G.R. No.

L-40098 August 29, 1975

ANTONIO LIM TANHU, DY OCHAY, ALFONSO LEONARDO NG SUA and
CO
OYO, petitioners,
vs.
HON. JOSE R. RAMOLETE as Presiding Judge, Branch III, CFI, Cebu
and TAN PUT, respondents.
Zosa, Zosa, Castillo, Alcudia & Koh for petitioners.
Fidel Manalo and Florido & Associates for respondents.

BARREDO, J.:
Petition for (1) certiorari to annul and set aside certain actuations of
respondent Court of First Instance of Cebu Branch III in its Civil Case No.
12328, an action for accounting of properties and money totalling allegedly
about P15 million pesos filed with a common cause of action against six
defendants, in which after declaring four of the said defendants herein
petitioners, in default and while the trial as against the two defendants not
declared in default was in progress, said court granted plaintiff's motion to
dismiss the case in so far as the non-defaulted defendants were concerned
and thereafter proceeded to hear ex-parte the rest of the plaintiffs
evidence and subsequently rendered judgment by default against the
defaulted defendants, with the particularities that notice of the motion to
dismiss was not duly served on any of the defendants, who had alleged a
compulsory counterclaim against plaintiff in their joint answer, and the
judgment so rendered granted reliefs not prayed for in the complaint, and
(2) prohibition to enjoin further proceedings relative to the motion for
immediate execution of the said judgment.
Originally, this litigation was a complaint filed on February 9, 1971 by
respondent Tan Put only against the spouses-petitioners Antonio Lim Tanhu
and Dy Ochay. Subsequently, in an amended complaint dated September
26, 1972, their son Lim Teck Chuan and the other spouses-petitioners
Alfonso Leonardo Ng Sua and Co Oyo and their son Eng Chong Leonardo
were included as defendants. In said amended complaint, respondent Tan
alleged that she "is the widow of Tee Hoon Lim Po Chuan, who was a
partner in the commercial partnership, Glory Commercial Company ... with
Antonio Lim Tanhu and Alfonso Ng Sua that "defendant Antonio Lim Tanhu,
Alfonso Leonardo Ng Sua, Lim Teck Chuan, and Eng Chong Leonardo,
through fraud and machination, took actual and active management of the

partnership and although Tee Hoon Lim Po Chuan was the manager of
Glory Commercial Company, defendants managed to use the funds of the
partnership to purchase lands and building's in the cities of Cebu,
Lapulapu, Mandaue, and the municipalities of Talisay and Minglanilla, some
of which were hidden, but the description of those already discovered were
as follows: (list of properties) ...;" and that:
13. (A)fter the death of Tee Hoon Lim Po Chuan, the defendants, without
liquidation continued the business of Glory Commercial Company by
purportedly organizing a corporation known as the Glory Commercial
Company, Incorporated, with paid up capital in the sum of P125,000.00,
which money and other assets of the said Glory Commercial Company,
Incorporated are actually the assets of the defunct Glory Commercial
Company partnership, of which the plaintiff has a share equivalent to one
third (/ 3) thereof;
14. (P)laintiff, on several occasions after the death of her husband, has
asked defendants of the above-mentioned properties and for the
liquidation of the business of the defunct partnership, including
investments on real estate in Hong Kong, but defendants kept on promising
to liquidate said properties and just told plaintiff to
15. (S)ometime in the month of November, 1967, defendants, Antonio Lim
Tanhu, by means of fraud deceit and misrepresentations did then and
there, induce and convince the plaintiff to execute a quitclaim of all her
rights and interests, in the assets of the partnership of Glory Commercial
Company, which is null and void, executed through fraud and without any
legal effect. The original of said quitclaim is in the possession of the
adverse party defendant Antonio Lim Tanhu.
16. (A)s a matter of fact, after the execution of said quitclaim, defendant
Antonio Lim Tanhu offered to pay the plaintiff the amount P65,000.00
within a period of one (1) month, for which plaintiff was made to sign a
receipt for the amount of P65,000.00 although no such amount was given
and plaintiff was not even given a copy of said document;
17. (T)hereafter, in the year 1968-69, the defendants who had earlier
promised to liquidate the aforesaid properties and assets in favor among
others of plaintiff and until the middle of the year 1970 when the plaintiff
formally demanded from the defendants the accounting of real and
personal properties of the Glory Commercial Company, defendants refused
and stated that they would not give the share of the plaintiff. (Pp. 36-37,
Record.)

She prayed as follows:

WHEREFORE, it is most respectfully prayed that judgment be rendered:
a) Ordering the defendants to render an accounting of the real and
personal properties of the Glory Commercial Company including those
registered in the names of the defendants and other persons, which
properties are located in the Philippines and in Hong Kong;
b) Ordering the defendants to deliver to the plaintiff after accounting, one
third (/ 3) of the total value of all the properties which is approximately
P5,000,000.00 representing the just share of the plaintiff;
c) Ordering the defendants to pay the attorney of the plaintiff the sum of
Two Hundred Fifty Thousand Pesos (P250,000.00) by way of attorney's fees
and damages in the sum of One Million Pesos (P1,000,000.00).
This Honorable Court is prayed for other remedies and reliefs consistent
with law and equity and order the defendants to pay the costs. (Page 38,
Record.)
The admission of said amended complaint was opposed by defendants
upon the ground that there were material modifications of the causes of
action previously alleged, but respondent judge nevertheless allowed the
amendment reasoning that:
The present action is for accounting of real and personal properties as well
as for the recovery of the same with damages.
An objective consideration of pars. 13 and 15 of the amended complaint
pointed out by the defendants to sustain their opposition will show that the
allegations of facts therein are merely to amplify material averments
constituting the cause of action in the original complaint. It likewise
include necessary and indispensable defendants without whom no final
determination can be had in the action and in order that complete relief is
to be accorded as between those already parties.
Considering that the amendments sought to be introduced do not change
the main causes of action in the original complaint and the reliefs
demanded and to allow amendments is the rule, and to refuse them the
exception and in order that the real question between the parties may be
properly and justly threshed out in a single proceeding to avoid multiplicity
of actions. (Page 40, Record.)

In a single answer with counterclaim, over the signature of their common

counsel, defendants denied specifically not only the allegation that
respondent Tan is the widow of Tee Hoon because, according to them, his
legitimate wife was Ang Siok Tin still living and with whom he had four (4)
legitimate children, a twin born in 1942, and two others born in 1949 and
1965, all presently residing in Hongkong, but also all the allegations of
fraud and conversion quoted above, the truth being, according to them,
that proper liquidation had been regularly made of the business of the
partnership and Tee Hoon used to receive his just share until his death, as
a result of which the partnership was dissolved and what corresponded to
him were all given to his wife and children. To quote the pertinent portions
of said answer:
AND BY WAY OF SPECIAL AND AFFIRMATIVE DEFENSES,
defendants hereby incorporate all facts averred and alleged in the answer,
and further most respectfully declare:
1. That in the event that plaintiff is filing the present complaint as an heir
of Tee Hoon Lim Po Chuan, then, she has no legal capacity to sue as such,
considering that the legitimate wife, namely: Ang Siok Tin, together with
their children are still alive. Under Sec. 1, (d), Rule 16 of the Revised Rules
of Court, lack of legal capacity to sue is one of the grounds for a motion to
dismiss and so defendants prays that a preliminary hearing be conducted
as provided for in Sec. 5, of the same rule;
2. That in the alternative case or event that plaintiff is filing the present
case under Art. 144 of the Civil Code, then, her claim or demand has been
paid, waived abandoned or otherwise extinguished as evidenced by the
'quitclaim' Annex 'A' hereof, the ground cited is another ground for a
motion to dismiss (Sec. 1, (h), Rule 16) and hence defendants pray that a
preliminary hearing be made in connection therewith pursuant to Section 5
of the aforementioned rule;
3. That Tee Hoon Lim Po Chuan was legally married to Ang Siok Tin and
were blessed with the following children, to wit: Ching Siong Lim and Ching
Hing Lim (twins) born on February 16, 1942; Lim Shing Ping born on March
3, 1949 and Lim Eng Lu born on June 25, 1965 and presently residing in
Hongkong;
4. That even before the death of Tee Hoon Lim Po Chuan, the plaintiff was
no longer his common law wife and even though she was not entitled to
anything left by Tee Hoon Lim Po Chuan, yet, out of the kindness and

generosity on the part of the defendants, particularly Antonio Lain Tanhu,

who, was inspiring to be monk and in fact he is now a monk, plaintiff was
given a substantial amount evidenced by the 'quitclaim' (Annex 'A');

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

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

5. That the defendants have acquired properties out of their own personal
fund and certainly not from the funds belonging to the partnership, just as
Tee Hoon Lim Po Chuan had acquired properties out of his personal fund
and which are now in the possession of the widow and neither the
defendants nor the partnership have anything to do about said properties;

E. That by way of litigation expenses during the time that this case will be
before this Honorable Court and until the same will be finally terminated
and adjudicated, defendants will have to spend at least P5,000.00. (Pp. 4447. Record.)

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

belonging to the partnership without the other partners knowing about it
considering that the amount taken allegedly is quite big and with such big
amount withdrawn the partnership would have been insolvent;
7. That plaintiff and Tee Hoon Lim Po Chuan were not blessed with children
who would have been lawfully entitled to succeed to the properties left by
the latter together with the widow and legitimate children;
8. That despite the fact that plaintiff knew that she was no longer entitled
to anything of the shares of the late Tee Hoon Lim Po Chuan, yet, this suit
was filed against the defendant who have to interpose the following
COUNTERCLAIM
A. That the defendants hereby reproduced, by way of reference, all the
allegations and foregoing averments as part of this counterclaim; .
B. That plaintiff knew and was aware she was merely the common-law wife
of Tee Hoon Lim Po Chuan and that the lawful and legal is still living,
together with the legitimate children, and yet she deliberately suppressed
this fact, thus showing her bad faith and is therefore liable for exemplary
damages in an amount which the Honorable Court may determine in the
exercise of its sound judicial discretion. In the event that plaintiff is married
to Tee Hoon Lim Po Chuan, then, her marriage is bigamous and should
suffer the consequences thereof;
C. That plaintiff was aware and had knowledge about the 'quitclaim', even
though she was not entitled to it, and yet she falsely claimed that
defendants refused even to see her and for filing this unfounded, baseless,
futile and puerile complaint, defendants suffered mental anguish and
torture conservatively estimated to be not less than P3,000.00;

After unsuccessfully trying to show that this counterclaim is merely

permissive and should be dismissed for non-payment of the corresponding
filing fee, and after being overruled by the court, in due time, plaintiff
answered the same, denying its material allegations.
On February 3, 1973, however, the date set for the pre-trial, both of the
two defendants-spouses the Lim Tanhus and Ng Suas, did not appear, for
which reason, upon motion of plaintiff dated February 16, 1973, in an order
of March 12, 1973, they were all "declared in DEFAULT as of February 3,
1973 when they failed to appear at the pre-trial." They sought to hive this
order lifted thru a motion for reconsideration, but the effort failed when the
court denied it. Thereafter, the trial started, but at the stage thereof where
the first witness of the plaintiff by the name of Antonio Nuez who testified
that he is her adopted son, was up for re-cross-examination, said plaintiff
unexpectedly filed on October 19, 1974 the following simple and
unreasoned
MOTION
TO
DROP
DEFENDANTS
CHUAN AND ENG CHONG LEONARDO

LIM

TECK

COMES now plaintiff, through her undersigned counsel, unto the Honorable
Court most respectfully moves to drop from the complaint the defendants
Lim Teck Chuan and Eng Chong Leonardo and to consider the case
dismissed insofar as said defendants Lim Teck Chuan and Eng Chong
Leonardo are concerned.
WHEREFORE, it is most respectfully prayed of the Honorable Court to drop
from the complaint the defendants Lim Teck Chuan and Eng Chong
Leonardo and to dismiss the case against them without pronouncement as
to costs. (Page 50, Record.)
which she set for hearing on December 21, 1974. According to petitioners,
none of the defendants declared in default were notified of said motion, in
violation of Section 9 of Rule 13, since they had asked for the lifting of the
order of default, albeit unsuccessfully, and as regards the defendants not

declared in default, the setting of the hearing of said motion on October

21, 1974 infringed the three-day requirement of Section 4 of Rule 15,
inasmuch as Atty. Adelino Sitoy of Lim Teck Chuan was served with a copy
of the motion personally only on October 19, 1974, while Atty. Benjamin
Alcudia of Eng Chong Leonardo was served by registered mail sent only on
the same date.
Evidently without even verifying the notices of service, just as simply as
plaintiff had couched her motion, and also without any legal grounds
stated, respondent court granted the prayer of the above motion thus:
ORDER
Acting on the motion of the plaintiff praying for the dismissal of the
complaint as against defendants Lim Teck Chuan and Eng Chong Leonardo.

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

Teck Chuan and Eng Chong Leonardo is hereby ordered DISMISSED without
pronouncement as to costs.
Simultaneously, the following order was also issued:
Considering that defendants Antonio Lim Tanhu and his spouse Dy Ochay
as well as defendants Alfonso Ng Sua and his spouse Co Oyo have been
declared in default for failure to appear during the pre-trial and as to the
other defendants the complaint had already been ordered dismissed as
against them.
Let the hearing of the plaintiff's evidence ex-parte be set on November 20,
1974, at 8:30 A.M. before the Branch Clerk of Court who is deputized for
the purpose, to swear in witnesses and to submit her report within ten (10)
days thereafter. Notify the plaintiff.
SO ORDERED.
Cebu City, Philippines, October 21, 1974. (Page 52, Record.)
But, in connection with this last order, the scheduled ex-parte reception of
evidence did not take place on November 20, 1974, for on October 28,
1974, upon verbal motion of plaintiff, the court issued the following selfexplanatory order: .

Acting favorably on the motion of the plaintiff dated October 18, 1974, the
Court deputized the Branch Clerk of Court to receive the evidence of the
plaintiff ex-parte to be made on November 20, 1974. However, on October
28, 1974, the plaintiff, together with her witnesses, appeared in court and
asked, thru counsel, that she be allowed to present her evidence.
Considering the time and expenses incurred by the plaintiff in bringing her
witnesses to the court, the Branch Clerk of Court is hereby authorized to
receive immediately the evidence of the plaintiff ex-parte.
SO ORDERED.
Cebu City, Philippines, October 28, 1974. (Page 53. Record.)
Upon learning of these orders on October 23, 1973, the defendant Lim Teck
Cheng, thru counsel, Atty. Sitoy, filed a motion for reconsideration thereof,
and on November 1, 1974, defendant Eng Chong Leonardo, thru counsel
Atty. Alcudia, filed also his own motion for reconsideration and clarification
of the same orders. These motions were denied in an order dated
December 6, 1974 but received by the movants only on December 23,
1974. Meanwhile, respondent court rendered the impugned decision on
December 20, 1974. It does not appear when the parties were served
copies of this decision.
Subsequently, on January 6, 1975, all the defendants, thru counsel, filed a
motion to quash the order of October 28, 1974. Without waiting however
for the resolution thereof, on January 13, 1974, Lim Teck Chuan and Eng
Chong Leonardo went to the Court of Appeals with a petition for certiorari
seeking the annulment of the above-mentioned orders of October 21, 1974
and October 28, 1974 and decision of December 20, 1974. By resolution of
January 24, 1975, the Court of Appeals dismissed said petition, holding that
its filing was premature, considering that the motion to quash the order of
October 28, 1974 was still unresolved by the trial court. This holding was
reiterated in the subsequent resolution of February 5, 1975 denying the
motion for reconsideration of the previous dismissal.
On the other hand, on January 20, 1975, the other defendants, petitioners
herein, filed their notice of appeal, appeal bond and motion for extension
to file their record on appeal, which was granted, the extension to expire
after fifteen (15) days from January 26 and 27, 1975, for defendants Lim
Tanhu and Ng Suas, respectively. But on February 7, 1975, before the
perfection of their appeal, petitioners filed the present petition with this
Court. And with the evident intent to make their procedural position clear,

counsel for defendants, Atty. Manuel Zosa, filed with respondent court a
manifestation dated February 14, 1975 stating that "when the nondefaulted defendants Eng Chong Leonardo and Lim Teck Chuan filed their
petition in the Court of Appeals, they in effect abandoned their motion to
quash the order of October 28, 1974," and that similarly "when Antonio Lim
Tanhu, Dy Ochay, Alfonso Leonardo Ng Sua and Co Oyo, filed their petition
for certiorari and prohibition ... in the Supreme Court, they likewise
abandoned their motion to quash." This manifestation was acted upon by
respondent court together with plaintiffs motion for execution pending
appeal in its order of the same date February 14, 1975 this wise:
ORDER
When these incidents, the motion to quash the order of October 28, 1974
and the motion for execution pending appeal were called for hearing today,
counsel for the defendants-movants submitted their manifestation inviting
the attention of this Court that by their filing for certiorari and prohibition
with preliminary injunction in the Court of Appeals which was dismissed
and later the defaulted defendants filed with the Supreme Court certiorari
with prohibition they in effect abandoned their motion to quash.
IN VIEW HEREOF, the motion to quash is ordered ABANDONED. The
resolution of the motion for execution pending appeal shall be resolved
after the petition for certiorari and prohibition shall have been resolved by
the Supreme Court.
SO ORDERED.
Cebu City, Philippines, February 14, 1975. (Page 216, Record.)
Upon these premises, it is the position of petitioners that respondent court
acted illegally, in violation of the rules or with grave abuse of discretion in
acting on respondent's motion to dismiss of October 18, 1974 without
previously ascertaining whether or not due notice thereof had been served
on the adverse parties, as, in fact, no such notice was timely served on the
non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo and no
notice at all was ever sent to the other defendants, herein petitioners, and
more so, in actually ordering the dismissal of the case by its order of
October 21, 1974 and at the same time setting the case for further hearing
as against the defaulted defendants, herein petitioners, actually hearing
the same ex-parte and thereafter rendering the decision of December 20,
1974 granting respondent Tan even reliefs not prayed for in the complaint.
According to the petitioners, to begin with, there was compulsory

counterclaim in the common answer of the defendants the nature of which

is such that it cannot be decided in an independent action and as to which
the attention of respondent court was duly called in the motions for
reconsideration. Besides, and more importantly, under Section 4 of Rule
18, respondent court had no authority to divide the case before it by
dismissing the same as against the non-defaulted defendants and
thereafter proceeding to hear it ex-parte and subsequently rendering
judgment against the defaulted defendants, considering that in their view,
under the said provision of the rules, when a common cause of action is
alleged against several defendants, the default of any of them is a mere
formality by which those defaulted are not allowed to take part in the
proceedings, but otherwise, all the defendants, defaulted and not
defaulted, are supposed to have but a common fate, win or lose. In other
words, petitioners posit that in such a situation, there can only be one
common judgment for or against all the defendant, the non-defaulted and
the defaulted. Thus, petitioners contend that the order of dismissal of
October 21, 1974 should be considered also as the final judgment insofar
as they are concerned, or, in the alternative, it should be set aside
together with all the proceedings and decision held and rendered
subsequent thereto, and that the trial be resumed as of said date, with the
defendants Lim Teck Chuan and Eng Chong Leonardo being allowed to
defend the case for all the defendants.
On the other hand, private respondent maintains the contrary view that
inasmuch as petitioners had been properly declared in default, they have
no personality nor interest to question the dismissal of the case as against
their non-defaulted co-defendants and should suffer the consequences of
their own default. Respondent further contends, and this is the only
position discussed in the memorandum submitted by her counsel, that
since petitioners have already made or at least started to make their
appeal, as they are in fact entitled to appeal, this special civil action has no
reason for being. Additionally, she invokes the point of prematurity upheld
by the Court of Appeals in regard to the above-mentioned petition therein
of the non-defaulted defendants Lim Teck Chuan and Eng Chong Leonardo.
Finally, she argues that in any event, the errors attributed to respondent
court are errors of judgment and may be reviewed only in an appeal.
After careful scrutiny of all the above-related proceedings, in the court
below and mature deliberation, the Court has arrived at the conclusion that
petitioners should be granted relief, if only to stress emphatically once
more that the rules of procedure may not be misused and abused as
instruments for the denial of substantial justice. A review of the record of
this case immediately discloses that here is another demonstrative

instance of how some members of the bar, availing of their proficiency in

invoking the letter of the rules without regard to their real spirit and intent,
succeed in inducing courts to act contrary to the dictates of justice and
equity, and, in some instances, to wittingly or unwittingly abet unfair
advantage by ironically camouflaging their actuations as earnest efforts to
satisfy the public clamor for speedy disposition of litigations, forgetting all
the while that the plain injunction of Section 2 of Rule 1 is that the "rules
shall be liberally construed in order to promote their object and to assist
the parties in obtaining not only 'speedy' but more imperatively, "just ...
and inexpensive determination of every action and proceeding." We cannot
simply pass over the impression that the procedural maneuvers and tactics
revealed in the records of the case at bar were deliberately planned with
the calculated end in view of depriving petitioners and their co-defendants
below of every opportunity to properly defend themselves against a claim
of more than substantial character, considering the millions of pesos worth
of properties involved as found by respondent judge himself in the
impugned decision, a claim that appears, in the light of the allegations of
the answer and the documents already brought to the attention of the
court at the pre-trial, to be rather dubious. What is most regrettable is that
apparently, all of these alarming circumstances have escaped respondent
judge who did not seem to have hesitated in acting favorably on the
motions of the plaintiff conducive to the deplorable objective just
mentioned, and which motions, at the very least, appeared to be 'of highly
controversial' merit, considering that their obvious tendency and
immediate result would be to convert the proceedings into a one-sided
affair, a situation that should be readily condemnable and intolerable to
any court of justice.
Indeed, a seeming disposition on the part of respondent court to lean more
on the contentions of private respondent may be discerned from the
manner it resolved the attempts of defendants Dy Ochay and Antonio Lim
Tanhu to have the earlier order of default against them lifted.
Notwithstanding that Dy Ochay's motion of October 8, 1971, co-signed by
her with their counsel, Atty. Jovencio Enjambre (Annex 2 of respondent
answer herein) was over the jurat of the notary public before whom she
took her oath, in the order of November 2, 1971, (Annex 3 id.) it was held
that "the oath appearing at the bottom of the motion is not the one
contemplated by the abovequoted pertinent provision (See. 3, Rule 18) of
the rules. It is not even a verification. (See. 6, Rule 7.) What the rule
requires as interpreted by the Supreme Court is that the motion must have
to be accompanied by an affidavit of merits that the defendant has a
meritorious defense, thereby ignoring the very simple legal point that the

ruling of the Supreme Court in Ong Peng vs. Custodio, 1 SCRA 781, relied
upon by His Honor, under which a separate affidavit of merit is required
refers obviously to instances where the motion is not over oath of the party
concerned, considering that what the cited provision literally requires is no
more than a "motion under oath." Stated otherwise, when a motion to lift
an order of default contains the reasons for the failure to answer as well as
the facts constituting the prospective defense of the defendant and it is
sworn to by said defendant, neither a formal verification nor a separate
affidavit of merit is necessary.
What is worse, the same order further held that the motion to lift the order
of default "is an admission that there was a valid service of summons" and
that said motion could not amount to a challenge against the jurisdiction of
the court over the person of the defendant. Such a rationalization is
patently specious and reveals an evident failure to grasp the import of the
legal concepts involved. A motion to lift an order of default on the ground
that service of summons has not been made in accordance with the rules
is in order and is in essence verily an attack against the jurisdiction of the
court over the person of the defendant, no less than if it were worded in a
manner specifically embodying such a direct challenge.
And then, in the order of February 14, 1972 (Annex 6, id.) lifting at last the
order of default as against defendant Lim Tanhu, His Honor posited that
said defendant "has a defense (quitclaim) which renders the claim of the
plaintiff contentious." We have read defendants' motion for reconsideration
of November 25, 1971 (Annex 5, id.), but We cannot find in it any reference
to a "quitclaim". Rather, the allegation of a quitclaim is in the amended
complaint (Pars. 15-16, Annex B of the petition herein) in which plaintiff
maintains that her signature thereto was secured through fraud and deceit.
In truth, the motion for reconsideration just mentioned, Annex 5, merely
reiterated the allegation in Dy Ochay's earlier motion of October 8, 1971,
Annex 2, to set aside the order of default, that plaintiff Tan could be but the
common law wife only of Tee Hoon, since his legitimate wife was still alive,
which allegation, His Honor held in the order of November 2, 1971, Annex
3, to be "not good and meritorious defense". To top it all, whereas, as
already stated, the order of February 19, 1972, Annex 6, lifted the default
against Lim Tanhu because of the additional consideration that "he has a
defense (quitclaim) which renders the claim of the plaintiff contentious,"
the default of Dy Ochay was maintained notwithstanding that exactly the
same "contentions" defense as that of her husband was invoked by her.
Such tenuous, if not altogether erroneous reasonings and manifest
inconsistency in the legal postures in the orders in question can hardly

convince Us that the matters here in issue were accorded due and proper
consideration by respondent court. In fact, under the circumstances herein
obtaining, it seems appropriate to stress that, having in view the rather
substantial value of the subject matter involved together with the
obviously contentious character of plaintiff's claim, which is discernible
even on the face of the complaint itself, utmost care should have been
taken to avoid the slightest suspicion of improper motivations on the part
of anyone concerned. Upon the considerations hereunder to follow, the
Court expresses its grave concern that much has to be done to dispel the
impression that herein petitioners and their co-defendants are being
railroaded out of their rights and properties without due process of law, on
the strength of procedural technicalities adroitly planned by counsel and
seemingly unnoticed and undetected by respondent court, whose orders,
gauged by their tenor and the citations of supposedly pertinent provisions
and jurisprudence made therein, cannot be said to have proceeded from
utter lack of juridical knowledgeability and competence.
1
The first thing that has struck the Court upon reviewing the record is the
seeming alacrity with which the motion to dismiss the case against nondefaulted defendants Lim Teck Chuan and Eng Chong Leonardo was
disposed of, which definitely ought not to have been the case. The trial was
proceeding with the testimony of the first witness of plaintiff and he was
still under re-cross-examination. Undoubtedly, the motion to dismiss at
that stage and in the light of the declaration of default against the rest of
the defendants was a well calculated surprise move, obviously designed to
secure utmost advantage of the situation, regardless of its apparent
unfairness. To say that it must have been entirely unexpected by all the
defendants, defaulted and non-defaulted , is merely to rightly assume that
the parties in a judicial proceeding can never be the victims of any
procedural waylaying as long as lawyers and judges are imbued with the
requisite sense of equity and justice.
But the situation here was aggravated by the indisputable fact that the
adverse parties who were entitled to be notified of such unanticipated
dismissal motion did not get due notice thereof. Certainly, the nondefaulted defendants had the right to the three-day prior notice required
by Section 4 of Rule 15. How could they have had such indispensable
notice when the motion was set for hearing on Monday, October 21, 1974,
whereas the counsel for Lim Teck Chuan, Atty. Sitoy was personally served
with the notice only on Saturday, October 19, 1974 and the counsel for Eng
Chong Leonardo, Atty. Alcudia, was notified by registered mail which was

posted only that same Saturday, October 19, 1974? According to Chief
Justice Moran, "three days at least must intervene between the date of
service of notice and the date set for the hearing, otherwise the court may
not validly act on the motion." (Comments on the Rules of Court by Moran,
Vol. 1, 1970 ed. p. 474.) Such is the correct construction of Section 4 of
Rule 15. And in the instant case, there can be no question that the notices
to the non-defaulted defendants were short of the requirement of said
provision.
We can understand the over-anxiety of counsel for plaintiff, but what is
incomprehensible is the seeming inattention of respondent judge to the
explicit mandate of the pertinent rule, not to speak of the imperatives of
fairness, considering he should have realized the far-reaching implications,
specially from the point of view he subsequently adopted, albeit
erroneously, of his favorably acting on it. Actually, he was aware of said
consequences, for simultaneously with his order of dismissal, he
immediately set the case for the ex-parte hearing of the evidence against
the defaulted defendants, which, incidentally, from the tenor of his order
which We have quoted above, appears to have been done by him motu
propio As a matter of fact, plaintiff's motion also quoted above did not pray
for it.
Withal, respondent court's twin actions of October 21, 1974 further ignores
or is inconsistent with a number of known juridical principles concerning
defaults, which We will here take occasion to reiterate and further
elucidate on, if only to avoid a repetition of the unfortunate errors
committed in this case. Perhaps some of these principles have not been
amply projected and elaborated before, and such paucity of elucidation
could be the reason why respondent judge must have acted as he did. Still,
the Court cannot but express its vehement condemnation of any judicial
actuation that unduly deprives any party of the right to be heard without
clear and specific warrant under the terms of existing rules or binding
jurisprudence. Extreme care must be the instant reaction of every judge
when confronted with a situation involving risks that the proceedings may
not be fair and square to all the parties concerned. Indeed, a keen sense of
fairness, equity and justice that constantly looks for consistency between
the letter of the adjective rules and these basic principles must be
possessed by every judge, If substance is to prevail, as it must, over form
in our courts. Literal observance of the rules, when it is conducive to unfair
and undue advantage on the part of any litigant before it, is unworthy of
any court of justice and equity. Withal, only those rules and procedure
informed, with and founded on public policy deserve obedience in accord
with their unequivocal language or words..

Before proceeding to the discussion of the default aspects of this case,

however, it should not be amiss to advert first to the patent incorrectness,
apparent on the face of the record, of the aforementioned order of
dismissal of October 21, 1974 of the case below as regards non-defaulted
defendants Lim and Leonardo. While it is true that said defendants are not
petitioners herein, the Court deems it necessary for a full view of the
outrageous procedural strategy conceived by respondent's counsel and
sanctioned by respondent court to also make reference to the very evident
fact that in ordering said dismissal respondent court disregarded
completely the existence of defendant's counterclaim which it had itself
earlier held if indirectly, to be compulsory in nature when it refused to
dismiss the same on the ground alleged by respondent Tan that he
docketing fees for the filing thereof had not been paid by defendants.
Indeed, that said counterclaim is compulsory needs no extended
elaboration. As may be noted in the allegations hereof aforequoted, it
arose out of or is necessarily connected with the occurrence that is the
subject matter of the plaintiff's claim, (Section 4, Rule 9) namely, plaintiff's
allegedly being the widow of the deceased Tee Hoon entitled, as such, to
demand accounting of and to receive the share of her alleged late husband
as partner of defendants Antonio Lim Tanhu and Alfonso Leonardo Ng Sua
in Glory Commercial Company, the truth of which allegations all the
defendants have denied. Defendants maintain in their counterclaim that
plaintiff knew of the falsity of said allegations even before she filed her
complaint, for she had in fact admitted her common-law relationship with
said deceased in a document she had jointly executed with him by way of
agreement to terminate their illegitimate relationship, for which she
received P40,000 from the deceased, and with respect to her pretended
share in the capital and profits in the partnership, it is also defendants'
posture that she had already quitclaimed, with the assistance of able
counsel, whatever rights if any she had thereto in November, 1967, for the
sum of P25,000 duly receipted by her, which quitclaim was, however,
executed, according to respondent herself in her amended complaint,
through fraud. And having filed her complaint knowing, according to
defendants, as she ought to have known, that the material allegations
thereof are false and baseless, she has caused them to suffer damages.
Undoubtedly, with such allegations, defendants' counterclaim is
compulsory, not only because the same evidence to sustain it will also
refute the cause or causes of action alleged in plaintiff's complaint,
(Moran, supra p. 352) but also because from its very nature, it is obvious
that the same cannot "remain pending for independent adjudication by the
court." (Section 2, Rule 17.)

The provision of the rules just cited specifically enjoins that "(i)f a
counterclaim has been pleaded by a defendant prior to the service upon
him of the plaintiff's motion to dismiss, the action shall not be dismissed
against the defendant's objection unless the counterclaim can remain
pending for independent adjudication by the court." Defendants Lim and
Leonardo had no opportunity to object to the motion to dismiss before the
order granting the same was issued, for the simple reason that they were
not opportunity notified of the motion therefor, but the record shows
clearly that at least defendant Lim immediately brought the matter of their
compulsory counterclaim to the attention of the trial court in his motion for
reconsideration of October 23, 1974, even as the counsel for the other
defendant, Leonardo, predicated his motion on other grounds. In its order
of December 6, 1974, however, respondent court not only upheld the
plaintiffs supposed absolute right to choose her adversaries but also held
that the counterclaim is not compulsory, thereby virtually making
unexplained and inexplicable 180-degree turnabout in that respect.
There is another equally fundamental consideration why the motion to
dismiss should not have been granted. As the plaintiff's complaint has
been framed, all the six defendants are charged with having actually taken
part in a conspiracy to misappropriate, conceal and convert to their own
benefit the profits, properties and all other assets of the partnership Glory
Commercial Company, to the extent that they have allegedly organized a
corporation, Glory Commercial Company, Inc. with what they had illegally
gotten from the partnership. Upon such allegations, no judgment finding
the existence of the alleged conspiracy or holding the capital of the
corporation to be the money of the partnership is legally possible without
the presence of all the defendants. The non-defaulted defendants are
alleged to be stockholders of the corporation and any decision depriving
the same of all its assets cannot but prejudice the interests of said
defendants. Accordingly, upon these premises, and even prescinding from
the other reasons to be discussed anon it is clear that all the six
defendants below, defaulted and non-defaulted, are indispensable parties.
Respondents could do no less than grant that they are so on page 23 of
their answer. Such being the case, the questioned order of dismissal is
exactly the opposite of what ought to have been done. Whenever it
appears to the court in the course of a proceeding that an indispensable
party has not been joined, it is the duty of the court to stop the trial and to
order the inclusion of such party. (The Revised Rules of Court, Annotated &
Commented by Senator Vicente J. Francisco, Vol. 1, p. 271, 1973 ed. See
also Cortez vs. Avila, 101 Phil. 705.) Such an order is unavoidable, for the
"general rule with reference to the making of parties in a civil action

requires the joinder of all necessary parties wherever possible, and the
joinder of all indispensable parties under any and all conditions, the
presence of those latter being a sine qua non of the exercise of judicial
power." (Borlasa vs. Polistico, 47 Phil. 345, at p. 347.) It is precisely " when
an indispensable party is not before the court (that) the action should be
dismissed." (People v. Rodriguez, 106 Phil. 325, at p. 327.) The absence of
an indispensable party renders all subsequent actuations of the court null
and void, for want of authority to act, not only as to the absent parties but
even as to those present. In short, what respondent court did here was
exactly the reverse of what the law ordains it eliminated those who by
law should precisely be joined.
As may he noted from the order of respondent court quoted earlier, which
resolved the motions for reconsideration of the dismissal order filed by the
non-defaulted defendants, His Honor rationalized his position thus:
It is the rule that it is the absolute prerogative of the plaintiff to choose, the
theory upon which he predicates his right of action, or the parties he
desires to sue, without dictation or imposition by the court or the adverse
party. If he makes a mistake in the choice of his right of action, or in that of
the parties against whom he seeks to enforce it, that is his own concern as
he alone suffers therefrom. The plaintiff cannot be compelled to choose his
defendants, He may not, at his own expense, be forced to implead anyone
who, under the adverse party's theory, is to answer for defendant's liability.
Neither may the Court compel him to furnish the means by which
defendant may avoid or mitigate their liability. (Vao vs. Alo, 95 Phil. 495496.)
This being the rule this court cannot compel the plaintiff to continue
prosecuting her cause of action against the defendants-movants if in the
course of the trial she believes she can enforce it against the remaining
defendants subject only to the limitation provided in Section 2, Rule 17 of
the Rules of Court. ... (Pages 6263, Record.)
Noticeably, His Honor has employed the same equivocal terminology as in
plaintiff's motion of October 18, 1974 by referring to the action he had
taken as being "dismissal of the complaint against them or their being
dropped therefrom", without perceiving that the reason for the evidently
intentional ambiguity is transparent. The apparent idea is to rely on the
theory that under Section 11 of Rule 3, parties may be dropped by the
court upon motion of any party at any stage of the action, hence "it is the
absolute right prerogative of the plaintiff to choosethe parties he desires
to sue, without dictation or imposition by the court or the adverse party." In

other words, the ambivalent pose is suggested that plaintiff's motion of

October 18, 1974 was not predicated on Section 2 of Rule 17 but more on
Section 11 of Rule 3. But the truth is that nothing can be more incorrect. To
start with, the latter rule does not comprehend whimsical and irrational
dropping or adding of parties in a complaint. What it really contemplates is
erroneous or mistaken non-joinder and misjoinder of parties. No one is free
to join anybody in a complaint in court only to drop him unceremoniously
later at the pleasure of the plaintiff. The rule presupposes that the original
inclusion had been made in the honest conviction that it was proper and
the subsequent dropping is requested because it has turned out that such
inclusion was a mistake. And this is the reason why the rule ordains that
the dropping be "on such terms as are just" just to all the other parties.
In the case at bar, there is nothing in the record to legally justify the
dropping of the non-defaulted defendants, Lim and Leonardo. The motion
of October 18, 1974 cites none. From all appearances, plaintiff just decided
to ask for it, without any relevant explanation at all. Usually, the court in
granting such a motion inquires for the reasons and in the appropriate
instances directs the granting of some form of compensation for the
trouble undergone by the defendant in answering the complaint, preparing
for or proceeding partially to trial, hiring counsel and making
corresponding expenses in the premises. Nothing of these, appears in the
order in question. Most importantly, His Honor ought to have considered
that the outright dropping of the non-defaulted defendants Lim and
Leonardo, over their objection at that, would certainly be unjust not only to
the petitioners, their own parents, who would in consequence be entirely
defenseless, but also to Lim and Leonardo themselves who would naturally
correspondingly suffer from the eventual judgment against their parents.
Respondent court paid no heed at all to the mandate that such dropping
must be on such terms as are just" meaning to all concerned with its
legal and factual effects.
Thus, it is quite plain that respondent court erred in issuing its order of
dismissal of October 21, 1974 as well as its order of December 6, 1974
denying reconsideration of such dismissal. As We make this ruling, We are
not oblivious of the circumstance that defendants Lim and Leonardo are
not parties herein. But such consideration is inconsequential. The fate of
the case of petitioners is inseparably tied up with said order of dismissal, if
only because the order of ex-parte hearing of October 21, 1974 which
directly affects and prejudices said petitioners is predicated thereon.
Necessarily, therefore, We have to pass on the legality of said order, if We
are to decide the case of herein petitioners properly and fairly.

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

their questioning of the dismissal is from another point of view
understandable. On the one hand, why should they insist on being
defendants when plaintiff herself has already release from her claims? On
the other hand, as far as their respective parents-co-defendants are
concerned, they must have realized that they (their parents) could even be
benefited by such dismissal because they could question whether or not
plaintiff can still prosecute her case against them after she had secured the
order of dismissal in question. And it is in connection with this last point
that the true and correct concept of default becomes relevant.
At this juncture, it may also be stated that the decision of the Court of
Appeals of January 24, 1975 in G. R. No. SP-03066 dismissing the petition
for certiorari of non-defaulted defendants Lim and Leonardo impugning the
order of dismissal of October 21, 1974, has no bearing at all in this case,
not only because that dismissal was premised by the appellate court on its
holding that the said petition was premature inasmuch as the trial court
had not yet resolved the motion of the defendants of October 28, 1974
praying that said disputed order be quashed, but principally because
herein petitioners were not parties in that proceeding and cannot,
therefore, be bound by its result. In particular, We deem it warranted to
draw the attention of private respondent's counsel to his allegations in
paragraphs XI to XIV of his answer, which relate to said decision of the
Court of Appeals and which have the clear tendency to make it appear to
the Court that the appeals court had upheld the legality and validity of the
actuations of the trial court being questioned, when as a matter of
indisputable fact, the dismissal of the petition was based solely and
exclusively on its being premature without in any manner delving into its
merits. The Court must and does admonish counsel that such manner of
pleading, being deceptive and lacking in candor, has no place in any court,
much less in the Supreme Court, and if We are adopting a passive attitude
in the premises, it is due only to the fact that this is counsel's first offense.
But similar conduct on his part in the future will definitely be dealt with
more severely. Parties and counsel would be well advised to avoid such
attempts to befuddle the issues as invariably then will be exposed for what
they are, certainly unethical and degrading to the dignity of the law
profession. Moreover, almost always they only betray the inherent
weakness of the cause of the party resorting to them.
2
Coming now to the matter itself of default, it is quite apparent that the
impugned orders must have proceeded from inadequate apprehension of

the fundamental precepts governing such procedure under the Rules of

Court. It is time indeed that the concept of this procedural device were
fully understood by the bench and bar, instead of being merely taken for
granted as being that of a simple expedient of not allowing the offending
party to take part in the proceedings, so that after his adversary shall have
presented his evidence, judgment may be rendered in favor of such
opponent, with hardly any chance of said judgment being reversed or
modified.
The Rules of Court contain a separate rule on the subject of default, Rule
18. But said rule is concerned solely with default resulting from failure of
the defendant or defendants to answer within the reglementary period.
Referring to the simplest form of default, that is, where there is only one
defendant in the action and he fails to answer on time, Section 1 of the
rule provides that upon "proof of such failure, (the court shall) declare the
defendant in default. Thereupon the court shall proceed to receive the
plaintiff's evidence and render judgment granting him such relief as the
complaint and the facts proven may warrant." This last clause is clarified
by Section 5 which says that "a judgment entered against a party in
default shall not exceed the amount or be different in kind from that
prayed for."
Unequivocal, in the literal sense, as these provisions are, they do not
readily convey the full import of what they contemplate. To begin with,
contrary to the immediate notion that can be drawn from their language,
these provisions are not to be understood as meaning that default or the
failure of the defendant to answer should be "interpreted as an admission
by the said defendant that the plaintiff's cause of action find support in the
law or that plaintiff is entitled to the relief prayed for." (Moran, supra, p.
535 citing Macondary & Co. v. Eustaquio, 64 Phil. 466, citing with approval
Chaffin v. McFadden, 41 Ark. 42; Johnson v. Pierce, 12 Ark. 599; Mayden v.
Johnson, 59 Ga. 105; People v. Rust, 292 111. 328; Ken v. Leopold 21 111.
A. 163; Chicago, etc. Electric R. Co. v. Krempel 116 111. A. 253.)
Being declared in default does not constitute a waiver of rights except that
of being heard and of presenting evidence in the trial court. According to
Section 2, "except as provided in Section 9 of Rule 13, a party declared in
default shall not be entitled to notice of subsequent proceedings, nor to
take part in the trial." That provision referred to reads: "No service of
papers other than substantially amended pleadings and final orders or
judgments shall be necessary on a party in default unless he files a motion
to set aside the order of default, in which event he shall be entitled to
notice of all further proceedings regardless of whether the order of default

10

is set aside or not." And pursuant to Section 2 of Rule 41, "a party who has
been declared in default may likewise appeal from the judgment rendered
against him as contrary to the evidence or to the law, even if no petition
for relief to set aside the order of default has been presented by him in
accordance with Rule 38.".
In other words, a defaulted defendant is not actually thrown out of court.
While in a sense it may be said that by defaulting he leaves himself at the
mercy of the court, the rules see to it that any judgment against him must
be in accordance with law. The evidence to support the plaintiff's cause is,
of course, presented in his absence, but the court is not supposed to admit
that which is basically incompetent. Although the defendant would not be
in a position to object, elementary justice requires that, only legal evidence
should be considered against him. If the evidence presented should not be
sufficient to justify a judgment for the plaintiff, the complaint must be
dismissed. And if an unfavorable judgment should be justifiable, it cannot
exceed in amount or be different in kind from what is prayed for in the
complaint.
Incidentally, these considerations argue against the present widespread
practice of trial judges, as was done by His Honor in this case, of
delegating to their clerks of court the reception of the plaintiff's evidence
when the defendant is in default. Such a Practice is wrong in principle and
orientation. It has no basis in any rule. When a defendant allows himself to
be declared in default, he relies on the faith that the court would take care
that his rights are not unduly prejudiced. He has a right to presume that
the law and the rules will still be observed. The proceedings are held in his
forced absence, and it is but fair that the plaintiff should not be allowed to
take advantage of the situation to win by foul or illegal means or with
inherently incompetent evidence. Thus, in such instances, there is need for
more attention from the court, which only the judge himself can provide.
The clerk of court would not be in a position much less have the authority
to act in the premises in the manner demanded by the rules of fair play
and as contemplated in the law, considering his comparably limited area of
discretion and his presumably inferior preparation for the functions of a
judge. Besides, the default of the defendant is no excuse for the court to
renounce the opportunity to closely observe the demeanor and conduct of
the witnesses of the plaintiff, the better to appreciate their truthfulness
and credibility. We therefore declare as a matter of judicial policy that there
being no imperative reason for judges to do otherwise, the practice should
be discontinued.

Another matter of practice worthy of mention at this point is that it is

preferable to leave enough opportunity open for possible lifting of the
order of default before proceeding with the reception of the plaintiff's
evidence and the rendition of the decision. "A judgment by default may
amount to a positive and considerable injustice to the defendant; and the
possibility of such serious consequences necessitates a careful and liberal
examination of the grounds upon which the defendant may seek to set it
aside." (Moran, supra p. 534, citing Coombs vs. Santos, 24 Phil. 446; 449450.) The expression, therefore, in Section 1 of Rule 18 aforequoted which
says that "thereupon the court shall proceed to receive the plaintiff's
evidence etc." is not to be taken literally. The gain in time and dispatch
should the court immediately try the case on the very day of or shortly
after the declaration of default is far outweighed by the inconvenience and
complications involved in having to undo everything already done in the
event the defendant should justify his omission to answer on time.
The foregoing observations, as may be noted, refer to instances where the
only defendant or all the defendants, there being several, are declared in
default. There are additional rules embodying more considerations of
justice and equity in cases where there are several defendants against
whom a common cause of action is averred and not all of them answer
opportunely or are in default, particularly in reference to the power of the
court to render judgment in such situations. Thus, in addition to the
limitation of Section 5 that the judgment by default should not be more in
amount nor different in kind from the reliefs specifically sought by plaintiff
in his complaint, Section 4 restricts the authority of the court in rendering
judgment in the situations just mentioned as follows:
Sec. 4. Judgment when some defendants answer, and other make difficult.
When a complaint states a common cause of action against several
defendant some of whom answer, and the others fail to do so, the court
shall try the case against all upon the answer thus filed and render
judgment upon the evidence presented. The same proceeding applies
when a common cause of action is pleaded in a counterclaim, cross-claim
and third-party claim.
Very aptly does Chief Justice Moran elucidate on this provision and the
controlling jurisprudence explanatory thereof this wise:
Where a complaint states a common cause of action against several
defendants and some appear to defend the case on the merits while others
make default, the defense interposed by those who appear to litigate the
case inures to the benefit of those who fail to appear, and if the court finds

11

that a good defense has been made, all of the defendants must be
absolved. In other words, the answer filed by one or some of the
defendants inures to the benefit of all the others, even those who have not
seasonably filed their answer. (Bueno v. Ortiz, L-22978, June 27, 1968, 23
SCRA 1151.) The proper mode of proceeding where a complaint states a
common cause of action against several defendants, and one of them
makes default, is simply to enter a formal default order against him, and
proceed with the cause upon the answers of the others. The defaulting
defendant merely loses his standing in court, he not being entitled to the
service of notice in the cause, nor to appear in the suit in any way. He
cannot adduce evidence; nor can he be heard at the final hearing, (Lim
Toco v. Go Fay, 80 Phil. 166.) although he may appeal the judgment
rendered against him on the merits. (Rule 41, sec. 2.) If the case is finally
decided in the plaintiff's favor, a final decree is then entered against all the
defendants; but if the suit should be decided against the plaintiff, the
action will be dismissed as to all the defendants alike. (Velez v. Ramas, 40
Phil. 787-792; Frow v. de la Vega, 15 Wal. 552,21 L. Ed. 60.) In other words
the judgment will affect the defaulting defendants either favorably or
adversely. (Castro v. Pea, 80 Phil. 488.)
Defaulting defendant may ask execution if judgment is in his favor. (Castro
v. Pea, supra.) (Moran, Rules of Court, Vol. 1, pp. 538-539.)
In Castro vs. Pea, 80 Phil. 488, one of the numerous cases cited by Moran,
this Court elaborated on the construction of the same rule when it
sanctioned the execution, upon motion and for the benefit of the defendant
in default, of a judgment which was adverse to the plaintiff. The Court held:
As above stated, Emilia Matanguihan, by her counsel, also was a movant in
the petition for execution Annex 1. Did she have a right to be such, having
been declared in default? In Frow vs. De la Vega,supra, cited as authority
in Velez vs. Ramas, supra, the Supreme Court of the United States adopted
as ground for its own decision the following ruling of the New York Court of
Errors in Clason vs. Morris, 10 Jons., 524:
It would be unreasonable to hold that because one defendant had made
default, the plaintiff should have a decree even against him, where the
court is satisfied from the proofs offered by the other, that in fact the
plaintiff is not entitled to a decree. (21 Law, ed., 61.)
The reason is simple: justice has to be consistent. The complaint stating a
common cause of action against several defendants, the complainant's
rights or lack of them in the controversy have to be the same, and not

different, as against all the defendant's although one or some make default
and the other or others appear, join issue, and enter into trial. For instance,
in the case of Clason vs. Morris above cited, the New York Court of Errors in
effect held that in such a case if the plaintiff is not entitled to a decree, he
will not be entitled to it, not only as against the defendant appearing and
resisting his action but also as against the one who made default. In the
case at bar, the cause of action in the plaintiff's complaint was common
against the Mayor of Manila, Emilia Matanguihan, and the other defendants
in Civil Case No. 1318 of the lower court. The Court of First Instance in its
judgment found and held upon the evidence adduced by the plaintiff and
the defendant mayor that as between said plaintiff and defendant
Matanguihan the latter was the one legally entitled to occupy the stalls;
and it decreed, among other things, that said plaintiff immediately vacate
them. Paraphrasing the New York Court of Errors, it would be unreasonable
to hold now that because Matanguihan had made default, the said plaintiff
should be declared, as against her, legally entitled to the occupancy of the
stalls, or to remain therein, although the Court of First Instance was so
firmly satisfied, from the proofs offered by the other defendant, that the
same plaintiff was not entitled to such occupancy that it peremptorily
ordered her to vacate the stalls. If in the cases of Clason vs. Morris,
supra, Frow vs. De la Vega, supra, and Velez vs. Ramas, supra the decrees
entered inured to the benefit of the defaulting defendants, there is no
reason why that entered in said case No. 1318 should not be held also to
have inured to the benefit of the defaulting defendant Matanguihan and
the doctrine in said three cases plainly implies that there is nothing in the
law governing default which would prohibit the court from rendering
judgment favorable to the defaulting defendant in such cases. If it inured
to her benefit, it stands to reason that she had a right to claim that benefit,
for it would not be a benefit if the supposed beneficiary were barred from
claiming it; and if the benefit necessitated the execution of the decree, she
must be possessed of the right to ask for the execution thereof as she did
when she, by counsel, participated in the petition for execution Annex 1.
Section 7 of Rule 35 would seem to afford a solid support to the above
considerations. It provides that when a complaint states a common cause
of action against several defendants, some of whom answer, and the
others make default, 'the court shall try the case against all upon the
answer thus filed and render judgment upon the evidence presented by
the parties in court'. It is obvious that under this provision the case is tried
jointly not only against the defendants answering but also against those
defaulting, and the trial is held upon the answer filed by the former; and
the judgment, if adverse, will prejudice the defaulting defendants no less

12

than those who answer. In other words, the defaulting defendants are held
bound by the answer filed by their co-defendants and by the judgment
which the court may render against all of them. By the same token, and by
all rules of equity and fair play, if the judgment should happen to be
favorable, totally or partially, to the answering defendants, it must
correspondingly benefit the defaulting ones, for it would not be just to let
the judgment produce effects as to the defaulting defendants only when
adverse to them and not when favorable.
In Bueno vs. Ortiz, 23 SCRA 1151, the Court applied the provision under
discussion in the following words:
In answer to the charge that respondent Judge had committed a grave
abuse of discretion in rendering a default judgment against the PC,
respondents allege that, not having filed its answer within the
reglementary period, the PC was in default, so that it was proper for
Patanao to forthwith present his evidence and for respondent Judge to
render said judgment. It should be noted, however, that in entering the
area in question and seeking to prevent Patanao from continuing his
logging operations therein, the PC was merely executing an order of the
Director of Forestry and acting as his agent. Patanao's cause of action
against the other respondents in Case No. 190, namely, the Director of
Forestry, the District Forester of Agusan, the Forest Officer of Bayugan,
Agusan, and the Secretary of Agriculture and Natural Resources. Pursuant
to Rule 18, Section 4, of the Rules of Court, 'when a complaint states a
common cause of action against several defendants some of whom answer
and the others fail to do so, the court shall try the case against all upon the
answer thus filed (by some) and render judgment upon the evidence
presented.' In other words, the answer filed by one or some of the
defendants inures to the benefit of all the others, even those who have not
seasonably filed their answer.
Indeed, since the petition in Case No. 190 sets forth a common cause of
action against all of the respondents therein, a decision in favor of one of
them would necessarily favor the others. In fact, the main issue, in said
case, is whether Patanao has a timber license to undertake logging
operations in the disputed area. It is not possible to decide such issue in
the negative, insofar as the Director of Forestry, and to settle it otherwise,
as regards the PC, which is merely acting as agent of the Director of
Forestry, and is, therefore, his alter ego, with respect to the disputed forest
area.

Stated differently, in all instances where a common cause of action is

alleged against several defendants, some of whom answer and the others
do not, the latter or those in default acquire a vested right not only to own
the defense interposed in the answer of their co- defendant or codefendants not in default but also to expect a result of the litigation totally
common with them in kind and in amount whether favorable or
unfavorable. The substantive unity of the plaintiff's cause against all the
defendants is carried through to its adjective phase as ineluctably
demanded by the homogeneity and indivisibility of justice itself. Indeed,
since the singleness of the cause of action also inevitably implies that all
the defendants are indispensable parties, the court's power to act is
integral and cannot be split such that it cannot relieve any of them and at
the same time render judgment against the rest. Considering the tenor of
the section in question, it is to be assumed that when any defendant allows
himself to be declared in default knowing that his defendant has already
answered, he does so trusting in the assurance implicit in the rule that his
default is in essence a mere formality that deprives him of no more than
the right to take part in the trial and that the court would deem anything
done by or for the answering defendant as done by or for him. The
presumption is that otherwise he would not -have seen to that he would
not be in default. Of course, he has to suffer the consequences of whatever
the answering defendant may do or fail to do, regardless of possible
adverse consequences, but if the complaint has to be dismissed in so far
as the answering defendant is concerned it becomes his inalienable right
that the same be dismissed also as to him. It does not matter that the
dismissal is upon the evidence presented by the plaintiff or upon the
latter's mere desistance, for in both contingencies, the lack of sufficient
legal basis must be the cause. The integrity of the common cause of action
against all the defendants and the indispensability of all of them in the
proceedings do not permit any possibility of waiver of the plaintiff's right
only as to one or some of them, without including all of them, and so, as a
rule, withdrawal must be deemed to be a confession of weakness as to all.
This is not only elementary justice; it also precludes the concomitant
hazard that plaintiff might resort to the kind of procedural strategem
practiced by private respondent herein that resulted in totally depriving
petitioners of every opportunity to defend themselves against her claims
which, after all, as will be seen later in this opinion, the record does not
show to be invulnerable, both in their factual and legal aspects, taking into
consideration the tenor of the pleadings and the probative value of the
competent evidence which were before the trial court when it rendered its
assailed decision where all the defendants are indispensable parties, for
which reason the absence of any of them in the case would result in the

13

court losing its competency to act validly, any compromise that the
plaintiff might wish to make with any of them must, as a matter of correct
procedure, have to await until after the rendition of the judgment, at which
stage the plaintiff may then treat the matter of its execution and the
satisfaction of his claim as variably as he might please. Accordingly, in the
case now before Us together with the dismissal of the complaint against
the non-defaulted defendants, the court should have ordered also the
dismissal thereof as to petitioners.
Indeed, there is more reason to apply here the principle of unity and
indivisibility of the action just discussed because all the defendants here
have already joined genuine issues with plaintiff. Their default was only at
the pre-trial. And as to such absence of petitioners at the pre-trial, the
same could be attributed to the fact that they might not have considered it
necessary anymore to be present, since their respective children Lim and
Leonardo, with whom they have common defenses, could take care of their
defenses as well. Anything that might have had to be done by them at
such pre-trial could have been done for them by their children, at least
initially, specially because in the light of the pleadings before the court, the
prospects of a compromise must have appeared to be rather remote. Such
attitude of petitioners is neither uncommon nor totally unjustified. Under
the circumstances, to declare them immediately and irrevocably in default
was not an absolute necessity. Practical considerations and reasons of
equity should have moved respondent court to be more understanding in
dealing with the situation. After all, declaring them in default as
respondent court did not impair their right to a common fate with their
children.
3
Another issue to be resolved in this case is the question of whether or not
herein petitioners were entitled to notice of plaintiff's motion to drop their
co-defendants Lim and Leonardo, considering that petitioners had been
previously declared in default. In this connection, the decisive
consideration is that according to the applicable rule, Section 9, Rule 13,
already quoted above, (1) even after a defendant has been declared in
default, provided he "files a motion to set aside the order of default, he
shall be entitled to notice of all further proceedings regardless of whether
the order of default is set aside or not" and (2) a party in default who has
not filed such a motion to set aside must still be served with all
"substantially amended or supplemented pleadings." In the instant case, it
cannot be denied that petitioners had all filed their motion for
reconsideration of the order declaring them in default. Respondents' own

answer to the petition therein makes reference to the order of April 3,

1973, Annex 8 of said answer, which denied said motion for
reconsideration. On page 3 of petitioners' memorandum herein this motion
is referred to as "a motion to set aside the order of default." But as We
have not been favored by the parties with a copy of the said motion, We do
not even know the excuse given for petitioners' failure to appear at the
pre-trial, and We cannot, therefore, determine whether or not the motion
complied with the requirements of Section 3 of Rule 18 which We have held
to be controlling in cases of default for failure to answer on time. (The
Philippine-British Co. Inc. etc. et al. vs. The Hon. Walfrido de los Angeles
etc. et al., 63 SCRA 50.)
We do not, however, have here, as earlier noted, a case of default for
failure to answer but one for failure to appear at the pre-trial. We reiterate,
in the situation now before Us, issues have already been joined. In fact,
evidence had been partially offered already at the pre-trial and more of it
at the actual trial which had already begun with the first witness of the
plaintiff undergoing re-cross-examination. With these facts in mind and
considering that issues had already been joined even as regards the
defaulted defendants, it would be requiring the obvious to pretend that
there was still need for an oath or a verification as to the merits of the
defense of the defaulted defendants in their motion to reconsider their
default. Inasmuch as none of the parties had asked for a summary
judgment there can be no question that the issues joined were genuine,
and consequently, the reason for requiring such oath or verification no
longer holds. Besides, it may also be reiterated that being the parents of
the non-defaulted defendants, petitioners must have assumed that their
presence was superfluous, particularly because the cause of action against
them as well as their own defenses are common. Under these
circumstances, the form of the motion by which the default was sought to
be lifted is secondary and the requirements of Section 3 of Rule 18 need
not be strictly complied with, unlike in cases of default for failure to
answer. We can thus hold as We do hold for the purposes of the revival of
their right to notice under Section 9 of Rule 13, that petitioner's motion for
reconsideration was in substance legally adequate regardless of whether or
not it was under oath.
In any event, the dropping of the defendants Lim and Leonardo from
plaintiff's amended complaint was virtually a second amendment of
plaintiffs complaint. And there can be no doubt that such amendment was
substantial, for with the elimination thereby of two defendants allegedly
solidarily liable with their co-defendants, herein petitioners, it had the
effect of increasing proportionally what each of the remaining defendants,

14

the said petitioners, would have to answer for jointly and severally.
Accordingly, notice to petitioners of the plaintiff's motion of October 18,
1974 was legally indispensable under the rule above-quoted.
Consequently, respondent court had no authority to act on the motion, to
dismiss, pursuant to Section 6 of Rule 15, for according to Senator
Francisco, "(t) he Rules of Court clearly provide that no motion shall be
acted upon by the Court without the proof of service of notice thereof,
together with a copy of the motion and other papers accompanying it, to
all parties concerned at least three days before the hearing thereof, stating
the time and place for the hearing of the motion. (Rule 26, section 4, 5 and
6, Rules of Court (now Sec. 15, new Rules). When the motion does not
comply with this requirement, it is not a motion. It presents no question
which the court could decide. And the Court acquires no jurisdiction to
consider it. (Roman Catholic Bishop of Lipa vs. Municipality of Unisan 44
Phil., 866; Manakil vs. Revilla, 42 Phil., 81.) (Laserna vs. Javier, et al., CAG.R. No. 7885, April 22, 1955; 21 L.J. 36, citing Roman Catholic Bishop of
Lipa vs. Municipality of Unisan 44 Phil., 866; Manakil vs. Revilla, 42 Phil.,
81.) (Francisco. The Revised Rules of Court in the Philippines, pp. 861-862.)
Thus, We see again, from a different angle, why respondent court's order of
dismissal of October 21, 1974 is fatally ineffective.
4
The foregoing considerations notwithstanding, it is respondents' position
that certiorari is not the proper remedy of petitioners. It is contended that
inasmuch as said petitioners have in fact made their appeal already by
filing the required notice of appeal and appeal bond and a motion for
extension to file their record on appeal, which motion was granted by
respondent court, their only recourse is to prosecute that appeal.
Additionally, it is also maintained that since petitioners have expressly
withdrawn their motion to quash of January 4, 1975 impugning the order of
October 28, 1974, they have lost their right to assail by certiorari the
actuations of respondent court now being questioned, respondent court
not having been given the opportunity to correct any possible error it might
have committed.
We do not agree. As already shown in the foregoing discussion, the
proceedings in the court below have gone so far out of hand that prompt
action is needed to restore order in the entangled situation created by the
series of plainly illegal orders it had issued. The essential purpose
of certiorari is to keep the proceedings in lower judicial courts and tribunals
within legal bounds, so that due process and the rule of law may prevail at
all times and arbitrariness, whimsicality and unfairness which justice

abhors may immediately be stamped out before graver injury, juridical and
otherwise, ensues. While generally these objectives may well be attained
in an ordinary appeal, it is undoubtedly the better rule to allow the special
remedy of certiorari at the option of the party adversely affected, when the
irregularity committed by the trial court is so grave and so far reaching in
its consequences that the long and cumbersome procedure of appeal will
only further aggravate the situation of the aggrieved party because other
untoward actuations are likely to materialize as natural consequences of
those already perpetrated. If the law were otherwise, certiorari would have
no reason at all for being.
No elaborate discussion is needed to show the urgent need for corrective
measures in the case at bar. Verily, this is one case that calls for the
exercise of the Supreme Court's inherent power of supervision over all
kinds of judicial actions of lower courts. Private respondent's procedural
technique designed to disable petitioners to defend themselves against her
claim which appears on the face of the record itself to be at least highly
controversial seems to have so fascinated respondent court that none
would be surprised should her pending motion for immediate execution of
the impugned judgment receive similar ready sanction as her previous
motions which turned the proceedings into a one-sided affair. The stakes
here are high. Not only is the subject matter considerably substantial;
there is the more important aspect that not only the spirit and intent of the
rules but even the basic rudiments of fair play have been disregarded. For
the Court to leave unrestrained the obvious tendency of the proceedings
below would be nothing short of wittingly condoning inequity and injustice
resulting from erroneous construction and unwarranted application of
procedural rules.
5
The sum and total of all the foregoing disquisitions is that the decision here
in question is legally anomalous. It is predicated on two fatal malactuations
of respondent court namely (1) the dismissal of the complaint against the
non-defaulted defendants Lim and Leonardo and (2) the ex-parte reception
of the evidence of the plaintiff by the clerk of court, the subsequent using
of the same as basis for its judgment and the rendition of such judgment.
For at least three reasons which We have already fully discussed above,
the order of dismissal of October 21, 1974 is unworthy of Our sanction: (1)
there was no timely notice of the motion therefor to the non-defaulted
defendants, aside from there being no notice at all to herein petitioners;
(2) the common answer of the defendants, including the non-defaulted,

15

contained a compulsory counterclaim incapable of being determined in an

independent action; and (3) the immediate effect of such dismissal was the
removal of the two non-defaulted defendants as parties, and inasmuch as
they are both indispensable parties in the case, the court consequently lost
the" sine qua non of the exercise of judicial power", per Borlasa vs.
Polistico, supra. This is not to mention anymore the irregular delegation to
the clerk of court of the function of receiving plaintiff's evidence. And as
regards the ex-parte reception of plaintiff's evidence and subsequent
rendition of the judgment by default based thereon, We have seen that it
was violative of the right of the petitioners, under the applicable rules and
principles on default, to a common and single fate with their non-defaulted
co-defendants. And We are not yet referring, as We shall do this anon to
the numerous reversible errors in the decision itself.

apparently accurate from the literal point of view, cannot prevail over the
imperatives of the substantive law and of equity that always underlie them
and which have to be inevitably considered in the construction of the
pertinent procedural rules.

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

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

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

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

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

respondent in securing the decision in her favor was ill-conceived. It was
characterized by that which every principle of law and equity disdains
taking unfair advantage of the rules of procedure in order to unduly
deprive the other party of full opportunity to defend his cause. The idea of
"dropping" the non-defaulted defendants with the end in view of
completely incapacitating their co-defendants from making any defense,
without considering that all of them are indispensable parties to a common
cause of action to which they have countered with a common defense
readily connotes an intent to secure a one-sided decision, even improperly.
And when, in this connection, the obvious weakness of plaintiff's evidence
is taken into account, one easily understands why such tactics had to be
availed of. We cannot directly or indirectly give Our assent to the
commission of unfairness and inequity in the application of the rules of
procedure, particularly when the propriety of reliance thereon is not
beyond controversy.
2. The theories of remedial law pursued by private respondents, although
approved by His Honor, run counter to such basic principles in the rules on
default and such elementary rules on dismissal of actions and notice of
motions that no trial court should be unaware of or should be mistaken in
applying. We are at a loss as to why His Honor failed to see through
counsel's inequitous strategy, when the provisions (1) on the three-day
rule on notice of motions, Section 4 of Rule 15, (2) against dismissal of
actions on motion of plaintiff when there is a compulsory counterclaim,
Section 2, Rule 17, (3) against permitting the absence of indispensable
parties, Section 7, Rule 3, (4) on service of papers upon defendants in

16

default when there are substantial amendments to pleadings, Section 9,

Rule 13, and (5) on the unity and integrity of the fate of defendants in
default with those not in default where the cause of action against them
and their own defenses are common, Section 4, Rule 18, are so plain and
the jurisprudence declaratory of their intent and proper construction are so
readily comprehensible that any error as to their application would be
unusual in any competent trial court.
3. After all, all the malactuations of respondent court are traceable to the
initiative of private respondent and/or her counsel. She cannot, therefore,
complain that she is being made to unjustifiably suffer the consequences
of what We have found to be erroneous orders of respondent court. It is
only fair that she should not be allowed to benefit from her own frustrated
objective of securing a one-sided decision.
4. More importantly, We do not hesitate to hold that on the basis of its own
recitals, the decision in question cannot stand close scrutiny. What is more,
the very considerations contained therein reveal convincingly the inherent
weakness of the cause of the plaintiff. To be sure, We have been giving
serious thought to the idea of merely returning this case for a resumption
of trial by setting aside the order of dismissal of October 21, 1974, with all
its attendant difficulties on account of its adverse effects on parties who
have not been heard, but upon closer study of the pleadings and the
decision and other circumstances extant in the record before Us, We are
now persuaded that such a course of action would only lead to more legal
complications incident to attempts on the part of the parties concerned to
desperately squeeze themselves out of a bad situation. Anyway, We feel
confident that by and large, there is enough basis here and now for Us to
rule out the claim of the plaintiff.
Even a mere superficial reading of the decision would immediately reveal
that it is littered on its face with deficiencies and imperfections which
would have had no reason for being were there less haste and more
circumspection in rendering the same. Recklessness in jumping to
unwarranted conclusions, both factual and legal, is at once evident in its
findings relative precisely to the main bases themselves of the reliefs
granted. It is apparent therein that no effort has been made to avoid
glaring inconsistencies. Where references are made to codal provisions and
jurisprudence, inaccuracy and inapplicability are at once manifest. It hardly
commends itself as a deliberate and consciencious adjudication of a
litigation which, considering the substantial value of the subject matter it
involves and the unprecedented procedure that was followed by

respondent's counsel, calls for greater attention and skill than the general
run of cases would.
Inter alia, the following features of the decision make it highly improbable
that if We took another course of action, private respondent would still be
able to make out any case against petitioners, not to speak of their codefendants who have already been exonerated by respondent herself thru
her motion to dismiss:
1. According to His Honor's own statement of plaintiff's case, "she is the
widow of the late Tee Hoon Po Chuan (Po Chuan, for short) who was then
one of the partners in the commercial partnership, Glory Commercial Co.
with defendants Antonio Lim Tanhu (Lim Tanhu, for short) and Alfonso
Leonardo Ng Sua (Ng Sua, for short) as co-partners; that after the death of
her husband on March 11, 1966 she is entitled to share not only in the
capital and profits of the partnership but also in the other assets, both real
and personal, acquired by the partnership with funds of the latter during its
lifetime."
Relatedly, in the latter part of the decision, the findings are to the following
effect: .
That the herein plaintiff Tan Put and her late husband Po Chuan married at
the Philippine Independent Church of Cebu City on December, 20, 1949;
that Po Chuan died on March 11, 1966; that the plaintiff and the late Po
Chuan were childless but the former has a foster son Antonio Nuez whom
she has reared since his birth with whom she lives up to the present; that
prior to the marriage of the plaintiff to Po Chuan the latter was already
managing the partnership Glory Commercial Co. then engaged in a little
business in hardware at Manalili St., Cebu City; that prior to and just after
the marriage of the plaintiff to Po Chuan she was engaged in the drugstore
business; that not long after her marriage, upon the suggestion of Po
Chuan the plaintiff sold her drugstore for P125,000.00 which amount she
gave to her husband in the presence of defendant Lim Tanhu and was
invested in the partnership Glory Commercial Co. sometime in 1950; that
after the investment of the above-stated amount in the partnership its
business flourished and it embarked in the import business and also
engaged in the wholesale and retail trade of cement and GI sheets and
under huge profits;
xxx xxx xxx

17

That the late Po Chuan was the one who actively managed the business of
the partnership Glory Commercial Co. he was the one who made the final
decisions and approved the appointments of new personnel who were
taken in by the partnership; that the late Po Chuan and defendants Lim
Tanhu and Ng Sua are brothers, the latter two (2) being the elder brothers
of the former; that defendants Lim Tanhu and Ng Sua are both naturalized
Filipino citizens whereas the late Po Chuan until the time of his death was a
Chinese citizen; that the three (3) brothers were partners in the Glory
Commercial Co. but Po Chuan was practically the owner of the partnership
having the controlling interest; that defendants Lim Tanhu and Ng Sua
were partners in name but they were mere employees of Po Chuan .... (Pp.
89-91, Record.)
How did His Honor arrive at these conclusions? To start with, it is not clear
in the decision whether or not in making its findings of fact the court took
into account the allegations in the pleadings of the parties and whatever
might have transpired at the pre-trial. All that We can gather in this respect
is that references are made therein to pre-trial exhibits and to Annex A of
the answer of the defendants to plaintiff's amended complaint. Indeed, it
was incumbent upon the court to consider not only the evidence formally
offered at the trial but also the admissions, expressed or implied, in the
pleadings, as well as whatever might have been placed before it or brought
to its attention during the pre-trial. In this connection, it is to be regretted
that none of the parties has thought it proper to give Us an idea of what
took place at the pre-trial of the present case and what are contained in
the pre-trial order, if any was issued pursuant to Section 4 of Rule 20.
The fundamental purpose of pre-trial, aside from affording the parties
every opportunity to compromise or settle their differences, is for the court
to be apprised of the unsettled issues between the parties and of their
respective evidence relative thereto, to the end that it may take
corresponding measures that would abbreviate the trial as much as
possible and the judge may be able to ascertain the facts with the least
observance of technical rules. In other words whatever is said or done by
the parties or their counsel at the pre- trial serves to put the judge on
notice of their respective basic positions, in order that in appropriate cases
he may, if necessary in the interest of justice and a more accurate
determination of the facts, make inquiries about or require clarifications of
matters taken up at the pre-trial, before finally resolving any issue of fact
or of law. In brief, the pre-trial constitutes part and parcel of the
proceedings, and hence, matters dealt with therein may not be
disregarded in the process of decision making. Otherwise, the real essence
of compulsory pre-trial would be insignificant and worthless.

Now, applying these postulates to the findings of respondent court just

quoted, it will be observed that the court's conclusion about the supposed
marriage of plaintiff to the deceased Tee Hoon Lim Po Chuan is contrary to
the weight of the evidence brought before it during the trial and the pretrial.
Under Article 55 of the Civil Code, the declaration of the contracting parties
that they take each other as husband and wife "shall be set forth in an
instrument" signed by the parties as well as by their witnesses and the
person solemnizing the marriage. Accordingly, the primary evidence of a
marriage must be an authentic copy of the marriage contract. While a
marriage may also be proved by other competent evidence, the absence of
the contract must first be satisfactorily explained. Surely, the certification
of the person who allegedly solemnized a marriage is not admissible
evidence of such marriage unless proof of loss of the contract or of any
other satisfactory reason for its non-production is first presented to the
court. In the case at bar, the purported certification issued by a Mons. Jose
M. Recoleto, Bishop, Philippine Independent Church, Cebu City, is not,
therefore, competent evidence, there being absolutely no showing as to
unavailability of the marriage contract and, indeed, as to the authenticity
of the signature of said certifier, the jurat allegedly signed by a second
assistant provincial fiscal not being authorized by law, since it is not part of
the functions of his office. Besides, inasmuch as the bishop did not testify,
the same is hearsay.
As regards the testimony of plaintiff herself on the same point and that of
her witness Antonio Nuez, there can be no question that they are both
self-serving and of very little evidentiary value, it having been disclosed at
the trial that plaintiff has already assigned all her rights in this case to said
Nuez, thereby making him the real party in interest here and, therefore,
naturally as biased as herself. Besides, in the portion of the testimony of
Nuez copied in Annex C of petitioner's memorandum, it appears admitted
that he was born only on March 25, 1942, which means that he was less
than eight years old at the supposed time of the alleged marriage. If for
this reason alone, it is extremely doubtful if he could have been sufficiently
aware of such event as to be competent to testify about it.
Incidentally, another Annex C of the same memorandum purports to be the
certificate of birth of one Antonio T. Uy supposed to have been born on
March 23, 1937 at Centro Misamis, Misamis Occidental, the son of one Uy
Bien, father, and Tan Put, mother. Significantly, respondents have not
made any adverse comment on this document. It is more likely, therefore,
that the witness is really the son of plaintiff by her husband Uy Kim Beng.

18

But she testified she was childless. So which is which? In any event, if on
the strength of this document, Nuez is actually the legitimate son of Tan
Put and not her adopted son, he would have been but 13 years old in 1949,
the year of her alleged marriage to Po Chuan, and even then, considering
such age, his testimony in regard thereto would still be suspect.
Now, as against such flimsy evidence of plaintiff, the court had before it,
two documents of great weight belying the pretended marriage. We refer
to (1) Exhibit LL, the income tax return of the deceased Tee Hoon Lim Po
Chuan indicating that the name of his wife was Ang Sick Tin and (2) the
quitclaim, Annex A of the answer, wherein plaintiff Tan Put stated that she
had been living with the deceased without benefit of marriage and that she
was his "common-law wife". Surely, these two documents are far more
reliable than all the evidence of the plaintiff put together.
Of course, Exhibit LL is what might be termed as pre-trial evidence. But it is
evidence offered to the judge himself, not to the clerk of court, and should
have at least moved him to ask plaintiff to explain if not rebut it before
jumping to the conclusion regarding her alleged marriage to the deceased,
Po Chuan. And in regard to the quitclaim containing the admission of a
common-law relationship only, it is to be observed that His Honor found
that "defendants Lim Tanhu and Ng Sua had the plaintiff execute a
quitclaim on November 29, 1967 (Annex "A", Answer) where they gave
plaintiff the amount of P25,000 as her share in the capital and profits of the
business of Glory Commercial Co. which was engaged in the hardware
business", without making mention of any evidence of fraud and
misrepresentation in its execution, thereby indicating either that no
evidence to prove that allegation of the plaintiff had been presented by her
or that whatever evidence was actually offered did not produce persuasion
upon the court. Stated differently, since the existence of the quitclaim has
been duly established without any circumstance to detract from its legal
import, the court should have held that plaintiff was bound by her
admission therein that she was the common-law wife only of Po Chuan and
what is more, that she had already renounced for valuable consideration
whatever claim she might have relative to the partnership Glory
Commercial Co.
And when it is borne in mind that in addition to all these considerations,
there are mentioned and discussed in the memorandum of petitioners (1)
the certification of the Local Civil Registrar of Cebu City and (2) a similar
certification of the Apostolic Prefect of the Philippine Independent Church,
Parish of Sto. Nio, Cebu City, that their respective official records
corresponding to December 1949 to December 1950 do not show any

marriage between Tee Hoon Lim Po Chuan and Tan Put, neither of which
certifications have been impugned by respondent until now, it stands to
reason that plaintiff's claim of marriage is really unfounded. Withal, there is
still another document, also mentioned and discussed in the same
memorandum and unimpugned by respondents, a written agreement
executed in Chinese, but purportedly translated into English by the
Chinese Consul of Cebu, between Tan Put and Tee Hoon Lim Po Chuan to
the following effect:
CONSULATE OF THE REPUBLIC OF CHINA Cebu City, Philippines
TRANSLATION
This is to certify that 1, Miss Tan Ki Eng Alias Tan Put, have lived with Mr.
Lim Po Chuan alias TeeHoon since 1949 but it recently occurs that we are
incompatible with each other and are not in the position to keep living
together permanently. With the mutual concurrence, we decided to
terminate the existing relationship of common law-marriage and promised
not to interfere each other's affairs from now on. The Forty Thousand Pesos
(P40,000.00) has been given to me by Mr. Lim Po Chuan for my
subsistence.
Witnesses:
Mr. Lim Beng Guan Mr. Huang Sing Se
Signed on the 10 day of the 7th month of the 54th year of the Republic of
China (corresponding to the year 1965).
(SGD) TAN KI ENG
Verified from the records. JORGE TABAR (Pp. 283-284, Record.)
Indeed, not only does this document prove that plaintiff's relation to the
deceased was that of a common-law wife but that they had settled their
property interests with the payment to her of P40,000.
In the light of all these circumstances, We find no alternative but to hold
that plaintiff Tan Put's allegation that she is the widow of Tee Hoon Lim Po
Chuan has not been satisfactorily established and that, on the contrary,
the evidence on record convincingly shows that her relation with said
deceased was that of a common-law wife and furthermore, that all her
claims against the company and its surviving partners as well as those
against the estate of the deceased have already been settled and paid. We

19

take judicial notice of the fact that the respective counsel who assisted the
parties in the quitclaim, Attys. H. Hermosisima and Natalio Castillo, are
members in good standing of the Philippine Bar, with the particularity that
the latter has been a member of the Cabinet and of the House of
Representatives of the Philippines, hence, absent any credible proof that
they had allowed themselves to be parties to a fraudulent document His
Honor did right in recognizing its existence, albeit erring in not giving due
legal significance to its contents.
2. If, as We have seen, plaintiff's evidence of her alleged status as
legitimate wife of Po Chuan is not only unconvincing but has been actually
overcome by the more competent and weighty evidence in favor of the
defendants, her attempt to substantiate her main cause of action that
defendants Lim Tanhu and Ng Sua have defrauded the partnership Glory
Commercial Co. and converted its properties to themselves is even more
dismal. From the very evidence summarized by His Honor in the decision in
question, it is clear that not an iota of reliable proof exists of such alleged
misdeeds.
Of course, the existence of the partnership has not been denied, it is
actually admitted impliedly in defendants' affirmative defense that Po
Chuan's share had already been duly settled with and paid to both the
plaintiff and his legitimate family. But the evidence as to the actual
participation of the defendants Lim Tanhu and Ng Sua in the operation of
the business that could have enabled them to make the extractions of
funds alleged by plaintiff is at best confusing and at certain points
manifestly inconsistent.
In her amended complaint, plaintiff repeatedly alleged that as widow of Po
Chuan she is entitled to / 3 share of the assets and properties of the
partnership. In fact, her prayer in said complaint is, among others, for the
delivery to her of such / 3 share. His Honor's statement of the case as well
as his findings and judgment are all to that same effect. But what did she
actually try to prove at the ex- parte hearing?
According to the decision, plaintiff had shown that she had money of her
own when she "married" Po Chuan and "that prior to and just after the
marriage of the plaintiff to Po Chuan, she was engaged in the drugstore
business; that not long after her marriage, upon the suggestion of Po
Chuan, the plaintiff sold her drugstore for P125,000 which amount she
gave to her husband in the presence of Tanhu and was invested in the
partnership Glory Commercial Co. sometime in 1950; that after the
investment of the above-stated amount in the partnership, its business

flourished and it embarked in the import business and also engaged in the
wholesale and retail trade of cement and GI sheets and under (sic) huge
profits." (pp. 25-26, Annex L, petition.)
To begin with, this theory of her having contributed of P125,000 to the
capital of the partnership by reason of which the business flourished and
amassed all the millions referred to in the decision has not been alleged in
the complaint, and inasmuch as what was being rendered was a judgment
by default, such theory should not have been allowed to be the subject of
any evidence. But inasmuch as it was the clerk of court who received the
evidence, it is understandable that he failed to observe the rule. Then, on
the other hand, if it was her capital that made the partnership flourish, why
would she claim to be entitled to only to / 3 of its assets and profits? Under
her theory found proven by respondent court, she was actually the owner
of everything, particularly because His Honor also found "that defendants
Lim Tanhu and Ng Sua were partners in the name but they were employees
of Po Chuan that defendants Lim Tanhu and Ng Sua had no means of
livelihood at the time of their employment with the Glory Commercial Co.
under the management of the late Po Chuan except their salaries
therefrom; ..." (p. 27, id.) Why then does she claim only / 3 share? Is this an
indication of her generosity towards defendants or of a concocted cause of
action existing only in her confused imagination engendered by the death
of her common-law husband with whom she had settled her common-law
claim for recompense of her services as common law wife for less than
what she must have known would go to his legitimate wife and children?
Actually, as may be noted from the decision itself, the trial court was
confused as to the participation of defendants Lim Tanhu and Ng Sua in
Glory Commercial Co. At one point, they were deemed partners, at another
point mere employees and then elsewhere as partners-employees, a newly
found concept, to be sure, in the law on partnership. And the confusion is
worse comfounded in the judgment which allows these "partners in name"
and "partners-employees" or employees who had no means of livelihood
and who must not have contributed any capital in the business, "as Po
Chuan was practically the owner of the partnership having the controlling
interest", / 3 each of the huge assets and profits of the partnership.
Incidentally, it may be observed at this juncture that the decision has
made Po Chuan play the inconsistent role of being "practically the owner"
but at the same time getting his capital from the P125,000 given to him by
plaintiff and from which capital the business allegedly "flourished."
Anent the allegation of plaintiff that the properties shown by her exhibits to
be in the names of defendants Lim Tanhu and Ng Sua were bought by them

20

with partnership funds, His Honor confirmed the same by finding and
holding that "it is likewise clear that real properties together with the
improvements in the names of defendants Lim Tanhu and Ng Sua were
acquired with partnership funds as these defendants were only partnersemployees of deceased Po Chuan in the Glory Commercial Co. until the
time of his death on March 11, 1966." (p. 30, id.) It Is Our considered view,
however, that this conclusion of His Honor is based on nothing but pure
unwarranted conjecture. Nowhere is it shown in the decision how said
defendants could have extracted money from the partnership in the
fraudulent and illegal manner pretended by plaintiff. Neither in the
testimony of Nuez nor in that of plaintiff, as these are summarized in the
decision, can there be found any single act of extraction of partnership
funds committed by any of said defendants. That the partnership might
have grown into a multi-million enterprise and that the properties
described in the exhibits enumerated in the decision are not in the names
of Po Chuan, who was Chinese, but of the defendants who are Filipinos, do
not necessarily prove that Po Chuan had not gotten his share of the profits
of the business or that the properties in the names of the defendants were
bought with money of the partnership. In this connection, it is decisively
important to consider that on the basis of the concordant and mutually
cumulative testimonies of plaintiff and Nuez, respondent court found very
explicitly that, and We reiterate:
xxx xxx xxx
That the late Po Chuan was the one who actively managed the business of
the partnership Glory Commercial Co. he was the one who made the final
decisions and approved the appointments of new Personnel who were
taken in by the partnership; that the late Po Chuan and defendants Lim
Tanhu and Ng Sua are brothers, the latter to (2) being the elder brothers of
the former; that defendants Lim Tanhu and Ng Sua are both naturalized
Filipino citizens whereas the late Po Chuan until the time of his death was a
Chinese citizen; that the three (3) brothers were partners in the Glory
Commercial Co. but Po Chuan was practically the owner of the partnership
having the controlling interest; that defendants Lim Tanhu and Ng Sua
were partners in name but they were mere employees of Po Chuan; .... (Pp.
90-91, Record.)
If Po Chuan was in control of the affairs and the running of the partnership,
how could the defendants have defrauded him of such huge amounts as
plaintiff had made his Honor believe? Upon the other hand, since Po Chuan
was in control of the affairs of the partnership, the more logical inference is
that if defendants had obtained any portion of the funds of the partnership

for themselves, it must have been with the knowledge and consent of Po
Chuan, for which reason no accounting could be demanded from them
therefor, considering that Article 1807 of the Civil Code refers only to what
is taken by a partner without the consent of the other partner or partners.
Incidentally again, this theory about Po Chuan having been actively
managing the partnership up to his death is a substantial deviation from
the allegation in the amended complaint to the effect that "defendants
Antonio Lim Tanhu, Alfonso Leonardo Ng Sua, Lim Teck Chuan and Eng
Chong Leonardo, through fraud and machination, took actual and active
management of the partnership and although Tee Hoon Lim Po Chuan was
the manager of Glory Commercial Co., defendants managed to use the
funds of the partnership to purchase lands and buildings etc. (Par. 4, p. 2 of
amended complaint, Annex B of petition) and should not have been
permitted to be proven by the hearing officer, who naturally did not know
any better.
Moreover, it is very significant that according to the very tax declarations
and land titles listed in the decision, most if not all of the properties
supposed to have been acquired by the defendants Lim Tanhu and Ng Sua
with funds of the partnership appear to have been transferred to their
names only in 1969 or later, that is, long after the partnership had been
automatically dissolved as a result of the death of Po Chuan. Accordingly,
defendants have no obligation to account to anyone for such acquisitions
in the absence of clear proof that they had violated the trust of Po Chuan
during the existence of the partnership. (See Hanlon vs. Hansserman and.
Beam, 40 Phil. 796.)
There are other particulars which should have caused His Honor to readily
disbelieve plaintiffs' pretensions. Nuez testified that "for about 18 years
he was in charge of the GI sheets and sometimes attended to the imported
items of the business of Glory Commercial Co." Counting 18 years back
from 1965 or 1966 would take Us to 1947 or 1948. Since according to
Exhibit LL, the baptismal certificate produced by the same witness as his
birth certificate, shows he was born in March, 1942, how could he have
started managing Glory Commercial Co. in 1949 when he must have been
barely six or seven years old? It should not have escaped His Honor's
attention that the photographs showing the premises of Philippine Metal
Industries after its organization "a year or two after the establishment of
Cebu Can Factory in 1957 or 1958" must have been taken after 1959. How
could Nuez have been only 13 years old then as claimed by him to have
been his age in those photographs when according to his "birth certificate",
he was born in 1942? His Honor should not have overlooked that according
to the same witness, defendant Ng Sua was living in Bantayan until he was

21

directed to return to Cebu after the fishing business thereat floundered,

whereas all that the witness knew about defendant Lim Teck Chuan's
arrival from Hongkong and the expenditure of partnership money for him
were only told to him allegedly by Po Chuan, which testimonies are
veritably exculpatory as to Ng Sua and hearsay as to Lim Teck Chuan.
Neither should His Honor have failed to note that according to plaintiff
herself, "Lim Tanhu was employed by her husband although he did not go
there always being a mere employee of Glory Commercial Co." (p. 22,
Annex the decision.)
The decision is rather emphatic in that Lim Tanhu and Ng Sua had no
known income except their salaries. Actually, it is not stated, however,
from what evidence such conclusion was derived in so far as Ng Sua is
concerned. On the other hand, with respect to Lim Tanhu, the decision
itself states that according to Exhibit NN-Pre trial, in the supposed income
tax return of Lim Tanhu for 1964, he had an income of P4,800 as salary
from Philippine Metal Industries alone and had a total assess sable net
income of P23,920.77 that year for which he paid a tax of P4,656.00. (p.
14. Annex L, id.) And per Exhibit GG-Pretrial in the year, he had a net
income of P32,000 for which be paid a tax of P3,512.40. (id.) As early as
1962, "his fishing business in Madridejos Cebu was making money, and he
reported "a net gain from operation (in) the amount of P865.64" (id., per
Exhibit VV-Pre-trial.) From what then did his Honor gather the conclusion
that all the properties registered in his name have come from funds
malversed from the partnership?
It is rather unusual that His Honor delved into financial statements and
books of Glory Commercial Co. without the aid of any accountant or
without the same being explained by any witness who had prepared them
or who has knowledge of the entries therein. This must be the reason why
there are apparent inconsistencies and inaccuracies in the conclusions His
Honor made out of them. In Exhibit SS-Pre-trial, the reported total assets of
the company amounted to P2,328,460.27 as of December, 1965, and yet,
Exhibit TT-Pre-trial, according to His Honor, showed that the total value of
goods available as of the same date was P11,166,327.62. On the other
hand, per Exhibit XX-Pre-trial, the supposed balance sheet of the company
for 1966, "the value of inventoried merchandise, both local and imported",
as found by His Honor, was P584,034.38. Again, as of December 31, 1966,
the value of the company's goods available for sale was P5,524,050.87,
per Exhibit YY and YY-Pre-trial. Then, per Exhibit II-3-Pre-trial, the supposed
Book of Account, whatever that is, of the company showed its "cash
analysis" was P12,223,182.55. We do not hesitate to make the observation
that His Honor, unless he is a certified public accountant, was hardly

qualified to read such exhibits and draw any definite conclusions

therefrom, without risk of erring and committing an injustice. In any event,
there is no comprehensible explanation in the decision of the conclusion of
His Honor that there were P12,223,182.55 cash money defendants have to
account for, particularly when it can be very clearly seen in Exhibits 11-4,
11-4- A, 11-5 and 11-6-Pre-trial, Glory Commercial Co. had accounts
payable as of December 31, 1965 in the amount of P4,801,321.17. (p.
15, id.) Under the circumstances, We are not prepared to permit anyone to
predicate any claim or right from respondent court's unaided exercise of
accounting knowledge.
Additionally, We note that the decision has not made any finding regarding
the allegation in the amended complaint that a corporation denominated
Glory Commercial Co., Inc. was organized after the death of Po Chuan with
capital from the funds of the partnership. We note also that there is
absolutely no finding made as to how the defendants Dy Ochay and Co
Oyo could in any way be accountable to plaintiff, just because they happen
to be the wives of Lim Tanhu and Ng Sua, respectively. We further note that
while His Honor has ordered defendants to deliver or pay jointly and
severally to the plaintiff P4,074,394.18 or / 3 of the P12,223,182.55, the
supposed cash belonging to the partnership as of December 31, 1965, in
the same breath, they have also been sentenced to partition and give
/ 3 share of the properties enumerated in the dispositive portion of the
decision, which seemingly are the very properties allegedly purchased
from the funds of the partnership which would naturally include the
P12,223,182.55 defendants have to account for. Besides, assuming there
has not yet been any liquidation of the partnership, contrary to the
allegation of the defendants, then Glory Commercial Co. would have the
status of a partnership in liquidation and the only right plaintiff could have
would be to what might result after such liquidation to belong to the
deceased partner, and before this is finished, it is impossible to determine,
what rights or interests, if any, the deceased had (Bearneza vs. Dequilla 43
Phil. 237). In other words, no specific amounts or properties may be
adjudicated to the heir or legal representative of the deceased partner
without the liquidation being first terminated.
Indeed, only time and the fear that this decision would be much more
extended than it is already prevent us from further pointing out the
inexplicable deficiencies and imperfections of the decision in question.
After all, what have been discussed should be more than sufficient to
support Our conclusion that not only must said decision be set aside but
also that the action of the plaintiff must be totally dismissed, and, were it
not seemingly futile and productive of other legal complications, that

22

plaintiff is liable on defendants' counterclaims. Resolution of the other

issues raised by the parties albeit important and perhaps pivotal has
likewise become superfluous.
IN VIEW OF ALL THE FOREGOING, the petition is granted. All proceedings
held in respondent court in its Civil Case No. 12328 subsequent to the
order of dismissal of October 21, 1974 are hereby annulled and set aside,
particularly the ex-parte proceedings against petitioners and the decision
on December 20, 1974. Respondent court is hereby ordered to enter an
order extending the effects of its order of dismissal of the action dated
October 21, 1974 to herein petitioners Antonio Lim Tanhu, Dy Ochay,
Alfonso Leonardo Ng Sua and Co Oyo. And respondent court is hereby
permanently enjoined from taking any further action in said civil case gave
and except as herein indicated. Costs against private respondent.
Makalintal, C.J., Fernando, Aquino and Concepcion Jr., JJ., concur.

23

G.R. No. 114398, October 24, 1997

CARMEN LIWANAG, PETITIONER, VS. THE HON. COURT OF APPEALS
AND THE PEOPLE OF THE PHILIPPINES, REPRESENTED BY THE
SOLICITOR
GENERAL,
RESPONDENTS.
DECISION
ROMERO, J.:
Petitioner was charged with the crime of estafa before the Regional Trial
Court (RTC), Branch 93, Quezon City, in an information which reads as
follows:

returned to Rosales. Consequently, Rosales gave several cash advances to

Liwanag
and
Tabligan
amounting
to
P633,650.00.
During the first two months, Liwanag and Tabligan made periodic visits to
Rosales to report on the progress of the transactions. The visits, however,
suddenly stopped, and all efforts by Rosales to obtain information
regarding
their
business
proved
futile.
Alarmed by this development and believing that the amounts she
advanced were being misappropriated, Rosales filed a case of estafa
against
Liwanag.

That on or between the month of May 19, 1988 and August, 1988 in
Quezon City, Philippines and within the jurisdiction of this Honorable Court,
the said accused, with intent of gain, with unfaithfulness, and abuse of
confidence, did then and there, willfully, unlawfully and feloniously defraud
one ISIDORA ROSALES, in the following manner, to wit: on the date and in
the place aforementioned, said accused received in trust from the offended
party cash money amounting to P536,650.00, Philippine Currency, with the
express obligation involving the duty to act as complainants agent in
purchasing local cigarettes (Philip Morris and Marlboro cigarettes), to resell
them to several stores, to give her commission corresponding to 40% of
the profits; and to return the aforesaid amount of offended party, but said
accused, far from complying her aforesaid obligation, and once in
possession thereof, misapplied, misappropriated and converted the same
to her personal use and benefit, despite repeated demands made upon
her, accused failed and refused and still fails and refuses to deliver and/or
return the same to the damage and prejudice of the said ISIDORA
ROSALES, in the aforementioned amount and in such other amount as may
be
awarded
under
the
provision
of
the
Civil
Code.

After trial on the merits, the trial court rendered a decision dated January
9, 1991, finding Liwanag guilty as charged. The dispositive portion of the
decision reads thus:

CONTRARY TO LAW.

WHEREFORE, in view of the foregoing, the judgment appealed from is

hereby affirmed with the correction of the nomenclature of the penalty
which should be: SIX (6) YEARS, EIGHT (8) MONTHS and TWENTY ONE (21)
DAYS of prision mayor, as minimum, to FOURTEEN (14) YEARS and EIGHT
(8) MONTHS of reclusion temporal, as maximum. In all other respects, the
decision
is
AFFIRMED.

The

antecedent

facts

are

as

follows:

Petitioner Carmen Liwanag (Liwanag) and a certain Thelma Tabligan went

to the house of complainant Isidora Rosales (Rosales) and asked her to join
them in the business of buying and selling cigarettes. Convinced of the
feasibility of the venture, Rosales readily agreed. Under their agreement,
Rosales would give the money needed to buy the cigarettes while Liwanag
and Tabligan would act as her agents, with a corresponding 40%
commission to her if the goods are sold; otherwise the money would be

WHEREFORE, the Court holds, that the prosecution has established the
guilt of the accused, beyond reasonable doubt, and therefore, imposes
upon the accused, Carmen Liwanag, an Indeterminate Penalty of SIX (6)
YEARS, EIGHT (8) MONTHS AND TWENTY ONE (21) DAYS OF PRISION
CORRECCIONAL TO FOURTEEN (14) YEARS AND EIGHT (8) MONTHS OF
PRISION MAYOR AS MAXIMUM, AND TO PAY THE COSTS.
The accused is likewise ordered to reimburse the private complainant the
sum of P526,650.00, without subsidiary imprisonment, in case of
insolvency.
SO ORDERED.
Said decision was affirmed with modification by the Court of Appeals in a
decision dated November 29, 1993, the decretal portion of which reads:

SO ORDERED.

24

Her motion for reconsideration having been denied in the resolution of

March 16, 1994, Liwanag filed the instant petition, submitting the following
assignment of errors:
1. RESPONDENT APPELLATE COURT GRAVELY ERRED IN AFFIRMING THE
CONVICTION OF THE ACCUSED-PETITIONER FOR THE CRIME OF ESTAFA,
WHEN CLEARLY THE CONTRACT THAT EXIST (sic) BETWEEN THE ACCUSEDPETITIONER AND COMPLAINANT IS EITHER THAT OF A SIMPLE LOAN OR
THAT OF A PARTNERSHIP OR JOINT VENTURE HENCE THE NON RETURN OF
THE MONEY OF THE COMPLAINANT IS PURELY CIVIL IN NATURE AND NOT
CRIMINAL.

May

(SGD
CARMEN

Liwanag advances the theory that the intention of the parties was to enter
into a contract of partnership, wherein Rosales would contribute the funds
while she would buy and sell the cigarettes, and later divide the profits
between them.[1] She also argues that the transaction can also be
interpreted as a simple loan, with Rosales lending to her the amount stated
on
an
installment
basis.[2]

Quezon

Court

of

Appeals

correctly

rejected

these

Quezon

City

&

(Sgd) Illegible

(sic)
LIWANAG

26

Signed

Thumbedmarked)

H.

Kaliraya

St.
City

in

the

presence

of:

(Sgd) Doming Z. Baligad

pretenses.

While factual findings of the Court of Appeals are conclusive on the parties
and not reviewable by the Supreme Court, and carry more weight when
these affirm the factual findings of the trial court, [3] we deem it more
expedient
to
resolve
the
instant
petition
on
its
merits.
Estafa is a crime committed by a person who defrauds another causing
him to suffer damages, by means of unfaithfulness or abuse of confidence,
or
of
false
pretenses
of
fraudulent
acts. [4]
From the foregoing, the elements of estafa are present, as follows: (1) that
the accused defrauded another by abuse of confidence or deceit; and (2)
that damage or prejudice capable of pecuniary estimation is caused to the
offended party or third party,[5] and it is essential that there be a fiduciary
relation between them either in the form of a trust, commission or
administration.[6]
The receipt signed by Liwanag states thus:

1988

Received from Mrs. Isidora P. Rosales the sum of FIVE HUNDRED TWENTY
SIX THOUSAND AND SIX HUNDRED FIFTY PESOS (P526,650.00) Philippine
Currency, to purchase cigarrets (sic) (Philip & Marlboro) to be sold to
customers. In the event the said cigarrets (sic) are not sold, the proceeds
of the sale or the said products (shall) be returned to said Mrs. Isidora P.
Rosales the said amount of P526,650.00 or the said items on or before
August
30,
1988.

2. RESPONDENT APPELLATE COURT GRAVELY ERRED IN NOT ACQUITTING

THE ACCUSED-PETITIONER ON GROUNDS OF REASONABLE DOUBT BY
APPLYING THE EQUIPOISE RULE.

The

19,

The language of the receipt could not be any clearer. It indicates that the
money delivered to Liwanag was for a specific purpose, that is, for the
purchase of cigarettes, and in the event the cigarettes cannot be sold, the
money
must
be
returned
to
Rosales.
Thus, even assuming that a contract of partnership was indeed entered
into by and between the parties, we have ruled that when money or
property have been received by a partner for a specific purpose (such as
that obtaining in the instant case) and he later misappropriated it, such
partner
is
guilty
of
estafa. [7]
Neither can the transaction be considered a loan, since in a contract of
loan once the money is received by the debtor, ownership over the same is
transferred.[8] Being the owner, the borrower can dispose of it for whatever
purpose
he
may
deem
proper.
In the instant petition, however, it is evident that Liwanag could not
dispose of the money as she pleased because it was only delivered to her

25

for a single purpose, namely, for the purchase of cigarettes, and if this was
not possible then to return the money to Rosales. Since in this case there
was no transfer of ownership of the money delivered, Liwanag is liable for
conversion under Art. 315, par. 1(b) of the Revised Penal Code.
WHEREFORE, in view of the foregoing, the appealed decision of the Court
of Appeals dated November 29, 1993, is AFFIRMED. Costs against
petitioner.
SO
ORDERED.
Melo,
Francisco,
and
Narvasa, C.J., (Chairman), on leave.

Panganiban,

JJ.,

concur.

26

G. R. No. 5840, September 17, 1910

THE UNITED STATES, PLAINTIFF AND APPELLEE, VS. EUSEBIO
CLARIN,
DEFENDANT
AND
APPELLANT.
DECISION
ARELLANO, C.J.:
Pedro Larin delivered to Pedro Tarug P172, in order that the latter, in
company with Eusebio Clarin and Carlos de Guzman, might buy and sell
mangoes, and, believing that he could make some money in this business,
the said Larin made an agreement with the three men by which the profits
were
to
be
divided
equally
between
him
and
them.
Pedro Tarug, Eusebio Clarin, and Carlos de Guzman did in fact trade in
mangoes and obtained P203 from the business, but did not comply with
the terms of the contract by delivering to Larin his half of the profits;
neither
did they render him any account of the capital.
Larin charged them with the crime of estafa, but the provincial fiscal
filed an information only against Eusebio Clarin in which he accused him of
appropriating to himself not only the P172 but also the share of the profits
that
belonged
to
Larin,
amounting
to
P15.50.
Pedro Tarug and Carlos de Guzman appeared in the case as witnesses and
assumed that the facts presented concerned the defendant and
themselves
together.
The trial court, that of First Instance of Pampanga, sentenced the
defendant, Eusebio Clarin, to six months' arresto mayor, to suffer the
accessory penalties, and to return to Pedro Larin P172, besides P30.50 as
his share of the profits, or to subsidiary imprisonment in case of
insolvency, and to pay the costs. The defendant appealed, and in
deciding his appeal we arrive at the following conclusions:

business of the purchase and sale of mangoes, and, even though he had
reserved the capital and conveyed only the usufruct of his money, it would
not devolve upon one of his three partners to return his capital to him, but
upon the partnership of which he himself formed part, or if it were to be
done by one of the three specifically, it would be Tarug, who, according to
the evidence, was the person who received the money directly from Larin.
The P172 having been received by the partnership, the business
commenced and profits accrued, the action that lies with the partner who
furnished the capital for the recovery of his money is not a criminal action
for estafa, but a civil one arising from the partnership contract for a
liquidation of the partnership and a levy on its assets if there should be
any.
No. 5 of article 535 of the Penal Code, according to which those are guilty
of estafa "who, to the prejudice of another, shall appropriate or misapply
any money, goods, or any kind of personal property which they may have
received as a deposit on commission for administration or in any other
character producing the obligation to deliver or return the same," (as, for
example, in commodatum, precarium, and other unilateral contracts which
require the return of the same thing received) does not include money
received for a partnership; otherwise the result would be that, if the
partnership, instead of obtaining profits, suffered losses, as it could not
be held liable civilly for the share of the capitalist partner who reserved
the ownership of the money brought in by him, it would have to answer to
the charge of estafa, for which it would be sufficient to argue that the
partnership had received the money under obligation to return it
We therefore freely acquit Eusebio Clarin, with the costs de oficio. The
complaint for estafa is dismissed without prejudice to the institution of a
civil
action.
Torres, Johnson, Moreland, and Trent, JJ., concur.

When 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, a contract is formed which is called
partnership.
(Art.
1665,
Civil
Code.)
When Larin put the P172 into the partnership which he formed with Tarug,
Clarin, and Guzman, he invested his capital in the risks or benefits of the

27

G. R. No. 16318, October 21, 1921

PANG LIM AND BENITO GALVEZ, PLAINTIFFS AND APPELLEES, VS.
LO SENG, DEFENDANT AND APPELLANT.
STREET, J.:
For several years prior to June 1, 1916, two of the litigating parties herein,
namely, Lo Seng and Pang Lim, Chinese residents of the City of Manila,
were partners, under the firm name of Lo Seng & Co., in the business of
running a distillery, known as "El Progreso," in the Municipality of
Paombong, in the Province of Bulacan. The land on which said distillery is
located as well as the buildings and improvements originally used in the
business were, at the time to which reference is now made, the property of
another Chinaman, who resides in Hongkong, named Lo Yao, who, in
September, 1911, leased the same to the firm of Lo Seng & Co. for the
term of three years.
Upon the expiration of this lease a new written contract, in the making of
which Lo Yao was represented by one Lo Shui as attorney in fact, became
effective whereby the lease was extended for fifteen years. The reason
why the contract was made for so long a period of time appears to have
been that the Bureau of Internal Revenue had required sundry expensive
improvements to be made in the distillery, and it was agreed that these
improvements should be effected at the expense of the lessees. In
conformity with this understanding many thousands of pesos were
expended by Lo Seng & Co., and later by Lo Seng alone, in enlarging and
improving the plant.
Among the provisions contained in said lease we note the following:
"Know all men by these presents:
*******
"1. That I, Lo Shui, as attorney in fact in charge of the properties of Mr. Lo
Yao of Hongkong, cede by way of lease for fifteen years more said distillery
'El Progreso' to Messrs. Pang Lim and Lo Seng (doing business under the
firm name of Lo Seng & Co.), after the termination of the previous contract,
because of the fact that they are required, by the Bureau of Internal
Revenue, to rearrange, alter and clean up the distillery.
"2. That all the improvements and betterments which they may introduce,
such as machinery, apparatus, tanks, pumps, boilers and buildings which

the business may require, shall be, after the termination of the fifteen
years of lease, for the benefit of Mr. Lo Yao, my principal, the buildings
being considered as improvements.
"3. That the monthly rent of said distillery is P200, as agreed upon in the
previous contract of September 11,1911, acknowledged before the notary
public D. Vicente Santos; and all modifications and repairs which may be
needed shall be paid for by Messrs. Pang Lim and Lo Seng.
"We, Pang Lim and Lo Seng, as partners in said distillery 'El Progreso,'
which we are at present conducting, hereby accept this contract in each
and all its parts, said contract to be effective upon the termination of the
contract of September 11, 1911."
Neither the original contract of lease nor the agreement extending the
same was inscribed in the property registry, for the reason that the estate
which is the subject of the lease has never at any time been so inscribed.
On June 1, 1916, Pang Lim sold all his interest in the distillery to his partner
Lo Seng, thus placing the latter in the position of sole owner; and on June
28, 1918, Lo Shui, again acting as attorney in fact of Lo Yao, executed and
acknowledged before a notary public a deed purporting to convey to Pang
Lim and another Chinaman named Benito Galvez, the entire distillery plant
including the land used in connection therewith. As in case of the lease this
document also was never recorded in the registry of property. Thereafter
Pang Lim and Benito Galvez demanded possession from Lo Seng, but the
latter refused to yield; and the present action of unlawful detainer was
thereupon initiated by Pang Lim and Benito Galvez in the court of the
justice of the peace of Paombong to recover possession of the premises.
From the decision of the justice of the peace the case was appealed to the
Court of First Instance, where judgment was rendered for the plaintiffs; and
the defendant thereupon appealed to the Supreme Court.
The case for the plaintiffs is rested exclusively on the provisions of article
1571 of the Civil Code, which reads in part as follows:
"ART. 1571. The purchaser of a leased estate shall be entitled to terminate
any lease in force at the time of making the sale, unless the contrary is
stipulated, and subject to the provisions of the Mortgage Law."
In considering this provision it may be premised that a contract of lease is
personally binding on all who participate in it regardless of whether it is
recorded or not, though of course the unrecorded lease creates no real
charge upon the land to which it relates. The Mortgage Law was devised

28

for the protection of third parties, or those who have not participated in the
contracts which are by that law required to be registered; and none of its
provisions with reference to leases interpose any obstacle whatever to the
giving of full effect to the personal obligations incident to such contracts,
so far as concerns the immediate parties thereto. This is rudimentary, and
the law appears to be so understood by all commentators, there being, so
far as we are aware, no authority suggesting the contrary. Thus, in the
commentaries of the authors Galindo and Escosura, on the Mortgage Law,
we find the following pertinent observation : "The Mortgage Law is enacted
in aid of and in respect to third persons only; it does not affect the relations
between the contracting parties, nor their capacity to contract. Any
question affecting the former will be determined by the dispositions of the
special law [i. e., the Mortgage Law], while any question affecting the latter
will be determined by the general law." (Galindo y Escosura, Comentarios a
la Legislation Hipotecaria, vol. I, p. 461.)
Although it is thus manifest that, under the Mortgage Law, as regards the
personal obligations expressed therein, the lease in question was from the
beginning, and has remained, binding upon all the parties theretoamong
whom is to be numbered Pang Lim, then a member of the firm of Lo Seng &
Co.this does not really solve the problem now before us, which is,
whether the plaintiffs herein, as purchasers of the estate, are at liberty to
terminate the lease, assuming that it was originally binding upon all parties
participating in it.
Upon this point the plaintiffs are undoubtedly supported, prima facie, by
the letter of article 1571 of the Civil Code; and the position of the
defendant derives no assistance from the mere circumstance that the
lease was admittedly binding as between the parties thereto.
The words "subject to the provisions of the Mortgage Law," contained in
article 1571, express a qualification which evidently has reference to the
familiar proposition that recorded instruments are effective against third
persons from the date of registration (Co-Tiongco vs. Co-Guia, 1 Phil.,
210) ; from whence it follows that a recorded lease must be respected by
any purchaser of the estate whomsoever. But there is nothing in the
Mortgage Law which, so far as we now see, would prevent a purchaser
from exercising the precise power conferred in article 1571 of the Civil
Code, namely, of terminating any lease which is unrecorded; nothing in
that law that can be considered as arresting the force of article 1571 as
applied to the lease now before us.

Article 1549 of the Civil Code has also been cited by the attorneys for the
appellant as supplying authority for the proposition that the lease in
question cannot be terminated by one who, like Pang Lim, has taken part in
the contract. That provision is practically identical in terms with the first
paragraph of article 23 of the Mortgage Law, being to the effect that
unrecorded leases shall be of no effect as against third persons; and the
same observation will suffice to dispose of it that was made by us above in
discussing the Mortgage Law, namely, that while it recognizes the fact that
an unrecorded lease is binding on all persons who participate therein, this
does not determine the question whether, admitting the lease to be so
binding, it can be terminated by the plaintiffs under article 1571.
Having thus disposed of the considerations which arise in relation with the
Mortgage Law, as well as article 1549 of the Civil Codeall of which, as we
have seen, are undecisivewe are brought to consider the aspect of the
case which seems to us conclusive. This is found in the circumstance that
the plaintiff Pang Lim has occupied a double role in the transactions which
gave rise to this litigation, namely, first, as one of the lessees; and
secondly, as one of the purchasers now seeking to terminate the lease.
These two positions are essentially antagonistic and incompatible. Every
competent person is by law bound to maintain in all good faith the integrity
of his own obligations; and no less certainly is he bound to respect the
rights of any person whom he has placed in his own shoes as regards any
contract
previously
entered
into
by
himself.
While yet a partner in the firm of Lo Seng & Co., Pang Lim participated in
the creation of this lease; and when he sold out his interest in that firm to
Lo Seng this operated as a transfer to Lo Seng of Pang Lim's interest in the
firm assets, including the lease; and Pang Lim cannot now be permitted, in
the guise of a purchaser of the estate, to destroy an interest derived from
himself, and for which he has received full value.
The bad faith of the plaintiffs in seeking to deprive the defendant of this
lease is strikingly revealed in the circumstance that prior to the acquisition
of this property Pang Lim had been partner with Lo Seng and Benito Galvez
an employee. Both therefore had been in relations of confidence with Lo
Seng and in that position had acquired knowledge of the possibilities of the
property and possibly an experience which would have enabled them, in
case they had acquired possession, to exploit the distillery with profit. On
account of his status as partner in the firm of Lo Seng & Co., Pang Lim
knew that the original lease had been extended for fifteen years; and he
knew the extent of valuable improvements that had been made thereon.
Certainly, as observed in the appellant's brief, it would be shocking to the

29

moral sense if the condition of the law were found to be such that Pang
Lim, after profiting by the sale of his interest in a business, worthless
without the lease, could intervene as purchaser of the property and
confiscate for his own benefit the property which he had sold for a valuable
consideration to Lo Seng. The sense of justice recoils before the mere
possibility
of
such
eventuality.
Above all other persons in business relations, partners are required to
exhibit towards each other the highest degree of good faith. In fact the
relation between partners is essentially fiduciary, each being considered in
law, as he is in fact, the confidential agent of the other. It is therefore
accepted as fundamental in equity jurisprudence that one partner cannot,
to the detriment of another, apply exclusively to his own benefit the results
of the knowledge and information gained in the character of partner. Thus,
it has been held that if one partner obtains in his own name and for his
own benefit the renewal of a lease on property used by the firm, to
commence at a date subsequent to the expiration of the firm's lease, the
partner obtaining the renewal is held to be a constructive trustee for the
firm as to such lease. (20 R. C. L., 878-882.) And this rule has even been
applied to a renewal taken in the name of one partner after the dissolution
of the firm and pending its liquidation. (16 R. C. L., 906; Knapp vs. Reed, 88
Neb., 754; 32 L. R. A. [N. S.], 869; Mitchell vs. Reed, 61 N. Y., 123; 19 Am.
Rep., 252.)
An additional consideration showing that the position of the plaintiff Pang
Lim in this case is untenable is deducible from articles 1461 and 1474 of
the Civil Code, which declare that every person who sells anything is bound
to deliver and warrant the subject-matter of the sale and is responsible to
the vendee for the legal and lawful possession of the thing sold. The
pertinence of these provisions to the case now under consideration is
undeniable, for among the assets of the partnership which Pang Lim
transferred to Lo Seng, upon selling out his interest in the firm to the latter,
was this very lease; and while it cannot be supposed that the obligation to
warrant recognized in the articles cited would nullify article 1571, if the
latter article had actually conferred on the plaintiffs the right to terminate
this lease, nevertheless said articles (1461,1474), in relation with other
considerations, reveal the basis of an estoppel which in our opinion
precludes Pang Lim from setting up his interest as purchaser of the estate
to the detriment of Lo Seng.
It will not escape observation that the doctrine thus applied is analogous to
the doctrine recognized in courts of common law under the head of
estoppel by deed, in accordance with which it is held that if a person,

having no title to land, conveys the same to another by some one or

another of the recognized modes of conveyance at common law, any title
afterwards acquired by the vendor will pass to the purchaser; and the
vendor is estopped as against such purchaser from asserting such afteracquired title. The indenture of lease, it may be further noted, was
recognized as one of the modes of conveyance at common law which
created this estoppel. (8 R. C. L., 1058, 1059.)
From what has been said it is clear that Pang Lim. having been a
participant in the contract of lease now in question, is not in a position to
terminate it: and this is a fatal obstacle to the maintenance of the action of
unlawful detainer by him. Moreover, it is fatal to the maintenance of the
action brought jointly by Pains Lim and Benito Galvez. The reason is that in
the action of unlawful detainer, under section 80 of the Code of Civil
Procedure, the only question that can be adjudicated is the right to
possession; and in order to maintain the action, in the form in which it is
here presented, the proof must show that occupant's possession is
unlawful, i. e., that he is unlawfully withholding possession after the
determination of the right to hold possession. In the case before us quite
the contrary appears; for, even admitting that Pang Lim and Benito Galvez
have purchased the estate from Lo Yao, the original landlord, they are, as
between themselves, in the position of tenants in common or owners pro
indiviso, according to the proportion of their respective contribution to the
purchase price. But it is well recognized that one tenant in common cannot
maintain a possessory action against his cotenant, since one is as much
entitled to have possession as the other. The remedy is ordinarily by an
action for partition. (Cornista vs. Ticson, 27 Phil., 80.) It follows that as Lo
Seng is vested with the possessory right as against Pang Lim, he cannot be
ousted either by Pang Lim or Benito Galvez. Having lawful possession as
against one cotenant, he is entitled to retain it against both. Furthermore,
it is obvious that partition proceedings could not be maintained at the
instance of Benito Galvez as against Lo Seng, since partition can only be
effected where the partitioners are cotenants, that is, have an interest of
an identical character as among themselves. (30 Cyc, 178-180.) The
practical result is that both Pang Lim and Benito Galvez are bound to
respect Lo Seng's lease, at least in so far as the present action is
concerned.
We have assumed in the course of the preceding discussion that the deed
of sale under which the plaintiffs acquired the rights of Lo Yao, the owner of
the fee, is competent proof in behalf of the plaintiffs. It is, however,
earnestly insisted by the attorney for Lo Seng that this document, having
never been recorded in the property registry, cannot, under article 389 of

30

the Mortgage Law, be used in court against him because as to said

instrument he is a third party. The important question thus raised is not
absolutely necessary to the decision of this case, and we are inclined to
pass it without decision, not only because the question does not seem to
have been ventilated in the Court of First Instance but for the further
reason that we have not had the benefit of any written brief in this case in
behalf of the appellees.
The judgment appealed from will be reversed, and the defendant will be
absolved from the complaint. It is so ordered, without express adjudication
as to costs.
Johnson, Araullo, Avancena, and Villamor, JJ., concur.

31

CATALAN vs. GATCHALIAN

105 Phil 1270, G.R. No. L-11648, April 22, 1959
FACTS:
Catalan and Gatchalian are partners. They mortgaged two lots to Dr.
Maravetogether with the improvements thereon to secure a credit from the
latter. Thepartnership failed to pay the obligation. The properties were
sold to Dr. Marave at apublic auction. Catalan redeemed the property and
he contends that title should becancelled and a new one must be issued in
his name.
ISSUE:
Did Catalans redemption of the properties make him the absolute owner of
thelands?
HELD:
No. Under Article 1807 of the NCC every partner becomes a trustee for
hiscopartner with regard to any benefits or profits derived from his act as a
partner.Consequently, when Catalan redeemed the properties in question,
he became a trusteeand held the same in trust for his copartner
Gatchalian, subject to his right to demandfrom the latter his contribution to
the amount of redemption.

32

G.R. No. 84197, July 28, 1989

PIONEER INSURANCE & SURETY CORPORATION, PETITIONER, VS.
THE HON. COURT OF APPEALS, BORDER MACHINERY & HEAVY
EQUIPMENT, INC., (BORMAHECO), CONSTANCIO M. MAGLANA AND
JACOB
S.
LIM
RESPONDENTS.
[G.R.

NO.

84157.

JULY

28,

1989]

JACOB S. LIM PETITIONER, VS. COURT OF APPEALS, PIONEER

INSURANCE AND SURETY CORPORATION, BORDER MACHINERY AND
HEAVY EQUIPMENT CO., INC., FRANCISCO AND MODESTO
CERVANTES AND CONSTANCIO MAGLANA, RESPONDENTS.
DECISION
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
plaintiff's 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 him 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 P151,000.00, 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 P184,878.74 with interest from the filing of the crosscomplaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P184,878.84 with interest from filing of the
cross-complaints until the amount is fully paid; plus moral and exemplary
damages in the amount of P50,000.00 for each of the two Cervanteses.

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

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

xxx

xxx

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

against defendants Bormaheco, the Cervanteses and Constancio B.
Maglana, is dismissed. Instead, plaintiff is required to indemnify the
defendants Bormaheco and the Cervanteses the amount of P20,000.00 as
attorney's fees and the amount of P4,379.21, per year from 1966 with legal
rate of interest up to the time it is paid.
"Furthermore, the plaintiff is required to pay Constancio B. Maglana the
amount of P20,000.00 as attorney's fees and costs.
"No moral or exemplary damages is awarded against plaintiff for this action
was filed in good faith. The fact that the properties of the Bormaheco and
the Cervanteses were attached and that they were required to file a
counterbond in order to dissolve the attachment, is not an act of bad faith.
When a man tries to protect his rights, he should not be saddled with moral
or exemplary damages. Furthermore, the rights exercised were provided
for in the Rules of Court, and it was the court that ordered it, in the
exercise of its discretion.
"No damage is decided against Malayan Insurance Company, Inc., the
third-party defendant, for it only secured the attachment prayed for by the
plaintiff Pioneer. If an insurance company would be liable for damages in
performing an act which is clearly within its power and which is the reason
for its being, then nobody would engage in the insurance business. No
further claim or counter-claim for or against anybody is declared by this
Court." (Rollo - G.R. No. 24197, pp. 15-16)
In 1965, Jacob S. Lim (petitioner in G.R. No. 84157) was engaged in the
airline business as owner-operator of Southern Air Lines (SAL) a single
proprietorship.
On May 17, 1965, at Tokyo, Japan, Japan Domestic Airlines (JDA) and Lim
entered into and executed a sales contract (Exhibit A) for the sale and
purchase of two (2) DC-3A 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.

33

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 a 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 coowners 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 crossclaims against Lim alleging that they were not privies to the contracts
signed by Lim and, by way of counterclaim, sought for damages for being
exposed to litigation and for recovery of the sums of money they advanced
to Lim for the purchase of the aircrafts in question.
After trial on the merits, a decision was rendered holding Lim liable to pay
Pioneer but dismissed Pioneer's complaint against all other defendants.
As stated earlier, the appellate court modified the trial court's decision in
that the plaintiff's 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 plaintiff's 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, plaintiff's 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

34

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. Germana, 1 NW 2d
424; Weber v. City of Cheye, 97 P. 2d 667, 669, quoting 47 C.V. 35).
"Based on the foregoing premises, plaintiff Pioneer cannot be considered
as the real party in interest as it has already been paid by the reinsurer the
sum of P295,000.00 - the bulk of defendants alleged obligation to Pioneer.
"In addition to the said proceeds of the reinsurance received by plaintiff
Pioneer from its reinsurer, the former was able to foreclose extra-judicially
one of the subject airplanes and its spare engine, realizing the total
amount of P37,050.00 from the sale of the mortgaged chattels. Adding the
sum of P37,050..00. to the proceeds of the reinsurance amounting to
P295,000.00, it is patent that plaintiff has been overpaid in the amount of
P33,383.72 considering that the total amount it had paid to JDA totals to
only P298,666.28. To allow plaintiff Pioneer to recover from defendants the
amount in excess of P298,666.28 would be tantamount to unjust
enrichment as it has already been paid by the reinsurance company of the
amount plaintiff has paid to JDA as surety of defendant Lim vis-a-vis
defendant Lim's liability to JDA. Well settled is the rule that no person
should unjustly enrich himself at the expense of another (Article 22, New
Civil Code)." (Rollo - 84197, pp. 24-25)
The petitioner contends that -- (1) it is at a loss where respondent court
based its finding that petitioner was paid by its reinsurer in the aforesaid
amount, as this matter has never been raised by any of the parties herein
both in their answers in the court below and in their respective briefs with
respondent court; (Rollo, p. 11) (2) even assuming hypothetically that it
was paid by its reinsurer, still none of the respondents had any interest in
the matter since the reinsurance is strictly between the petitioner and the
re-insurer pursuant to section 91 of the Insurance Code; (3) pursuant to the
indemnity agreements, the petitioner is entitled to recover from
respondents Bormaheco and Maglana; and (4) the principle of unjust
enrichment is not applicable considering that whatever amount he would
recover from the co-indemnitor will be paid to the reinsurer.

The records belie the petitioner's contention that the issue on the
reinsurance money was never raised by the parties.
A cursory reading of the trial court's lengthy decision shows that two of the
issues threshed out were:
xxx

xxx

xxx

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

35

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. Gradana and Gentero, 18 Phil. Rep. 484;
Luchauco v. Limjuco and Gonzalo, 19 Phil. Rep. 12; Filipinas Industrial
Corporation v. San Diego, G.R. No. L-22347, 1968, 23 SACRA 706, 710714.'"
"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 2d 925.

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."
(Underscoring supplied)
It is clear from the records that Pioneer sued in its own name and not as an
attorney-in-fact of the reinsurer.
Accordingly, the appellate court did not commit a reversible error in
dismissing the petitioner's complaint as against the respondents for the
reason that the petitioner was not the real party in interest in the
complaint and, therefore, has no cause of action against the respondents.
Nevertheless, the petitioner argues that the appeal as regards the counter
indemnitors should not have been dismissed on the premise that the
evidence on record shows that it is entitled to recover from the counter
indemnitors. It does not, however, cite any grounds except its allegation
that respondent "Maglana's defense and evidence are certainly incredible"
(p. 12, Rollo) to back up its contention.

"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)"

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:

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

"Apart from the foregoing proposition, the indemnity agreement ceased to

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

"Art. 2207. If the plaintiff's 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

Testimonies of defendants Francisco Cervantes and Modesto Cervantes.

36

"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 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, extinguished 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 x x x shall be due and payable on the 26th
day xxx 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 xxx shall be due and payable on
the 4th day xxx 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

37

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 documents. The consequence of this
was the extinguishments 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 of 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.
"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 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:
"1. 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 of P151,000.00 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
P184,878.74."
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.

38

Perryman, 119 P. 229, 29 Okl. 615, Ann.Cas. 1913A 1065). Thus, where
persons associate themselves together under articles to purchase property
to carry on a business, and their organization is so defective as to come
short of creating a corporation within the statute, they become in legal
effect partners inter se, and their rights as members of the company to the
property acquired by the company will be recognized (Smith v. Schoodoc
Pond Packing Co., 84 A. 268, 109 Me. 555; Whipple v. Parker, 29 Mich. 369).
So, where certain persons associated themselves as a corporation for the
development of land for irrigation purposes, and each conveyed land to the
corporation, and two of them contracted to pay a third the difference in the
proportionate value of the land conveyed by him, and no stock was ever
issued in the corporation, it was treated as a trustee for the associates in
an action between them for an accounting, and its capital stock was
treated as partnership assets, sold, and the proceeds distributed among
them in proportion to the value of the property contributed by each (Shorb
v. Beaudry, 56 Cal. 446). However, such a relation does not necessarily
exist, for ordinarily persons cannot be made to assume the relation of
partners, as between themselves, when their purpose is that no
partnership shall exist (London Assur. Corp. v. Drennen, Minn., 6 S.Ct. 442,
116 U. S. 461, 472, 29 L.Ed. 688), and it should be implied only when
necessary to do justice between the parties; thus, one who takes no part
except to subscribe for stock in a proposed 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) (Underlining supplied)
In the instant case, it is to be noted that the petitioner was declared nonsuited for his failure to appear during the pre-trial 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 representations to them. This
gives credence to the cross-claims 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:
"x x x 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 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
P178,997.14 as evidenced by a statement of accounts, the latter ignored,

39

omitted and refused to comply with them." (Record on Appeal, pp. 341342)
Applying therefore the principles of law earlier cited to the facts of the
case, necessarily, no de facto partnership was created among the parties
which would entitle the petitioner to a reimbursement of the supposed
losses of the proposed corporation. The record shows that the petitioner
was acting on his own and not in behalf of his other would-be incorporators
in transacting the sale of the airplanes and spare parts.
WHEREFORE, the instant petitions are DISMISSED.
decision of the Court of Appeals is AFFIRMED.

The questioned

SO ORDERED.
Fernan,
C.J.,
(Chairman),
Feliciano, J., no part.

Bidin,

and

Cortes,

JJ.,

concur.

40

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

EVANGELISTA & CO., DOMINGO C. EVANGELISTA, JR., CONCHITA B.
NAVARRO AND LEONARDA ATIENZA ABAD SANTOS, PETITIONERS,
VS.
ESTRELLA
ABAD
SANTOS,
RESPONDENT.
DECISION
MAKALINTAL,ACTING CJ.:
On October 9, 1954 a co-partnership was formed under the name of
"Evangelista & Co." On June 7, 1955 the Articles of Co-partnership were
amended so as to include herein respondent, Estrella Abad Santos, as
industrial partner, with herein petitioners Domingo C. Evangelista, Jr.,
Leonardo Atienza Abad Santos and Conchita P. Navarro, the original
capitalist partners, remaining in that capacity, with a contribution of
P17,500 each. The amended Articles provided, inter alia, that "the
contribution of Estrella Abad Santos consists of her industry being an
industrial partner"; and that the profits and losses "shall be divided and
distributed among the partners . . . in the proportion of 70% for the first
three partners, Domingo C. Evangelista, Jr., Conchita P. Navarro and
Leonardo Atienza Abad Santos to be divided among them equally; and 30%
for the fourth partner, Estrella Abad Santos."
On December 17, 1963 herein respondent filed suit against the three other
partners in the Court of First Instance of Manila, alleging that the
partnership, which was also made a party-defendant, had been paying
dividends to the partners except to her; and that notwithstanding her
demands the defendants had refused and continued to refuse and let her
examine the partnership books or to give her information regarding the
partnership affairs to pay her any share in the dividends declared by the
partnership. She therefore prayed that the defendants be ordered to
render an accounting to her of the partnership business and to pay her
corresponding share in the partnership profits after such accounting, plus
attorney's fees and costs.
The defendants, in their answer, denied ever having declared dividends or
distributed profits of the partnership; denied likewise that the plaintiff ever
demanded that she be allowed to examine the partnership books; and by
way of affirmative defense alleged that the amended Articles of Copartnership did not express the true agreement of the parties, which was
that the plaintiff was not an industrial partner; that she did not in fact
contribute industry to the partnership; and that her share of 30% was to be

based on the profits which might be realized by the partnership only until
full payment of the loan which it had obtained in December, 1955 from the
Rehabilitation Finance Corporation in the sum of P30,000, for which the
plaintiff had signed a promisory note as co-maker and mortgaged her
property as security.
The parties are in agreement that the main issue in this case is "whether
the plaintiff-appellee (respondent here) is an industrial partner as claimed
by her or merely a profit sharer entitled to 30% of the net profits that may
be realized by the partnership from June 7, 1955 until the mortgage loan
from the Rehabilitation Finance Corporation shall be fully paid, as claimed
by appellants (herein petitioners)." On that issue the Court of First Instance
found for the plaintiff and rendered judgment "declaring her an industrial
partner of Evangelista & Co.; ordering the defendants to render an
accounting of the business operations of the (said) partnership . . . from
June 7, 1955; to pay the plaintiff such amounts as may be due as her share
in the partnership profits and/or dividends after such an accounting has
been properly made; to pay plaintiff attorney's fees in the sum of
P2,000.00 and the costs of this suit."
The defendants appealed to the Court of Appeals, which thereafter
affirmed judgment of the court a quo.
In the petition before Us the petitioners have assigned the following errors:
"I. The Court of Appeals erred in finding that the respondent is an industrial
partner of Evangelista & Co., notwithstanding the admitted fact that since
1954 and until after promulgation of the decision of the appellate court the
said respondent was one of the judges of the City Court of Manila, and
despite its finding that respondent has been paid for services allegedly
contributed by her to the partnership. In this connection the Court of
Appeals erred:
(A In finding that the 'amended Articles of Co-partnership,' Exhibit 'A' is
) conclusive evidence that respondent was in fact made an industrial
partner of Evangelista & Co.

(B In not finding that a portion of respondent's testimony quoted in the

) decision proves that said respondent did not bind herself to contribute
her industry, and she could not, and in fact did not, because she was

41

one of the judges of the City Court of Manila since 1954.

(C In finding that respondent did in fact contribute her industry, despite

) the appellate court's own finding that she has been paid for the
services allegedly rendered by her, as well as for the loans of money
made by her to the partnership.
"II. The lower court erred in not finding that in any event the respondent
was lawfully excluded from, and deprived of, her alleged share, interest
and participation, as an alleged industrial partner, in the partnership
Evangelista & Co., and in its profits or net income.
"III. The Court of Appeals erred in affirming in toto the decision of the trial
court whereby respondent was declared an industrial partner of petitioner
partnership, and petitioners were ordered to render an accounting of the
business operation of the partnership from June 7, 1955, and to pay the
respondent her alleged share in the net profits of the partnership plus the
sum of P2,000.00 as attorney's fees and the costs of the suit, instead of
dismissing respondent's complaint, with costs, against the respondent."
It is quite obvious that the questions raised in the first assigned error refer
to the facts as found by the Court of Appeals. The evidence presented by
the parties as the trial in support of their respective positions on the issue
of whether or not the respondent was an industrial partner was thoroughly
analyzed by the Court of Appeals on its decision, to the extent of
reproducing verbatim therein the lengthy testimony of the witnesses.
It is not the function of the Supreme Court to analyze or weigh such
evidence all over again, its jurisdiction being limited to reviewing errors of
law that might have been committed by the lower court. It should be
observed, in this regard, that the Court of Appeals did not hold that the
Articles of Co-partnership, identified in the record as Exhibit "A", was
conclusive evidence that the respondent was an industrial partner of the
said company, but considered it together with other factors, consisting of
both testimonial and documentary evidences, in arriving at the factual
conclusion expressed in the decision.
The findings of the Court of Appeals on the various points raised in the first
assignment of error are hereunder reproduced if only to demonstrate that
the same were made after a thorough analysis of the evidence, and hence
are beyond this Court's power of review.

"The aforequoted findings of the lower Court are assailed under Appellants'
first assigned error, wherein it is pointed out that 'Appellee's documentary
evidence does not conclusively prove that appellee was in fact admitted by
appellants as industrial partner of Evangelista & Co.' and that 'The grounds
relied upon by the lower Court are untenable' (Pages 21 and 26,
Appellant's Brief).
"The first point refers to Exhibits A, B, C, K, K-1, J, N, and S, appellants'
complaint being that 'In finding that the appellee is an industrial partner of
appellant Evangelista & Co., - herein referred to as the partnership the
lower court relied mainly on the appellee's documentary evidence, entirely
disregarding facts and circumstances established by appellants' evidence
which contradict the said finding' (Page 21, Appellants' Brief). The lower
court could not have done otherwise but rely on the exhibits just
mentioned, first, because appellants have admitted their genuineness and
due execution, hence they were admitted without objection by the lower
court when appellee rested her case and, secondly, the said exhibits
indubitably show that appellee is an industrial partner of appellant
company. Appellants are virtually estopped from attempting to detract
from the probative force of the said exhibits because they all bear the
imprint of their knowledge and consent, and there is no credible showing
that they ever protested against or opposed their contents prior to the
filing of their answer to appellee's complaint. As a matter of fact, all that
appellant Evangelista, Jr., would have us believe - as against the
cumulative force of appellee's aforesaid documentary evidence is that
appellee's Exhibit 'A', as confirmed and corroborated by the other exhibits
already mentioned, does not express the true intent and agreement of the
parties thereto, the real understanding between them being that appellee
would be merely a profit sharer entitled to 30% of the net profits that may
be realized between the partners from June 7, 1955 until the mortgage
loan of P30,000.00 to be obtained from the RFC shall have been fully paid.
This version, however, is discredited not only by the aforesaid
documentary evidence brought forward by the appellee, but also by the
fact that from June 7, 1955 up to the filing of their answer to the complaint
on February 8, 1964 or a period of over eight (8) years appellants did
nothing to correct the alleged false agreement of the parties contained in
Exhibit 'A'. It is thus reasonable to suppose that, had appellee not filed the
present action, appellants would not have advanced this obvious
afterthought that Exhibit 'A' does not express the true intent and
agreement of the parties thereto.
"At pages 32-33 of appellants' brief, they also make much of the argument
that there is an overriding fact which proves that the parties to the

42

Amended Articles of Partnership, Exhibit 'A', did not contemplate to make

the appellee Estrella Abad Santos, an industrial partner of Evangelista &
Co. It is an admitted fact that since before the execution of the amended
articles of partnership, Exhibit 'A', the appellee Estrella Abad Santos has
been, and up to the present time still is, one of the judges of the City Court
of Manila, devoting all her time to the performance of the duties of her
public office. This fact proves beyond peradventure that it was never
contemplated between the parties, for she could not lawfully contribute
her full time and industry which is the obligation of an industrial partner
pursuant to Art. 1789 of the Civil Code."
The Court of Appeals then proceeded to consider appellee's testimony on
this point, quoting it in the decision, and then concluded as follows:
"One cannot read appellee's testimony just quoted without gaining the
very definite impression that, even as she was and still is a Judge of the
City Court of Manila, she has rendered services for appellants without
which they would not have had the wherewithal to operate the business for
which appellant company was organized. Article 1767 of the New Civil
Code which provides that 'By contract of partnership two or more persons
bind themselves, to contribute money, property, or industry to a common
fund, with the intention of dividing the profits among themselves,' does not
specify the kind of industry that a partner may thus contribute, hence the
said services may legitimately be considered as appellee's contribution to
the common fund. Another article of the same Code relied upon by
appellants reads:
'ART. 1789. An industrial partner cannot engage in business for himself,
unless the partnership expressly permits him to do so; and if he should do
so, the capitalist partners may either exclude him from the firm or avail
themselves of the benefits which he may have obtained in violation of this
provision, with a right to damages in either case.'
It is not disputed that the prohition against an industrial partner engaging
in business for himself seeks to prevent any conflict of interest between
the industrial partner and the partnership, and to insure faithful
compliance by said partner with his prestation. There is no pretense,
however, even on the part of appellants that appellee is engaged in any
business antagonistic to that of appellant company, since being a Judge of
one of the branches of the City Court of Manila can hardly be characterized
as a business. That appellee has faithfully complied with her prestation
with respect to appellants is clearly shown by the fact that it was only after
the filing of the complaint in this case and the answer thereto that

appellants exercised their right of exclusion under the codal article just
mentioned by alleging in their Supplemental Answer dated June 29, 1964 or after around nine (9) years from June 7, 1955 - "That subsequent to the
filing of defendants' answer to the complaint, the defendants reached an
agreement whereby the herein plaintiff has been excluded from, and
deprived of, her alleged share, interest or participation, as an alleged
industrial partner, in the defendant partnership and/or in its net profits or
income, on the ground that plaintiff has never contributed her industry to
the partnership, and instead she has been and still is a judge of the City
Court (formerly Municipal Court) of the City of Manila, devoting her time to
the performance of her duties as such judge and enjoying the privileges
and emoluments appertaining to the said office, aside from teaching in law
school in Manila, without the express consent of the herein defendants'
(Record On Appeal, pp. 24-25). Having always known appellee as a City
Judge even before she joined appellant company on June 7, 1955 as an
industrial partner, why did it take appellants so many years before
excluding her from said company as per aforequoted allegations? And how
can they reconcile such exclusion with their main theory that appellee has
never been such a partner because 'The real agreement evidenced by
Exhibit 'A' was to grant the appellee a share of 30% of the net profits which
the appellant partnership may realize from June 7, 1955, until the
mortgage loan of P30,000.00 obtained from the Rehabilitation Finance
Corporation shall have been fully paid.' (Appellants Brief, p. 38).
"What has gone before persuades us to hold with the lower Court that
appellee is an industrial partner of appellant company, with the right to
demand for a formal accounting and to receive her share in the net profit
that may result from such an accounting, to which right appellants take
exception under their second assigned error. Our said holding is based on
the following article of the New Civil Code:
'ART. 1899. Any partner shall have the right to a formal account as to
partnership affairs:
(1) If he is wrongfully excluded from the partnership business or possession
of its property by his co-partners;
(2) If the right exists under the terms of any agreement;
(3) As provided by Article 1807;
(4) Whenever other circumstances render it just and reasonable."

43

We find no reason in this case to depart from the rule which limits this
Court's appellate jurisdiction to reviewing only errors of law, accepting as
conclusive the factual findings of the lower court upon its own assessment
of the evidence.
The judgment appealed from is affirmed, with costs.
Zaldivar, Ruiz Castro, Fernando, Teehankee, Barredo, Makasiar, Antonio,
and Esguerra, JJ., concur.

44

G.R. No. L-59956, October 31, 1984

ISABELO MORAN, JR., PETITIONER, VS. THE HON. COURT OF
APPEALS
AND
MARIANO
E.
PECSON,
RESPONDENTS.
DECISION
GUTIERREZ, JR., J.:
This is a petition for review on certiorari of the decision of the respondent
Court of Appeals which ordered petitioner Isabelo Moran, Jr. to pay
damages to respondent Mariano E. Pecson.
As found by the respondent Court of Appeals, the undisputed facts indicate
that:
xxxxxxxxx
"x x x on February 22, 1971 Pecson and Moran entered into an agreement
whereby both would contribute P15,000 each for the purpose of printing
95,000 posters (featuring the delegates to the 1971 Constitutional
Convention), with Moran actually supervising the work; that Pecson would
receive a commission of P1,000 a month starting on April 15, 1971 up to
December 15, 1971; that on December 15, 1971, a liquidation of the
accounts in the distribution and printing of the 95,000 posters would be
made; that Pecson gave Moran P10,000 for which the latter issued a
receipt; that only a few posters were printed; that on or about May 28,
1971, Moran executed in favor of Pecson a promissory note in the amount
of P20,000 payable in two equal installments (P10,000 payable on or
before June 15, 1971 and P10,000 payable on or before June 30, 1971), the
whole sum becoming due upon default in the payment of the first
installment on the date due, complete with the costs of collection."
Private respondent Pecson filed with the Court of First Instance of Manila an
action for the recovery of a sum of money and alleged in his complaint
three (3) causes of action, namely: (1) on the alleged partnership
agreement, the return of his contribution of P10,000.00, payment of his
share in the profits that the partnership would have earned, and, payment
of unpaid commission; (2) on the alleged promissory note, payment of the
sum of P20,000.00; and, (3) moral and exemplary damages and attorney's
fees.
After the trial, the Court of First Instance held that:

"From the evidence presented it is clear in the mind of the court that by
virtue of the partnership agreement entered into by the parties - plaintiff
and defendant - the plaintiff did contribute P10,000.00, and another sum of
P7,000.00 for the Voice of the Veteran or Delegate Magazine. Of the
expected 95,000 copies of the posters, the defendant was able to print
2,000 copies only all of which, however, were sold at P5.00 each. Nothing
more was done after this and it can be said that the venture did not really
get off the ground. On the other hand, the plaintiff failed to give his full
contribution of P15,000.00. Thus, each party is entitled to rescind the
contract which right is implied in reciprocal obligations under Article 1385
of the Civil Code whereunder 'rescission creates the obligation to return the
things which were the object of the contract x x x.
"WHEREFORE, the court hereby renders judgment ordering defendant
Isabelo C. Moran, Jr. to return to plaintiff Mariano E. Pecson the sum of
P17,000.00, with interest at the legal rate from the filing of the complaint
on June 19, 1972, and the costs of the suit.
"For insufficiency of evidence, the counterclaim is hereby dismissed."
From this decision, both parties appealed to the respondent Court of
Appeals. The latter likewise rendered a decision against the petitioner. The
dispositive portion of the decision reads:
"PREMISES CONSIDERED, the decision appealed from is hereby SET ASIDE,
and a new one is hereby rendered, ordering defendant-appellant Isabelo C.
Moran, Jr. to pay plaintiff-appellant Mariano E. Pecson:
"(a) Forty-seven thousand five hundred (P47,500) (the amount that could
have accrued to Pecson under their agreement);
"(b) Eight thousand (P8,000), (the commission for eight months);
"(c) Seven thousand (P7,000) (as a return of Pecson's investment for the
Veteran's Project);
"(d) Legal interest on (a), (b) and (c) from the date the complaint was filed
(up to the time payment is made)"
The petitioner contends that the respondent Court of Appeals decided
questions of substance in a way not in accord with law and with Supreme
Court decisions when it committed the following errors:
I

45

THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING

PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E.
PECSON IN THE SUM OF P47,500 AS THE SUPPOSED EXPECTED PROFITS
DUE HIM.
II
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING
PETITIONER ISABELO C. MORAN, JR. LIABLE TO RESPONDENT MARIANO E.
PECSON IN THE SUM OF P8,000, AS SUPPOSED COMMISSION IN THE
PARTNERSHIP ARISING OUT OF PECSON'S INVESTMENT.
III
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN HOLDING
PETITIONER ISABELO C. MORAN, JR LIABLE TO RESPONDENT MARIANO E.
PECSON IN THE SUM OF P7,000 AS A SUPPOSED RETURN OF INVESTMENT
IN A MAGAZINE VENTURE.
IV
ASSUMING WITHOUT ADMITTING THAT PETITIONER IS AT ALL LIABLE FOR
ANY AMOUNT, THE HONORABLE COURT OF APPEALS DID NOT EVEN OFFSET
PAYMENTS ADMITTEDLY RECEIVED BY PECSON FROM MORAN.
V
THE HONORABLE COURT OF APPEALS GRIEVOUSLY ERRED IN NOT
GRANTING THE PETITIONER'S COMPULSORY COUNTERCLAIM FOR
DAMAGES.
The first question raised in this petition refers to the award of P47,500.00
as the private respondent's share in the unrealized profits of the
partnership. The petitioner contends that the award is highly speculative.
The petitioner maintains that the respondent court did not take into
account the great risks involved in the business undertaking.
We agree with the petitioner that the award of speculative damages has no
basis in fact and law.

There is no dispute over the nature of the agreement between the

petitioner and the private respondent. It is a contract of partnership. The
latter in his complaint alleged that he was induced by the petitioner to
enter into a partnership with him under the following terms and
conditions:
"1. That the partnership will print colored posters of the delegates to the
Constitutional Convention;
"2. That they will invest the amount of Fifteen Thousand Pesos
(P15,000.00) each;
"3. That they will print Ninety Five Thousand (95,000) copies of the said
posters;
"4. That plaintiff will receive a commission of One Thousand Pesos
(P1,000.00) a month starting April 15, 1971 up to December 15, 1971;
"5. That upon the termination of the partnership on December 15, 1971, a
liquidation of the account pertaining to the distribution and printing of the
said 95,000 posters shall be made."
The petitioner on the other hand admitted in his answer the existence of
the partnership.
The rule is, when a partner who has undertaken to contribute a sum of
money fails to do so, he becomes a debtor of the partnership for whatever
he may have promised to contribute (Art. 1786, Civil Code) and for
interests and damages from the time he should have complied with his
obligation (Art. 1788, Civil Code). Thus in Uy v. Puzon (79 SCRA 598), which
interpreted Art. 2200 of the Civil Code of the Philippines, we allowed a total
of P200,000.00 compensatory damages in favor of the appellee because
the appellant therein was remiss in his obligations as a partner and as
prime contractor of the construction projects in question. This case was
decided on a particular set of facts. We awarded compensatory damages in
the Uy case because there was a finding that the "constructing business is
a profitable one and that the UP construction company derived some
profits from its contractors in the construction of roads and bridges despite
its deficient capital." Besides, there was evidence to show that the
partnership made some profits during the periods from July 2, 1956 to
December 31, 1957 and from January 1, 1958 up to September 30, 1959.
The profits on two government contracts worth P2,327,335.76 were not
speculative. In the instant case, there is no evidence whatsoever that the
partnership between the petitioner and the private respondent would have

46

been a profitable venture. In fact, it was a failure doomed from the start.
There is therefore no basis for the award of speculative damages in favor
of the private respondent.
Furthermore, in the Uy case, only Puzon failed to give his full contribution
while Uy contributed much more than what was expected of him. In this
case, however, there was mutual breach. Private respondent failed to give
his entire contribution in the amount of P15,000.00. He contributed only
P10,000.00. The petitioner likewise failed to give any of the amount
expected of him. He further failed to comply with the agreement to print
95,000 copies of the posters. Instead, he printed only 2,000 copies.
Article 1797 of the Civil Code provides:
"The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed
upon, the share of each in the losses shall be in the same proportion."
Being a contract of partnership, each partner must share in the profits and
losses of the venture. That is the essence of a partnership. And even with
an assurance made by one of the partners that they would earn a huge
amount of profits, in the absence of fraud, the other partner cannot claim a
right to recover the highly speculative profits. It is a rare business venture
guaranteed to give 100% profits. In this case, on an investment of
P15,000.00, the respondent was supposed to earn a guaranteed P1,000,00
a month for eight months and around P142,500.00 on 95,000 posters
costing P2.00 each but 2,000 of which were sold at P5.00 each. The
fantastic nature of expected profits is obvious. We have to take various
factors into account. The failure of the Commission on Elections to proclaim
all the 320 candidates of the Constitutional Convention on time was a
major factor. The petitioner used his best business judgment and felt that it
would be a losing venture to go on with the printing of the agreed 95,000
copies of the posters. Hidden risks in any business venture have to be
considered.
It does not follow however that the private respondent is not entitled to
recover any amount from the petitioner. The records show that the private
respondent gave P10,000.00 to the petitioner. The latter used this amount
for the printing of 2,000 posters at a cost of P2.00 per poster or a total
printing cost of P4,000.00. The records further show that the 2,000 copies
were sold at P5.00 each. The gross income therefore was P10,000.00.
Deducting the printing costs of P4,000.00 from the gross income of
P10,000.00 and with no evidence on the cost of distribution, the net profits

amount to only P6,000.00. This net profit of P6,000.00 should be divided

between the petitioner and the private respondent. And since only
P4,000.00 was used by the petitioner in printing the 2,000 copies, the
remaining P6,000.00 should therefore be returned to the private
respondent.
Relative to the second alleged error, the petitioner submits that the award
of P8,000.00 as Pecson's supposed commission has no justifiable basis in
law.
Again, we agree with the petitioner.
The partnership agreement stipulated that the petitioner would give the
private respondent a monthly commission of P1,000.00 from April 15, 1971
to December 15, 1971 for a total of eight (8) monthly commissions. The
agreement does not state the basis of the commission. The payment of the
commission could only have been predicated on relatively extravagant
profits. The parties could not have intended the giving of a commission
inspite of loss or failure of the venture. Since the venture was a failure, the
private respondent is not entitled to the P8,000.00 commission.
Anent the third assigned error, the petitioner maintains that the
respondent Court of Appeals erred in holding him liable to the private
respondent in the sum of P7,000.00 as a supposed return of investment in
a magazine venture.
In awarding P7,000.00 to the private respondent as his supposed return of
investment in the "Voice of the Veterans" magazine venture, the
respondent court ruled that:
xxxxxxxxx
"x x x Moran admittedly signed the promissory note of P20,000 in favor of
Pecson. Moran does not question the due execution of said note. Must
Moran therefore pay the amount of P20,000? The evidence indicates that
the P20,000 was assigned by Moran to cover the following:
"(a) P7,000 - the amount of the PNB check given by Pecson to Moran
representing Pecson's investment in Moran's other project (the publication
and printing of the 'Voice of the Veterans');
"(b) P10,000 - to cover the return of Pecson's contribution in the project of
the Posters;

47

"(c) P3,000 - representing Pecson's commission for three months (April,

May, June, 1971).
Of said P20,000 Moran has to pay P7,000 (as a return of Pecson's
investment for the Veterans' project, for this project never left the ground).
x x x"
As a rule, the findings of facts of the Court of Appeals are final and
conclusive and cannot be reviewed on appeal to this Court (Amigo v. Teves,
96 Phil. 252), provided they are borne out by the record or are based on
substantial evidence (Alsua-Betts v. Court of Appeals, 92 SCRA 332).
However, this rule admits of certain exceptions. Thus, in Carolina
Industries Inc. v. CMS Stock Brokerage, Inc., et al, (97 SCRA 734), we held
that this Court retains the power to review and rectify the findings of fact
of the Court of Appeals when (1) the conclusion is a finding grounded
entirely on speculation, surmises and conjectures; (2) when the inference
made is manifestly mistaken, absurd and impossible; (3) where there is
grave abuse of discretion; (4) when the judgment is based on a
misapprehension of facts; and (5) when the court, in making its findings,
went beyond the issues of the case and the same are contrary to the
admissions of both the appellant and the appellee.
In this case, there is misapprehension of facts. The evidence of the private
respondent himself shows that his investment in the "Voice of Veterans"
project amounted to only P3,000.00. The remaining P4,000.00 was the
amount of profit that the private respondent expected to receive.
The records show the following exhibits
"E - Xerox copy of PNB Manager's Check No. 234265 dated March 22, 1971
in favor of defendant. Defendant admitted the authenticity of this check
and of his receipt of the proceeds thereof (t.s.n., pp. 3-4, Nov. 29, 1972).
This exhibit is being offered for the purpose of showing plaintiff's capital
investment in the printing of the 'Voice of the Veterans' for which he was
promised a fixed profit of P8,000. This investment of P6,000.00 and the
promised profit of P8,000 are covered by defendant's promissory note for
P14,000 dated March 31, 1971 marked by defendant as Exhibit 2 (t.s.n.,
pp. 20-21, Nov. 29, 1972), and by plaintiff as Exhibit P. Later, defendant
returned P3,000.00 of the P6,000.00 investment thereby proportionately
reducing the promised profit to P4,000. With the balance of P3,000
(capital) and P4,000 (promised profit), defendant signed and executed the
promissory note for P7,000 marked Exhibit 3 for the defendant and Exhibit
M for plaintiff. Of this P7,000, defendant paid P4,000 representing full

return of the capital investment and P1,000 partial payment of the

promised profit. The P3,000 balance of the promised profit was made part
consideration of the P20,000 promissory note (t.s.n., pp. 22-24, Nov. 29,
1972). It is, therefore, being presented to show the consideration for the
P20,000 promissory note.
"F - Xerox copy of PNB Manager's check dated May 28, 1971 for P7,000 in
favor of defendant. The authenticity of the check and his receipt of the
proceeds thereof were admitted by the defendant (t.s.n., pp. 3-4, Nov. 29,
1972). This P7,000 is part consideration, and in cash, of the P20,000
promissory note (t.s.n., p. 25, Nov. 29, 1972), and it is being presented to
show the consideration for the P20,000 note and the existence and validity
of the obligation.
xxxxxxxxx
"L - Book entitled 'Voice of the Veterans' which is being offered for the
purpose of showing the subject matter of the other partnership agreement
and in which plaintiff invested the P6,000 (Exhibit E) which, together with
the promised profit of P8,000 made up for the consideration of the P14,000
promissory note (Exhibit 2; Exhibit P). As explained in connection with
Exhibit E, the P3,000 balance of the promised profit was later made part
consideration of the P20,000 promissory note.
"M - Promissory note for P7,000 dated March 30, 1971. This is also
defendant's Exhibit 3. This document is being offered for the purpose of
further showing the transaction as explained in connection with Exhibits E
and L.
"N - Receipt of plaintiff dated March 30, 1971 for the return of his P3,000
out of his capital investment of P6,000 (Exh. E) in the P14,000 promissory
note (Exh. 2; P). This is also defendant's Exhibit 4. This document is being
offered in support of plaintiff's explanation in connection with Exhibits E, L,
and M to show the transaction mentioned therein.
xxxxxxxxx
"P - Promissory note for P14,000.00. This is also defendant's Exhibit 2. It is
being offered for the purpose of showing the transaction as explained in
connection with Exhibits E, L, M, and N above."
Explaining the above-quoted exhibits, respondent Pecson testified that:

48

"Q During the pre-trial of this case, Mr. Pecson, the defendant presented a
promissory note in the amount of P14,000.00 which has been marked as
Exhibit 2. Do you know this promissory note?

"Q Was there any document executed by Mr. Moran in connection with the
Balance of P3,000.00 of your capital investment and the P4,000.00
promised profits?

"A Yes, sir.

"A Yes, sir, he executed a promissory note.

"Q What is this promissory note, in connection with your transaction with
the defendant?

"Q I show you a promissory note in the amount of P7,000.00 dated March
30, 1971 which for purposes of identification I request the same to be
marked as Exhibit M. . .

"A This promissory note is for the printing of the 'Voice of the Veterans'.
"Q What is this 'Voice of the Veterans', Mr. Pecson?
"A It is a book."
(T.S.N., p. 19, Nov. 29, 1972)
"Q And what does the amount of P14,000.00 indicated in the promissory
note, Exhibit 2, represent?

Court
Mark it as Exhibit M.
"Q (continuing) is this the promissory note which you said was executed by
Mr. Moran in connection with your transaction regarding the printing of the
'Voice of the Veterans"?
"A Yes, sir.

"A It represents the P6,000.00 cash which I gave to Mr. Moran, as

evidenced by the Philippine National Bank Manager's check and the
P8,000.00 profit assured me by Mr. Moran which I will derive from the
printing of this 'Voice of the Veterans' book.

(T.S.N., pp. 20-22, Nov. 29, 1972).

"Q You said that the P6,000.00 of this P14,000.00 is covered by a

Manager's check. I show you Exhibit E, is this the Manager's check that you
mentioned?

"A Mr. Moran paid me P4,000.00 out of the P7,000.00 as shown by the
promissory note.

"A Yes, sir.

"Q What happened to this promissory note executed by Mr. Moran, Mr.
Pecson?

"Q Was there a receipt issued by you covering this payment of P4,000.00 in
favor of Mr. Moran?

"Q What happened to this promissory note of P14,000.00 which you said
represented P6,000.00 of your investment and P8,000.00 promised
profits?

"A Yes, sir."

"A Later, Mr. Moran returned to me P3,000.00 which represented one-half

(1/2) of the P6,000.00 capital I gave to him.

"Q You stated that Mr. Moran paid the amount of P4,000.00 on account of
the P7,000.00 covered by the promissory note, Exhibit M. What does this
P4,000.00 covered by Exhibit N represent?

"Q As a consequence of the return by Mr. Moran of one-half (1/2) of the

P6,000.00 capital you gave to him, what happened to the promised profit
of P8,000.00?
"A It was reduced to one-half (1/2) which is P4,000.00.

(T.S.N., p. 23, Nov. 29, 1972).

"A This 4,000.00 represents the P3,000.00 which he has returned of my

P6,000.00 capital investment and the P1,000.00 represents partial
Payment of the P4,000.00 profit that was promised to me by Mr. Moran.
"Q And what happened to the balance of P3,000.00 under the promissory
note, Exhibit M?

49

"A The balance of P3,000.00 and the rest of the profit was applied as part
of the consideration of the promissory note of P20,000.00."
(T.S.N. pp. 23-24, Nov. 29, 1972).
The respondent court erred when it concluded that the project never left
the ground because the project did take place. Only it failed. It was the
private respondent himself who presented a copy of the book entitled
"Voice of the Veterans" in the lower court as Exhibit "L". Therefore, it would
be error to state that the project never took place and on this basis decree
the return of the private respondent's investment.
As already mentioned, there are risks in any business venture and the
failure of the undertaking cannot entirely be blamed on the managing
partner alone, specially if the latter exercised his best business judgment,
which seems to be true in this case.
In view of the foregoing, there is no reason to pass upon the fourth and
fifth assignments of errors raised by the petitioner. We likewise find no
valid basis for the grant of the counterclaim.
WHEREFORE, the petition is GRANTED. The decision of the respondent
Court of Appeals (now Intermediate Appellate Court) is hereby SET ASIDE
and a new one is rendered ordering the petitioner Isabelo Moran, Jr., to pay
private respondent Mariano Pecson SIX THOUSAND (P6,000.00) PESOS
representing the amount of the private respondent's contribution to the
partnership but which remained unused; and THREE THOUSAND
(P3,000.00) PESOS representing one-half (1/2) of the net profits gained by
the partnership in the sale of the two thousand (2,000) copies of the
posters, with interests at the legal rate on both amounts from the date the
complaint was filed until full payment is made.
SO ORDERED.
Teehankee (Chairman), Melencio-Herrera, Plana, and Relova, JJ., concur.
De La Fuente, J., no part.

50

G. R. No. 5236, January 10, 1910

2.

For not having considered the fact that there were losses.

PEDRO MARTINEZ, PLAINTIFF AND APPELLEE, VS. ONG PONG CO

AND ONG LAY, DEFENDANTS. - ONG PONG CO, APPELLANT.

3.

For holding that there should have been profits.

4.

For having applied article 1138 of the Civil Code.

5.

and 6. For holding that the capital ought to have yielded profits,
and that the latter should be calculated at 12 per cent per annum;
and

7.

The findings of the judgment.

DECISION
ARELLANO, C.J.:
On the 12th of December, 1900, the plaintiff herein delivered P1,500 to
the defendants who, in a private document, acknowledged that they had
received the same with the agreement, as stated by them, "that we are to
invest the amount in a store, the profits or losses of which we are to divide
with
the
former,
in
equal
shares."
The plaintiff filed a complaint on April 25, 1907, in order to compel the
defendants to render him an accounting of the partnership as agreed to, or
else to refund him the Pl,500 that he had given them for the said purpose.
Ong Pong Co alone appeared to answer the complaint; he admitted the
fact of the agreement and the delivery to him and to Ong Lay of the
P1,500 for the purpose aforesaid, but he alleged that Ong Lay, who was
then deceased, was the one who had managed the business, and that
nothing had resulted therefrom save the loss of the capital of P1,500, to
which
loss
the
plaintiff
had
agreed.
The judge of the Court of First Instance of the city of Manila who tried the
case ordered Ong Pong Co to return to the plaintiff one-half of the said
capital of Pl,500 which, together with Ong Lay, he had received from the
plaintiff, to wit, P750, plus P90 as one-half of the profits, calculated at the
rate of 12 per cent per annum for the six months that the store was
supposed to have been open, both sums in Philippine currency, making a
total of P840, with legal interest thereon at the rate of 6 per cent per
annum, from the 12th of June, 1901, when the business terminated and on
which date he ought to have returned the said amount to the plaintiff, until
the
full
payment
thereof
with
costs.
From this judgment Ong Pong Co appealed to this court, and assigned the
following errors:
1.

For not having taken into consideration the fact that the reason for
the closing of the store was the ejectment from the premises
occupied by it.

As to the first assignment of error, the fact that the store was closed by
virtue of ejectment proceedings is of no importance for the effects of the
suit. The whole action is based upon the fact that the defendants
received certain capital from the plaintiff for the purpose of organizing a
company; they, according to the agreement, were to handle the said
money and invest it in a store which was the object of the association;
they, in the absence of a special agreement vesting in one sole person the
management of the business, were the actual administrators thereof; as
such administrators they were the agents of the company and incurred
the liabilities peculiar to every agent, among which is that of rendering
account to the principal of their transactions, and paying him everything
they may have received by virtue of the mandatum. (Arts, 1695 and
1720, Civil Code.) Neither of them has rendered such account nor
proven the losses referred to by Ong Pong Co; they are therefore obliged
to refund the money that they received for the purpose of establishing the
said store - the object of the association. This was the principal
pronouncement
of
the
judgment.
With regard to the second and third assignments of error, this court, like
the court below, finds no evidence that the entire capital or any part
thereof was lost. It is no evidence of such loss to aver, without proof, that
the effects of the store were ejected. Even though this were proven, it
could not be inferred therefrom that the ejectment was due to the fact
that no rents were paid, and that the rent was not paid on account of the
loss
of
the
capital
belonging
to
the
enterprise.
With regard to the possible profits, the findings of the court below are
based on the statements of the defendant Ong Pong Co, to the effect that
"there were some profits, but not large ones." This court, however, does
not find that the amount thereof has been proven, nor deem it possible
to estimate them to be a certain sum, and for a given period of time;

51

hence, it can not admit the estimate, made in the judgment, of 12 per
cent
per
annum
for
the
period
of
six
months.
Inasmuch as in this case nothing appears other than the failure to fulfill an
obligation on the part of a partner who acted as agent in receiving money
for a given purpose, for which he has rendered no accounting, such agent
is responsible only for the losses which, by a violation of the provisions of
the law, he incurred. This being an obligation to pay in cash, there are
no other losses than the legal interest, which interest is not due except
from the time of the judicial demand, or, in the present case, from the
filing of the complaint. (Arts. 1108 and 1100, Civil Code.) We do not
consider that article 1688 is applicable in this case, in so far as it provides
"that the partnership is liable to every partner for the amounts he may
have disbursed on account of the same and for the proper interest," for
the reason that no other money than that contributed as capital is
involved.
As in the partnership there were two administrators or. agents liable for
the above-named amount, article 1138 of the Civil Code has been properly
applied, and article 1698 might also have been invoked; this latter deals
with debts of a partnership where the obligation is not a joint one, as is
likewise provided by article 1723 of said code with respect to the liability
of two or more agents with respect to the return of the money that they
receive from their principal. Therefore, the other errors assigned have
not
been
committed.
In view of the foregoing, the judgment appealed from is hereby affirmed,
provided, however, that the defendant Ong Pong Co shall only pay the
plaintiff the sum of P750 with the legal interest thereon at the rate of 6
per cent per annum from the time of the filing of the complaint, and the
costs, without special ruling as to the costs of this instance. So
ordered.
Torres, Johnson, Carson, and Moreland, JJ., concur.

52

[G.R.

No.

L-3745.

October

26,

1907.

JUAN AGUSTIN, ET AL., plaintiffs; VICTOR DEL ROSARIO, appellant,

v.
BARTOLOME
INOCENCIO, Defendant-Appellee.
Salas
Southworth

and

Soncuya,
and

Ingersoll,

for Appellant.
for Appellee.

SYLLABUS
1. PARTNERSHIP; ADVANCES ALLOWED MANAGING PARTNER. On the
adjustment of the accounts of a partnership, the managing partner may be
allowed funds borrowed or advanced and necessary to the completion of
the work, within the scope of the business and expressly provided for by
agreement among the partners.
DECISION
TRACEY, J. :
The parties to this controversy, who had been conducting a partnership as
industrial partners without capital, contributed from its profits the sum of
P807.28 as a fund toward the construction of a casco for use in their
business, to which they added P3,500, borrowed from Maria del Rosario,
the wife of the defendant, Bartolome Inocencio, he being the managing
partner. It is admitted that this total, a little over P4,300, was the
estimated cost of the casco, but in the progress of the work the defendant
found that it called for additional funds, which he advanced to the amount
of P2,024.49. It is satisfactorily appears from the evidence that this amount
is necessary in order to complete the work undertaken. Although it would
seem that he failed to notify his partners of the various items from time to
time going to make up this sum, it is shown that the books were at all
times open to their inspection, and that, being asked to examine them,
they omitted to do so, and that the plaintiff Juan Agustin, representing all
the partners, was also present at the construction of the casco, in charge
of the practical work and cognizant of its needs and its progress.

The work done in the casco having been within the scope of the
association and necessary to carry out its express object, the borrowing of
the money required to carry it on, with the acquiescence if not with the
affirmative consent of his associates, was not outside the powers of the
managing partner and constitutes a debt for which all the associates are
liable.
The note passed into the hands of the defendant by reason of the
successive deaths of his wife and of their only child, each without debts,
and for the amount thereof he became a creditor, subject, however, to the
deduction therefrom of his proportionate part of the indebtedness.
The trial court treated his claim on this note, as well as the sum of
P2,024.49 furnished by him, as an addition to his capital in the firm, rather
than as a loan, and this constitutes one of the grounds of error stated by
the Appellant. We do not deem it necessary to pass upon this objection, for
the reason that, considered as a loan, this sum would place the defendant
as a creditor in a stronger position as against his associates than if
regarded as a mere contribution to capital. The error, if it be an error, is
not, therefore, prejudicial to the plaintiff, but is rather beneficial to him.
The
respondent
did
not
except
to
it.
Various small sums have been paid out of the profits to some of the
partners and these were properly allowed him in the judgment.
On the theory on which the action was disposed of, the trial court
committed no error in the computation of the various shares.
Of the four parties plaintiff, but one, Victor del Rosario, is interested in this
appeal, which has been dismissed as to the others, and as to him the
judgment of the trial court must be affirmed, with costs of this instance. So
ordered.
Arellano, C.J., Torres, Johnson, and Willard, JJ., concur.

53