Sunga-Chan vs. Chua

A verbal contract of partnership is valid and enforceable where the essential elements of mutual contribution to a common stock and a joint interest in profits are proven, and the Dead Man's Statute does not bar testimonial evidence when the representatives of the deceased's estate file a compulsory counterclaim, thereby removing the case from the statute's ambit.

Lamberto T. Chua and Jacinto L. Sunga were business associates who, in 1977, allegedly entered into a verbal partnership for the distribution of Shellane Liquefied Petroleum Gas in Manila. For business convenience, the partnership was registered under Jacinto's name as a sole proprietorship under the business name "Shellite Gas Appliance Center." Jacinto served as manager, assisted by Josephine Sy, the sister of respondent's wife. After Jacinto's death in late 1989, his surviving wife Cecilia Sunga and daughter Lilibeth Sunga-Chan assumed control of the business. The dispute centers on whether a valid partnership existed between respondent and the deceased, and whether respondent is entitled to an accounting and recovery of his partnership share from the deceased's heirs who continued the business.

In 1977, Lamberto T. Chua and Jacinto L. Sunga verbally agreed to form a partnership for the distribution of Shellane Liquefied Petroleum Gas in Manila. For business convenience, they registered the business name "Shellite Gas Appliance Center" under Jacinto's name as a sole proprietorship. Respondent delivered his initial capital contribution of ₱100,000.00 to Jacinto, who in turn produced ₱100,000.00 as his counterpart contribution, with the intention that profits would be equally divided between them. Jacinto served as manager, assisted by Josephine Sy, the sister of respondent's wife, Erlinda Sy. As compensation, Jacinto would receive a manager's fee of 10% of the gross profit, and Josephine would receive 10% of the net profits in addition to her wages.

From the time Shellite opened for business on July 8, 1977, operations were profitable, as evidenced by the volume of orders and deliveries of filled Shellane cylinder tanks supplied by Pilipinas Shell Petroleum Corporation. Jacinto furnished respondent with merchandise inventories, balance sheets, and net worth statements of Shellite from 1977 to 1989. Respondent, however, suspected that the amounts indicated in these documents were understated and undervalued by Jacinto and Josephine for their own benefit and for tax avoidance purposes.

Upon Jacinto's death in the latter part of 1989, his surviving wife Cecilia Sunga and daughter Lilibeth Sunga-Chan took over the operations, control, custody, disposition, and management of Shellite without respondent's consent. Despite respondent's repeated demands for accounting, inventory, appraisal, winding up, and restitution of his net shares in the partnership, petitioners failed to comply. Petitioner Lilibeth continued the operations of Shellite, converting its properties to her own use and advantage. On March 31, 1991, after respondent persisted in his demands, petitioner Lilibeth disbursed ₱200,000.00 from partnership funds as partial payment of respondent's share, with a promise to make a complete inventory and winding up of the business properties—a commitment that was never fulfilled.

On June 22, 1992, respondent filed a complaint for winding up of partnership affairs, accounting, appraisal, recovery of shares, and damages with the Regional Trial Court, Branch 11, Sindangan, Zamboanga del Norte. Petitioners moved to dismiss twice—first on the ground of lack of jurisdiction, arguing the SEC had exclusive jurisdiction, and second on the ground that the claim should be prosecuted against the estate of the deceased in a probate or intestate proceeding. Both motions were denied. Petitioners' petition for certiorari before the Court of Appeals and subsequent petition for review before the Supreme Court were likewise denied. During trial, respondent presented his evidence, while petitioners were deemed to have waived their right to present evidence for failure to attend the scheduled hearing despite notice. The trial court rendered judgment for respondent on October 7, 1997, finding that a partnership existed and ordering accounting, restitution, payment of respondent's half-share, unpaid income, damages, and attorney's fees. The Court of Appeals affirmed this decision in all respects on January 31, 2000.

• Existence of Partnership: Petitioners argued that the Court of Appeals erred in concluding that a partnership existed between respondent and the late Jacinto L. Sunga, there being no written document to evidence such partnership, and that the testimonies of respondent and his witness Josephine should have been barred under the Dead Man's Statute or Survivorship Rule (Section 23, Rule 130 of the Rules of Court) as they were offered to prove claims against a deceased person three years after his death.
• Laches and Prescription: Petitioners maintained that laches and/or prescription should have extinguished respondent's claim.
• Insufficiency of Evidence and Exaggerated Valuations: Petitioners contended that there was no competent and credible evidence to warrant the finding of a partnership, and assuming arguendo that a partnership existed, the amounts or values found in the partnership assets and profits were highly exaggerated.
• SEC Registration Requirement: Petitioners maintained that the partnership, having an initial capital of ₱200,000.00, should have been registered with the Securities and Exchange Commission, as registration is mandated by the Civil Code, and that failure to register invalidated the partnership.

• Dead Man's Statute: Whether the Dead Man's Statute under Section 23, Rule 130 of the Rules of Court bars the testimonies of respondent and his witness Josephine Sy to prove the existence of a verbal partnership with the deceased Jacinto L. Sunga.
• Existence of Partnership: Whether a verbal partnership was validly formed between respondent and Jacinto notwithstanding the absence of a written contract and SEC registration.
• Prescription and Laches: Whether respondent's action for accounting was barred by prescription or laches, having been filed approximately three years after Jacinto's death.
• SEC Registration: Whether failure to register the partnership with the SEC invalidates the partnership as between the partners.

• Dead Man's Statute: No. The statute does not apply because petitioners filed a compulsory counterclaim, thereby removing the case from its ambit, and the witness Josephine Sy is not a party or assignor of a party within the meaning of the rule.
• Existence of Partnership: Yes. A partnership may be constituted in any form, including verbally, provided the essential elements of mutual contribution to a common stock and a joint interest in profits are proven; both lower courts found these elements satisfied by documentary and testimonial evidence.
• Prescription and Laches: No. The action for accounting was filed within the six-year prescriptive period for oral contracts under the Civil Code, and the right to demand an accounting accrues at the date of dissolution, which was Jacinto's death in late 1989.
• SEC Registration: No. Article 1772 of the Civil Code's registration requirement is directory, not mandatory; under Article 1768, the partnership retains its juridical personality even if it fails to register, and non-compliance does not invalidate the partnership as among the partners.

• Dead Man's Statute: The Dead Man's Statute bars a party or assignor of a party from testifying as to matters of fact occurring before the death of a deceased person when the action is against the executor, administrator, or representative of the deceased's estate. Four requisites must concur for its application: (1) the witness is a party or assignor of a party; (2) the action is against a representative of a deceased person; (3) the subject matter is a claim or demand against the estate; and (4) the testimony refers to matters occurring before the death. Two reasons forestall its application here. First, petitioners filed a compulsory counterclaim against respondent in their Answer, effectively removing the case from the statute's ambit. Well-entrenched is the rule that when the representatives of the estate set up a counterclaim, the plaintiff may testify to occurrences before the death to defeat the counterclaim, as the action is not brought against but by the estate. Second, Josephine Sy is not a party or assignor of a party to the case; she is merely a witness of respondent. Petitioners' characterization of her as respondent's "alter ego" does not make her an assignor, as the term "assignor" refers to one who assigns a cause of action that has already arisen, not one who assigns a right before any cause of action has arisen. Furthermore, Josephine's testimony was not shown to be involuntary—her candid admission that she would not have testified absent a request does not amount to coercion—and her relationship to respondent's wife does not per se diminish her credibility.

• Existence of Partnership: A partnership may be constituted in any form, except where immovable property or real rights are contributed, in which case a public instrument is necessary. Based on the intention of the parties as gathered from their facts, language, and conduct, a verbal contract of partnership may arise. The essential elements that must be proven are (1) mutual contribution to a common stock, and (2) a joint interest in the profits. Both the trial court and the Court of Appeals found these elements satisfied based not only on testimonial evidence but on documentary evidence as well. Petitioners did not present any evidence in their favor during trial, having waived their right by failing to attend the scheduled hearing. A factual matter such as the existence of a partnership is conclusive on review and cannot be inquired into by the Supreme Court. Moreover, petitioners failed to object to the admissibility of respondent's documentary evidence at the time it was offered, precluding them from questioning its admissibility on appeal.

• Prescription and Laches: The Civil Code provides that an action to enforce an oral contract prescribes in six years. The right to demand an accounting for a partner's interest accrues at the date of dissolution, in the absence of any contrary agreement. The death of a partner results in dissolution under Article 1830 of the Civil Code. Respondent filed the action approximately three years after Jacinto's death, well within the six-year prescriptive period. While Jacinto's death dissolved the partnership, dissolution did not immediately terminate it; under Articles 1828 and 1829, the partnership continues and retains its legal personality until the complete winding up of its business, culminating in its termination. Thus, respondent as the surviving partner had the right to an account of his interest as against petitioners, who continued the business.

• SEC Registration: Article 1772 of the Civil Code requires partnerships with a capital of ₱3,000.00 or more to register with the SEC. However, this registration requirement is not mandatory. Article 1768 explicitly provides that the partnership retains its juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772. The failure to register does not invalidate the partnership as among the partners, so long as the contract has the essential requisites, because the main purpose of registration is to give notice to third parties. Non-compliance with this directory provision will not invalidate the partnership where the totality of the evidence proves the partners indeed forged the partnership.

• Dead Man's Statute (Survivorship Rule) — Under Section 23, Rule 130 of the Rules of Court, parties or assignors of parties to a case, or persons in whose behalf a case is prosecuted, against an executor, administrator, or other representative of a deceased person, cannot testify as to any matter of fact occurring before the death of such deceased person. Four requisites must concur: (1) the witness is a party or assignor of a party; (2) the action is against a representative of a deceased person or person of unsound mind; (3) the subject matter is a claim or demand against the estate; and (4) the testimony refers to matters occurring before the death. The statute does not apply when the representatives of the estate file a counterclaim, as the plaintiff may then testify to occurrences before the death to defeat the counterclaim. A witness who is not a party or assignor of a party is likewise not covered by the statute.

• Verbal Partnership — A partnership may be constituted in any form, except where immovable property or real rights are contributed, in which case a public instrument is necessary. A verbal contract of partnership may arise based on the intention of the parties as gathered from their facts, language, and conduct. The essential elements to prove a partnership are (1) mutual contribution to a common stock, and (2) a joint interest in the profits.

• SEC Registration as Directory, Not Mandatory — Under Article 1772 of the Civil Code, partnerships with capital of ₱3,000.00 or more must register with the SEC. However, this requirement is directory, not mandatory. Article 1768 provides that the partnership retains its juridical personality even if it fails to register. Failure to register does not invalidate the partnership as among the partners, so long as the essential requisites are present, because the main purpose of registration is to give notice to third parties.

• Dissolution vs. Termination of Partnership — The death of a partner results in dissolution under Article 1830 of the Civil Code. However, dissolution does not immediately terminate the partnership. Under Articles 1828 and 1829, the partnership continues and retains its legal personality until the complete winding up of its business, culminating in its termination. The right to demand an accounting accrues at the date of dissolution, in the absence of any contrary agreement (Article 1842).

• Prescription of Actions on Oral Contracts — An action upon an oral contract must be commenced within six years. An action for accounting filed by a surviving partner against the representatives of a deceased partner who continued the business is timely if filed within six years from the date of dissolution (the deceased partner's death).

• "A partnership may be constituted in any form, except where immovable property of real rights are contributed thereto, in which case a public instrument shall necessary. Hence, based on the intention of the parties, as gathered from the facts and ascertained from their language and conduct, a verbal contract of partnership may arise." — This passage states the ratio decidendi on the validity of verbal partnerships, establishing that form is not essential except where immovable property is contributed.

• "Well entrenched is the rule that when it is the executor or administrator or representatives of the estates that sets up the counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of the deceased to defeat the counterclaim." — This articulates the exception to the Dead Man's Statute when the estate's representatives file a counterclaim, a doctrine frequently cited in subsequent evidence jurisprudence.

• "The failure to register the contract of partnership does not invalidate the same as among the partners, so long as the contract has the essential requisites, because the main purpose of registration is to give notice to third parties, and it can be assumed that the members themselves knew of the contents of their contract." — This defines the directory nature of SEC registration under Article 1772 and its limited purpose of protecting third parties.

• Tan vs. Court of Appeals, 295 SCRA 247 (1998) — Cited for the definition of the Dead Man's Statute: that if one party to the alleged transaction is precluded from testifying by death, insanity, or other mental disabilities, the surviving party is not entitled to the undue advantage of giving his own uncontradicted and unexplained account of the transaction.

• Goni vs. Court of Appeals, 144 SCRA 222 (1986) — Cited as controlling authority for the rule that when the executor, administrator, or representatives of the estate set up a counterclaim, the plaintiff may testify to occurrences before the death of the deceased to defeat the counterclaim, and that as defendant in the counterclaim, the plaintiff is not disqualified from testifying.

• People vs. Nang, 289 SCRA 16 (1998) — Cited for the proposition that relationship per se, without more, does not affect the credibility of witnesses, applied to uphold the probative value of Josephine Sy's testimony despite her being the sister of respondent's wife.

• Alicbusan vs. Court of Appeals, 269 SCRA 336 — Cited for the rule that a factual matter like the finding of the existence of a partnership cannot be inquired into by the Supreme Court on review, and that the Court can no longer be tasked to go over the proofs presented by the parties and assess or weigh them.

• Chua vs. Court of Appeals, 301 SCRA 356 (1999) — Cited for the rule that a party who fails to object to the admissibility of evidence at the time it is offered cannot later question its admissibility on appeal.

• Sy vs. Court of Appeals, 313 SCRA 328 (1999) — Cited for the principle that upon dissolution, the partnership continues and its legal personality is retained until the complete winding up of its business, culminating in its termination.

• Section 23, Rule 130, Rules of Court — The Dead Man's Statute or Survivorship Rule, disqualifying parties or assignors of parties from testifying as to matters of fact occurring before the death of a deceased person in claims against the estate. Applied to determine the admissibility of respondent's and Josephine Sy's testimonies; held inapplicable due to petitioners' compulsory counterclaim and Josephine's status as a non-party witness.

• Article 1772, Civil Code — Requires partnerships with capital of ₱3,000.00 or more to register with the SEC. Held to be directory, not mandatory, and non-compliance does not invalidate the partnership as among the partners.

• Article 1768, Civil Code — Provides that the partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772. Applied to confirm the partnership's validity despite non-registration.

• Article 1828, Civil Code — Defines dissolution as the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on, as distinguished from the winding up of the business.

• Article 1829, Civil Code — Provides that on dissolution, the partnership is not terminated but continues until the winding up of partnership affairs is completed. Applied to establish that respondent's right to accounting persisted after Jacinto's death.

• Article 1830, Civil Code — Provides that the death of a partner results in the dissolution of the partnership. Applied to fix the date of dissolution as the date of Jacinto's death, from which the right to demand accounting accrued.

• Article 1842, Civil Code — Provides that the right to an account of a partner's interest accrues at the date of dissolution, in the absence of any agreement to the contrary. Applied to determine when respondent's cause of action accrued.

• Article 1144(1), Civil Code (prescription) — Provides that actions upon an oral contract must be commenced within six years. Applied to hold that respondent's action, filed three years after Jacinto's death, was well within the prescriptive period.

Melo, Vitug, Panganiban, and Sandoval-Gutierrez, JJ., concurred.