CASE DIGEST : Lim Tong Lim v. Philippine Fishing Gear Industries, Inc. G.R. No. 136448, November 3, 1999 Third Division — Panganiban, J.

 

FACTS

Lim Tong Lim, Antonio Chua, and Peter Yao agreed to engage in a commercial fishing business. They agreed to acquire fishing boats and financed the venture through loans. Two boats, the F/B Lourdes and F/B Nelson, were purchased for ₱3.35 million, with ₱3.25 million borrowed from Jesus Lim, the brother of petitioner Lim Tong Lim. The boats were registered in Lim's name, but the Court noted that the registration was intended to serve as security for the loan. The parties also agreed that the expenses for refurbishing, repairing, and equipping the boats would be undertaken by Chua and Yao.

Because of the lack of funds, another ₱1 million loan was extended to the partnership. In connection with this loan, Chua and Yao entrusted the ownership papers of two other fishing boats to Lim. Thereafter, Chua and Yao purchased fishing nets and floats from Philippine Fishing Gear Industries, Inc. in the name of "Ocean Quest Fishing Corporation," their purported business name. The fishing nets cost ₱532,045, while the floats cost ₱68,000. The buyers failed to pay, prompting Philippine Fishing Gear to file a collection suit against Chua, Yao, and Lim and to seek a writ of preliminary attachment.

The alleged "Ocean Quest Fishing Corporation" was found to be nonexistent as a corporation according to a Certification from the Securities and Exchange Commission. The trial court therefore treated Chua, Yao, and Lim as general partners. The RTC found that a partnership existed based on the parties' conduct and a subsequent Compromise Agreement they entered into in another case. Under that agreement, the parties agreed to sell the four fishing vessels for ₱5.75 million, apply the proceeds to their obligations, and divide any excess or deficiency equally among Lim, Chua, and Yao.

The RTC ruled that Lim, Chua, and Yao were jointly liable for the unpaid fishing nets and floats. The Court of Appeals affirmed, finding that they had undertaken a partnership for commercial fishing. Lim then filed a petition for review before the Supreme Court, arguing that no partnership existed, that he was merely a lessor of the boats, that he had not participated in purchasing the nets, and that he should not be liable under the doctrine of corporation by estoppel.

ISSUE

The principal issue was whether a partnership existed among Lim, Chua, and Yao, such that Lim could be held liable for the fishing nets and floats purchased for their fishing venture. The Court examined their agreement, their contributions to the venture, their agreement to divide profits and losses, and their subsequent conduct.

The Court also had to determine whether Lim could avoid liability by claiming that he was merely a lessor of the fishing boats and that he did not personally purchase the nets and floats from Philippine Fishing Gear. Lim argued that the purchase negotiations were conducted only by Chua and Yao and that his name did not appear in the contracts with the respondent.

Another issue was whether Lim could escape liability because the supposed Ocean Quest Fishing Corporation was never legally incorporated. Lim invoked the doctrine of corporation by estoppel and argued that only Chua and Yao, who dealt directly with Philippine Fishing Gear in the name of the supposed corporation, should be liable for the purchase.

Finally, Lim questioned the validity of the writ of preliminary attachment over the fishing nets. The Court therefore considered whether the attachment was proper, particularly because the nets were acquired and used in the fishing venture and because ownership of the nets had been retained by Philippine Fishing Gear until full payment.

HELD

The Supreme Court DENIED the petition and AFFIRMED the decision of the Court of Appeals. It held that a partnership existed among Lim, Chua, and Yao under Article 1767 of the Civil Code, which provides that by a 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. The Court explained that their contribution to the common fund did not have to consist of cash or fixed assets; it could also consist of credit or industry.

The Court found that the parties had agreed to engage in a fishing business, acquired the boats through borrowed money, and agreed to divide equally any profits or losses arising from the sale and operation of the vessels. These circumstances established the existence of their partnership. The Court also held that the partnership extended to the purchase of the fishing nets and floats because these items were essential to the fishing business. Lim's claim that he was merely a lessor was rejected because his conduct—including consenting to the sale of the boats to pay the partnership's debt—was inconsistent with an ordinary lessor-lessee relationship.

The Court further applied Section 21 of the Corporation Code, concerning corporation by estoppel. The provision states that persons who assume to act as a corporation, knowing that they have no authority to do so, are liable as general partners for debts, liabilities, and damages incurred as a result. The Court explained that even if an ostensible corporation is legally nonexistent, persons who act on its behalf or knowingly benefit from transactions made by it may be held liable. Although Lim did not directly transact with Philippine Fishing Gear, he benefited from the use of the fishing nets because they were placed on the F/B Lourdes, which the Court found to be a partnership asset. He was therefore covered by the doctrine of corporation by estoppel.

The Court also held that the writ of preliminary attachment was proper. The F/B Lourdes was an asset of the partnership, while the nets and floats were specifically manufactured and acquired for the fishing venture. Moreover, ownership of the nets remained with Philippine Fishing Gear until full payment. The Court therefore DENIED the petition, affirmed the Court of Appeals, and ordered costs against Lim Tong Lim. The Court emphasized that the partners were liable for debts incurred by or on behalf of the partnership, and that a person who benefits from a contract entered into on behalf of an ostensible corporation may likewise be held liable.