Uy vs. Puzon

A partner who fails to contribute his agreed capital, applies partnership funds to his personal obligations without his co-partner’s consent, and ousts that co-partner from management is liable for breach of the partnership agreement and for reimbursement and unrealized profits, the latter being recoverable as lucrum cessans under Article 2200 of the Civil Code. The trial court’s factual findings, especially on credibility and accounting, will not be disturbed on appeal when supported by the evidence.

Bartolome Puzon held contracts with the Republic of the Philippines for the construction of the Ganyangan Bato Section of the Pagadian-Zamboanga City Road and five bridges in the Malangas-Ganyangan Road. William Uy agreed to provide financial assistance and to form a partnership, the U.P. Construction Company, which would act as subcontractor on those projects, with profits to be divided equally. The partnership was capitalized at P100,000.00, each partner to contribute P50,000.00. Article 2200 of the Civil Code, governing indemnification for damages including unrealized profits, supplies the statutory backdrop for the damages later awarded.

Bartolome Puzon had contracts with the Republic of the Philippines for the construction of the Ganyangan Bato Section of the Pagadian-Zamboanga City Road and five bridges in the Malangas-Ganyangan Road. Finding difficulty in accomplishing both projects, Puzon sought the financial assistance of William Uy. As an inducement, Puzon proposed the creation of a partnership between them that would be the subcontractor of the projects, with profits divided equally. Uy inspected the projects, expected considerable profits, and agreed, resulting in the formation of the U.P. Construction Company, which was subsequently engaged as subcontractor. The partners agreed that the capital would be P100,000.00, each contributing P50,000.00 in cash. Puzon, however, was short of cash and promised to contribute his share once his P150,000.00 loan application with the Philippine National Bank was approved, but before the loan could be acted upon he had to clear his collaterals of incumbrances.

On October 24, 1956, Uy gave Puzon P10,000.00 as advance contribution to the partnership to be organized under the firm name U.P. Construction Company, which amount Puzon would use to pay his obligations with the Philippine National Bank and effect the release of his mortgages. On October 29, 1956, Uy again gave Puzon P30,000.00 as partial contribution to the proposed partnership, which Puzon would use to pay his obligation to the Rehabilitation Finance Corporation. Puzon promised Uy that the P150,000.00 would be given to the partnership and applied as follows: P40,000.00 as reimbursement of Uy’s capital contribution advanced to clear the title of Puzon’s property; P50,000.00 as Puzon’s contribution to the partnership; and P60,000.00 as Puzon’s personal loan to the partnership. Although the partnership agreement was signed on January 18, 1957, work on the projects started on October 1, 1956 because the Bureau of Public Highways insisted on immediate completion. Since Puzon was busy with other projects, Uy was entrusted with management, and whatever expense Uy incurred would be considered part of his contribution. At the end of December 1957, Uy had contributed P115,453.39, including his capital.

Puzon’s loan was approved by the Philippine National Bank in November 1956, and he gave Uy P60,000.00. Of this amount, P40,000.00 was for reimbursement of Uy’s contribution used to clear the title to Puzon’s property, and P20,000.00 was Puzon’s contribution to the partnership capital. To guarantee repayment of the loan, Puzon, without the knowledge and consent of Uy, assigned to the Philippine National Bank all payments to be received on account of the contracts with the Bureau of Public Highways. By virtue of the assignment, the Bureau paid the money due on partial accomplishments to the Philippine National Bank, which applied portions to Puzon’s loan. Of the P1,047,181.07 released by the Bureau in payment of partial work completed by the partnership, P332,539.60 was applied to Puzon’s loan and only P27,820.80 was deposited in the partnership funds, which for practical purposes was also under Puzon’s account since he was the custodian of the common funds.

As time passed and the financial demands of the projects increased, Uy, who supervised the projects, found difficulty in obtaining funds. Uy called on Puzon to comply with his obligations under the partnership agreement and to place at least his capital contribution at the disposal of the partnership. Despite several promises, Puzon failed to do so. Uy wrote formal letters of demand, to which Puzon replied that he was unable to put in additional capital to continue with the projects. Failing to reach an agreement, Puzon, as prime contractor, wrote the subcontractor U.P. Construction Company on November 20, 1957, advising that unless they presented an immediate solution and capacity to prosecute the work effectively, he would be constrained to consider the subcontract terminated and thereafter assume all responsibilities in the construction of the projects. On November 27, 1957, Puzon again wrote the U.P. Construction Company finally terminating their subcontract agreement as of December 1, 1957. Thereafter, Uy was not allowed to hold office in the U.P. Construction Company, and his authority to deal with the Bureau of Public Highways on behalf of the partnership was revoked by Puzon, who continued with the construction projects alone.

On May 20, 1958, Uy, claiming that Puzon had violated the terms of their partnership agreement, instituted an action in court seeking, among other things, the dissolution of the partnership and payment of damages. Puzon denied that he violated the terms of their agreement, claiming that it was Uy who violated them, and prayed for dissolution and for payment by Uy of his share in the losses suffered by the partnership. After appropriate proceedings, the trial court found that Puzon, contrary to the terms of the partnership agreement, failed to contribute his share in the capital, applied partnership funds to his personal use, ousted Uy from management, and caused the failure of the partnership to realize the expected profits of at least P400,000.00. The trial court dismissed Puzon’s counterclaim, ordered the dissolution of the partnership, and ordered Puzon to pay Uy P320,103.13. Puzon appealed, and during the pendency of the appeal he died and was substituted by Franco Puzon.

• Breach of Contract: Appellant/Petitioner Bartolome Puzon argued that he was not guilty of breach of contract and maintained that it was the appellee, William Uy, who violated the terms of their partnership agreement.
• Insufficient Evidence for Monetary Awards: Appellant contended that the amounts of money he was ordered to pay the appellee were not supported by the evidence and the law.
• Unrealized Profits: Appellant argued that the trial court’s finding of P400,000.00 as reasonable profits of the partnership venture was without basis and unsupported by evidence; he maintained that the lower court did not consider the great risks involved in business operations and the fact that the appellee, who was in charge of the projects in the field, contributed in large measure to the failure of the partnership to realize such profits.
• Assignment and Reimbursement: Appellant claimed that the assignment to the Philippine National Bank was made with the consent of the appellee and did not prejudice the partnership because it was reimbursed by the appellant.
• Appellee’s Equal Fault: Appellant claimed that the appellee was equally guilty of not contributing his share in the partnership capital because the P40,000.00 allegedly given in October 1956 as the appellee’s partial contribution was merely a personal loan of the appellant which he had paid to the appellee.

• Breach and Dissolution: Appellee/Respondent William Uy claimed that Bartolome Puzon had violated the terms of their partnership agreement and sought the dissolution of the partnership and payment of damages.
• Failure to Contribute Capital: Appellee maintained that Puzon failed to contribute his share in the partnership capital and did not place his capital contribution at the disposal of the partnership despite repeated demands.
• Misapplication of Funds: Appellee stated that the assignment to the Philippine National Bank was made without his prior knowledge and consent; when he learned of it, he called the attention of the appellant, who assured him that the assignment was only temporary and that he would transfer the loan to the Rehabilitation Finance Corporation within three months.
• Ouster from Management: Appellee testified that after he demanded payment of Puzon’s contribution to the partnership capital, Puzon did not allow him to hold office in the U.P. Construction Company and revoked his authority to deal with the Bureau of Public Highways.
• Investments in the Partnership: Appellee presented claims for amounts he advanced for the construction projects, including unrecorded balances and payments to Munoz as subcontractor of the five bridges, which were not included in the commissioners’ report.

• Breach of Partnership Agreement: Whether appellant breached the partnership agreement by failing to contribute his share in the capital, applying partnership funds to his personal loan, and ousting appellee from management.
• Sufficiency of Evidence for Monetary Awards: Whether the amounts ordered against appellant—reimbursement, unrealized profits, and attorney’s fees—are supported by evidence and law.
• Unrealized Profits: Whether the award of P200,000.00 as appellee’s share in unrealized profits is speculative or based on reasonable estimate under Article 2200 of the Civil Code.
• Assignment to PNB and Reimbursement: Whether appellant’s assignment of partnership receivables to the Philippine National Bank was with appellee’s consent and did not prejudice the partnership, and whether appellant made complete restitution.
• Appellee’s Equal Fault: Whether appellee equally failed to contribute his share in the partnership capital because the P40,000.00 was merely a personal loan.

• Breach of Partnership Agreement: Yes. The trial court’s findings that appellant failed to contribute his capital, misapplied partnership funds, and ousted appellee from management are supported by evidence and were affirmed.
• Sufficiency of Evidence for Monetary Awards: Yes. The monetary awards were affirmed; the reimbursement was based on the commissioners’ accounting and the trial court’s findings, and the damages were supported by law and evidence.
• Unrealized Profits: Yes. Article 2200 of the Civil Code allows indemnification for profits the obligee failed to obtain; the P200,000.00 award was not speculative but based on reasonable estimate.
• Assignment to PNB and Reimbursement: No. The assignment was without appellee’s knowledge and consent and prejudiced the partnership; appellant did not make complete restitution, leaving a deficit of P94,342.24.
• Appellee’s Equal Fault: No. The receipts signed by appellant clearly stated that the P10,000.00 and P30,000.00 were appellee’s partial contributions to partnership capital, not personal loans.

• Breach of Partnership Agreement: The trial court’s finding that appellant failed to contribute his share in the capital of the partnership was clear and incontrovertible. After appellant’s P150,000.00 loan was approved by the Philippine National Bank in November 1956, he gave appellee P60,000.00; of this, P40,000.00 was applied as reimbursement of appellee’s contribution used to clear title to appellant’s property, and P20,000.00 was appellant’s contribution to the partnership. Thereafter, appellant failed to make any further contributions, as shown by his letters confessing his inability to put in additional capital. Appellant also assigned to the Philippine National Bank all payments to be received on account of the contracts with the Bureau of Public Highways without appellee’s knowledge and consent. By virtue of the assignment, the Bureau paid the money due on partial accomplishments to the bank, which applied P332,539.60 to appellant’s personal loan; only P27,820.80 was deposited in the partnership funds. Appellant received P1,047,181.01 but disbursed only P952,839.77 for the partnership, leaving a deficit balance of P94,342.24, so he did not make complete restitution. Appellee also testified that after demanding appellant’s contribution, appellant did not allow him to hold office and revoked his authority to deal with the Bureau. The trial court’s factual findings, especially on credibility, deserved respect.

• Sufficiency of Evidence for Monetary Awards: The trial court appointed two commissioners, Jesus B. Tayag for the plaintiff and Angel C. Ablaza for the defendant, to examine the books of account of the U.P. Construction Company and the defendant’s personal account. The commissioners agreed that at the end of December 1957 appellee had a balance of P8,242.39, but disagreed on adjustments to appellee’s capital account. Commissioner Ablaza sought to charge appellee P24,239.48 representing checks issued by appellant and encashed by appellee or his brother, Uy Han, which would make appellee owe the partnership P15,997.09. Commissioner Tayag sought to credit appellee additional amounts: P7,497.80 for items omitted from the partnership books but recognized and charged to Miscellaneous Expenses by Mr. Ablaza; P65,103.77 for payrolls paid by appellee in the amount of P128,103.77 less payroll remittances from appellant of P63,000.00; and P26,027.04 for other expenses incurred by appellee at the construction site. The trial court found Commissioner Ablaza’s report unreliable because of his proclivity to favor appellant and his inaccurate accounting procedure, while Commissioner Tayag’s report inspired faith and credence. The Court adopted the trial court’s findings. Appellee’s credit balance was computed as P106,871.00, plus unrecorded balances of P3,917.39 and payments to Munoz of P4,665.00, for total investments of P115,453.39. The trial court properly ordered appellant to reimburse appellee whatever amount the latter had invested in or spent for the partnership on account of the construction projects, and the decision was affirmed.

• Unrealized Profits: Under Article 2200 of the Civil Code, indemnification for damages shall comprehend not only the value of the loss suffered but also the profits which the obligee failed to obtain; lucrum cessans is a basis for indemnification. The contracting business was profitable, and the U.P. Construction Company derived some profits from its subcontracts in the construction of the road and bridge projects despite its deficient working capital and appellant’s juggling of funds. Although the Profit and Loss Statement showed a net loss of P134,019.43, this was primarily due to the confusing accounting method employed by the auditor, the erroneous inclusion of certain items such as appellant’s personal expenses and alleged extraordinary losses due to an accidental plane crash, and corrected, the statement would indicate a net profit of P41,611.28. For the period from January 1, 1958 to September 30, 1959, the partnership admittedly made a net profit of P52,943.89. Appellant received P1,047,181.01 from the Bureau of Public Highways and disbursed P952,839.77, leaving an unaccounted balance of P94,342.24, which was also part of the profits. During trial, it was discovered that appellant had money and credits receivable from the projects in the custody of the Bureau in the amount of P128,669.75, representing the 10% retention; after trial, total retentions amounted to P145,358.00. These retained amounts also formed part of the profits. Considering that the total contract amount of the two projects was P2,327,335.76, it was reasonable to expect that the partnership would have earned much more than the P334,255.61 indicated. The award of P200,000.00 as compensatory damages was not speculative but based on reasonable estimate.

• Assignment to PNB and Reimbursement: Appellee categorically stated that the assignment to the Philippine National Bank was made without his prior knowledge and consent and that when he learned of it, he called the attention of appellant, who assured him that the assignment was only temporary and that he would transfer the loan to the Rehabilitation Finance Corporation within three months. The question of whom to believe was largely dependent on the trier’s discretion, and the trial court’s findings deserved respect. The assignment was prejudicial to the partnership: of the P1,047,181.01 received from the Bureau of Public Highways, the bank withheld and applied P332,539.60 to appellant’s personal loan, and only P27,820.80 was deposited in the partnership account. Appellant’s claim of reimbursement was also insufficient. For the same period, appellant actually disbursed P952,839.77 for the partnership, but since he received P1,047,181.01, he had a deficit balance of P94,342.24. He therefore did not make complete restitution.

• Appellee’s Equal Fault: Appellant’s claim that appellee was equally guilty of not contributing his share because the P40,000.00 given in October 1956 was merely a personal loan was untenable. The terms of the receipts signed by appellant were clear and unequivocal that the sums of money given by appellee were appellee’s partial contributions to the partnership capital. In the receipt for P10,000.00 dated October 24, 1956, appellant stated that the amount was received “as advance contribution of the share of said William Uy in the partnership to be organized between us under the firm name U.P. CONSTRUCTION COMPANY.” In the receipt for P30,000.00 dated October 29, 1956, appellant stated that the amount was received “as partial contribution of the share of the said William Uy to the U.P. CONSTRUCTION COMPANY.” These receipts negated appellant’s claim that the amounts were personal loans.

• Lucrum cessans under Article 2200 of the Civil Code — Indemnification for damages includes not only the value of the loss suffered but also the profits which the obligee failed to obtain. The Court applied this doctrine to affirm the award of P200,000.00 as appellee’s share in unrealized profits, finding it based on reasonable estimate rather than speculation.
• Finality of trial court’s factual findings — Findings of fact of the trial court, especially those involving credibility of witnesses and accounting evidence, are entitled to respect and will not be disturbed on appeal when supported by the record. The Court applied this principle to sustain the findings on breach, misapplication of partnership funds, ouster from management, and damages.
• Partner’s duty to contribute and account — A partner who fails to contribute his agreed capital and applies partnership funds to his personal obligations without the consent of his co-partner breaches the partnership agreement and is liable to reimburse the partnership and account for any deficit. The Court affirmed liability for reimbursement and damages based on this principle.

• "Under Article 2200 of the Civil Code, indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain. In other words lucrum cessans is also a basis for indemnification." — This passage states the ratio decidendi for the award of unrealized profits, grounding the P200,000.00 compensatory damages in the Civil Code’s lucrum cessans doctrine.
• "The findings of the trial court that the appellant failed to contribute his share in the capital of the partnership is clear incontrovertible." — This passage reflects the Court’s deference to the trial court’s factual finding on appellant’s breach of the partnership agreement.
• "The appellant, therefore, did not make complete restitution." — This passage rejects appellant’s claim that his assignment to the Philippine National Bank and subsequent disbursements sufficiently reimbursed the partnership.
• "The award, therefore, made by the trial court of the amount of P200,000.00, as compensatory damages, is not speculative, but based on reasonable estimate." — This passage confirms that the unrealized profits award was not speculative and was supported by the evidence.

• Article 2200, Civil Code — Indemnification for damages shall comprehend not only the value of the loss suffered, but also that of the profits which the obligee failed to obtain. The Court applied this provision to uphold the award of P200,000.00 as appellee’s share in unrealized profits, treating lucrum cessans as a basis for indemnification.

Fernando (Chairman), Barredo, Antonio, and Santos, JJ., concurred. Aquino, J., concurred in the result.