G.R. No.

L-19819 October 26, 1977

WILLIAM UY, plaintiff-appellee,

CONCEPCION JR., J.:

BartolomePuzon had a contract with the government for the construction of the GanyanganBato
Section of the PagadianZamboanga City Road, and of five (5) 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 which would be the
sub-contractor of the projects and the profits to be divided equally between them. William Uy inspected
the projects in question and, expecting to derive considerable profits therefrom, agreed to the
proposition, thus resulting in the formation of the "U.P. Construction Company".

The partners agreed that the capital of the partnership would be P100,000.00 of which each partner
shall contribute the amount of P50,000.00 in cash. But Puzon was short of cash and he promised to
contribute his share in the partnership capital as soon as his application for a loan with the PNB in the
amount of P150,000.00 shall have been approved. However, before his loan application could be acted
upon, he had to clear his collaterals of its encumbrances first. For this purpose, Uy gavePuzon the
amount of P10,000 as advance contribution of his share in the partnership to be organized which
amount will be used by Puzon to pay his obligations with the PNB. Uy again gave Puzon the amount of
P30,000 as his partial contribution to the proposed partnership and which Puzon was to use in payment
of his obligation to the Rehabilitation Finance Corporation. Puzon promised Uy that the amount of
P150,000 would be given to the partnership to be applied thusly: P40,000.00, as reimbursement of the
capital contribution of Uy which Uy had advanced to clear the title of Puzon's property; P50,000.00, as
Puzon's contribution to the partnership; and the balance of P60,000.00 as Puzon's personal loan to the
partnership.

Although the partnership agreement was signed by the parties in 1957,work on the projects was started
by the partnership in 1956 in view of the insistence of the Bureau of Public Highways to complete the
project right away. Since Puzon was busy with his other projects, Uy was entrusted with the
management of the projects and whatever expense the latter might incur, would be considered as part
of his contribution. At the end of December 1957, Uy had contributed to the partnership the amount of
P115,453.39, including his capital.

The loan of Puzon was approved and he gave to Uy the amount of P60,000.00. Of this amount,
P40,000.00 was for the reimbursement of Uy's contribution, and the P20,000.00 as Puzon's contribution
to the partnership capital.

To guarantee the repayment of the loan,Puzon, without the knowledge and consent of Uy, assigned to
PNB all the payments to be received on account of the contracts with the Bureau of Public Highways. By
virtue of said assignment, the Bureau of Public Highways paid the money due on the partial
accomplishments on the government projects to PNB which, in turn, applied portions of it in payment of
Puzon's loan. Of the amount of P1,047,181.07, released by the Bureau of Public Highways in payment of
the partial work completed by the partnership on the projects, the amount of P332,539.60 was applied
in payment of Puzon's loan and only the amount of P27,820.80 was deposited in the partnership
funds, which, for all practical purposes, was also under Puzon's account since Puzon was the custodian
of the common funds.

As time passed and the financial demands of the projects increased, Uy, who supervised the said
projects, found difficulty in obtaining the necessary funds with which to pursue the construction
projects. Uycalled on Puzon to comply with his obligations under the terms of their partnership and to
place, at least, his capital contribution at the disposal of the partnership. Despite several promises,
Puzon, however, failed to do so.

Failing to reach an agreement with Uy, Puzon, as prime contractor of the construction projects, wrote
the subcontractor, U.P. Construction Company, advising the partnership, of which he is also a partner,
that unless they presented an immediate solution and capacity to prosecute the work effectively, he
would be constrained to consider the sub-contract terminated and, thereafter, to assume all
responsibilities in the construction of the projects in accordance with his original contract with the
Bureau of Public Highways. On November 27, 1957, BartolomePuzon 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 in behalf of the partnership was revoked by Puzon who continued
with the construction projects alone.

On May 20, 1958, Uy, claiming that BartolomePuzon had violated the terms of their partnership
agreement, instituted an action in court, seekingthe dissolution of the partnership and payment of
damages.

After appropriate proceedings, the trial court found that the defendant, contrary to the terms of their
partnership agreement, failed to contribute his share in the capital of the partnership applied
partnership funds to his personal use; ousted the plaintiff from the management of the firm, and caused
the failure of the partnership to realize the expected profits of at least P400,000.00. As a consequence,
the trial court dismissed the defendant's counterclaim and ordered the dissolution of the partnership.
The trial court further ordered the defendant to pay the plaintiff the sum of P320,103.13.

Issue: W/N Puzon is guilty of breach of contract.

Held:Yes

Ratio:

After giving the amount of 60,00 he obtained from the loan, the appellant failed to make any further
contributions to the partnership funds as shown in his letters to the appellee wherein he confessed his
inability to put in additional capital to continue with the projects.
Parenthetically, the claim of the appellant that the appellee is equally guilty of not contributing his share
in the partnership capital inasmuch as the amount of P40,000is merely a personal loan of Puzon which
he had paid to Uy, is plainly untenable. The terms of the receipts signed by Puzon are clear and
unequivocal that the sums of money given by the Uy are Uy's partial contributions to the partnership
capital.

The findings of the trial court that Puzon misapplied partnership funds is, likewise, sustained by
competent evidence. It is of record that he assigned to PNB all the payments to be received on account
of the contracts to guarantee the repayment of the bank. By virtue of his personal loan with the said
bank assignment, the Bureau of Public Highways paid the money due on the partial accomplishments on
the construction projects in question to PNB who, in turn, applied portions of it in payment of the
appellant's loan.

Uy categorically stated that the assignment was made without his prior knowledge and consent and that
when he learned of said assignment, he called the attention of Puzon who assured him that the
assignment was only temporary as he would transfer the loan to the Rehabilitation Finance Corporation
within three (3) months’ time.

That the assignment to PNB was prejudicial to the partnership cannot be denied. The record shows that
Puzon received from the Bureau of Public highways, in payment of the work accomplished on the
construction projects, the amount of P1,047,181.01, which amount rightfully and legally belongs to the
partnership by virtue of the subcontract agreements between the appellant and the U.P. Construction
Company. In view of the assignment made by Puzon to PNB, the latter withheld and applied the amount
of P332,539,60 in payment of the appellant's personal loan with the said bank. The balance was
deposited in Puzon's current account and only the amount of P27,820.80 was deposited in the current
account of the partnership. If Puzongave to the partnership all that were earned and due it under the
subcontract agreements, the money would have been used as a safe reserve for the discharge of all
obligations of the firm and the partnership would have been able to successfully and profitably
prosecute the projects it subcontracted.

When did the appellant make the reimbursement claimed by him?

For the same period, the appellant actually disbursed for the partnership, in connection with the
construction projects, the amount of P952,839.77. Since the appellant received from the Bureau of
Public Highways the sum of P1,047,181.01, the appellant has a deficit balance of P94,342.24. The
appellant, therefore, did not make complete restitution.

Since the defendant appellant was at fault, the trial court properly ordered him to reimburse the
plaintiff-appellee whatever amount latter had invested in or spent for the partnership on account of
construction projects.

How much did the appellee spend in the construction projects question?

The commissioners are agreed that at the end of December, 1957, the appellee had a balance of
P8,242.39.
Mr. Ablaza, designated by the appellant, would want to charge the appellee with the sum of P24,239.48,
representing the checks isssued by the appellant, and encashed by the appellee or his brother, Uy Han
so that the appellee would owe the partnership the amount of P15,997.09.

Mr. Tayag, designated by the appellee, upon the other hand, would credit the appellee the following
additional amounts:

(1) P7,497.80 — items omitted from the books of partnership but recognized and charged to
Miscellaneous Expenses by Mr. Ablaza;

(2) P65,103.77 — payrolls paid by the appellee in the amount P128,103.77 less payroll remittances from
the appellant in amount of P63,000.00; and

(3) P26,027.04 other expenses incurred by the appellee at construction site.

With respect to the amount of P24,239.48, claimed by appellant, we are hereunder adopting the
findings of the trial which we find to be in accord with the evidence:

To enhance defendant's theory that he should be credited P24,239.48, he presented checks allegedly
given to plaintiff and the latter's brother, Uy Han. However, defendant admitted that said checks were
not entered nor record their books of account, as expenses for and in behalf of partnership or its affairs.
On the other hand, Uy Han testified that of the checks he received were exchanged for cash, while other
used in the purchase of spare parts requisitioned by defendant. This testimony was not refuted to the
satisfaction of the Court, considering that Han's explanation thereof is the more plausible because if
they were employed in the prosecution of the partners’ projects, the corresponding disbursements
would have certainly been recorded in its books, which is not the case. Taking into account defendant is
the custodian of the books of account, his failure to so enter therein the alleged disbursements,
accentuates the falsity of his claim on this point.

As for the sum of P26,027.04, the same represents the expenses which the appellee paid in connection
with the projects and not entered in the books of the partnership since all vouchers and receipts were
sent to the Manila office which were under the control of the appellant.

In resume', the appellee's credit balance would be as follows:

Undisputed balance as of Dec. 1957

Add: Items omitted from the books but P 8,242.

recognized and charged to

Expenses by Mr. Ablaza 7,497.80

Add: Payrolls paid by the appellee P128,103.77

Less: Payroll remittances received 63,000.00 65,103.77

Add: Other expenses incurred at the

site 26,027.04

TOTAL P106,871.00

At the trial, the appellee presented a claim for the amounts of P3,917.39 and P4,665.00 which he also
advanced for the construction projects but which were not included in the Commissioner's Report.

Appellee's total investments in the partnership would, therefore, be:

Appellee's total credits P106,871.00

Add: unrecorded balances for the month of Dec. 1957 3,917,39

Add: Payments to Munoz, as subcontractor of five Bridges 4,665.00

Total Investments P115,453.39

Has the appellee failed to make profits because of appellant's breach of contract?

There is no doubt that the contracting business is a profitable one.

Contrary to the appellant's claim, the partnership showed some profits during the period from July 2,
1956 to December 31, 1957. It showed a net loss of P134,019.43 due to the confusing accounting
method employed by the auditor. Corrected, the Profit and Loss 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.

Besides, as We have heretofore pointed out, the appellant received from the Bureau of Public Highways,
in payment of the construction projects in question, the amount of P1,047,181.01and disbursed the
amount of P952,839.77,leaving an unaccounted balance of P94,342.24. Obviously, this amount is also
part of the profits of the partnership.

During the trial of this case, it was discovered that the appellant had money and credits receivable from
the projects in question, in the custody of the Bureau of Public Highways, in the amount of P128,669.75,
representing the 10% retention.After the trial of this case, it was shown that the total retentions
amounted to P145,358.00.Surely, these retained amounts also form part of the profits of the
partnership.

Had the appellant not been remiss in his obligations as partner and as prime contractor of the
construction projects in question as he was bound to perform pursuant to the partnership and
subcontract agreements, and considering the fact that the total contract amount of these two projects is
P2,327,335.76, it is reasonable to expect that the partnership would have earned much more than the
P334,255.61 We have hereinabove indicated. 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.