Deluao v Casteel G.R. No.

L-21906 December 24, 1968

Castro, J.
INOCENCIA DELUAO and FELIPE DELUAO plaintiffs-appellees,
vs.
NICANOR CASTEEL and JUAN DEPRA, defendants,
NICANOR CASTEEL, defendant-appellant.

In 1940 Nicanor Casteel filed a fishpond application for a big tract of swampy land in Davao measuring 178.76
hectares. His first 2 applications were not acted upon, but his 3 rd application was disproved by the Bureau of Forestry
because the area applied for was still needed for firewood production.

Casteel did not lose interest despite the rejection. He still filed a motion for reconsideration. Meanwhile, several
applications were submitted by other persons for portions of the area covered by Casteel’s application. These were
approved. Because of the threat poised upon his position by the above applicants who entered upon and spread
themselves within the area, Casteel realized the urgent necessity of expanding his occupation thereof by constructing
dikes and cultivating marketable fishes. But lacking financial resources at that time, he sought financial aid from his
uncle Felipe Deluao who then extended a P27,000 loan. Hence, a wide productive fishpond was built.

Moreover, upon learning that portions of the area applied for by him were already occupied by rival applicants, Casteel
immediately filed the corresponding protests. Consequently, two administrative cases ensued involving the area in
question.

Despite the finding made in the investigation of the above administrative cases that Casteel had already introduced
improvements on portions of the area, the Director of Fisheries nevertheless rejected Casteel's application on October
25, 1949, required him to remove all the improvements and ordered that the land be leased through public auction.

On November 25, 1949 Inocencia Deluao (wife of Felipe Deluao) as party of the first part, and Nicanor Casteel as
party of the second part, executed a contract — denominated a "contract of service" — the salient provisions of which
are as follows:

That the Party of the First Part in consideration of the mutual covenants and agreements made herein to the Party of
the Second Part, hereby enter into a contract of service, whereby the Party of the First Part hires and employs the Party
of the Second Part on the following terms and conditions, to wit:

That the Party of the First Part will finance as she has hereby financed the sum of TWENTY SEVEN THOUSAND
PESOS (P27,000.00), Philippine Currency, to the Party of the Second Part who renders only his services for the
construction and improvements of a fishpond at Barrio Malalag, Municipality of Padada, Province of Davao,
Philippines;

That the Party of the Second Part will be the Manager and sole buyer of all the produce of the fish that will be produced
from said fishpond;

That the Party of the First Part will be the administrator of the same she having financed the construction and
improvement of said fishpond;

That this contract was the result of a verbal agreement entered into between the Parties sometime in the month of
November, 1947, with all the above-mentioned conditions enumerated;

On the same date that the contract was entered into, Inocencia Deluao executed a special power of attorney in favor
of Jesus Donesa. On November 29, 1949 the Director of Fisheries rejected the application filed by Felipe Deluao on
November 17, 1948. Unfazed by this rejection, Deluao reiterated his claim over the same area in the two administrative
cases and asked for reinvestigation of the application of Nicanor Casteel over the subject fishpond.
The Secretary of Agriculture and Natural Resources rendered a decision ordering Casteel to be reinstated in the area
and that he shall pay for the improvement made thereupon. 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.

The Deluao spouses filed an action in the CFI of Davao for specific performance and damages against Casteel for
alleged violation of the contract of service. On the date of the Hearing (May 2, 1956), there was no appearance on the
part of the defendant, so plaintiff introduced their evidence ex parte. A decision was rendered ordering the issuance of
a writ of preliminary injunction.

W/N the lower court erred in ordering the issuance ex parte of a writ of preliminary injunction against
defendant-appellant? YES

Apparently, the court a quo relied on exhibit A — the so-called "contract of service" — and the
appellees' contention that it created a contract of co-ownership and partnership between Inocencia
Deluao and the appellant over the fishpond in question.

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 appellees' allegation that exhibit A 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 the appellee Inocencia Deluao and the appellant entered into the so-called
"contract of service" on November 25, 1949, there were two pending applications over the fishpond.
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.

he 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 plaintiffs-appellees,
with the further provision that Casteel should reimburse the expenses incurred by the appellees over
one-half of the fishpond that would pertain to him.

Pursuant to the foregoing suggestion of the appellant that a document be drawn evidencing their
partnership, the appellee Inocencia Deluao and the appellant executed exhibit A which, although
denominated a "contract of service," was actually the memorandum of their partnership agreement.

Further exchanges of letters between the parties reveal the continuing intent to divide the fishpond.
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 the appellant'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.

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.

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.