PARTNERSHIP-Case Digests

A. DEFINITION/ELEMENTS/EXISTENCE
Art. 1767. By the contract of partnership two or more
persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of
dividing the profits among themselves.
Two or more persons may also form a partnership for
the exercise of a profession.
G.R. No. L-4811
July 31, 1953
CHARLES F. WOODHOUSE vs. FORTUNATO F.
HALILI
A contract of partnership is a personal act (acto personalismo).

Facts: On November 29, 1947, the plaintiff entered on

a written agreement with the defendant, the most
important provisions of which are (1) that they shall
organize a partnership for the bottling and distribution
of Mision soft drinks, plaintiff to act as industrial partner
or manager, and the defendant as a capitalist,
furnishing the capital necessary therefor; (2) that the
plaintiff was to secure the Mission Soft Drinks franchise
for and in behalf of the proposed partnership; and (3)
that the plaintiff was to receive 30 per cent of the net
profits of the business. Prior to entering into this
agreement, plaintiff had informed the Mission Dry
Corporation of Los Angeles, California, U.S.A.,
manufacturers of the bases and ingredients of the
beverages bearing its name, that he had interested a
prominent financier (defendant herein) in the business,
who was willing to invest half a million dollars in the
bottling and distribution of the said beverages, and
requested, in order that he may close the deal with him,
that the right to bottle and distribute be granted him for
a limited time under the condition that it will finally be
transferred to the partnership. Pursuant for this request,
plaintiff was given "a thirty-days" option on exclusive
bottling and distribution rights for the Philippines".
A franchise agreement was later on entered into the
Mission Dry Corporation and Fortunato F. Halili and/or
Charles F. Woodhouse, granted defendant the exclusive
right, license, and authority to produce, bottle,
distribute, and sell Mision beverages in the Philippines.
When the bottling plant was already on operation,
plaintiff demanded of defendant that the partnership
papers be executed. As nothing definite was
forthcoming and as defendant refused to give further
allowances to plaintiff the present action for the
execution of the contract of partnership. In his answer
defendant alleges by way of defence that defendant's
consent to the agreement was secured by the
representation of plaintiff that he was the owner, or was
about to become owner of an exclusive bottling
franchise, when as a matter of fact, at the time of its
execution, he no longer had it as the same had expired,
and that, therefore, the consent of the defendant to the
contract was vitiated by fraud and it is, consequently,
null and void, and plaintiff did not secure the franchise,
but was given to defendant himself.
First Issue: Whether plaintiff had falsely represented
that he had an exclusive franchise to bottle Mission
beverages, and whether this false representation or
fraud, if it existed, annuls the agreement to form the
partnership.
Held: We conclude that plaintiff did actually represent
to defendant that he was the holder of the exclusive
franchise. The defendant was made to believe, and he
actually believed, that plaintiff had the exclusive
franchise.
We now come to the legal aspect of the false
representation. Does it amount to a fraud that would

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vitiate the contract? There are two kinds of (civil)

fraud, the causal fraud, which may be a ground for
the annulment of a contract, and the incidental
deceit, which only renders the party who employs it
liable for damages. This Court had held that in order
that fraud may vitiate consent, it must be the
causal (dolo causante), not merely the incidental
(dolo incidente), inducement to the making of the
contract. We declare that if he was guilty of a false
representation,
this
was
not
the
causal
consideration, or the principal inducement, that led
plaintiff to enter into the partnership agreement
because the plaintiff no longer had the exclusive
franchise, or the option thereto, at the time the
contract was perfected. But while he had already
lost his option thereto (when the contract was
entered into), the principal obligation that he
assumed or undertook was to secure said franchise
for the partnership, as the bottler and distributor for
the Mission Dry Corporation.
The representation that plaintiff had the exclusive
franchise did not vitiate defendant's consent to the
contract, it was merely used by plaintiff to get from
defendant a share of 30 per cent of the net profits;
in other words, by pretending that he had the
exclusive franchise and promising to transfer it to
defendant, he obtained the consent of the latter to
give him (plaintiff) a big slice in the net profits. This
is the dolo incidente defined in article 1270 of the
Spanish Civil Code, because it was used to get the
other party's consent to a big share in the profits,
an incidental matter in the agreement.
Second Issue: May the agreement be carried out
or executed?
Held: The defendant may not be compelled against
his will to carry out the agreement nor execute the
partnership papers. Under the Spanish Civil Code,
the defendant has an obligation to do, not to give.
The law recognizes the individual's freedom or
liberty to do an act he has promised to do, or not to
do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto
personalismo), of which courts may not compel
compliance, as it is considered an act of violence to
do so.
G.R. No. L-31684 June 28, 1973
EVANGELISTA & CO. vs. ESTRELLA ABAD
SANTOS
Article 1767 does not specify the kind of industry
that a partner may thus contribute.

Facts: On October 9, 1954 a co-partnership was

formed under the name of "Evangelista & Co." On
June 7, 1955 the Articles of Co-partnership was
amended as to include Estrella Abad Santos, as
industrial partner, with 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 Abad Santos filed
suit against the three other partners alleging that
the partnership, which was also made a partydefendant, had been paying dividends to the

PARTNERSHIP-Case Digests

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partners except to her. She therefore prayed that the

other partners be ordered to pay her corresponding
share in the partnership profits.
According to the other partners, by way of defence,
there is an overriding fact which proves that the parties
to the Amended Articles of Partnership did not
contemplate to make the 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 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.
Issue: Whether Abad Santos is an industrial partner
entitled to receive dividends
Held: Abad Santos
Evangelista & Co.

is

an

industrial

partner

of

Even as she was and still is a Judge of the City Court of

Manila, she has rendered services for Evangelista & Co.
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 Abad Santos contribution
to the common fund.
G.R. No. L-1147
September 24, 1903
ESCOLASTICO
DUTERTE
Y
ROSALES
FLORENTINO RALLOS

vs.

Facts: Duterte claimed that he, Rallos and one Castro

were partners in the management of a cockpit. Rallos
denied this.
It is undisputed that the plaintiff rendered services in
the management of the cockpit, and that the defendant
paid him money on account of the cockpit.
The defendant, after denying that the plaintiff was his
partner, testified that the profits were divided a portion
of which was given to two friends, Seores Duterte and
Castro, but not as partners. A portion was given to
Seor Duterte solely because he was a friend who aided
and encouraged the cockpit and had no duty to
perform, except when he had to preside at the cockpit.
He added that he only paid them for his pleasure, as
friends, Duterte had no legal interest.
The plaintiff testified that he made a verbal contract of
partnership with the defendant for this business,
uncontradicted evidence that he performed services in
connection with it; that the defendant paid him the
money on account thereof and sent him accounts for
three months showing his interest to be one-third of the
profits in addition to the $5 each day, and wrote him a
letter in which he said that he admitted the plaintiff into
the partnership in order to collect what the plaintiff
owed him on another transaction.
The lower court found that no such partnership existed
and ordered judgment for the defendant. The plaintiff
moved for a new trial, which was denied.
Issue: Whether or not Duterte and and Rallos entered
into a contract of partnership

Held: We have examined the evidence and are of

the opinion that the finding of the lower court, so far
as the existence of the copartnership to September
1, 1901, is concerned, is plainly and manifestly
against the evidence.
We see no way of explaining the accounts
submitted by the defendant to plaintiff on any
theory other than that there was a partnership
between them up to September 1, 1901, at least.
The letter of the defendant, in which he says that he
admitted the plaintiff into the partnership, can be
explained on no other theory.
The reason which the defendant gives for paying
the plaintiff money is not credible.
That there was an agreement to share the profits is
clearly proved by the accounts submitted. The
plaintiff testified that the profits and losses were to
be shared equally. But even omitting this testimony,
the case is covered by article 1689 of the Civil
Code, which provides that, in the absence of
agreement as to the losses, they shall be shared as
the gains are.
Article 1668 of the Civil Code is not applicable to
the case. No real estate was contributed by any
member. The partnership did not become the owner
of the cockpit. It is undisputed that this was owned
by the defendant and that the partnership paid him
ten dollars a day for the use of it.
The finding of fact by the court below, that there
was no partnership, at least to September 1, 1901,
was plainly and manifestly against the evidence,
and for that reason a new trial of this case must be
had.
G.R. No. L-49982 April 27, 1988
ELIGIO ESTANISLAO, JR. vs. THE HONORABLE
COURT OF APPEALS, REMEDIOS ESTANISLAO,
EMILIO and LEOCADIO SANTIAGO
Facts: Eligio and private respondents Remedios,
Emilio and Leocadio are brothers and sisters who
are co-owners of certain lots at the corner of
Annapolis and Aurora Blvd., Quezon City which were
then being leased to the Shell Company of the
Philippines. They agreed to open and operate a gas
station thereat to be known as Estanislao Shell
Service Station with an initial investment of P
15,000.00 to be taken from the advance rentals due
to them from SHELL for the occupancy of the said
lots owned in common by them. A joint affidavit was
executed by them on April 11, 1966 prepared by
Atty. Angeles. They agreed to help Eligio by allowing
him to operate and manage the gasoline service
station of the family. For practical purposes and in
order not to run counter to the Shell's policy of
appointing only one dealer, it was agreed that Eligio
would apply for the dealership. Remedios helped in
managing the business with Eligio from May 3, 1966
up to February 16, 1967.
On May 26, 1966, the parties herein entered into an
Additional Cash Pledge Agreement with SHELL
wherein it was reiterated that the P 15,000.00
advance rental shall be deposited with SHELL to
cover advances of fuel to petitioner as dealer with a
proviso that said agreement "cancels and
supersedes the Joint Affidavit dated 11 April 1966
executed by the co-owners."
For some time, the petitioner submitted financial
statements regarding the operation of the business
to private respondents, but thereafter petitioner
failed to render subsequent accounting. Hence

PARTNERSHIP-Case Digests

through Atty. Angeles, a demand was made on

petitioner to render an accounting of the profits. Thus,
private respondents filed a complaint against petitioner.
Petitioner contends that because of the stipulation in
the Additional Cash Pledge Agreement cancelling and
superseding that previous Joint Affidavit, whatever
partnership agreement there was in said previous
agreement had thereby been abrogated.
Issue: whether or not a partnership exists between
members of the same family arising from their joint
ownership of certain properties.
Held: We find no merit in this argument. Said cancelling
provision was necessary for the Joint Affidavit speaks of
P 15,000.00 advance rentals starting May 25, 1966
while the latter agreement also refers to advance
rentals of the same amount starting May 24, 1966.
There is, therefore, a duplication of reference to the P
15,000.00 hence the need to provide in the subsequent
document that it "cancels and supersedes" the previous
one. True it is that in the latter document, it is silent as
to the statement in the Joint Affidavit that the P
15,000.00 represents the "capital investment" of the
parties in the gasoline station business and it speaks of
petitioner as the sole dealer, but this is as it should be
for in the latter document SHELL was a signatory and it
would be against its policy if in the agreement it should
be stated that the business is a partnership with private
respondents and not a sole proprietorship of petitioner.
Moreover other evidence in the record shows that there
was in fact such partnership agreement between the
parties. This is attested by the testimonies of private
respondent Remedios Estanislao and Atty. Angeles.
Petitioner submitted to private respondents periodic
accounting of the business. Petitioner gave a written
authority to private respondent Remedios Estanislao,
his sister, to examine and audit the books of their
"common business' aming negosyo). Respondent
Remedios assisted in the running of the business. There
is no doubt that the parties hereto formed a partnership
when they bound themselves to contribute money to a
common fund with the intention of dividing the profits
among themselves. The sole dealership by the
petitioner and the issuance of all government permits
and licenses in the name of petitioner was in
compliance with the afore-stated policy of SHELL and
the understanding of the parties of having only one
dealer of the SHELL products.
G.R. No. L-59956 October 31, 1984
ISABELO MORAN, JR. vs. COURT OF APPEALS and
MARIANO E. PECSON
Being a contract of partnership, each partner must share in
the profits and losses of the venture. That is the essence of a
partnership.

Facts: 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 P l,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

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payment of the first installment on the date due,

complete with the costs of collection.
The project failed. Out of the 95,000 posters only
2,000 posters were printed.
Pecson now seeks the retun of his capital
contribution and share in the profits in the sale of
2,000 posters.
The RTC held Moran liable to Pecson in the sum of P
7,000.00 as supposed return of investment in the
magazine venture. The CA affirmed. This amount is
now being assailed by Moran.
Issue: Whether or not the amount of award of RTC
as affirmed by CA was correct
Held: There is no dispute over the nature of the
agreement between the petitioner and the private
respondent. It is a contract of partnership.
Pecson failed to give his entire contribution in the
amount of P15,000.00. He contributed only
P10,000.00. Moran 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 Pecson
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 undesirable 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 Pecson is not
entitled to recover any amount from the Moran. The
records show that Pecson gave P10,000.00 to the
Moran. 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 Moran and Pecson. And
since only P4,000.00 was undesirable by the
petitioner in printing the 2,000 copies, the
remaining P6,000.00 should therefore be returned
to the private respondent.
G.R. No. 78133 October 18, 1988

PARTNERSHIP-Case Digests

MARIANO P. PASCUAL and RENATO P. DRAGON vs.

THE COMMISSIONER OF INTERNAL REVENUE and
COURT OF TAX APPEALS
It is evident that an isolated transaction whereby two or more
persons contribute funds to buy certain real estate for profit
in the absence of other circumstances showing a contrary
intention cannot be considered a partnership.

Facts: On June 22, 1965, petitioners Pascual and

Dragon bought two (2) parcels of land from Santiago
Bernardino, et al. and on May 28, 1966, they bought
another three (3) parcels of land from Juan Roque. The
first two parcels of land were sold by petitioners in 1968
to Marenir Development Corporation, while the three
parcels of land were sold by petitioners to Erlinda Reyes
and Maria Samson on March 19,1970. Petitioners
realized a net profit in the sale made in 1968 in the
amount of P165,224.70, while they realized a net profit
of P60,000.00 in the sale made in 1970. The
corresponding capital gains taxes were paid by
petitioners in 1973 and 1974 by availing of the tax
amnesties granted in the said years.
However, in a letter dated March 31, 1979 of then
Acting BIR Commissioner Efren I. Plana, petitioners were
assessed and required to pay a total amount of
P107,101.70 as alleged deficiency corporate income
taxes for the years 1968 and 1970.
Petitioners protested the said assessment in a letter of
June 26, 1979 asserting that they had availed of tax
amnesties way back in 1974.
In a reply of August 22, 1979, respondent Commissioner
informed petitioners that in the years 1968 and 1970,
petitioners as co-owners in the real estate transactions
formed an unregistered partnership or joint venture
taxable as a corporation under Section 20(b) and its
income was subject to the taxes prescribed under
Section 24, both of the National Internal Revenue Code
that the unregistered partnership was subject to
corporate income tax as distinguished from profits
derived from the partnership by them which is subject
to individual income tax; and that the availment of tax
amnesty under P.D. No. 23, as amended, by petitioners
relieved petitioners of their individual income tax
liabilities but did not relieve them from the tax liability
of the unregistered partnership. Hence, the petitioners
were required to pay the deficiency income tax
assessed.
Issue: Whether or not there existed a unregistered
partnership
Held: Pascual and Dragon did not enter into a contract
of partnership.
There is no evidence that petitioners entered into an
agreement to contribute money, property or industry to
a common fund, and that they intended to divide the
profits among themselves. Respondent commissioner
and/ or his representative just assumed these
conditions to be present on the basis of the fact that
petitioners purchased certain parcels of land and
became co-owners thereof.
In the instant case, petitioners bought two (2) parcels of
land in 1965. They did not sell the same nor make any
improvements thereon. In 1966, they bought another
three (3) parcels of land from one seller. It was only
1968 when they sold the two (2) parcels of land after
which they did not make any additional or new
purchase. The remaining three (3) parcels were sold by
them in 1970. The transactions were isolated. The
character
of
habituality
peculiar
to
business
transactions for the purpose of gain was not present.

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In Evangelista, the properties were leased out to

tenants for several years. The business was under
the management of one of the partners. Such
condition existed for over fifteen (15) years. None of
the circumstances are present in the case at bar.
The co-ownership started only in 1965 and ended in
1970.
Thus, in the concurring opinion of Mr. Justice Angelo
Bautista in Evangelista he said:
I wish however to make the following
observation Article 1769 of the new Civil
Code lays down the rule for determining
when a transaction should be deemed a
partnership or a co-ownership. Said article
paragraphs 2 and 3, provides;
(2) Co-ownership or co-possession does not
itself establish a partnership, whether such
co-owners or co-possessors do or do not
share any profits made by the use of the
property;
(3) The sharing of gross returns does not of
itself establish a partnership, whether or not
the persons sharing them have a joint or
common right or interest in any property
from which the returns are derived;
From the above it appears that the fact that
those who agree to form a co- ownership
share or do not share any profits made by
the use of the property held in common
does not convert their venture into a
partnership. Or the sharing of the gross
returns does not of itself establish a
partnership whether or not the persons
sharing therein have a joint or common
right or interest in the property. This only
means that, aside from the circumstance of
profit, the presence of other elements
constituting partnership is necessary, such
as the clear intent to form a partnership,
the existence of a juridical personality
different from that of the individual
partners, and the freedom to transfer or
assign any interest in the property by one
with the consent of the others.
It is evident that an isolated transaction
whereby two or more persons contribute
funds to buy certain real estate for profit in
the absence of other circumstances
showing a contrary intention cannot be
considered a partnership.
Persons who contribute property or funds
for a common enterprise and agree to share
the gross returns of that enterprise in
proportion to their contribution, but who
severally retain the title to their respective
contribution, are not thereby rendered
partners. They have no common stock or
capital, and no community of interest as
principal proprietors in the business itself
which the proceeds derived.
A joint purchase of land, by two, does not
constitute a co-partnership in respect
thereto; nor does an agreement to share the
profits and losses on the sale of land create
a partnership; the parties are only tenants
in common.
In order to constitute a partnership inter se
there must be: (a) An intent to form the
same; (b) generally participating in both
profits and losses; (c) and such a
community of interest, as far as third
persons are concerned as enables each

PARTNERSHIP-Case Digests

party to make contract, manage the business,

and dispose of the whole property.
The common ownership of property does not
itself create a partnership between the owners,
though they may use it for the purpose of
making gains; and they may, without becoming
partners, agree among themselves as to the
management, and use of such property and the
application of the proceeds therefrom.
The sharing of returns does not in itself establish a
partnership whether or not the persons sharing therein
have a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the
existence of a juridical personality different from the
individual partners, and the freedom of each party to
transfer or assign the whole property.
In the present case, there is clear evidence of coownership between the petitioners. There is no
adequate basis to support the proposition that they
thereby formed an unregistered partnership. The two
isolated
transactions
whereby
they
purchased
properties and sold the same a few years thereafter did
not thereby make them partners. They shared in the
gross profits as co- owners and paid their capital gains
taxes on their net profits and availed of the tax amnesty
thereby. Under the circumstances, they cannot be
considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the
respondent commissioner proposes.
And even assuming for the sake of argument that such
unregistered partnership appears to have been formed,
since there is no such existing unregistered partnership
with a distinct personality nor with assets that can be
held liable for said deficiency corporate income tax,
then petitioners can be held individually liable as
partners for this unpaid obligation of the partnership.
However, as petitioners have availed of the benefits of
tax amnesty as individual taxpayers in these
transactions, they are thereby relieved of any further
tax liability arising therefrom.
G.R. No. L-17295
July 30, 1962
ANG PUE & COMPANY, ET AL. vs. SECRETARY OF
COMMERCE AND INDUSTRY
To organize a corporation or a partnership that could claim a
juridical personality of its own and transact business as such,
is not a matter of absolute right but a privilege which may be
enjoyed only under such terms as the State may deem
necessary to impose.

Facts: It appears that on May 1, 1953, Ang Pue and Tan

Siong, both Chinese citizens, organized the partnership
Ang Pue & Company for a term of five years from May
1, 1953, extendible by their mutual consent. The
purpose of the partnership was "to maintain the
business of general merchandising, buying and selling
at wholesale and retail, particularly of lumber, hardware
and other construction materials for commerce, either
native or foreign." The corresponding articles of
partnership were registered in the Office of the
Securities & Exchange Commission on June 16, 1953.
On June 19, 1954 Republic Act No. 1180 was enacted to
regulate the retail business. It provided, among other
things, that after its enactment, a partnership not
wholly formed by Filipinos could continue to engage in
the retail business until the expiration of its term.
On April 15, 1958 prior to the expiration of the fiveyear term of the partnership Ang Pue & Company, but
after the enactment of the Republic Act 1180, the
partners already mentioned amended the original
articles of part ownership so as to extend the term of
life of the partnership to another five years. When the

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amended articles were presented for registration in

the Office of the Securities & Exchange Commission
on April 16, 1958, registration was refused upon the
ground that the extension was in violation of the
aforesaid Act.
Issue: Whether or not Ang Pue & Co. can rightfully
extend the term of life of their partnership.
Held: To organize a corporation or a partnership
that could claim a juridical personality of its own
and transact business as such, is not a matter of
absolute right but a privilege which may be enjoyed
only under such terms as the State may deem
necessary to impose. That the State, through
Congress, and in the manner provided by law, had
the right to enact Republic Act No. 1180 and to
provide therein that only Filipinos and concerns
wholly owned by Filipinos may engage in the retail
business cannot be seriously disputed. That this
provision was clearly intended to apply to
partnership already existing at the time of the
enactment of the law is clearly showing by its
provision giving them the right to continue
engaging in their retail business until the expiration
of their term or life.
To argue that because the original articles of
partnership provided that the partners could extend
the term of the partnership, the provisions of
Republic Act 1180 cannot be adversely affect
appellants herein, is to erroneously assume that the
aforesaid provision constitute a property right of
which the partners cannot be deprived without due
process or without their consent. The agreement
contain therein must be deemed subject to the law
existing at the time when the partners came to
agree regarding the extension. In the present case,
as already stated, when the partners amended the
articles of partnership, the provisions of Republic
Act 1180 were already in force, and there can be
not the slightest doubt that the right claimed by
appellants to extend the original term of their
partnership to another five years would be in
violation of the clear intent and purpose of the law
aforesaid.
G.R. No. 31057
September 7, 1929
ADRIANO ARBES, ET AL. vs. VICENTE
POLISTICO, ET AL.
Held: There is no question that "Turnuhan Polistico
& Co." is an unlawful partnership, but the appellants
allege that because it is so, some charitable
institution to whom the partnership funds may be
ordered to be turned over, should be included, as a
party defendant. The appellants refer to article
1666 of the Civil Code, which provides:
A partnership must have a lawful object, and must
be established for the common benefit of the
partners.
When the dissolution of an unlawful partnership is
decreed, the profits shall be given to charitable
institutions of the domicile of the partnership, or, in
default of such, to those of the province.

Appellant's contention on this point is untenable.

According to said article, no charitable institution is
a necessary party in the present case of
determination of the rights of the parties. The
action which may arise from said article, in the case
of unlawful partnership, is that for the recovery of
the amounts paid by the member from those in
charge of the administration of said partnership,
and it is not necessary for the said parties to base
their action to the existence of the partnership, but
on the fact that of having contributed some money
to the partnership capital. And hence, the charitable

PARTNERSHIP-Case Digests

institution of the domicile of the partnership, and in the

default thereof, those of the province are not necessary
parties in this case.
The article cited above permits no action for the
purpose of obtaining the earnings made by the unlawful
partnership, during its existence as result of the
business in which it was engaged, because for the
purpose, as Manresa remarks, the partner will have to
base his action upon the partnership contract, which is
to annul and without legal existence by reason of its
unlawful object; and it is self evident that what does not
exist cannot be a cause of action. Hence, paragraph 2
of the same article provides that when the dissolution of
the unlawful partnership is decreed, the profits cannot
inure to the benefit of the partners, but must be given
to some charitable institution.
We deem in pertinent to quote Manresa's commentaries
on article 1666 at length, as a clear explanation of the
scope and spirit of the provision of the Civil Code which
we are concerned. Commenting on said article Manresa,
among other things says:
When the subscriptions of the members have
been paid to the management of the
partnership, and employed by the latter in
transactions consistent with the purposes of the
partnership may the former demand the return
of the reimbursement thereof from the manager
or administrator withholding them?
Apropos of this, it is asserted: If the partnership
has no valid existence, if it is considered
juridically non-existent, the contract entered
into can have no legal effect; and in that case,
how can it give rise to an action in favor of the
partners to judicially demand from the manager
or the administrator of the partnership capital,
each one's contribution?
The authors discuss this point at great length,
but Ricci decides the matter quite clearly,
dispelling all doubts thereon. He holds that the
partner who limits himself to demanding only
the amount contributed by him need not resort
to the partnership contract on which to base his
action. And he adds in explanation that the
partner makes his contribution, which passes to
the managing partner for the purpose of
carrying on the business or industry which is the
object of the partnership; or in other words, to
breathe the breath of life into a partnership
contract with an objection forbidden by law. And
as said contrast does not exist in the eyes of the
law, the purpose from which the contribution
was made has not come into existence, and the
administrator of the partnership holding said
contribution retains what belongs to others,
without any consideration ; for which reason he
is not bound to return it and he who has paid in
his share is entitled to recover it.
But this is not the case with regard to profits
earned in the course of the partnership,
because they do not constitute or represent the
partner's contribution but are the result of the
industry, business or speculation which is the
object of the partnership, and therefor, in order
to demand the proportional part of the said
profits, the partner would have to base his
action on the contract which is null and void,
since this partition or distribution of the profits
is one of the juridical effects thereof. Wherefore
considering this contract as non-existent, by
reason of its illicit object, it cannot give rise to
the necessary action, which must be the basis
of the judicial complaint. Furthermore, it would

Thyrza

be immoral and unjust for the law to permit

a profit from an industry prohibited by it.
Hence the distinction made in the second
paragraph of this article of this Code,
providing that the profits obtained by
unlawful means shall not enrich the
partners, but shall upon the dissolution of
the partnership, be given to the charitable
institutions of the domicile of the
partnership, or, in default of such, to those
of the province.
Our Code does not state whether, upon the
dissolution of the unlawful partnership, the
amounts contributed are to be returned by
the partners, because it only deals with the
disposition of the profits; but the fact that
said contributions are not included in the
disposal prescribed profits, shows that in
consequences of said exclusion, the general
law must be followed, and hence the
partners should reimburse the amount of
their respective contributions. Any other
solution is immoral, and the law will not
consent to the latter remaining in the
possession of the manager or administrator
who has refused to return them, by denying
to the partners the action to demand them.

G.R. No. L-21906

December 24, 1968
INOCENCIA DELUAO and FELIPE DELUAO vs.
NICANOR CASTEEL and JUAN DEPRA
Facts: In 1940 Nicanor Casteel filed a fishpond
application for a big tract of swampy land in the
then Sitio of Malalag, Municipality of Padada, Davao.
No action was taken thereon by the authorities
concerned. He filed another fishpond application for
the same area, but because of the conditions then
prevailing, it was not acted upon either. He filed a
third fishpond application for the same area which
was as well disapproved.
Meanwhile, several applications were submitted by
other persons for portions of the area covered by
Casteel's application. Said applications were
approved by Bureau of Forestry.
Because of the threat poised upon his position by
the said applicants who entered upon and spread
themselves within the area, Casteel realized the
urgent necessity of expanding his occupation
thereof by constructing dikes and cultivating
marketable fishes, in order to prevent old and new
squatters from usurping the land. But lacking
financial resources at that time, he sought financial
aid from his uncle Felipe Deluao who then extended
loans totalling more or less P27,000 with which to
finance the needed improvements on the fishpond.
Hence, a wide productive fishpond was built.
On November 25, 1949 Inocencia Deluao (wife of
Felipe Deluao) executed a contract denominated
a "contract of service" where they agreed that
Deluao hires and employs Casteel; that Deluao will
finance as she has financed P 27, 000.00 to Casteel
who renders only his services for the construction
and improvements of a fishpond; and that Casteel
will be the Manager and sole buyer of all the
produce while Deluao will be the administrator of
the fishpond.
On the same date the above contract was entered
into, Inocencia Deluao executed a special power of
attorney in favor of Jesus Donesa, extending to the

PARTNERSHIP-Case Digests

latter the authority "To represent me in the

administration of the fishpond at Malalag, Municipality
of Padada, Province of Davao, Philippines, which has
been applied for fishpond permit by Nicanor Casteel,
but rejected by the Bureau of Fisheries, and to
supervise, demand, receive, and collect the value of the
fish that is being periodically realized from it...."
Eventually, decisions both dated September 15, 1950
were issued by the Secretary of Agriculture and Natural
Resources in DANR Cases 353 and 353-B granting
Fishpond Permit to Casteel.
Sometime in January 1951 Nicanor Casteel forbade
Inocencia Deluao from further administering the
fishpond, and ejected the latter's representative, Jesus
Donesa, from the premises.
Alleging violation of the contract of service entered into
between Inocencia Deluao and Nicanor Casteel, Felipe
Deluao and Inocencia Deluao filed an action for specific
performance against Nicanor Casteel.
Issue: Whether or not the Contract of Service created
a contract of partnership between Deluao and Casteel.
Held: Yes, a contract of partnership was created.
Too well-settled to require any citation of authority is
the rule that everyone is conclusively presumed to
know the law. It must be assumed, conformably to such
rule, that the parties entered into the so-called
"contract of service" cognizant of the mandatory and
prohibitory laws governing the filing of applications for
fishpond permits. And since they were aware of the said
laws, it must likewise be assumed in fairness to the
parties that they did not intend to violate them. This
view must perforce negate the appellees' allegation
that the contract of service created a contract of coownership between the parties over the disputed
fishpond. Were we to admit the establishment of a coownership violative of the prohibitory laws which will
hereafter be discussed, we shall be compelled to
declare altogether the nullity of the contract. This would
certainly not serve the cause of equity and justice,
considering that rights and obligations have already
arisen between the parties. We shall therefore construe
the contract as one of partnership, divided into two
parts namely, a contract of partnership to exploit the
fishpond pending its award to either Felipe Deluao or
Nicanor Casteel, and a contract of partnership to divide
the fishpond between them after such award. The first
is valid, the second illegal.
The evidence preponderates in favor of the view that
the initial intention of the parties was not to form a coownership but to establish a partnership Inocencia
Deluao as capitalist partner and Casteel as industrial
partner the ultimate undertaking of which was to
divide into two equal parts such portion of the fishpond
as might have been developed by the amount extended
by the plaintiffs-appellees, with the further provision
that Casteel should reimburse the expenses incurred by
the appellees over one-half of the fishpond that would
pertain to him.
Pursuant to the foregoing suggestion of the appellant
that a document be drawn evidencing their partnership,
the appellee Inocencia Deluao and the appellant
executed the Contract of Service which, although
denominated a "contract of service," was actually the
memorandum of their partnership agreement. That it
was not a contract of the services of the appellant, was
admitted by the appellees themselves in their letter to
Casteel dated December 19, 1949 wherein they stated
that they did not employ him in his (Casteel's) claim but
because he used their money in developing and
improving the fishpond, his right must be divided
between them.

Thyrza

The arrangement under the so-called "contract of

service" continued until the decisions both dated
September 15, 1950 were issued by the Secretary
of Agriculture and Natural Resources in DANR Cases
353 and 353-B. This development, by itself, brought
about the dissolution of the partnership.
Art. 1830(3) of the Civil Code enumerates, as one of
the causes for the dissolution of a partnership, "...
any event which makes it unlawful for the business
of the partnership to be carried on or for the
members to carry it on in partnership." The
approval of the appellant's fishpond application by
the decisions in DANR Cases 353 and 353-B brought
to the fore several provisions of law which made the
continuation of the partnership unlawful and
therefore caused its ipso facto dissolution.
Act 4003, known as the Fisheries Act, prohibits the
holder of a fishpond permit (the permittee) from
transferring or subletting the fishpond granted to
him, without the previous consent or approval of the
Secretary of Agriculture and Natural Resources. To
the same effect is Condition No. 3 of the fishpond
permit which states that "The permittee shall not
transfer or sublet all or any area herein granted or
any rights acquired therein without the previous
consent and approval of this Office."
Pursuant to our holding that there was a partnership
between the parties for the exploitation of the
fishpond before it was awarded to Casteel, this case
should be remanded to the lower court for the
reception of evidence relative to an accounting from
November 25, 1949 to September 15, 1950, in
order for the court to determine (a) the profits
realized by the partnership, (b) the share (in the
profits) of Casteel as industrial partner, (e) the
share (in the profits) of Deluao as capitalist partner,
and (d) whether the amounts totalling about
P27,000 advanced by Deluao to Casteel for the
development and improvement of the fishpond
have already been liquidated. Besides, since the
appellee Inocencia Deluao continued in possession
and enjoyment of the fishpond even after it was
awarded to Casteel, she did so no longer in the
concept of a capitalist partner but merely as
creditor of the appellant, and therefore, she must
likewise submit in the lower court an accounting of
the proceeds of the sales of all the fishes harvested
from the fishpond from September 16, 1950 until
Casteel shall have been finally given the possession
and enjoyment of the same.
G.R. No. 75875 December 15, 1989
WOLRGANG AURBACH, JOHN GRIFFIN, DAVID
P. WHITTINGHAM and CHARLES CHAMSAY vs.
SANITARY WARES MANUFACTURING
CORPORATOIN, ERNESTO V. LAGDAMEO,
ERNESTO R. LAGDAMEO, JR., ENRIQUE R.
LAGDAMEO, GEORGE F. LEE, RAUL A. BONCAN,
BALDWIN YOUNG and AVELINO V. CRUZ
These consolidated petitions seek the review of the
amended decision of the Court of Appeals in CAG.R. SP Nos. 05604 and 05617 which set aside the
earlier decision dated June 5, 1986, of the then
Intermediate Appellate Court and directed that in all
subsequent elections for directors of Sanitary Wares
Manufacturing Corporation (Saniwares), American
Standard Inc. (ASI) cannot nominate more than
three (3) directors; that the Filipino stockholders
shall not interfere in ASI's choice of its three (3)
nominees; that, on the other hand, the Filipino
stockholders can nominate only six (6) candidates
and in the event they cannot agree on the six (6)
nominees, they shall vote only among themselves

PARTNERSHIP-Case Digests

Thyrza

to determine who the six (6) nominees will be, with

cumulative voting to be allowed but without
interference from ASI.
The antecedent facts can be summarized as follows:
In 1961, Saniwares, a domestic corporation was
incorporated for the primary purpose of manufacturing
and marketing sanitary wares. One of the incorporators,
Mr. Baldwin Young went abroad to look for foreign
partners, European or American who could help in its
expansion plans. On August 15, 1962, ASI, a foreign
corporation domiciled in Delaware, United States
entered into an Agreement with Saniwares and some
Filipino investors whereby ASI and the Filipino investors
agreed to participate in the ownership of an enterprise
which would engage primarily in the business of
manufacturing in the Philippines and selling here and
abroad vitreous china and sanitary wares. The parties
agreed that the business operations in the Philippines
shall be carried on by an incorporated enterprise and
that the name of the corporation shall initially be
"Sanitary Wares Manufacturing Corporation."
The Agreement has the following provisions relevant to
the issues in these cases on the nomination and
election of the directors of the corporation:
3. Articles of Incorporation
(a) The Articles of Incorporation of the
Corporation shall be substantially in the
form annexed hereto as Exhibit A and,
insofar as permitted under Philippine
law, shall specifically provide for
(1) Cumulative
for directors:

voting

xxx xxx xxx

5. Management
(a) The management of the Corporation
shall be vested in a Board of Directors,
which shall consist of nine individuals.
As long as American-Standard shall own
at least 30% of the outstanding stock of
the Corporation, three of the nine
directors shall be designated by
American-Standard, and the other six
shall be designated by the other
stockholders of the Corporation. (pp. 51
& 53, Rollo of 75875)
At the request of ASI, the agreement contained
provisions designed to protect it as a minority group,
including the grant of veto powers over a number of
corporate acts and the right to designate certain
officers, such as a member of the Executive Committee
whose vote was required for important corporate
transactions.
Later, the 30% capital stock of ASI was increased to
40%. The corporation was also registered with the
Board of Investments for availment of incentives with
the condition that at least 60% of the capital stock of
the corporation shall be owned by Philippine nationals.
The joint enterprise thus entered into by the Filipino
investors and the American corporation prospered.
Unfortunately, with the business successes, there came
a deterioration of the initially harmonious relations
between the two groups. According to the Filipino group,
a basic disagreement was due to their desire to expand

the export operations of the company to which ASI

objected as it apparently had other subsidiaries of
joint venture groups in the countries where
Philippine exports were contemplated. On March 8,
1983, the annual stockholders' meeting was held.
The meeting was presided by Baldwin Young. The
minutes were taken by the Secretary, Avelino Cruz.
After disposing of the preliminary items in the
agenda, the stockholders then proceeded to the
election of the members of the board of directors.
The ASI group nominated three persons namely;
Wolfgang Aurbach, John Griffin and David P.
Whittingham. The Philippine investors nominated
six, namely; Ernesto Lagdameo, Sr., Raul A. Boncan,
Ernesto R. Lagdameo, Jr., George F. Lee, and
Baldwin Young. Mr. Eduardo R, Ceniza then
nominated Mr. Luciano E. Salazar, who in turn
nominated Mr. Charles Chamsay. The chairman,
Baldwin Young ruled the last two nominations out of
order on the basis of section 5 (a) of the Agreement,
the consistent practice of the parties during the
past annual stockholders' meetings to nominate
only nine persons as nominees for the nine-member
board of directors, and the legal advice of
Saniwares' legal counsel. The following events then,
transpired:
... There were protests against the
action of the Chairman and heated
arguments ensued. An appeal was
made by the ASI representative to
the body of stockholders present
that a vote be taken on the ruling of
the
Chairman.
The
Chairman,
Baldwin Young, declared the appeal
out of order and no vote on the
ruling was taken. The Chairman
then instructed the Corporate
Secretary to cast all the votes
present and represented by proxy
equally for the 6 nominees of the
Philippine Investors and the 3
nominees of ASI, thus effectively
excluding the 2 additional persons
nominated, namely, Luciano E.
Salazar and Charles Chamsay. The
ASI
representative,
Mr.
Jaqua
protested the decision of the
Chairman and announced that all
votes accruing to ASI shares, a total
of 1,329,695 (p. 27, Rollo, AC-G.R.
SP
No.
05617)
were
being
cumulatively voted for the three ASI
nominees and Charles Chamsay,
and instructed the Secretary to so
vote. Luciano E. Salazar and other
proxy holders announced that all
the votes owned by and or
represented by them 467,197
shares (p. 27, Rollo, AC-G.R. SP No.
05617)
were
being
voted
cumulatively in favor of Luciano E.
Salazar. The Chairman, Baldwin
Young, nevertheless instructed the
Secretary to cast all votes equally in
favor of the three ASI nominees,
namely, Wolfgang Aurbach, John
Griffin and David Whittingham and
the six originally nominated by
Rogelio Vinluan, namely, Ernesto
Lagdameo,
Sr.,
Raul
Boncan,
Ernesto Lagdameo, Jr., Enrique
Lagdameo, George F. Lee, and
Baldwin Young. The Secretary then
certified for the election of the
following Wolfgang Aurbach, John
Griffin, David Whittingham Ernesto
Lagdameo, Sr., Ernesto Lagdameo,
Jr., Enrique Lagdameo, George F.

PARTNERSHIP-Case Digests

Lee, Raul A. Boncan, Baldwin Young. The

representative of ASI then moved to
recess the meeting which was duly
seconded. There was also a motion to
adjourn (p. 28, Rollo, AC-G.R. SP No.
05617). This motion to adjourn was
accepted by the Chairman, Baldwin
Young, who announced that the motion
was carried and declared the meeting
adjourned.
Protests
against
the
adjournment
were
registered
and
having been ignored, Mr. Jaqua the ASI
representative, stated that the meeting
was not adjourned but only recessed
and that the meeting would be
reconvened in the next room. The
Chairman then threatened to have the
stockholders who did not agree to the
decision of the Chairman on the casting
of votes bodily thrown out. The ASI
Group, Luciano E. Salazar and other
stockholders, allegedly representing 53
or 54% of the shares of Saniwares,
decided to continue the meeting at the
elevator lobby of the American Standard
Building. The continued meeting was
presided by Luciano E. Salazar, while
Andres Gatmaitan acted as Secretary.
On the basis of the cumulative votes
cast earlier in the meeting, the ASI
Group nominated its four nominees;
Wolfgang Aurbach, John Griffin, David
Whittingham and Charles Chamsay.
Luciano E. Salazar voted for himself,
thus the said five directors were
certified as elected directors by the
Acting Secretary, Andres Gatmaitan,
with the explanation that there was a tie
among the other six (6) nominees for
the four (4) remaining positions of
directors and that the body decided not
to break the tie. (pp. 37-39, Rollo of
75975-76)
These incidents triggered off the filing of separate
petitions by the parties with the Securities and
Exchange Commission (SEC). The first petition filed was
for preliminary injunction by Saniwares, Emesto V.
Lagdameo, Baldwin Young, Raul A. Bonean Ernesto R.
Lagdameo, Jr., Enrique Lagdameo and George F. Lee
against Luciano Salazar and Charles Chamsay. The case
was denominated as SEC Case No. 2417. The second
petition was for quo warranto and application for
receivership by Wolfgang Aurbach, John Griffin, David
Whittingham, Luciano E. Salazar and Charles Chamsay
against the group of Young and Lagdameo (petitioners
in SEC Case No. 2417) and Avelino F. Cruz. The case was
docketed as SEC Case No. 2718. Both sets of parties
except for Avelino Cruz claimed to be the legitimate
directors of the corporation.

Thyrza

Saniwares be ordered convoked as soon as possible,

under the supervision of the Commission.
Upon a motion for reconsideration filed by the
appellees Lagdameo Group) the appellate court
(Court of Appeals) rendered the questioned
amended decision. Petitioners Wolfgang Aurbach,
John Griffin, David P. Whittingham and Charles
Chamsay in G.R. No. 75875 assign the following
errors:
I. THE COURT OF APPEALS, IN
EFFECT, UPHELD THE ALLEGED
ELECTION
OF
PRIVATE
RESPONDENTS AS MEMBERS OF
THE BOARD OF DIRECTORS OF
SANIWARES WHEN IN FACT THERE
WAS NO ELECTION AT ALL.
II.
THE
COURT
OF
APPEALS
PROHIBITS THE STOCKHOLDERS
FROM EXERCISING THEIR FULL
VOTING RIGHTS REPRESENTED BY
THE NUMBER OF SHARES IN
SANIWARES,
THUS
DEPRIVING
PETITIONERS
AND
THE
CORPORATION THEY REPRESENT OF
THEIR PROPERTY RIGHTS WITHOUT
DUE PROCESS OF LAW.
III. THE COURT OF APPEALS
IMPOSES CONDITIONS AND READS
PROVISIONS INTO THE AGREEMENT
OF THE PARTIES WHICH WERE NOT
THERE, WHICH ACTION IT CANNOT
LEGALLY DO. (p. 17, Rollo-75875)
Petitioner Luciano E. Salazar in G.R. Nos. 75975-76
assails the amended decision on the following
grounds:
11.1.
ThatAmendedDecisionwouldsanctio
ntheCA'sdisregard
of
binding
contractual agreements entered
into by stockholders and the
replacement of the conditions of
such agreements with terms never
contemplated by the stockholders
but merely dictated by the CA .
11.2. The Amended decision would
likewise sanction the deprivation of
the property rights of stockholders
without due process of law in order
that a favored group of stockholders
may be illegally benefitted and
guaranteed a continuing monopoly
of the control of a corporation. (pp.
14-15, Rollo-75975-76)

The two petitions were consolidated and tried jointly by

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

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

contend that:

The SEC decision led to the filing of two separate

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

THE AMENDED DECISION OF THE

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

PARTNERSHIP-Case Digests

Thyrza

II
THE AMENDED DECISION DOES NOT
CATEGORICALLY RULE THAT PRIVATE
PETITIONERS HEREIN WERE THE DULY
ELECTED DIRECTORS DURING THE 8
MARCH 1983 ANNUAL STOCKHOLDERS
MEETING OF SANTWARES. (P. 24, Rollo75951)
The issues raised in the petitions are interrelated,
hence, they are discussed jointly.
The main issue hinges on who were the duly elected
directors of Saniwares for the year 1983 during its
annual stockholders' meeting held on March 8, 1983. To
answer this question the following factors should be
determined: (1) the nature of the business established
by the parties whether it was a joint venture or a
corporation and (2) whether or not the ASI Group may
vote their additional 10% equity during elections of
Saniwares' board of directors.
The rule is that whether the parties to a particular
contract have thereby established among themselves a
joint venture or some other relation depends upon their
actual intention which is determined in accordance with
the rules governing the interpretation and construction
of contracts. (Terminal Shares, Inc. v. Chicago, B. and
Q.R. Co. (DC MO) 65 F Supp 678; Universal Sales Corp.
v. California Press Mfg. Co. 20 Cal. 2nd 751, 128 P 2nd
668)
The ASI Group and petitioner Salazar (G.R. Nos. 7597576) contend that the actual intention of the parties
should be viewed strictly on the "Agreement" dated
August 15,1962 wherein it is clearly stated that the
parties' intention was to form a corporation and not a
joint venture.
They
specifically
mention
number
Miscellaneous Provisions which states:

16

under

xxx xxx xxx

c) nothing herein contained shall be
construed to constitute any of the
parties
hereto
partners
or
joint
venturers in respect of any transaction
hereunder. (At P. 66, Rollo-GR No.
75875)
They object to the admission of other evidence which
tends to show that the parties' agreement was to
establish a joint venture presented by the Lagdameo
and Young Group on the ground that it contravenes the
parol evidence rule under section 7, Rule 130 of the
Revised Rules of Court. According to them, the
Lagdameo and Young Group never pleaded in their
pleading that the "Agreement" failed to express the true
intent of the parties.
The parol evidence Rule under Rule 130 provides:
Evidence of written agreements-When
the terms of an agreement have been
reduced to writing, it is to be considered
as containing all such terms, and
therefore, there can be, between the
parties and their successors in interest,
no evidence of the terms of the
agreement other than the contents of
the writing, except in the following
cases:

(a) Where a mistake or imperfection

of the writing, or its failure to
express
the true
intent
and
agreement of the parties or the
validity of the agreement is put in
issue by the pleadings.
(b) When there is an
ambiguity in the writing.

intrinsic

Contrary to ASI Group's stand, the Lagdameo and

Young Group pleaded in their Reply and Answer to
Counterclaim in SEC Case No. 2417 that the
Agreement failed to express the true intent of the
parties, to wit:
xxx xxx xxx
4. While certain provisions of the
Agreement would make it appear
that the parties thereto disclaim
being partners or joint venturers
such disclaimer is directed at third
parties and is not inconsistent with,
and
does
not
preclude,
the
existence of two distinct groups of
stockholders in Saniwares one of
which (the Philippine Investors) shall
constitute the majority, and the
other ASI shall constitute the
minority stockholder. In any event,
the evident intention of the
Philippine Investors and ASI in
entering into the Agreement is to
enter into ajoint venture enterprise,
and if some words in the Agreement
appear to be contrary to the evident
intention of the parties, the latter
shall prevail over the former (Art.
1370, New Civil Code). The various
stipulations of a contract shall be
interpreted together attributing to
the doubtful ones that sense which
may result from all of them taken
jointly (Art. 1374, New Civil Code).
Moreover, in order to judge the
intention of the contracting parties,
their
contemporaneous
and
subsequent acts shall be principally
considered. (Art. 1371, New Civil
Code). (Part I, Original Records, SEC
Case No. 2417)
It has been ruled:
In an action at law, where there is
evidence tending to prove that the
parties joined their efforts in
furtherance of an enterprise for
their joint profit, the question
whether they intended by their
agreement to create a joint
adventure, or to assume some other
relation is a question of fact for the
jury. (Binder v. Kessler v 200 App.
Div. 40,192 N Y S 653; Pyroa v.
Brownfield (Tex. Civ. A.) 238 SW
725; Hoge v. George, 27 Wyo, 423,
200 P 96 33 C.J. p. 871)
In the instant cases, our examination of important
provisions of the Agreement as well as the
testimonial evidence presented by the Lagdameo
and Young Group shows that the parties agreed to
establish a joint venture and not a corporation. The
history of the organization of Saniwares and the
unusual arrangements which govern its policy

10

PARTNERSHIP-Case Digests

making body are all consistent with a joint venture and

not with an ordinary corporation. As stated by the SEC:
According to the unrebutted testimony
of Mr. Baldwin Young, he negotiated the
Agreement with ASI in behalf of the
Philippine nationals. He testified that
ASI agreed to accept the role of minority
vis-a-vis the Philippine National group of
investors, on the condition that the
Agreement should contain provisions to
protect ASI as the minority.
An examination of the Agreement shows
that certain provisions were included to
protect the interests of ASI as the
minority. For example, the vote of 7 out
of 9 directors is required in certain
enumerated corporate acts [Sec. 3 (b)
(ii) (a) of the Agreement]. ASI is
contractually entitled to designate a
member of the Executive Committee
and the vote of this member is required
for certain transactions [Sec. 3 (b) (i)].
The Agreement also requires a 75%
super-majority vote for the amendment
of the articles and by-laws of Saniwares
[Sec. 3 (a) (iv) and (b) (iii)]. ASI is also
given the right to designate the
president and plant manager [Sec. 5
(6)]. The Agreement further provides
that the sales policy of Saniwares shall
be that which is normally followed by
ASI [Sec. 13 (a)] and that Saniwares
should not export "Standard" products
otherwise than through ASI's Export
Marketing Services [Sec. 13 (6)]. Under
the Agreement, ASI agreed to provide
technology and know-how to Saniwares
and the latter paid royalties for the
same. (At p. 2).
xxx xxx xxx
It is pertinent to note that the provisions
of the Agreement requiring a 7 out of 9
votes of the board of directors for
certain actions, in effect gave ASI
(which designates 3 directors under the
Agreement) an effective veto power.
Furthermore, the grant to ASI of the
right to designate certain officers of the
corporation; the super-majority voting
requirements for amendments of the
articles
and
by-laws;
and
most
significantly to the issues of tms case,
the provision that ASI shall designate 3
out of the 9 directors and the other
stockholders shall designate the other
6, clearly indicate that there are two
distinct groups in Saniwares, namely
ASI, which owns 40% of the capital
stock and the Philippine National
stockholders who own the balance of
60%, and that 2) ASI is given certain
protections as the minority stockholder.
Premises considered, we believe that
under the Agreement there are two
groups of stockholders who established
a corporation with provisions for a
special contractual relationship between
the parties, i.e., ASI and the other
stockholders. (pp. 4-5)

Thyrza

Section 5 (a) of the agreement uses the word

"designated" and not "nominated" or "elected" in
the selection of the nine directors on a six to three
ratio. Each group is assured of a fixed number of
directors in the board.
Moreover, ASI in its communications referred to the
enterprise as joint venture. Baldwin Young also
testified that Section 16(c) of the Agreement that
"Nothing herein contained shall be construed to
constitute any of the parties hereto partners or joint
venturers in respect of any transaction hereunder"
was merely to obviate the possibility of the
enterprise being treated as partnership for tax
purposes and liabilities to third parties.
Quite often, Filipino entrepreneurs in their desire to
develop the industrial and manufacturing capacities
of a local firm are constrained to seek the
technology and marketing assistance of huge
multinational corporations of the developed world.
Arrangements are formalized where a foreign group
becomes a minority owner of a firm in exchange for
its manufacturing expertise, use of its brand names,
and other such assistance. However, there is always
a danger from such arrangements. The foreign
group may, from the start, intend to establish its
own sole or monopolistic operations and merely
uses the joint venture arrangement to gain a
foothold or test the Philippine waters, so to speak.
Or the covetousness may come later. As the
Philippine firm enlarges its operations and becomes
profitable, the foreign group undermines the local
majority ownership and actively tries to completely
or predominantly take over the entire company. This
undermining of joint ventures is not consistent with
fair dealing to say the least. To the extent that such
subversive actions can be lawfully prevented, the
courts should extend protection especially in
industries
where
constitutional
and
legal
requirements reserve controlling ownership to
Filipino citizens.
The Lagdameo Group stated in their appellees' brief
in the Court of Appeal
In fact, the Philippine Corporation
Code itself recognizes the right of
stockholders
to
enter
into
agreements regarding the exercise
of their voting rights.
Sec.
100.
stockholders.-

Agreements

by

xxx xxx xxx

2. An agreement between two or
more stockholders, if in writing and
signed by the parties thereto, may
provide that in exercising any voting
rights, the shares held by them shall
be voted as therein provided, or as
they may agree, or as determined in
accordance with a procedure agreed
upon by them.
Appellants contend that the above
provision
is
included
in
the
Corporation Code's chapter on close
corporations and Saniwares cannot
be a close corporation because it
has
95
stockholders.
Firstly,
although
Saniwares
had
95
stockholders at the time of the
disputed
stockholders
meeting,

11

PARTNERSHIP-Case Digests

these 95 stockholders are not separate

from each other but are divisible into
groups representing a single Identifiable
interest. For example, ASI, its nominees
and lawyers count for 13 of the 95
stockholders. The YoungYutivo family
count for another 13 stockholders, the
Chamsay family for 8 stockholders, the
Santos family for 9 stockholders, the Dy
family for 7 stockholders, etc. If the
members of one family and/or business
or interest group are considered as one
(which, it is respectfully submitted, they
should be for purposes of determining
how closely held Saniwares is there
were as of 8 March 1983, practically
only 17 stockholders of Saniwares.
(Please refer to discussion in pp. 5 to 6
of appellees' Rejoinder Memorandum
dated 11 December 1984 and Annex
"A" thereof).
Secondly,
even
assuming
that
Saniwares is technically not a close
corporation because it has more than
20 stockholders, the undeniable fact is
that it is a close-held corporation.
Surely, appellants cannot honestly claim
that Saniwares is a public issue or a
widely held corporation.
In the United States, many courts have
taken a realistic approach to joint
venture corporations and have not
rigidly applied principles of corporation
law designed primarily for public issue
corporations.
These
courts
have
indicated that express arrangements
between corporate joint ventures should
be construed with less emphasis on the
ordinary rules of law usually applied to
corporate entities and with more
consideration given to the nature of the
agreement between the joint venturers
(Please see Wabash Ry v. American
Refrigerator Transit Co., 7 F 2d 335;
Chicago, M & St. P. Ry v. Des Moines
Union Ry; 254 Ass'n. 247 US. 490';
Seaboard Airline Ry v. Atlantic Coast
Line Ry; 240 N.C. 495,.82 S.E. 2d 771;
Deboy v. Harris, 207 Md., 212,113 A 2d
903; Hathway v. Porter Royalty Pool,
Inc., 296 Mich. 90, 90, 295 N.W. 571;
Beardsley v. Beardsley, 138 U.S. 262;
"The Legal Status of Joint Venture
Corporations", 11 Vand Law Rev. p.
680,1958). These American cases dealt
with legal questions as to the extent to
which the requirements arising from the
corporate
form
of
joint
venture
corporations should control, and the
courts ruled that substantial justice lay
with those litigants who relied on the
joint venture agreement rather than the
litigants who relied on the orthodox
principles of corporation law.
As correctly held by the SEC Hearing
Officer:
It is said that participants in a joint
venture, in organizing the joint venture
deviate from the traditional pattern of
corporation management. A noted
authority has pointed out that just as in
close
corporations,
shareholders'
agreements
in
joint
venture
corporations often contain provisions

Thyrza

which do one or more of the

following: (1) require greater than
majority vote for shareholder and
director action; (2) give certain
shareholders
or
groups
of
shareholders power to select a
specified number of directors; (3)
give to the shareholders control
over the selection and retention of
employees; and (4) set up a
procedure for the settlement of
disputes by arbitration (See I O'
Neal, Close Corporations, 1971 ed.,
Section 1.06a, pp. 15-16) (Decision
of SEC Hearing Officer, P. 16)
Thirdly paragraph 2 of Sec. 100 of
the Corporation Code does not
necessarily imply that agreements
regarding the exercise of voting
rights are allowed only in close
corporations. As Campos and LopezCampos explain:
Paragraph 2 refers to pooling and
voting agreements in particular.
Does this provision necessarily
imply that these agreements can be
valid only in close corporations as
defined by the Code? Suppose that
a corporation has twenty five
stockholders, and therefore cannot
qualify as a close corporation under
section 96, can some of them enter
into an agreement to vote as a unit
in the election of directors? It is
submitted that there is no reason
for
denying
stockholders
of
corporations other than close ones
the right to enter into not voting or
pooling agreements to protect their
interests, as long as they do not
intend to commit any wrong, or
fraud on the other stockholders not
parties to the agreement. Of course,
voting or pooling agreements are
perhaps more useful and more often
resorted to in close corporations.
But they may also be found
necessary even in widely held
corporations. Moreover, since the
Code limits the legal meaning of
close corporations to those which
comply with the requisites laid down
by section 96, it is entirely possible
that a corporation which is in fact a
close corporation will not come
within the definition. In such case,
its stockholders should not be
precluded
from
entering
into
contracts like voting agreements if
these are otherwise valid. (Campos
& Lopez-Campos, op cit, p. 405)
In short, even assuming that sec.
5(a) of the Agreement relating to
the designation or nomination of
directors restricts the right of the
Agreement's signatories to vote for
directors,
such
contractual
provision, as correctly held by the
SEC, is valid and binding upon the
signatories thereto, which include
appellants. (Rollo No. 75951, pp. 9094)
In regard to the question as to whether or not the
ASI group may vote their additional equity during

12

PARTNERSHIP-Case Digests

elections of Saniwares' board of directors, the Court of

Appeals correctly stated:
As in other joint venture companies, the
extent of ASI's participation in the
management of the corporation is
spelled out in the Agreement. Section
5(a) hereof says that three of the nine
directors shall be designated by ASI and
the remaining six by the other
stockholders,
i.e.,
the
Filipino
stockholders. This allocation of board
seats is obviously in consonance with
the minority position of ASI.
Having entered into a well-defined
contractual relationship, it is imperative
that the parties should honor and
adhere to their respective rights and
obligations thereunder. Appellants seem
to contend that any allocation of board
seats,
even
in
joint
venture
corporations, are null and void to the
extent that such may interfere with the
stockholder's rights to cumulative
voting as provided in Section 24 of the
Corporation Code. This Court should not
be prepared to hold that any agreement
which curtails in any way cumulative
voting should be struck down, even if
such agreement has been freely
entered
into
by
experienced
businessmen and do not prejudice those
who are not parties thereto. It may well
be that it would be more cogent to hold,
as the Securities and Exchange
Commission has held in the decision
appealed from, that cumulative voting
rights may be voluntarily waived by
stockholders who enter into special
relationships with each other to pursue
and implement specific purposes, as in
joint venture relationships between
foreign and local stockholders, so long
as such agreements do not adversely
affect third parties.
In any event, it is believed that we are
not here called upon to make a general
rule on this question. Rather, all that
needs to be done is to give life and
effect to the particular contractual
rights and obligations which the parties
have assumed for themselves.
On the one hand, the clearly established
minority position of ASI and the
contractual allocation of board seats
Cannot be disregarded. On the other
hand, the rights of the stockholders to
cumulative voting should also be
protected.
In
our
decision
sought
to
be
reconsidered, we opted to uphold the
second over the first. Upon further
reflection, we feel that the proper and
just solution to give due consideration
to both factors suggests itself quite
clearly. This Court should recognize and
uphold the division of the stockholders
into two groups, and at the same time
uphold the right of the stockholders
within each group to cumulative voting
in the process of determining who the
group's nominees would be. In practical
terms, as suggested by appellant

Thyrza

Luciano E. Salazar himself, this

means
that
if
the
Filipino
stockholders cannot agree who their
six nominees will be, a vote would
have to be taken among the Filipino
stockholders
only.
During
this
voting, each Filipino stockholder can
cumulate his votes. ASI, however,
should not be allowed to interfere in
the voting within the Filipino group.
Otherwise, ASI would be able to
designate more than the three
directors it is allowed to designate
under the Agreement, and may
even be able to get a majority of
the board seats, a result which is
clearly contrary to the contractual
intent of the parties.
Such a ruling will give effect to both
the allocation of the board seats
and the stockholder's right to
cumulative voting. Moreover, this
ruling
will
also
give
due
consideration to the issue raised by
the appellees on possible violation
or circumvention of the Anti-Dummy
Law (Com. Act No. 108, as
amended) and the nationalization
requirements of the Constitution
and the laws if ASI is allowed to
nominate more than three directors.
(Rollo-75875, pp. 38-39)
The ASI Group and petitioner Salazar, now reiterate
their theory that the ASI Group has the right to vote
their additional equity pursuant to Section 24 of the
Corporation Code which gives the stockholders of a
corporation the right to cumulate their votes in
electing directors. Petitioner Salazar adds that this
right if granted to the ASI Group would not
necessarily mean a violation of the Anti-Dummy Act
(Commonwealth Act 108, as amended). He cites
section 2-a thereof which provides:
And provided finally that the
election of aliens as members of the
board of directors or governing body
of corporations or associations
engaging in partially nationalized
activities shall be allowed in
proportion
to
their
allowable
participation or share in the capital
of such entities. (amendments
introduced by Presidential Decree
715, section 1, promulgated May
28, 1975)
The ASI Group's argument is correct within the
context of Section 24 of the Corporation Code. The
point of query, however, is whether or not that
provision is applicable to a joint venture with clearly
defined agreements:
The legal concept of ajoint venture
is of common law origin. It has no
precise legal definition but it has
been generally understood to mean
an organization formed for some
temporary
purpose.
(Gates
v.
Megargel, 266 Fed. 811 [1920]) It is
in fact hardly distinguishable from
the
partnership,
since
their
elements are similar community of
interest in the business, sharing of
profits and losses, and a mutual
right of control. Blackner v. Mc

13

PARTNERSHIP-Case Digests

Dermott, 176 F. 2d. 498, [1949];

Carboneau v. Peterson, 95 P. 2d., 1043
[1939]; Buckley v. Chadwick, 45 Cal. 2d.
183, 288 P. 2d. 12 289 P. 2d. 242
[1955]). The main distinction cited by
most
opinions
in
common
law
jurisdictions is that the partnership
contemplates a general business with
some degree of continuity, while the
joint venture is formed for the execution
of a single transaction, and is thus of a
temporary nature. (Tufts v. Mann 116
Cal. App. 170, 2 P. 2d. 500 [1931];
Harmon v. Martin, 395 111. 595, 71 NE
2d. 74 [1947]; Gates v. Megargel 266
Fed. 811 [1920]). This observation is not
entirely accurate in this jurisdiction,
since
under
the
Civil
Code,
a
partnership may be particular or
universal, and a particular partnership
may have for its object a specific
undertaking. (Art. 1783, Civil Code). It
would seem therefore that under
Philippine law, a joint venture is a form
of partnership and should thus be
governed by the law of partnerships.
The Supreme Court has however
recognized a distinction between these
two business forms, and has held that
although a corporation cannot enter
into a partnership contract, it may
however engage in a joint venture with
others. (At p. 12, Tuazon v. Bolanos, 95
Phil. 906 [1954]) (Campos and LopezCampos Comments, Notes and Selected
Cases, Corporation Code 1981)
Moreover, the usual rules as regards the construction
and operations of contracts generally apply to a
contract of joint venture. (O' Hara v. Harman 14 App.
Dev. (167) 43 NYS 556).
Bearing these principles in mind, the correct view would
be that the resolution of the question of whether or not
the ASI Group may vote their additional equity lies in
the agreement of the parties.
Necessarily, the appellate court was correct in
upholding the agreement of the parties as regards the
allocation of director seats under Section 5 (a) of the
"Agreement," and the right of each group of
stockholders to cumulative voting in the process of
determining who the group's nominees would be under
Section 3 (a) (1) of the "Agreement." As pointed out by
SEC, Section 5 (a) of the Agreement relates to the
manner of nominating the members of the board of
directors while Section 3 (a) (1) relates to the manner of
voting for these nominees.

Thyrza

to the contractual intent of the

parties.
Such a ruling will give effect to both
the allocation of the board seats
and the stockholder's right to
cumulative voting. Moreover, this
ruling
will
also
give
due
consideration to the issue raised by
the appellees on possible violation
or circumvention of the Anti-Dummy
Law (Com. Act No. 108, as
amended) and the nationalization
requirements of the Constitution
and the laws if ASI is allowed to
nominate more than three directors.
(At p. 39, Rollo, 75875)
Equally important as the consideration of the
contractual intent of the parties is the consideration
as regards the possible domination by the foreign
investors of the enterprise in violation of the
nationalization requirements enshrined in the
Constitution and circumvention of the Anti-Dummy
Act. In this regard, petitioner Salazar's position is
that the Anti-Dummy Act allows the ASI group to
elect board directors in proportion to their share in
the capital of the entity. It is to be noted, however,
that the same law also limits the election of aliens
as members of the board of directors in proportion
to their allowance participation of said entity. In the
instant case, the foreign Group ASI was limited to
designate three directors. This is the allowable
participation of the ASI Group. Hence, in future
dealings, this limitation of six to three board seats
should always be maintained as long as the joint
venture agreement exists considering that in
limiting 3 board seats in the 9-man board of
directors there are provisions already agreed upon
and embodied in the parties' Agreement to protect
the interests arising from the minority status of the
foreign investors.
With these findings, we the decisions of the SEC
Hearing Officer and SEC which were impliedly
affirmed by the appellate court declaring Messrs.
Wolfgang
Aurbach,
John
Griffin,
David
P
Whittingham, Emesto V. Lagdameo, Baldwin young,
Raul A. Boncan, Emesto V. Lagdameo, Jr., Enrique
Lagdameo, and George F. Lee as the duly elected
directors of Saniwares at the March 8,1983 annual
stockholders' meeting.

This is the proper interpretation of the Agreement of the

parties as regards the election of members of the board
of directors.

On the other hand, the Lagdameo and Young Group

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

To allow the ASI Group to vote their additional equity to

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

They also stress the possibility that the ASI Group

might take control of the enterprise if the Filipino
stockholders are allowed to select their nominees
separately and not as a common slot determined by
the majority of their group.

... ASI, however, should not be allowed

to interfere in the voting within the
Filipino group. Otherwise, ASI would be
able to designate more than the three
directors it is allowed to designate
under the Agreement, and may even be
able to get a majority of the board
seats, a result which is clearly contrary

Section 5 (a) of the Agreement which uses the word

designates in the allocation of board directors
should not be interpreted in isolation. This should
be construed in relation to section 3 (a) (1) of the
Agreement. As we stated earlier, section 3(a) (1)
relates to the manner of voting for these nominees
which is cumulative voting while section 5(a) relates
to the manner of nominating the members of the

14

PARTNERSHIP-Case Digests

Thyrza

board of directors. The petitioners in G.R. No. 75951

agreed to this procedure, hence, they cannot now
impugn its legality.
The insinuation that the ASI Group may be able to
control the enterprise under the cumulative voting
procedure cannot, however, be ignored. The validity of
the cumulative voting procedure is dependent on the
directors thus elected being genuine members of the
Filipino group, not voters whose interest is to increase
the ASI share in the management of Saniwares. The
joint venture character of the enterprise must always be
taken into account, so long as the company exists under
its original agreement. Cumulative voting may not be
used as a device to enable ASI to achieve stealthily or
indirectly what they cannot accomplish openly. There
are substantial safeguards in the Agreement which are
intended to preserve the majority status of the Filipino
investors as well as to maintain the minority status of
the foreign investors group as earlier discussed. They
should be maintained.
WHEREFORE, the petitions in G.R. Nos. 75975-76 and
G.R. No. 75875 are DISMISSED and the petition in G.R.
No. 75951 is partly GRANTED. The amended decision of
the Court of Appeals is MODIFIED in that Messrs.
Wolfgang Aurbach John Griffin, David Whittingham
Emesto V. Lagdameo, Baldwin Young, Raul A. Boncan,
Ernesto R. Lagdameo, Jr., Enrique Lagdameo, and
George F. Lee are declared as the duly elected directors
of Saniwares at the March 8,1983 annual stockholders'
meeting. In all other respects, the questioned decision
is AFFIRMED. Costs against the petitioners in G.R. Nos.
75975-76 and G.R. No. 75875.
SO ORDERED.

15