February 25, 1981, however, after presenting several witnesses, counsel for defendant

promised that he will present the defendant as his last witness. Notably there were several postponement

asked by counsel for the defendant and the last one was on October 1, 1981 when he asked that this case

be postponed for 45 days because said defendant was then in Hongkong and he (defendant) will be back

after said period. The Court acting with great concern and understanding reset the hearing to November

17, 1981. On said date, the counsel for the defendant who again failed to present the defendant asked for

another postponement, this time to November 24, 1981 in order to give said defendant another judicial

magnanimity and substantial due process. It was however a condition in the order granting the

postponement to said date that if the defendant cannot be presented, counsel is deemed to have waived the

presentation of said witness and will submit his case for decision.

On November 24, 1981, there being a typhoon prevailing in Manila said date was declared a partial non-

working holiday, so much so, the hearing was reset to December 7 and 22, 1981. On December 7, 1981,

on motion of defendant's counsel, the same was again reset to December 22, 1981 as previously

scheduled which hearing was understood as intransferable in character. Again on December 22, 1981, the

defendant's counsel asked for postponement on the ground that the defendant was sick. the Court, after

much tolerance and judicial magnanimity, denied said motion and ordered that the case be submitted for

resolution based on the evidence on record and gave the parties 30 days from December 23, 1981, within

which to file their simultaneous memoranda. (Rollo, pp. 148-150)

259

The restaurant is located at No. 747 Florentino Torres, Sta. Cruz, Manila in front of the Republic Supermarket. It is near

the corner of Claro M. Recto Street. According to the trial court, it is in the heart of Chinatown where people who buy and

sell jewelries, businessmen, brokers, manager, bank employees, and people from all walks of life converge and patronize

Sun Wah.

There is more than substantial evidence to support the factual findings of the trial court and the appellate court. If the

respondent court awarded damages only from judicial demand in 1978 and not from the opening of the restaurant in 1955,

it is because of the petitioner's contentions that all profits were being plowed back into the expansion of the business.

There is no basis in the records to sustain the petitioners contention that the damages awarded are excessive. Even if the

Court is minded to modify the factual findings of both the trial court and the appellate court, it cannot refer to any portion

of the records for such modification. There is no basis in the records for this Court to change or set aside the factual

findings of the trial court and the appellate court. The petitioner was given every opportunity to refute or rebut the

respondent's submissions but, after promising to do so, it deliberately failed to present its books and other evidence.

The resolution of the Intermediate Appellate Court ordering the payment of the petitioner's obligation shows that the same

continues until fully paid. The question now arises as to whether or not the payment of a share of profits shall continue

into the future with no fixed ending date.

Considering the facts of this case, the Court may decree a dissolution of the partnership under Article 1831 of the Civil

Code which, in part, provides:

Art. 1831. On application by or for a partner the court shall decree a dissolution whenever:

xxx xxx xxx

(3) A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the

business;

(4) A partner willfully or persistently commits a breach of the partnership agreement, or otherwise so

conducts himself in matters relating to the partnership business that it is not reasonably practicable to

carry on the business in partnership with him;

xxx xxx xxx

(6) Other circumstances render a dissolution equitable.

There shall be a liquidation and winding up of partnership affairs, return of capital, and other incidents of dissolution

because the continuation of the partnership has become inequitable.

WHEREFORE, the petition for review is hereby DISMISSED for lack of merit. The decision of the respondent court is

AFFIRMED with a MODIFICATION that as indicated above, the partnership of the parties is ordered dissolved.

260

G.R. No. 164401 June 25, 2008

LILIBETH SUNGA-CHAN and CECILIA SUNGA, petitioners,

vs.

THE HONORABLE COURT OF APPEALS; THE HONORABLE PRESIDING JUDGE, Regional Trial Court,

Branch 11, Sindangan, Zamboanga Del Norte; THE REGIONAL TRIAL COURT SHERIFF, Branch 11,

Sindangan, Zamboanga Del Norte; THE CLERK OF COURT OF MANILA, as Ex-Officio Sheriff; and

LAMBERTO T. CHUA, respondents.

VELASCO, JR., J.:

The Case

Before us is a petition for review under Rule 45, seeking to nullify and set aside the Decision1 and Resolution dated

November 6, 2003 and July 6, 2004, respectively, of the Court of Appeals (CA) in CA-G.R. SP No. 75688. The impugned

CA Decision and Resolution denied the petition for certiorari interposed by petitioners assailing the Resolutions2 dated

November 6, 2002 and January 7, 2003, respectively, of the Regional Trial Court (RTC), Branch 11 in Sindangan,

Zamboanga Del Norte in Civil Case No. S-494, a suit for winding up of partnership affairs, accounting, and recovery of

shares commenced thereat by respondent Lamberto T. Chua.

The Facts

In 1977, Chua and Jacinto Sunga formed a partnership to engage in the marketing of liquefied petroleum gas. For

convenience, the business, pursued under the name, Shellite Gas Appliance Center (Shellite), was registered as a sole

proprietorship in the name of Jacinto, albeit the partnership arrangement called for equal sharing of the net profit.

After Jacinto’s death in 1989, his widow, petitioner Cecilia Sunga, and married daughter, petitioner Lilibeth Sunga-Chan,

continued with the business without Chua’s consent. Chua’s subsequent repeated demands for accounting and winding up

went unheeded, prompting him to file on June 22, 1992 a Complaint for Winding Up of a Partnership Affairs, Accounting,

Appraisal and Recovery of Shares and Damages with Writ of Preliminary Attachment, docketed as Civil Case No. S-494

of the RTC in Sindangan, Zamboanga del Norte and raffled to Branch 11 of the court.

After trial, the RTC rendered, on October 7, 1997, judgment finding for Chua, as plaintiff a quo. The RTC’s decision

would subsequently be upheld by the CA in CA-G.R. CV No. 58751 and by this Court per its Decision dated August 15,

2001 in G.R. No. 143340.3 The corresponding Entry of Judgment

4 would later issue declaring the October 7, 1997 RTC

decision final and executory as of December 20, 2001. The fallo of the RTC’s decision reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendants, as follows:

(1) DIRECTING them to render an accounting in acceptable form under accounting procedures and

standards of the properties, assets, income and profits of [Shellite] since the time of death of Jacinto

L. Sunga, from whom they continued the business operations including all businesses derived from

[Shellite]; submit an inventory, and appraisal of all these properties, assets, income, profits, etc. to the

Court and to plaintiff for approval or disapproval;

(2) ORDERING them to return and restitute to the partnership any and all properties, assets, income

and profits they misapplied and converted to their own use and advantage that legally pertain to the

plaintiff and account for the properties mentioned in pars. A and B on pages 4-5 of this petition as basis;

261

(3) DIRECTING them to restitute and pay to the plaintiff ½ shares and interest of the plaintiff in the

partnership of the listed properties, assets and good will in schedules A, B and C, on pages 4-5 of the

petition;

(4) ORDERING them to pay the plaintiff earned but unreceived income and profits from the

partnership from 1988 to May 30, 1992, when the plaintiff learned of the closure of the store the sum

of P35,000.00 per month, with legal rate of interest until fully paid;

(5) ORDERING them to wind up the affairs of the partnership and terminate its business activities

pursuant to law, after delivering to the plaintiff all the ½ interest, shares, participation and equity in the

partnership, or the value thereof in money or money’s worth, if the properties are not physically divisible;

(6) FINDING them especially Lilibeth Sunga-Chan guilty of breach of trust and in bad faith and hold

them liable to the plaintiff the sum of P50,000.00 as moral and exemplary damages; and,

(7) DIRECTING them to reimburse and pay the sum of P25,000.00 as attorney’s [fee] and P25,000.00 as

litigation expenses.

NO special pronouncements as to COSTS.

SO ORDERED.5 (Emphasis supplied.)

Via an Order6 dated January 16, 2002, the RTC granted Chua’s motion for execution. Over a month later, the RTC, acting

on another motion of Chua, issued an amended writ of execution.7

It seems, however, that the amended writ of execution could not be immediately implemented, for, in an omnibus motion

of April 3, 2002, Chua, inter alia, asked the trial court to commission a certified public accountant (CPA) to undertake the

accounting work and inventory of the partnership assets if petitioners refuse to do it within the time set by the court. Chua

later moved to withdraw his motion and instead ask the admission of an accounting report prepared by CPA Cheryl A.

Gahuman. In the report under the heading, Computation of Claims,8 Chua’s aggregate claim, arrived at using the

compounding-of-interest method, amounted to PhP 14,277,344.94. Subsequently, the RTC admitted and approved the

computation of claims in view of petitioners’ failure and refusal, despite notice, to appear and submit an accounting report

on the winding up of the partnership on the scheduled hearings on April 29 and 30, 2002.9

After another lengthy proceedings, petitioners, on September 24, 2002, submitted their own CPA-certified valuation and

accounting report. In it, petitioners limited Chua’s entitlement from the winding up of partnership affairs to an aggregate

amount of PhP 3,154,736.65 only.10

Chua, on the other hand, submitted a new computation,11

this time applying simple

interest on the various items covered by his claim. Under this methodology, Chua’s aggregate claim went down to PhP

8,733,644.75.

On November 6, 2002, the RTC issued a Resolution,12

rejecting the accounting report petitioners submitted, while

approving the new computation of claims Chua submitted. The fallo of the resolution reads:

WHEREFORE, premises considered, this Court resolves, as it is hereby resolved, that the Computation of Claims

submitted by the plaintiff dated October 15, 2002 amounting to P8,733,644.75 be APPROVED in all respects as

the final computation and accounting of the defendants’ liabilities in favor of the plaintiff in the above-captioned

case, DISAPPROVING for the purpose, in its entirety, the computation and accounting filed by the defendants.

SO RESOLVED.13

Petitioners sought reconsideration, but their motion was denied by the RTC per its Resolution of January 7, 2003.14

262

In due time, petitioners went to the CA on a petition for certiorari15

under Rule 65, assailing the November 6, 2002 and

January 7, 2003 resolutions of the RTC, the recourse docketed as CA-G.R. SP No. 75688.

The Ruling of the CA

As stated at the outset, the CA, in the herein assailed Decision of November 6, 2003, denied the petition for certiorari,

thus:

WHEREFORE, the foregoing considered, the Petition is hereby DENIED for lack of merit.

SO ORDERED.16

The CA predicated its denial action on the ensuing main premises:

1. Petitioners, by not appearing on the hearing dates, i.e., April 29 and 30, 2002, scheduled to consider Chua’s

computation of claims, or rendering, as required, an accounting of the winding up of the partnership, are deemed to have

waived their right to interpose any objection to the computation of claims thus submitted by Chua.

2. The 12% interest added on the amounts due is proper as the unwarranted keeping by petitioners of Chua’s money

passes as an involuntary loan and forbearance of money.

3. The reiterative arguments set forth in petitioners’ pleadings below were part of their delaying tactics. Petitioners had

come to the appellate court at least thrice and to this Court twice. Petitioners had more than enough time to question the

award and it is now too late in the day to change what had become final and executory.

Petitioners’ motion for reconsideration was rejected by the appellate court through the assailed Resolution17

dated July 6,

2004. Therein, the CA explained that the imposition of the 12% interest for forbearance of credit or money was proper

pursuant to paragraph 1 of the October 7, 1997 RTC decision, as the computation done by CPA Gahuman was made in

"acceptable form under accounting procedures and standards of the properties, assets, income and profits of

[Shellite]."18

Moreover, the CA ruled that the imposition of interest is not based on par. 3 of the October 7, 1997 RTC

decision as the phrase "shares and interests" mentioned therein refers not to an imposition of interest for use of money in a

loan or credit, but to a legal share or right. The appellate court also held that the imposition of interest on the partnership

assets falls under par. 2 in relation to par. 1 of the final RTC decision as the restitution mentioned therein does not simply

mean restoration but also reparation for the injury or damage committed against the rightful owner of the property.

Finally, the CA declared the partnership assets referred to in the final decision as "liquidated claim" since the claim of

Chua is ascertainable by mathematical computation; therefore, interest is recoverable as an element of damage.

The Issues

Hence, the instant petition with petitioners raising the following issues for our consideration:

I.

Whether or not the Regional Trial Court can [impose] interest on a final judgment of unliquidated claims.

II.

Whether or not the Sheriff can enforce the whole divisible obligation under judgment only against one Defendant.

III.

263

Whether or not the absolute community of property of spouses Lilibeth Sunga Chan with her husband Norberto

Chan can be lawfully made to answer for the liability of Lilibeth Chan under the judgment.19

Significant Intervening Events

In the meantime, pending resolution of the instant petition for review and even before the resolution by the CA of its CA-

G.R. SP No. 75688, the following relevant events transpired:

1. Following the RTC’s approval of Chua’s computation of claims in the amount of PhP 8,733,644.75, the sheriff

of Manila levied upon petitioner Sunga-Chan’s property located along Linao St., Paco, Manila, covered by

Transfer Certificate of Title (TCT) No. 208782,20

over which a building leased to the Philippine National Bank

(PNB) stood. In the auction sale of the levied lot, Chua, with a tender of PhP 8 million,21

emerged as the winning

bidder.

2. On January 21, 2005, Chua moved for the issuance of a final deed of sale and a writ of possession. He also

asked the RTC to order the Registry of Deeds of Manila to cancel TCT No. 208782 and to issue a new certificate.

Despite petitioners’ opposition on the ground of prematurity, a final deed of sale22

was issued on February 16,

2005.

3. On February 18, 2005, Chua moved for the confirmation of the sheriff’s final deed of sale and for the issuance

of an order for the cancellation of TCT No. 208782. Petitioners again interposed an opposition in which they

informed the RTC that this Court had already granted due course to their petition for review on January 31, 2005;

4. On April 11, 2005, the RTC, via a Resolution, confirmed the sheriff’s final deed of sale, ordered the Registry

of Deeds of Manila to cancel TCT No. 208782, and granted a writ of possession23

in favor of Chua.

5. On May 3, 2005, petitioners filed before this Court a petition for the issuance of a temporary restraining order

(TRO). On May 24, 2005, the sheriff of Manila issued a Notice to Vacate24

against petitioners, compelling

petitioners to repair to this Court anew for the resolution of their petition for a TRO.

6. On May 31, 2005, the Court issued a TRO,25

enjoining the RTC and the sheriff from enforcing the April 11,

2005 writ of possession and the May 24, 2005 Notice to Vacate. Consequently, the RTC issued an Order26

on

June 17, 2005, suspending the execution proceedings before it.

7. Owing to the clashing ownership claims over the leased Paco property, coupled with the filing of an unlawful

detainer suit before the Metropolitan Trial Court (MeTC) in Manila against PNB, the Court, upon the bank’s

motion, allowed, by Resolution27

dated April 26, 2006, the consignation of the monthly rentals with the MeTC

hearing the ejectment case.

The Court’s Ruling

The petition is partly meritorious.

First Issue: Interest Proper in Forbearance of Credit

Petitioners, citing Article 221328

of the Civil Code, fault the trial court for imposing, in the execution of its final judgment,

interests on what they considered as unliquidated claims. Among these was the claim for goodwill upon which the RTC

attached a monetary value of PhP 250,000. Petitioners also question the imposition of 12% interest on the claimed

monthly profits of PhP 35,000, reckoned from 1988 to October 15, 1992. To petitioners, the imposable rate should only be

6% and computed from the finality of the RTC’s underlying decision, i.e., from December 20, 2001.

264

Third on the petitioners’ list of unliquidated claims is the yet-to-be established value of the one-half partnership share and

interest adjudicated to Chua, which, they submit, must first be determined with reasonable certainty in a judicial

proceeding. And in this regard, petitioners, citing Eastern Shipping Lines, Inc. v. Court of Appeals,29

would ascribe error

on the RTC for adding a 12% per annum interest on the approved valuation of the one-half share of the assets, inclusive of

goodwill, due Chua.

Petitioners are partly correct.

For clarity, we reproduce the summary valuations and accounting reports on the computation of claims certified to by the

parties’ respective CPAs. Chua claimed the following:

A 50% share on assets (exclusive of goodwill) at fair market

value (Schedule 1) P 1,613,550.00

B 50% share in the monetary value of goodwill (P500,000 x

50%) 250,000.00

C Legal interest on share of assets from June 1, 1992 to Oct.

15, 2002 at 12% interest per year (Schedule 2) 2,008,869.75

D Unreceived profits from 1988 to 1992 and its

corresponding interest from Jan. 1, 1988 to Oct. 15, 2002

(Schedule 3) 4,761,225.00

E Damages 50,000.00

F Attorney’s fees 25,000.00

G Litigation fees 25,000.00

TOTAL AMOUNT P 8,733,644.75

On the other hand, petitioners acknowledged the following to be due to Chua:

Total Assets – Schedule 1 P2,431,956.35

50% due to Lamberto Chua P1,215,978.16

Total Alleged Profit, Net of Payments Made,

May 1992-Sch. 2 1,613,758.49

50% share in the monetary value of goodwill

(500,000 x 50%) 250,000.00

Moral and Exemplary Damages 50,000.00

Attorney’s Fee 25,000.00

Litigation Fee 25,000.00

TOTAL AMOUNT P3,154,736.65

As may be recalled, the trial court admitted and approved Chua’s computation of claims amounting to PhP 8,733,644.75,

but rejected that of petitioners, who came up with the figure of only PhP 3,154,736.65. We highlight the substantial

differences in the accounting reports on the following items, to wit: (1) the aggregate amount of the partnership assets

bearing on the 50% share of Chua thereon; (2) interests added on Chua’s share of the assets; (3) amount of profits from

265

1988 through May 30, 1992, net of alleged payments made to Chua; and (4) interests added on the amount entered as

profits.

From the foregoing submitted valuation reports, there can be no dispute about the goodwill earned thru the years by

Shellite. In fact, the parties, by their own judicial admissions, agreed on the monetary value, i.e., PhP 250,000, of this

item. Clearly then, petitioners contradict themselves when they say that such amount of goodwill is without basis. Thus,

the Court is loathed to disturb the trial court’s approval of the amount of PhP 250,000, representing the monetary value of

the goodwill, to be paid to Chua.

Neither is the Court inclined to interfere with the CA’s conclusion as to the total amount of the partnership profit, that is,

PhP 1,855,000, generated for the period January 1988 through May 30, 1992, and the total partnership assets of PhP

3,227,100, 50% of which, or PhP 1,613,550, pertains to Chua as his share. To be sure, petitioners have not adduced

adequate evidence to belie the above CA’s factual determination, confirmatory of the trial court’s own. Needless to stress,

it is not the duty of the Court, not being a trier of facts, to analyze or weigh all over again the evidence or premises

supportive of such determination, absent, as here, the most compelling and cogent reasons.

This brings us to the question of the propriety of the imposition of interest and, if proper, the imposable rate of interest

applicable.

In Reformina v. Tomol, Jr.,30

the Court held that the legal interest at 12% per annum under Central Bank (CB) Circular

No. 416 shall be adjudged only in cases involving the loan or forbearance of money. And for transactions involving

payment of indemnities in the concept of damages arising from default in the performance of obligations in general and/or

for money judgment not involving a loan or forbearance of money, goods, or credit, the governing provision is Art. 2209

of the Civil Code prescribing a yearly 6% interest. Art. 2209 pertinently provides:

Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor incurs in delay, the

indemnity for damages, there being no stipulation to the contrary, shall be the payment of the interest agreed

upon, and in the absence of stipulation, the legal interest, which is six per cent per annum.

The term "forbearance," within the context of usury law, has been described as a contractual obligation of a lender or

creditor to refrain, during a given period of time, from requiring the borrower or debtor to repay the loan or debt then due

and payable.31

Eastern Shipping Lines, Inc. synthesized the rules on the imposition of interest, if proper, and the applicable rate, as

follows: The 12% per annum rate under CB Circular No. 416 shall apply only to loans or forbearance of money, goods, or

credits, as well as to judgments involving such loan or forbearance of money, goods, or credit, while the 6% per annum

under Art. 2209 of the Civil Code applies "when the transaction involves the payment of indemnities in the concept of

damage arising from the breach or a delay in the performance of obligations in general,"32

with the application of both

rates reckoned "from the time the complaint was filed until the [adjudged] amount is fully paid."33

In either instance, the

reckoning period for the commencement of the running of the legal interest shall be subject to the condition "that the

courts are vested with discretion, depending on the equities of each case, on the award of interest."34

Otherwise formulated, the norm to be followed in the future on the rates and application thereof is:

I. – When an obligation, regardless of its source, is breached, the contravenor can be held liable for damages. The

provisions under Title XVIII on "Damages" of the Civil Code govern in determining the measure of recoverable

damages.

II. – With regard particularly to an award of interest in the concept of actual and compensatory damages, the rate

of interest, as well as the accrual thereof, is imposed, as follows:

266

1. When the obligation breached consists in the payment of a sum of money, i.e., a loan or forbearance of

money, the interest due should be that which may have been stipulated in writing. Furthermore, the

interest due shall itself earn legal interest from the time it is judicially demanded. In the absence of

stipulation, the rate of interest shall be 12% per annum to be computed from default, i.e., from judicial or

extrajudicial demand under and subject to the provisions of Article 1169 of the Civil Code.

2. When an obligation not constituting loans or forbearance of money is breached, an interest on the

amount of damages awarded may be imposed at the discretion of the court at the rate of 6% per annum.

No interest, however, shall be adjudged on unliquidated claims or damages except when or until the

demand can be established with reasonable certainty. Accordingly, where the demand is established with

reasonable certainty, the interest shall begin to run from the time the claim is made judicially or

extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be so reasonably established at the

time the demand is made, the interest shall begin to run only from the date the judgment of the court is

made (at which time the quantification of damages may be deemed to have been reasonably ascertained).

The actual base for the computation of legal interest shall, in any case, be on the amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and executory, the rate of

legal interest, whether the case falls under paragraph 1 or paragraph 2, above, shall be 12% per annum

from such finality until its satisfaction, this interim period being deemed to be by then an equivalent to a

forbearance of credit.35

Guided by the foregoing rules, the award to Chua of the amount representing earned but unremitted profits, i.e.. PhP

35,000 monthly, from January 1988 until May 30, 1992, must earn interest at 6% per annum reckoned from October 7,

1997, the rendition date of the RTC decision, until December 20, 2001, when the said decision became final and

executory. Thereafter, the total of the monthly profits inclusive of the add on 6% interest shall earn 12% per annum

reckoned from December 20, 2001 until fully paid, as the award for that item is considered to be, by then, equivalent to a

forbearance of credit. Likewise, the PhP 250,000 award, representing the goodwill value of the business, the award of PhP

50,000 for moral and exemplary damages, PhP 25,000 attorney’s fee, and PhP 25,000 litigation fee shall earn 12% per

annum from December 20, 2001 until fully paid.

Anent the impasse over the partnership assets, we are inclined to agree with petitioners’ assertion that Chua’s share and

interest on such assets partake of an unliquidated claim which, until reasonably determined, shall not earn interest for him.

As may be noted, the legal norm for interest to accrue is "reasonably determinable," not, as Chua suggested and the CA

declared, determinable by mathematical computation.

The Court has certainly not lost sight of the fact that the October 7, 1997 RTC decision clearly directed petitioners to

render an accounting, inventory, and appraisal of the partnership assets and then to wind up the partnership affairs by

restituting and delivering to Chua his one-half share of the accounted partnership assets. The directive itself is a

recognition that the exact share and interest of Chua over the partnership cannot be determined with reasonable precision

without going through with the inventory and accounting process. In fine, a liquidated claim cannot validly be asserted

without accounting. In net effect, Chua’s interest and share over the partnership asset, exclusive of the goodwill, assumed

the nature of a liquidated claim only after the trial court, through its November 6, 2002 resolution, approved the assets

inventory and accounting report on such assets.

Considering that Chua’s computation of claim, as approved by the trial court, was submitted only on October 15, 2002, no

interest in his favor can be added to his share of the partnership assets. Consequently, the computation of claims of Chua

should be as follows:

(1) 50% share on assets (exclusive of goodwill)

at fair market value PhP 1,613,550.00

(2) 50% share in the monetary value of goodwill 250,000.00

267

(PhP 500,000 x 50%)

(3) 12% interest on share of goodwill from December 20,

2001 to October 15, 2000

[PhP 250,000 x 0.12 x 299/365 days] 24,575.34

(4) Unreceived profits from 1988 to May 30, 1992 1,855,000.00

(5) 6% interest on unreceived profits from January 1, 1988 to

December 20, 200136

1,360,362.50

(6) 12% interest on unreceived profits from December

20, 2001 to October 15, 2002

[PhP 3,215,362.50 x 12% x 299/365 days] 316,074.54

(7) Moral and exemplary damages 50,000.00

(8) Attorney’s fee 25,000.00

(9) Litigation fee 25,000.00

(10) 12% interest on moral and exemplary damages,

attorney’s fee, and litigation fee from December 20, 2001 to

October 15, 2002

[PhP 100,000 x 12% x 299/365 days] 9,830.14

TOTAL AMOUNT PhP 5,529,392.52

Second Issue: Petitioners’ Obligation Solidary

Petitioners, on the submission that their liability under the RTC decision is divisible, impugn the implementation of the

amended writ of execution, particularly the levy on execution of the absolute community property of spouses petitioner

Sunga-Chan and Norberto Chan. Joint, instead of solidary, liability for any and all claims of Chua is obviously petitioners’

thesis.

Under the circumstances surrounding the case, we hold that the obligation of petitioners is solidary for several reasons.

For one, the complaint of Chua for winding up of partnership affairs, accounting, appraisal, and recovery of shares and

damages is clearly a suit to enforce a solidary or joint and several obligation on the part of petitioners. As it were, the

continuance of the business and management of Shellite by petitioners against the will of Chua gave rise to a solidary

obligation, the acts complained of not being severable in nature. Indeed, it is well-nigh impossible to draw the line

between when the liability of one petitioner ends and the liability of the other starts. In this kind of situation, the law itself

imposes solidary obligation. Art. 1207 of the Civil Code thus provides:

Art. 1207. The concurrence of two or more creditors or of two or more debtors in one and the same obligation

does not imply that each one of the former has a right to demand, or that each of the latter is bound to render,

entire compliance with the prestation. There is solidary liability only when the obligation expressly so states, or

when the law or the nature of the obligation requires solidarity. (Emphasis ours.)

Any suggestion that the obligation to undertake an inventory, render an accounting of partnership assets, and to wind up

the partnership affairs is divisible ought to be dismissed.

For the other, the duty of petitioners to remit to Chua his half interest and share of the total partnership assets proceeds

from petitioners’ indivisible obligation to render an accounting and inventory of such assets. The need for the imposition

268

of a solidary liability becomes all the more pronounced considering the impossibility of quantifying how much of the

partnership assets or profits was misappropriated by each petitioner.

And for a third, petitioners’ obligation for the payment of damages and attorney’s and litigation fees ought to be solidary

in nature, they having resisted in bad faith a legitimate claim and thus compelled Chua to litigate.

Third Issue: Community Property Liable

Primarily anchored as the last issue is the erroneous theory of divisibility of petitioners’ obligation and their joint liability

therefor. The Court needs to dwell on it lengthily.

Given the solidary liability of petitioners to satisfy the judgment award, respondent sheriff cannot really be faulted for

levying upon and then selling at public auction the property of petitioner Sunga-Chan to answer for the whole obligation

of petitioners. The fact that the levied parcel of land is a conjugal or community property, as the case may be, of spouses

Norberto and Sunga-Chan does not per se vitiate the levy and the consequent sale of the property. Verily, said property is

not among those exempted from execution under Section 13,37

Rule 39 of the Rules of Court.

And it cannot be overemphasized that the TRO issued by the Court on May 31, 2005 came after the auction sale in

question.

Parenthetically, the records show that spouses Sunga-Chan and Norberto were married on February 4, 1992, or after the

effectivity of the Family Code on August 3, 1988. Withal, their absolute community property may be held liable for the

obligations contracted by either spouse. Specifically, Art. 94 of said Code pertinently provides:

Art. 94. The absolute community of property shall be liable for:

(1) x x x x

(2) All debts and obligations contracted during the marriage by the designated administrator-spouse for the benefit

of the community, or by both spouses, or by one spouse with the consent of the other.

(3) Debts and obligations contracted by either spouse without the consent of the other to the extent that the

family may have been benefited. (Emphasis ours.)

Absent any indication otherwise, the use and appropriation by petitioner Sunga-Chan of the assets of Shellite even after

the business was discontinued on May 30, 1992 may reasonably be considered to have been used for her and her

husband’s benefit.

It may be stressed at this juncture that Chua’s legitimate claim against petitioners, as readjusted in this disposition,

amounts to only PhP 5,529,392.52, whereas Sunga-Chan’s auctioned property which Chua acquired, as the highest bidder,

fetched a price of PhP 8 million. In net effect, Chua owes petitioner Sunga-Chan the amount of PhP 2,470,607.48,

representing the excess of the purchase price over his legitimate claims.

Following the auction, the corresponding certificate of sale dated January 15, 2004 was annotated on TCT No. 208782.

On January 21, 2005, Chua moved for the issuance of a final deed of sale (1) to order the Registry of Deeds of Manila to

cancel TCT No. 208782; (2) to issue a new TCT in his name; and (3) for the RTC to issue a writ of possession in his

favor. And as earlier stated, the RTC granted Chua’s motion, albeit the Court restrained the enforcement of the RTC’s

package of orders via a TRO issued on May 31, 2005.

269

Therefore, subject to the payment by Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, we affirm the RTC’s April 11,

2005 resolution, confirming the sheriff’s final deed of sale of the levied property, ordering the Registry of Deeds of

Manila to cancel TCT No. 208782, and issuing a writ of possession in favor of Chua.

WHEREFORE, this petition is PARTLY GRANTED. Accordingly, the assailed decision and resolution of the CA in

CA-G.R. SP No. 75688 are hereby AFFIRMED with the following MODIFICATIONS:

(1) The Resolutions dated November 6, 2002 and January 7, 2003 of the RTC, Branch 11 in Sindangan, Zamboanga Del

Norte in Civil Case No. S-494, as effectively upheld by the CA, are AFFIRMED with the modification that the approved

claim of respondent Chua is hereby corrected and adjusted to cover only the aggregate amount of PhP 5,529,392.52;

(2) Subject to the payment by respondent Chua of PhP 2,470,607.48 to petitioner Sunga-Chan, the Resolution dated April

11, 2005 of the RTC, confirming the sheriff’s final deed of sale of the levied property, ordering the Registry of Deeds of

Manila to cancel TCT No. 208782, and issuing a writ of possession in favor of respondent Chua, is AFFIRMED; and

The TRO issued by the Court on May 31, 2005 in the instant petition is LIFTED.

270

G.R. No. L-23726 August 27, 1925

In re estate of the deceased Domingo Florentino.

JOSE VILLANUEVA, executor, petitioner-appellant,

vs.

ROBERTA DE LEON, opponent-appellee.

MALCOLM, J.:

The salient points of this case are these:

Domingo Florentino died at Vigan, Ilocos Sur, on January 16, 1924, leaving a considerable estate. Shortly thereafter, the

will of the late Florentino was admitted to probate and Jose Villanueva named executor. Villanueva qualified as executor

by filing the necessary bond in the amount of P20,000. He was granted the usual letters of administration.

In the meantime, one Roberta de Leon had presented a motion in which she prayed in effect that the court allow her to

intervene in the proceedings. She alleged that she and the deceased Florentino had been living together as husband and

wife since 1888; that in that year they formed a partnership to which each contributed P1,000 for the purpose of engaging

in business; and that the partnership was dissolved by the death of Florentino without there having been any liquidation.

This motion was denied by Judge Quintero as improper, inasmuch as the movant could present her claims to the

commissioners or institute an independent action to confirm her rights in the estate. In accordance with the suggestion of

the court, Roberta de Leon did in fact bring suit against Jose Villanueva, executor, in which she asked that she be declared

the owner of one-half of the property left by Domingo Florentino.

Later, Roberta de Leon filed another motion duly sworn to in which she alleged that the executor had made it appear that

the property of the deceased was worth only P50,000, whereas the same was valued at over P300,000. Specific mention

was made by her of jewelry and tobacco leaf. Accordingly, movant prayed the court to order the executor to correct the

inventory to the end that the true amount should appear in the same.

On October 31, 1924, Judge Mariano issued an order commanding the executor within three days to give reasons under

oath why the jewels referred to in one of Roberta de Leon's motions, should not be included in the inventory, and to

explain what had been done with the tobacco leaf. In the same order, the court ruled that Roberta de Leon had the right to

intervene in the settlement of the accounts. The contents of this order were objected to by counsel for the executor and

steps taken to perfect an appeal. In turn, counsel for Roberta de Leon entered opposition on the ground that the executor

had no right of appeal. The court admitted the appeal in so far as it related to the right of Roberta de Leon to intervene, but

denied the appeal in so far as it related to the order to the executor to state under oath why the jewels in question should

not be included in the inventory and also to explain what had been done with the consignments of tobacco leaf.

In this court, three errors are assigned by the executor as appellant. The second and third errors need not be discussed

since they relate to matters as to which the lower court denied appeal. Had appellant desired to contest the correctness of

the action taken by the trial judge in not certifying the bill of exceptions as to one question, he had his remedy pursuant to

section 499 of the Code of Civil Procedure. Not having taken advantage of this provision of the law, the appellate court is

powerless to interfere on questions which are not properly before it. (Code of Civil Procedure, sec. 499; Somes vs.

Crossfield and Molina [1907], 8 Phil., 283; Lituaña and Calica vs. Oliveros [1918], 38 Phil., 628.) The single question is

whether or not an alleged partner of a deceased person has such interest in the estate of the deceased as to allow her to

take part in the approval of the accounts.

It is the duly of the probate court to scrutinize carefully the accounts of executors and administrators and to correct all

errors founded in law or fact. It is the right of all the creditors and distributees of the estate to be present and, if so

disposed, to contest the account of the executor or administrator. Only a prima facie right at the time of filing the petition

is sufficient to entitle the applicant to intervene in the accounts of the executor or administrator. It is for the trial court to

271

determine whether the person seeking to participate in the proceedings is a person interested within the meaning of the

law, or is merely an intruder who should be excluded from any further participation. The determination of this question

must necessarily be largely discretionary in the trial court. Any doubt as to the interest of the petitioner ought, however, to

be resolved in favor of the petitioner, and any doubt arising in the appellate court ought to be resolved in favor of the

action taken by the trial judge. Administrators and executors instead of opposing the intervention of interested parties

should welcome the participation of the same for their own protection. (See Garwood vs. Garwood [1866], 29 Cal., 514,

cited by appellant; Estate of Willey [1903], 140 Cal., 238.)

On the supposition that that part of the order of the trial court which relates to the right of Roberta de Leon, the alleged

partner of the deceased, to intervene in the testate proceedings is appealable, we entertain the view that the action taken by

the trial judge was correct. Accordingly, it results that the order is affirmed, with costs against the appellant. So ordered.