Deluao v. Casteel, G.R. No. L-21906, December 24, 1968

Summary: Nicanor Casteel filed a fishpond application for a big tract of swampy land in Sitio of Malalag.  Pending its resolution, several applications were submitted by other persons. One of them was Felipe Deluao who filed his own fishpond application for the area covered by Casteel's application.

Upon learning that portions of the area applied for by him were already occupied by rival applicants, Casteel immediately filed the corresponding protests (which became DANR Case 353 and DANR Case 353-B).

The Director of Fisheries rejected Casteel's application. Failing to secure a favorable resolution of his MR, Casteel appealed to the Secretary of Agriculture and Natural Resources.

Meanwhile, Inocencia Deluao (wife of Felipe Deluao) and Nicanor Casteel executed a contract — denominated a "contract of service" — whereby:

- Deluao will finance the sum of P27k for the construction and improvements of a fishpond at Barrio Malalag.

- Casteel will be responsible for the construction and improvements

- Deluao will be the administrator of the same she having financed the construction and improvement of said fishpond;

- Casteel will be the Manager and sole buyer of all the produce of the fish that will be produced from said fishpond

On Nov 29, 1949 the Director of Fisheries rejected the application filed by Felipe.

On Sept 15, 1950 the Secretary of Agriculture and Natural Resources ruled in favor of Casteel in DANR Case 353 and Case 353-B, revoking and denying the permits and applications of the other claimants, while granting the application of Casteel.

Casteel then forbade Inocencia Deluao from further administering the fishpond.

Alleging violation of the contract of service, Felipe Deluao and Inocencia Deluao filed an action in the CFI Davao for specific performance and damages against Nicanor Casteel and Juan Depra (who, they alleged, instigated Casteel to violate his contract). The Deluaos also filed an ex parte motion for the issuance of a preliminary injunction. The lower court granted the motion, and, two days later, it issued a preliminary mandatory injunction addressed to Casteel.

CFI Davao ruled in favor of Deluao, declared permanently the prohibition injunction, and ordered Casteel to deliver to the Deluao the possession and administration of ½ of the fishpond in question with all the improvements.

-RATIO: the  "contract of service"created a contract of co-ownership and partnership over the fishpond in question.

Dissatisfied with the said ruling, Casteel appealed to the CA which certified the case to the SC for final determination on the ground that it involves only questions of law.

SC set aside the decision of the CFI.

(1) The evidence preponderates in favor of the view that the initial intention of the parties was not to form a co-ownership but to establish a partnership.

-  the contract shows Inocencia Deluao as capitalist partner and Casteel as industrial partner.

-  exchanges of letters between the parties reveal the continuing intent to divide the fishpond

(2) This partnership continued until the decisions in DANR Cases 353 and 353-B were issued. This development, by itself, brought about the dissolution of the partnership. Several provisions of law prohibit the holder of a fishpond permit from transferring or subletting the fishpond granted to him. These made the continuation of the partnership unlawful and therefore caused its ipso facto dissolution. Moreover, subsequent events likewise reveal the intent of both parties to terminate the partnership because each refused to share the fishpond with the other.

                IN sum, the contract entered into by the parties was one of partnership, which can be 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.

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Ponente: CASTRO, J.

Facts:

On 4 separate occasions, Nicanor Casteel filed a fishpond application for a big tract of swampy land in Sitio of Malalag. No action was taken on his first 2 applications. His 3^rd was disapproved. Casteel filed a MR. But upon the advise of a district forester of Davao City, he filed another fishpond application.

Meanwhile, several applications were submitted by other persons for portions of the area covered by Casteel's application. One of them was Felipe Deluao who filed his own fishpond application on Nov 17, 1948 for the area covered by Casteel's application.

Upon learning that portions of the area applied for by him were already occupied by rival applicants, Casteel immediately filed the corresponding protests (which became DANR Case 353 and DANR Case 353-B).

However, despite the finding made in the investigation of the administrative cases that Casteel had already introduced improvements on portions of the area applied for by him in the form of dikes, fishpond gates, clearings, etc., the Director of Fisheries nevertheless rejected Casteel's application, required him to remove all the improvements which he had introduced on the land, and ordered that the land be leased through public auction. Failing to secure a favorable resolution of his MR of the Director's order, Casteel appealed to the Secretary of Agriculture and Natural Resources.

On Nov 25, 1949 Inocencia Deluao (wife of Felipe Deluao) and Nicanor Casteel executed a contract — denominated a "contract of service" — whereby:

- Delau will finance the sum of P27k for the construction and improvements of a fishpond at Barrio Malalag.

- Casteel will be responsible for the construction and improvements

- Delau will be the administrator of the same she having financed the construction and improvement of said fishpond;

- Casteel will be the Manager and sole buyer of all the produce of the fish that will be produced from said fishpond

On Nov 29, 1949 the Director of Fisheries rejected the application filed by Felipe.

On Sept 15, 1950 the Secretary of Agriculture and Natural Resources issued decisions in DANR Case 353 and Case 353-B. Both in favor of Casteel.

The dispositive portion of Case 353:

- In view of all the foregoing considerations, Fp. A. No. 661 (now Fp. A. No. 1717) of Nicanor Casteel should be, as hereby it is, reinstated and given due course for the area indicated in the sketch drawn at the back of the last page hereof; and Fp. A. No. 762 of Victorio D. Carpio shall remain rejected.

The dispositive portion of Case 353-B:

- WHEREFORE, Fishpond Permit No. F-289-C of Leoncio Aradillos and Fishpond Permit No. F-539-C of Alejandro Cacam, should be, as they are hereby cancelled and revoked; Nicanor Casteel is required to pay the improvements introduced thereon by said permittees xxx.

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, Felipe Deluao and Inocencia Deluao filed an action in the CFI Davao for specific performance and damages against Nicanor Casteel and Juan Depra (who, they alleged, instigated Casteel to violate his contract), praying inter alia, (a) that Casteel be ordered to respect and abide by the terms and conditions of said contract and that Inocencia Deluao be allowed to continue administering the said fishpond and collecting the proceeds from the sale of the fishes caught from time to time; and (b) that the defendants be ordered to pay jointly and severally to plaintiffs the sum of P20,000 in damages.

On April 18, 1951 the Deluaos filed an ex parte motion for the issuance of a preliminary injunction. The lower court granted the motion, and, two days later, it issued a preliminary mandatory injunction addressed to Casteel,

CFI Davao ruled in favor of Deluao, declared permanently the prohibition injunction, and ordered Casteel to deliver the claimant the possession and administration of ½ of the fishpond in question with all the improvements within it; and, pay Deluao damages.

-RATIO: the  "contract of service"created a contract of co-ownership and partnership between Inocencia Deluao and the appellant over the fishpond in question.

Dissatisfied with the said ruling, Casteel appealed to the CA which certified the case to the SC for final determination on the ground that it involves only questions of law.

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Issue: Whether the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction against Casteel, and in not dismissing the Deluaos' complaint.

Held: Yes.

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 Deluaos' allegation that the contract created a contract of co-ownership between the parties over the disputed fishpond. Were we to admit the establishment of a co-ownership 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.

It is well to note that when Inocencia Deluao and Casteel entered into the so-called "contract of service", there were two pending applications over the fishpond. One was Casteel's which was appealed by him to the Secretary of Agriculture and Natural Resources. The other was Felipe Deluao's application over the same area which was likewise rejected by the Director of Fisheries. Clearly, although the fishpond was then in the possession of Casteel, neither he nor, Felipe Deluao was the holder of a fishpond permit over the area. But be that as it may, they were not however precluded from exploiting the fishpond pending resolution of Casteel's appeal or the approval of Deluao's application over the same area — whichever event happened first. No law, rule or regulation prohibited them from doing so. Thus, rather than let the fishpond remain idle they cultivated it.

The evidence preponderates in favor of the view that the initial intention of the parties was not to form a co-ownership 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 Deluaos, with the further provision that Casteel should reimburse the expenses incurred by the them over one-half of the fishpond that would pertain to him. This can be gleaned, among others, from the letter of Casteel to Felipe Deluao on November 15, 1949, which states, inter alia:

... [W]ith respect to your allowing me to use your money, same will redound to your benefit because you are the ones interested in half of the work we have done so far, besides I did not insist on our being partners in my fishpond permit, but it was you "Tatay" Eping the one who wanted that we be partners and it so happened that we became partners because I am poor, but in the midst of my poverty it never occurred to me to be unfair to you. Therefore so that each of us may be secured, let us have a document prepared to the effect that we are partners in the fishpond that we caused to be made here in Balasinon, but it does not mean that you will treat me as one of your "Bantay" (caretaker) on wage basis but not earning wages at all, while the truth is that we are partners. In the event that you are not amenable to my proposition and consider me as "Bantay" (caretaker) instead, do not blame me if I withdraw all my cases and be left without even a little and you likewise.

Pursuant to the foregoing suggestion of Casteel that a document be drawn evidencing their partnership, Inocencia Deluao and Casteel executed the contract, which, although denominated a "contract of service," was actually the memorandum of their partnership agreement. That it was not a contract of the services was admitted by the Deluaos themselves in their letter to Casteel dated Dec 19, 1949 wherein they stated that they did not employ him.

Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond. In a letter, dated March 24, 1950, Casteel suggested that they divide the fishpond and the remaining capital, and offered to pay the Deluaos a yearly installment of P3,000 — presumably as reimbursement for the expenses of the Deluaos for the development and improvement of the one-half that would pertain to Casteel. Two days later, the Felipe Deluao replied, expressing his concurrence in Casteel's suggestion and advising the latter to ask for a reconsideration of the order of the Director of Fisheries disapproving Casteel's application, so that if a favorable decision was secured, then they would divide the area.

Apparently relying on the partnership agreement, the Felipe Deluao saw no further need to maintain his petition for the reinvestigation of Casteel's application. Thus by letter dated March 15, 1950 addressed to the Secretary of Agriculture and Natural Resources, he withdrew his petition on the alleged ground that he was no longer interested in the area, but stated however that he wanted his interest to be protected and his capital to be reimbursed by the highest bidder.

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. Moreover, subsequent events likewise reveal the intent of both parties to terminate the partnership because each refused to share the fishpond with the other.

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 Casteel'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."

Sec. 40 of Commonwealth Act 141, otherwise known as the Public Land Act, likewise provides that

The lessee shall not assign, encumber, or sublet his rights without the consent of the Secretary of Agriculture and Commerce, and the violation of this condition shall avoid the contract; Provided, That assignment, encumbrance, or subletting for purposes of speculation shall not be permitted in any case: Provided, further, That nothing contained in this section shall be understood or construed to permit the assignment, encumbrance, or subletting of lands leased under this Act, or under any previous Act, to persons, corporations, or associations which under this Act, are not authorized to lease public lands.

Finally, section 37 of Administrative Order No. 14 of the Secretary of Agriculture and Natural Resources issued in August 1937, prohibits a transfer or sublease unless first approved by the Director of Lands and under such terms and conditions as he may prescribe.

Since the partnership had for its object the division into two equal parts of the fishpond between the appellees and the appellant after it shall have been awarded to the latter, and therefore it envisaged the unauthorized transfer of one-half thereof to parties other than the applicant Casteel, it was dissolved by the approval of his application and the award to him of the fishpond. The approval was an event which made it unlawful for the business of the partnership to be carried on or for the members to carry it on in partnership.

The appellees, however, argue that in approving the appellant's application, the Secretary of Agriculture and Natural Resources likewise recognized and/or confirmed their property right to one-half of the fishpond by virtue of the contract of service, exhibit A. But the untenability of this argument would readily surface if one were to consider that the Secretary of Agriculture and Natural Resources did not do so for the simple reason that he does not possess the authority to violate the aforementioned prohibitory laws nor to exempt anyone from their operation.

However, assuming in gratia argumenti that the approval of Casteel's application, coupled with the foregoing prohibitory laws, was not enough to cause the dissolution ipso facto of their partnership, succeeding events reveal the intent of both parties to terminate the partnership by refusing to share the fishpond with the other.

On December 27, 1950 Casteel wrote Inocencia Deluao, expressing his desire to divide the fishpond so that he could administer his own share, such division to be subject to the approval of the Secretary of Agriculture and Natural Resources. By letter dated December 29, 1950, Felipe Deluao demurred to Casteel's proposition because there were allegedly no appropriate grounds to support the same and, moreover, the conflict over the fishpond had not been finally resolved.

Casteel wrote on January 4, 1951 a last letter to the Felipe Deluao wherein the former expressed his determination to administer the fishpond himself because the decision of the Government was in his favor and the only reason why administration had been granted to the Deluaos was because he was indebted to them. In the same letter, Casteel forbade Felipe Deluao from sending the couple's encargado, Jesus Donesa, to the fishpond. In reply thereto, Felipe Deluao wrote a letter dated January 5, 1951 in which he reiterated his refusal to grant the administration of the fishpond to Casteel, stating as a ground his belief "that only the competent agencies of the government are in a better position to render any equitable arrangement relative to the present case; hence, any action we may privately take may not meet the procedure of legal order."

Inasmuch as the erstwhile partners articulated in the aforecited letters their respective resolutions not to share the fishpond with each other — in direct violation of the undertaking for which they have established their partnership — each must be deemed to have expressly withdrawn from the partnership, thereby causing its dissolution pursuant to art. 1830(2) of the Civil Code which provides, inter alia, that dissolution is caused "by the express will of any partner at any time."

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. In the event that the appellee Deluao has received more than her lawful credit of P27,000 (or whatever amounts have been advanced to Casteel), plus 6% interest thereon per annum, then she should reimburse the excess to the appellant.

ACCORDINGLY, the judgment of the lower court is set aside. Another judgment is hereby rendered: (1) dissolving the injunction issued against the appellant, (2) placing the latter back in possession of the fishpond in litigation, and (3) remanding this case to the court of origin for the reception of evidence relative to the accounting that the parties must perforce render in the premises, at the termination of which the court shall render judgment accordingly. The appellant's counterclaim is dismissed. No pronouncement as to costs.