Lim Tong Lim vs. Philippine Fishing Gear Industries

Under the doctrine of corporation by estoppel, a person who knowingly benefits from a contract entered into by others on behalf of an ostensible corporation without valid existence may be held liable as a general partner, even if he did not directly participate in the transaction or represent himself as a corporate agent. Additionally, a partnership is deemed to exist among parties who agree to borrow money to pursue a business and divide the profits or losses, regardless of whether they contributed cash or fixed assets to a "common fund," as contribution may be in the form of credit or industry.

The case arose from a commercial fishing venture involving three individuals who agreed to engage in the fishing business. They borrowed substantial sums to acquire fishing vessels and equipment. Two of the individuals entered into a contract for the purchase of fishing nets and floats on behalf of a purported corporation that was later discovered to be non-existent. When the sellers sought payment, the third individual disclaimed liability, asserting he was merely a lessor and not a partner, and that he never directly transacted with the seller.

• On February 7, 1990, Antonio Chua and Peter Yao entered into a contract with Philippine Fishing Gear Industries, Inc. for the purchase of fishing nets valued at P532,045.00 and floats valued at P68,000.00, representing themselves as acting for "Ocean Quest Fishing Corporation."
• A Certification from the Securities and Exchange Commission revealed that "Ocean Quest Fishing Corporation" was a non-existent corporation.
• Petitioner Lim Tong Lim, together with Chua and Yao, had previously agreed to engage in a commercial fishing business. They verbally agreed to acquire two fishing boats (F/B Lourdes and F/B Nelson) for P3.35 million, financed by a loan of P3.25 million from Jesus Lim, the petitioner's brother.
• The parties agreed that the refurbishing, re-equipping, and repair expenses for the boats would be shouldered by Chua and Yao, and that profits or losses from the venture would be divided equally among the three.
• A subsequent loan of P1 million was extended by Jesus Lim to the partnership, secured by ownership papers of two other boats owned by Chua and Yao.
• In a separate civil case (Civil Case No. 1492-MN) involving the three parties, they executed a Compromise Agreement providing for the sale of the four vessels and the equal division of any excess proceeds or deficiency among Lim, Chua, and Yao.
• Lim Tong Lim claimed he was merely the lessor of F/B Lourdes to Chua and Yao under a Contract of Lease dated February 1, 1990, and denied any participation in the purchase of the nets.
• Philippine Fishing Gear Industries filed the collection suit when the buyers failed to pay, and the attached nets were subsequently sold at public auction where the respondent emerged as the winning bidder with a bid of P900,000.00.

• The Court of Appeals erred in finding a partnership existed based solely on the Compromise Agreement executed in a separate case, which was merely intended to end the dispute and not to adjudicate pre-existing rights.
• Since only Chua represented that he was acting for Ocean Quest Fishing Corporation when purchasing the nets, liability should attach only to Chua and Yao, not to Lim who never dealt with respondent.
• The trial court improperly ordered the seizure and attachment of the nets which were allegedly his property as lessor of F/B Lourdes.
• He was merely a lessor of the fishing boat to Chua and Yao, not a partner in the fishing venture, as evidenced by the Contract of Lease and registration papers showing him as owner of the boats.
• Under the doctrine of corporation by estoppel, liability can be imputed only to those who directly acted on behalf of the ostensible corporation (Chua and Yao), and not to him who never transacted with respondent.

• Procedural Issues:
  • Whether the Petition for Review under Rule 45 properly raised questions of law or improperly raised questions of fact regarding the existence of a partnership and the liability of petitioner.
• Substantive Issues:
  • Whether a partnership existed among petitioner Lim Tong Lim, Antonio Chua, and Peter Yao despite the absence of a written partnership agreement and despite Lim not contributing cash or fixed assets to a "common fund."
  • Whether petitioner Lim Tong Lim may be held liable for the purchase price of fishing nets and floats under the doctrine of corporation by estoppel despite not having directly transacted with respondent or signed the purchase contract.
  • Whether the Writ of Preliminary Attachment was properly issued against the fishing nets.

• Procedural:
  • The Supreme Court held that under Rule 45, a petition for review should involve only questions of law. The factual findings of the RTC and CA regarding the existence of a partnership are binding on the Supreme Court, absent cogent proof that the case falls under exceptions to the rule. Petitioner's attempt to assail factual findings effectively went beyond the bounds of a Rule 45 petition.
• Substantive:
  • A partnership existed among Lim, Chua, and Yao pursuant to Article 1767 of the Civil Code. The parties agreed to contribute money (through borrowed funds), property (the boats), and industry (refurbishing efforts) to a common fund with the intention of dividing profits equally. Contribution to the common fund need not be cash or fixed assets; it can be in the form of credit or industry.
  • Lim is liable under the doctrine of corporation by estoppel. Section 21 of the Corporation Code provides that all persons who assume to act as a corporation knowing it to be without authority shall be liable as general partners. This doctrine applies not only to those who directly transact on behalf of the ostensible corporation but also to those who knowingly benefit from such transactions. Lim benefited from the use of the nets found inside F/B Lourdes, which was an asset of the partnership, and he questioned the attachment precisely because it stopped his use of the vessel.
  • The issue regarding the validity of the Writ of Attachment is moot and academic. The writ was properly issued because the nets were specifically manufactured for the partnership's use and were essential to the fishing venture. Ownership of the nets remained with respondent until full payment, and F/B Lourdes was proven to be a partnership asset, not Lim's personal property.

• Corporation by Estoppel — Under Section 21 of the Corporation Code, persons who assume to act as a corporation knowing it to be without authority are liable as general partners for debts incurred. The doctrine extends to third parties who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it; such parties are barred from denying its corporate existence and may be held liable for contracts they impliedly assented to or took advantage of. In this case, Lim was held liable despite not directly transacting with respondent because he knowingly benefited from the contract entered into by his partners.
• Partnership by Contribution of Credit or Industry — Under Article 1767 of the Civil Code, a partnership exists when parties bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits. The Court clarified that contribution need not be in the form of cash or fixed assets; it may consist of credit (borrowing money) or industry (services or efforts), provided there is intent to divide profits and share losses.
• Partnership by Estoppel (Article 1825) — When a person represents himself or consents to being represented as a partner, he becomes liable to those who rely on such representation. This doctrine was discussed in Justice Vitug's concurring opinion as an alternative basis for liability.

• "A partnership may be deemed to exist among parties who agree to borrow money to pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown that they have not contributed any capital of their own to a 'common fund.' Their contribution may be in the form of credit or industry, not necessarily cash or fixed assets." — Establishing that borrowing money to finance a venture constitutes contribution to a common fund.
• "Technically, it is true that petitioner did not directly act on behalf of the corporation. However, having reaped the benefits of the contract entered into by persons with whom he previously had an existing relationship, he is deemed to be part of said association and is covered by the scope of the doctrine of corporation by estoppel." — Explaining the extension of corporation by estoppel to beneficiaries who did not directly contract but knowingly participated in the benefits.
• "A litigation is not a game of technicalities in which one, more deeply schooled and skilled in the subtle art of movement and position, entraps and destroys the other. It is, rather, a contest in which each contending party fully and fairly lays before the court the facts in issue and then, brushing aside as wholly trivial and indecisive all imperfections of form and technicalities of procedure, asks that justice be done upon the merits." — From Alonso v. Villamor, cited to emphasize that technicality should not hinder the administration of justice.

• Alonso v. Villamor — Cited for the principle that litigation is not a game of technicalities and that courts should brush aside procedural imperfections that hinder justice.
• Salvatierra v. Garlitos — Cited as the source of the doctrine that persons acting on behalf of a non-existent corporation assume the privileges and obligations of a principal and become personally liable.
• Fuentes v. Court of Appeals — Cited regarding the scope of Rule 45 and the binding nature of factual findings by lower courts in petitions for review.
• Maramba v. Lozano — Cited for the rule that liability is joint when not specifically stated to be solidary.

• Section 21, Corporation Code — Defines corporation by estoppel and imposes liability as general partners on persons who assume to act as a corporation without authority.
• Article 1767, Civil Code — Defines partnership as a contract where two or more persons bind themselves to contribute money, property, or industry to a common fund with the intention of dividing profits.
• Article 1816, Civil Code — Provides that all partners, including industrial ones, shall be liable pro rata with all their property for contracts entered into in the name of the partnership.
• Article 1825, Civil Code — Defines partnership by estoppel (holding out), where a person who represents himself as a partner becomes liable to those who rely on such representation.
• Article 1207, Civil Code — Distinguishes between joint and solidary obligations, providing that concurrence of creditors or debtors does not imply solidarity unless expressly stated.
• Rule 45, Rules of Court — Governs petitions for review on certiorari to the Supreme Court, limited to questions of law.

• Justice Vitug — Concurred in the result but elucidated on the liability of partners in a general partnership. He emphasized that under Article 1825, Lim became liable as an apparent partner because he consented to the representation by Chua and Yao that they were partners in the fishing venture. He further clarified that under Article 1816, general partners are liable pro rata beyond partnership assets, but may be held solidarily liable in specific instances such as wrongful acts, misapplication of funds by a partner with apparent authority, or misapplication of partnership-received funds.