SECOND DIVISION

[G.R. No. 159333. July 31, 2006.]

ARSENIO T. MENDIOLA , petitioner, vs . COURT OF APPEALS,

NATIONAL LABOR RELATIONS COMMISSION, PACIFIC FOREST
RESOURCES, PHILS., INC. and/or CELLMARK AB , respondents.

DECISION

PUNO , J : p

On appeal are the Decision 1 and Resolution 2 of the Court of Appeals, dated January 30,
2003 and July 30, 2003, respectively, in CA-G.R. SP No. 71028, affirming the ruling 3 of the
National Labor Relations Commission (NLRC), which in turn set aside the July 30, 2001
Decision 4 of the labor arbiter. The labor arbiter declared illegal the dismissal of petitioner
from employment and awarded separation pay, moral and exemplary damages, and
attorney's fees.
The facts are as follows:
Private respondent Pacific Forest Resources, Phils., Inc. (Pacfor) is a corporation
organized and existing under the laws of California, USA. It is a subsidiary of Cellulose
Marketing International, a corporation duly organized under the laws of Sweden, with
principal office in Gothenburg, Sweden.
Private respondent Pacfor entered into a "Side Agreement on Representative Office known
as Pacific Forest Resources (Phils.), Inc." 5 with petitioner Arsenio T. Mendiola (ATM),
effective May 1, 1995, "assuming that Pacfor-Phils. is already approved by the Securities
and Exchange Commission [SEC] on the said date." 6 The Side Agreement outlines the
business relationship of the parties with regard to the Philippine operations of Pacfor.
Private respondent will establish a Pacfor representative office in the Philippines, to be
known as Pacfor Phils, and petitioner ATM will be its President. Petitioner's base salary
and the overhead expenditures of the company shall be borne by the representative office
and funded by Pacfor/ATM, since Pacfor Phils. is equally owned on a 50-50 equity by ATM
and Pacfor-USA. DAHCaI

On July 14, 1995, the SEC granted the application of private respondent Pacfor for a
license to transact business in the Philippines under the name of Pacfor or Pacfor Phils. 7
In its application, private respondent Pacfor proposed to establish its representative
office in the Philippines with the purpose of monitoring and coordinating the market
activities for paper products. It also designated petitioner as its resident agent in the
Philippines, authorized to accept summons and processes in all legal proceedings, and all
notices affecting the corporation. 8
In March 1997, the Side Agreement was amended through a "Revised Operating and Profit
Sharing Agreement for the Representative Office Known as Pacific Forest Resources
(Philippines)," 9 where the salary of petitioner was increased to $78,000 per annum. Both
agreements show that the operational expenses will be borne by the representative office
and funded by all parties "as equal partners," while the profits and commissions will be
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 shared among them.
In July 2000, petitioner wrote Kevin Daley, Vice President for Asia of Pacfor, seeking
confirmation of his 50% equity of Pacfor Phils. 1 0 Private respondent Pacfor, through
William Gleason, its President, replied that petitioner is not a part-owner of Pacfor Phils.
because the latter is merely Pacfor-USA's representative office and not an entity separate
and distinct from Pacfor-USA. "It's simply a 'theoretical company' with the purpose of
dividing the income 50-50." 1 1 Petitioner presumably knew of this arrangement from the
start, having been the one to propose to private respondent Pacfor the setting up of a
representative office, and "not a branch office" in the Philippines to save on taxes. 1 2
Petitioner claimed that he was all along made to believe that he was in a joint venture with
them. He alleged he would have been better off remaining as an independent agent or
representative of Pacfor-USA as ATM Marketing Corp. 1 3 Had he known that no joint
venture existed, he would not have allowed Pacfor to take the profitable business of his
own company, ATM Marketing Corp. 1 4 Petitioner raised other issues, such as the rentals
of office furniture, salary of the employees, company car, as well as commissions allegedly
due him. The issues were not resolved, hence, in October 2000, petitioner wrote Pacfor-
USA demanding payment of unpaid commissions and office furniture and equipment
rentals, amounting to more than one million dollars. 1 5
On November 27, 2000, private respondent Pacfor, through counsel, ordered petitioner to
turn over to it all papers, documents, files, records, and other materials in his or ATM
Marketing Corporation's possession that belong to Pacfor or Pacfor Phils. 1 6 On
December 18, 2000, private respondent Pacfor also required petitioner to remit more than
three hundred thousand-peso Christmas giveaway fund for clients of Pacfor Phils. 1 7
Lastly, private respondent Pacfor withdrew all its offers of settlement and ordered
petitioner to transfer title and turn over to it possession of the service car. 1 8
Private respondent Pacfor likewise sent letters to its clients in the Philippines, advising
them not to deal with Pacfor Phils. In its letter to Intercontinental Paper Industries, Inc.,
dated November 21, 2000, private respondent Pacfor stated: cEDIAa

Until further notice, please course all inquiries and communications for Pacific
Forest Resources (Philippines) to:

Pacific Forest Resources

200 Tamal Plaza, Suite 200

Corte Madera, CA, USA 94925

(415) 927 1700 phone

(415) 381 4358 fax

Please do not send any communication to Mr. Arsenio "Boy" T. Mendiola or to the
offices of ATM Marketing Corporation at Room 504, Concorde Building, Legaspi
Village, Makati City, Philippines. 1 9

In another letter addressed to Davao Corrugated Carton Corp. (DAVCOR), dated

December 2000, private respondent directed said client "to please communicate
directly with us on any further questions associated with these payments or any future
business. Do not communicate with [Pacfor] and/or [ATM]." 2 0
Petitioner construed these directives as a severance of the "unregistered partnership"
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 between him and Pacfor, and the termination of his employment as resident manager of
Pacfor Phils. 2 1 In a memorandum to the employees of Pacfor Phils., dated January 29,
2001, he stated:
I received a letter from Pacific Forest Resources, Inc. demanding the turnover of
all records to them effective December 19, 2000. The company records were
turned over only on January 26, 2001. This means our jobs with Pacific Forest
were terminated effective December 19, 2000. I am concerned about your welfare.
I would like to help you by offering you to work with ATM Marketing Corporation.

Please let me know if you are interested. 2 2

On the basis of the "Side Agreement," petitioner insisted that he and Pacfor equally own
Pacfor Phils. Thus, it follows that he and Pacfor likewise own, on a 50/50 basis, Pacfor
Phils.' office furniture and equipment and the service car. He also reiterated his demand for
unpaid commissions, and proposed to offset these with the remaining Christmas
giveaway fund in his possession. 2 3 Furthermore, he did not renew the lease contract with
Pulp and Paper, Inc., the lessor of the office premises of Pacfor Phils., wherein he was the
signatory to the lease agreement. 2 4
On February 2, 2001, private respondent Pacfor placed petitioner on preventive
suspension and ordered him to show cause why no disciplinary action should be taken
against him. Private respondent Pacfor charged petitioner with willful disobedience and
serious misconduct for his refusal to turn over the service car and the Christmas giveaway
fund which he applied to his alleged unpaid commissions. Private respondent also alleged
loss of confidence and gross neglect of duty on the part of petitioner for allegedly allowing
another corporation owned by petitioner's relatives, High End Products, Inc. (HEPI), to use
the same telephone and facsimile numbers of Pacfor, to possibly steal and divert the sales
and business of private respondent for HEPI's principal, International Forest Products, a
competitor of private respondent. 2 5
Petitioner denied the charges. He reiterated that he considered the import of Pacfor
President William Gleason's letters as a "cessation of his position and of the existence of
Pacfor Phils." He likewise informed private respondent Pacfor that ATM Marketing Corp.
now occupies Pacfor Phils.' office premises, 2 6 and demanded payment of his separation
pay. 2 7 On February 15, 2001, petitioner filed his complaint for illegal dismissal, recovery of
separation pay, and payment of attorney's fees with the NLRC. 2 8
In the meantime, private respondent Pacfor lodged fresh charges against petitioner. In a
memorandum dated March 5, 2001, private respondent directed petitioner to explain why
he should not be disciplined for serious misconduct and conflict of interest. Private
respondent charged petitioner anew with serious misconduct for the latter's alleged act of
fraud and misrepresentation in authorizing the release of an additional peso salary for
himself, besides the dollar salary agreed upon by the parties. Private respondent also
accused petitioner of disloyalty and representation of conflicting interests for having
continued using the Pacfor Phils.' office for operations of HEPI. In addition, petitioner
allegedly solicited business for HEPI from a competitor company of private respondent
Pacfor. 2 9
Labor Arbiter Felipe Pati ruled in favor of petitioner, finding there was constructive
dismissal. By directing petitioner to turn over all office records and materials, regardless
of whether he may have retained copies, private respondent Pacfor virtually deprived
petitioner of his job by the gradual diminution of his authority as resident manager.
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 Petitioner's position as resident manager whose duty, among others, was to maintain the
security of its business transactions and communications was rendered meaningless. The
dispositive portion of the decision of the Labor Arbiter reads:

WHEREFORE, premises considered, judgment is hereby rendered ordering herein

respondents Cellmark AB and Pacific Forest Resources, Inc., jointly and severally
to compensate complainant Arsenio T. Mendiola separation pay equivalent to at
least one month for every year of service, whichever is higher (sic) , as
reinstatement is no longer feasible by reason of the strained relations of the
parties equivalent to five (5) months in the amount of $32,000.00 plus the sum of
P250,000.00; pay complainant the sum of P500,000.00 as moral and exemplary
damages and ten percent (10%) of the amounts awarded as and for attorney's
fees.

All other claims are dismissed for lack of basis.

SO ORDERED. 3 0

Private respondent Pacfor appealed to the NLRC which ruled in its favor. On December 20,
2001, the NLRC set aside the July 30, 2001 decision of the labor arbiter, for lack of
jurisdiction and lack of merit. 3 1 It held there was no employer-employee relationship
between the parties. Based on the two agreements between the parties, it concluded that
petitioner is not an employee of private respondent Pacfor, but a full co-owner (50/50
equity). aEACcS

The NLRC denied petitioner's Motion for Reconsideration. 3 2

Petitioner was not successful on his appeal to the Court of Appeals. The appellate court
upheld the ruling of the NLRC.
Petitioner's Motion for Reconsideration 3 3 of the decision of the Court of Appeals was
denied.
Hence, this appeal. 3 4
Petitioner assigns the following errors:
A. THE RESPONDENT COURT OF APPEALS COMMITTED REVERSIBLE
ERROR AND ABUSED ITS DISCRETION IN RENDERING JUDGMENT
AGAINST PETITIONER SINCE JURISDICTION HAS BEEN ACQUIRED OVER
THE SUBJECT MATTER OF THE CASE AS THERE EXISTS EMPLOYER-
EMPLOYEE RELATIONSHIP BETWEEN THE PARTIES.

B. THE RESPONDENT COURT OF APPEALS COMMITTED REVERSIBLE

ERROR AND ABUSED ITS DISCRETION IN RULING THAT JURISDICTION
OVER THE SUBJECT MATTER CANNOT BE WAIVED AND MAY BE
ALLEGED EVEN FOR THE FIRST TIME ON APPEAL OR CONSIDERED BY
THE COURT MOTU PROP[R]IO. 3 5

The first issue is whether an employer-employee relationship exists between petitioner

and private respondent Pacfor. caTIDE

Petitioner argues that he is an industrial partner of the partnership he formed with private
respondent Pacfor, and also an employee of the partnership. Petitioner insists that an
industrial partner may at the same time be an employee of the partnership, provided there
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 is such an agreement, which, in this case, is the "Side Agreement" and the "Revised
Operating and Profit Sharing Agreement." The Court of Appeals denied the appeal of
petitioner, holding that "the legal basis of the complaint is not employment but perhaps
partnership, co-ownership, or independent contractorship." Hence, the Labor Code cannot
apply.
We hold that petitioner is an employee of private respondent Pacfor and that no
partnership or co-ownership exists between the parties.
In a partnership, the members become co-owners of what is contributed to the firm capital
and of all property that may be acquired thereby and through the efforts of the members.
3 6 The property or stock of the partnership forms a community of goods, a common fund,
in which each party has a proprietary interest. 3 7 In fact, the New Civil Code regards a
partner as a co-owner of specific partnership property. 3 8 Each partner possesses a joint
interest in the whole of partnership property. If the relation does not have this feature, it is
not one of partnership. 3 9 This essential element, the community of interest, or co-
ownership of, or joint interest in partnership property is absent in the relations between
petitioner and private respondent Pacfor. Petitioner is not a part-owner of Pacfor Phils.
William Gleason, private respondent Pacfor's President established this fact when he said
that Pacfor Phils. is simply a "theoretical company" for the purpose of dividing the income
50-50. He stressed that petitioner knew of this arrangement from the very start, having
been the one to propose to private respondent Pacfor the setting up of a representative
office, and "not a branch office" in the Philippines to save on taxes. Thus, the parties in this
case, merely shared profits. This alone does not make a partnership. 4 0
Besides, a corporation cannot become a member of a partnership in the absence of
express authorization by statute or charter. 4 1 This doctrine is based on the following
considerations: (1) that the mutual agency between the partners, whereby the corporation
would be bound by the acts of persons who are not its duly appointed and authorized
agents and officers, would be inconsistent with the policy of the law that the corporation
shall manage its own affairs separately and exclusively; and, (2) that such an arrangement
would improperly allow corporate property to become subject to risks not contemplated
by the stockholders when they originally invested in the corporation. 4 2 No such
authorization has been proved in the case at bar. ITAaCc

Be that as it may, we hold that on the basis of the evidence, an employer-employee

relationship is present in the case at bar. The elements to determine the existence of an
employment relationship are: (a) the selection and engagement of the employee; (b) the
payment of wages; (c) the power of dismissal; and (d) the employer's power to control the
employee's conduct. The most important element is the employer's control of the
employee's conduct, not only as to the result of the work to be done, but also as to the
means and methods to accomplish it. 4 3
In the instant case, all the foregoing elements are present. First, it was private respondent
Pacfor which selected and engaged the services of petitioner as its resident agent in the
Philippines. Second, as stipulated in their Side Agreement, private respondent Pacfor pays
petitioner his salary amounting to $65,000 per annum which was later increased to
$78,000. Third, private respondent Pacfor holds the power of dismissal, as may be
gleaned through the various memoranda it issued against petitioner, placing the latter on
preventive suspension while charging him with various offenses, including willful
disobedience, serious misconduct, and gross neglect of duty, and ordering him to show
cause why no disciplinary action should be taken against him.
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 Lastly and most important, private respondent Pacfor has the power of control over the
means and method of petitioner in accomplishing his work.
The power of control refers merely to the existence of the power, and not to the actual
exercise thereof. The principal consideration is whether the employer has the right to
control the manner of doing the work, and it is not the actual exercise of the right by
interfering with the work, but the right to control, which constitutes the test of the
existence of an employer-employee relationship. 4 4 In the case at bar, private respondent
Pacfor, as employer, clearly possesses such right of control. Petitioner, as private
respondent Pacfor's resident agent in the Philippines, is, exactly so, only an agent of the
corporation, a representative of Pacfor, who transacts business, and accepts service on its
behalf.
This right of control was exercised by private respondent Pacfor during the period of
November to December 2000, when it directed petitioner to turn over to it all records of
Pacfor Phils.; when it ordered petitioner to remit the Christmas giveaway fund intended for
clients of Pacfor Phils.; and, when it withdrew all its offers of settlement and ordered
petitioner to transfer title and turn over to it the possession of the service car. It was also
during this period when private respondent Pacfor sent letters to its clients in the
Philippines, particularly Intercontinental Paper Industries, Inc. and DAVCOR, advising them
not to deal with petitioner and/or Pacfor Phils. In its letter to DAVCOR, private respondent
Pacfor replied to the client's request for an invoice payment extension, and formulated a
revised payment program for DAVCOR. This is one unmistakable proof that private
respondent Pacfor exercises control over the petitioner. DaEcTC

Next, we shall determine if petitioner was constructively dismissed from employment.

The evidence shows that when petitioner insisted on his 50% equity in Pacfor Phils., and
would not quit however, private respondent Pacfor began to systematically deprive
petitioner of his duties and benefits to make him feel that his presence in the company
was no longer wanted. First, private respondent Pacfor directed petitioner to turn over to it
all records of Pacfor Phils. This would certainly make the work of petitioner very difficult, if
not impossible. Second, private respondent Pacfor ordered petitioner to remit the
Christmas giveaway fund intended for clients of Pacfor Phils. Then it ordered petitioner to
transfer title and turn over to it the possession of the service car. It also advised its clients
in the Philippines, particularly Intercontinental Paper Industries, Inc. and DAVCOR, not to
deal with petitioner and/or Pacfor Phils. Lastly, private respondent Pacfor appointed a new
resident agent for Pacfor Phils. 4 5
Although there is no reduction of the salary of petitioner, constructive dismissal is still
present because continued employment of petitioner is rendered, at the very least,
unreasonable. 4 6 There is an act of clear discrimination, insensibility or disdain by the
employer that continued employment may become so unbearable on the part of the
employee so as to foreclose any choice on his part except to resign from such
employment. 4 7
The harassing acts of the private respondent are unjustified. They were undertaken when
petitioner sought clarification from the private respondent about his supposed 50% equity
on Pacfor Phils. Private respondent Pacfor invokes its rights as an owner. Allegedly, its
issuance of the foregoing directives against petitioner was a valid exercise of
management prerogative. We remind private respondent Pacfor that the exercise of
management prerogative is not absolute. "By its very nature, encompassing as it could be,
management prerogative must be exercised in good faith and with due regard to the rights
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 of labor verily, with the principles of fair play at heart and justice in mind." The exercise of
management prerogative cannot be utilized as an implement to circumvent our laws and
oppress employees. 4 8

As resident agent of private respondent corporation, petitioner occupied a position

involving trust and confidence. In the light of the strained relations between the parties, the
full restoration of an employment relationship based on trust and confidence is no longer
possible. He should be awarded separation pay, in lieu of reinstatement.
IN VIEW WHEREOF, the petition is GRANTED. The Court of Appeals' January 30, 2003
Decision in CA-G.R. SP No. 71028 and July 30, 2003 Resolution, affirming the December
20, 2001 Decision of the National Labor Relations Commission, are ANNULED and SET
ASIDE. The July 30, 2001 Decision of the Labor Arbiter is REINSTATED with the
MODIFICATION that the amount of P250,000.00 representing an alleged increase in
petitioner's salary shall be deducted from the grant of separation pay for lack of evidence.
SO ORDERED.
Sandoval-Gutierrez, Corona, Azcuna and Garcia, JJ., concur.

Footnotes

1. CA rollo, pp. 1058-1072.

2. Id. at 1105.
3. Id. at 28-37.
4. Id. at 118-139.
5. Id. at 682-683.
6. Id. at 683.
7. Rollo, p. 63.
8. Id. at 64.
9. CA rollo, p. 684. Other terms of the revised agreement include:

a) ATM and Pacfor-USA shall jointly manage Pacfor Phils.

b) Pacfor-Phils. will earn commissions at 1.5% of F.O.B. value, the computation of
which shall be shown in a credit memo issued by Cellmark/Pacfor.

c) Losses, if any, will be reimbursed by Cellmark/Pacfor to ATM for ATM's share of the
loss, for two consecutive years beginning with the first year of loss.

d) The revised agreement shall take effect on January 1, 1997.

e) Cash paid to the representative office by Pacific Paper belongs to Pacfor and will
be held in trust by ATM.
10. Id. at 685.
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 11. Rollo, p. 528.
12. Id. at 527.
13. Ibid.
14. Id. at 532.
15. Id. at 539.
16. Id. at 541.
17. Id. at 544.
18. Id. at 545.
19. CA rollo, p. 829.
20. Id. at 828.
21. Rollo, pp. 546-550.
22. Id. at 553.
23. Id. at 546-550.
24. Id. at 560.
25. Id. at 554-558.
26. Id. at 560.
27. Id. at 561.
28. CA rollo, p. 652.
29. Rollo, pp. 562-563.
30. Id. at 150.
31. Id. at 231-240.
32. CA rollo, pp. 333-335.
33. Id. at 84-86.
34. Rollo, pp. 14-36.
35. Id. at 27.
36. Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed., citing Nelson v.
Abraham, 177 P.2d 931 (1947); Henry v. Darnall, 246 Ill.App. 250 (1927), cited in Notes
of Decisions, 7 U.L.A. 15 (1949).
37. Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed., citing Darden v.
Cox, 123 So.2d 68 (1960).
38. Art. 1811 (1st par.).
39. Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed.

40. Fortis v. Gutierrez Hermanos, 6 Phil. 100 (1906).

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 41. J.M. Tuason v. Bolanos, 95 Phil. 106 (1954); Esteban B. Bautista, Treatise on Philippine
Partnership Law, 1978 ed., citing 60 A.L.R.2d 917; 6 Fletcher, Cyclopedia of Corporations,
Sec. 2520 (1950).

42. Esteban B. Bautista, Treatise on Philippine Partnership Law, 1978 ed., citing 13 Am. Jur.
830; 60 A.L.R.2d 913.

43. Sy v. Court of Appeals, G.R. No. 142293, February 27, 2003, 398 SCRA 301, citing
Caurdanetaan Piece Workers Union v. Laguesma, 286 SCRA 401, 420 (1998);
Maraguinot, Jr. v. NLRC, 284 SCRA 539, 552 (1998); APP Mutual Benefit Association,
Inc. v. NLRC, 267 SCRA 47, 57 (1997); Aurora Land Projects Corp. v. NLRC, 266 SCRA 48,
59 (1997); Encyclopedia Britannica (Phils.), Inc. v. NLRC, 264 SCRA 1, 6-7 (1996).

44. Feati University v. Bautista, G.R. No. L-21278, December 27, 1966, 18 SCRA 1191, 1217,
citing Amalgamated Roofing Co. v. Travelers' Ins. Co., 133 N.E. 259, 261; 300 Ill. 487.
45. CA rollo, pp. 724-733.
46. Philippine Japan Active Carbon Corp. v. NLRC, G.R. No. 83239, March 8, 1989, 171
SCRA 164.
47. Unicorn Safety Glass, Inv. v. Basarte, G.R. No. 154689, November 25, 2004, 444 SCRA
287.

48. Ibid.

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