agpart 925- part
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AgPart 925TRANSCRIPT
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CLV NOTES ON PROPERTY AUGUST 2010
1 HISTORICAL BACKGROUND ON PHILIPPINE PARTNERSHIP LAW page 3
2 THREE LEVELS OF EXISTENCE OF PARTNERSHIPS page 14
3 PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP page 22
4 ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP page 32
5 PARTNERSHIP AS A MEANS OF DOING BUSINESS, THROUGH THE JURIDICAL PERSON page 55
6 PARTNERSHIP AS A BUSINESS ENTERPRISE page 68
7 ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP page
72
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8 PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA page 84
9 CLASSES OF PARTNERSHIPS AND PARTNERS page 97
10 SPECIAL ISSUES OF WHO MAY QUALIFY TO BECOME PARTNERS page 107
11 PARTNERSHIP FORMAL AND REGISTRATION REQUIREMENTS page 122
12 RIGHTS AND POWERS OF PARTNERS page 149
13 DUTIES AND OBLIGATIONS OF PARTNERS page 175
14 DISSOLUTION, WINDING-UP AND TERMINATION OF THE PARTNERSHIP page 194
15 LIMITED PARTNERSHIPS page 230
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1 HISTORICAL BACKGROUND ON PHILIPPINE PARTNERSHIP LAW
[Updated: 23 August 2010]
I. HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP
LAW
1. Historical Background and Sources of Philippine Law on
Partnership
a. Notion of Partnership Is of Ancient Origins
Prof. Esteban B. Bautista wrote that as a business device, the
partnership was well known among the ancients and apparently
occupied such an important place in their social and economic life
that they made provision for it in their lawsamong the
Babylonians from the time of Hammurabi, among the Babylonian
Jews as early as the fourth century, and among the Romans almost
from the time they laid the foundation of their monumental legal
system. (BAUTISTA, ESTEBAN B., TREATISE ON PHILIPPINE
PARTNERSHIP LAW, Rex Book Store, 1995 Ed., at p. 1, hereinafter
referred to as BAUTISTA; citing 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 3 [1948]). He also wrote that in medieval times, the
device was prominent among the merchant princes in the Italian
cities; it also thrived in thirteenth century England where it was
regulated by guilds merchant. (BAUTISTA, at p. 1,citing 4 COLLIERS ENCYCLOPEDIA 257 [1952] and 12 ENCYCLOPEDIA OF
SOCIAL SCIENCE 4 [1948])
Professors Hector S. de Leon and Hector M. de Leon, Jr. write that
As early as 2300 B.C., Hammurabi, the famous king of Babylon, in
his compilation of the system of laws of that time, provided for the
regulation of the relation called partnership. Commercial
partnerships of that time were generally for single transactions or
undertakings. (DE LEON, HECTOR S., and DE LEON, HECTOR M.,
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JR., COMMENTS AND CASES ON PARTNERSHIP, AGENCY AND
TRUST, Rex Book Store, Inc., Manila, Philippines, 2005 ed. , at p. 2,
hereinafter referred to as DE LEONS). They also write that
Following the Babylonian period, we find clear-cut references to
partnerships in Jewish law . . . however, it must be remembered
that the ancient Jews were a pastoral people, and, therefore, the
partnership as a business organization under Jewish law was
concerned with the holding of title to land by two or more persons.
(DE LEONS, at p. 2)
b. Civil and Common Law Bases of Partnership Laws
The De Leons trace the origins of the modern-day partnership
through the English commercials courts which eventually was
integrated by then Chief Justice Lord Mansfield into the common law
system and that it was not until the latter years of the 18th
century that the law of partnership as we know it today began to
assume both form and substance. (DE LEONS, at p. 3)
They write that eventually in the United States, in 1914 the Uniform
Partnerships Act was endorsed by the National Conference of
Commissioners on Uniform State Laws, which had many points of
similarity with the English Partnership Act of 1890, and that For
this reason, the practical operation of the Uniform Partnership Act
has a background of application in the workings of the English Act.
(DE LEONS, at p. 5)
Bautista suggested that the modern world provisions on
partnership of every legal system providing for and regulating this
type of business organization are based upon the Roman law, of
course with several important modifications; . . . and that civil law
countries or jurisdiction regard the partnership as a legal entity,
while the common law ones generally do not. (BAUTISTA, at p.
1, citing 17 ENCYCLOPEDIA BRITANNICA 420 [1969]). The De Leons observe that In fine, modern partnership law may be said to
contain combination of principles and concepts developed from
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three sources: the Roman Law, the law [on] merchant and equity,
and the common law courts. (DE LEONS, at p. 5)
c. Particular Bases of Philippine Law on Partnerships
Before the promulgation of the New Civil Code, the Philippine
partnership laws formerly distinguished between civil partnership
and commercial partnerships. Civil partnerships were governed in
Title VIII of Book IV of the old Civil Code of 1889 (Articles 1665 to
1708); while commercial or mercantile partnership were governed
by Title I of Book II of the Code of Commerce (Articles 116 to 238).
According to Bautista, both sets of laws had their origin in the
Roman Law. (BAUTISTA, at p. 2)
The present Philippine Law on Partnership is provided under Title IX,
Book V of the New Civil Code (Republic Act No. 386), which took
effect on 30 August 1950, superseding the old Civil Code and
repealed in toto the provisions of the Code of Commerce on partnerships, which has resulted in the abolition of the distinction
between civil and commercial partnerships. (BAUTISTA, at p. 2). In
particular, Article 45 of the New Civil Code expressly provides that
Partnerships and associations for private interest or purpose are
governed by the provisions of this Code concerning partnerships.
While the bulk of the present provisions in the Civil Code were taken
from the old Civil Code provisions, the Code Commission reported
that some provisions were taken from the Code of Commerce, and
other rules were adopted from the Uniform Partnership Act and the
Uniform Limited Partnership Act of the United States. Bautista
assessed that [o]n the whole, it may be stated that the bulk of the
provisions of the New Civil Code on this subject are of American
origin, i.e., based on the United States Uniform Partnership Act and
Uniform Limited Partnership Act. (BAUTISTA, at p. 2)
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d. The Significance of Knowing the Historical Background of
Philippine Partnership Law
The historical background of Philippine Law on Partnerships, finding
its source from ancient times, indicate to us the relative efficiency of
the medium as it is able to survive up to the modern times. The
longevity of the partnership as a medium of doing business can be
drawn from two characteristics.
Firstly, that society considers it important enough to provide a legal framework by which entrepreneurs, merchants and businessmen
may draw upon a set of rules to govern the medium by which to
pursue a venture, without having to enter into costly and time-
consuming negotiations and contract drafting. The essential
characteristics of partnership as governed by law (under modern
settings, they would be: juridical personality, mutual
agency, delectus personae and unlimited liability of partners); and allow would-be partners the ability to rely upon the default legal
rules, with the assurance of the backings of the State by which to
enforce such default rules. This is what may be termed as the
nominate and principal characteristic of the contract of partnership.
Secondly, that the partnership relationship being essentially contractual in nature, assures would-be partners of the expedience
of contractual stipulation, to be able to tailor-fit their relationships in
a way that would best address their individual needs and their
working relationships with their co-partners, as well as the demands
of the business enterprise they have decided to embark upon.
Partnership Law therefore provides a stable platform by which
individuals may provide an active means to pursue jointly a
business enterprise.
The other significant reason coming from the historical background
of our Philippine Law on Partnerships is that it draws it strength and
its weakness from the fact that it is really an amalgam between two
sets of legal traditions: the Civil Law system upon which most of the
provisions of the New Civil Code had been drawn, and from the
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Common Law tradition, particularly from the Uniform Partnership
Act of the United States. Properly appreciated, that means that the
Philippine Law on Partnerships can truly be molded into a
framework that provides a stability from the set of rules and
principles that are laid out in the provisions of the New Civil Code,
and yet be dynamic and progressive in characteristic to allow
Filipino businessmen and the legal profession to be able to evolve
them effectively through application in the business world of
innovative changes and advances, confirmed and made
precedential in decisions of our courts resolving the acceptability
of such cutting-edge innovations.
2. Old Branches of Partnership Law
a. Distinguishing Between Civil and Commercial Partnerships
Before the New Civil Code, resolution of partnership issues
depended on whether it covered a civil partnership for which the
provisions of the old Civil Code were made to apply, or commercial
partnership, and therefore covered by the Code of Commerce. There
was even a third type of partnerships, the industrial partnerships,
which may have the characteristics of commercial or civil
partnerships, according to whether they have been established in
accordance with the requirements of the Code of Commerce or
without regard to the latter. (Prautch, etc. v. Hernandez, 1 Phil. 705, 709-710 [1903]).
The essence of a commercial partnership was that it was
undertaken by merchants, and essentially possessed of the
characteristic of habitualness (or more properly referred to as pursued as a going concern) to be governed under the provisions of the Code of Commerce. Article 1 of the Code of Commerce
provided that For purposes of this Code, the following are
merchants: 1. Those who, having legal capacity to engage in
commerce, habitually devote themselves thereto. . .
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To illustrate, Evangelista v. Commissioner of Internal Revenue, 102 Phil. 140 (1957), held that there would exists the elements of
common fund and intention to divide the profits among the
members of the family who borrowed money as a group, when the
facts showed that the
1. Said common fund was not something they found already in
existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in
a series of transactions. x x x The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of
the property acquired . . . In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to
other personal uses, of petitioners herein. The properties were
leased separately to several persons who, from 1945 to 1948
inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
(Ibid, at p. 145).
Prior to the New Civil Code, the significant distinctions between civil
partnerships from commercial partnerships were as follows:
(a) Registration was essential for the coming into existence of
commercial partnerships and their acquisition of juridical
personalities (Arts. 118-119, Code of Commerce;Hung-Man-Yoc v. Kieng-Chiong Seng, 6 Phil. 498 [1906]); whereas, it was the perfection of a contract of partnership which under the old Civil
Code brought about the separate juridical personality of a civil
partnership;
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(b) Commercial partners were solidarily liable for partnership
debts, albeit in a subsidiary manner, and therefore had the benefit
of excussion (Viuda de Chan Diaco v. Peng, 53 Phil. 906 [1928]); while civil partners were primarily but only jointly (pro-rata) liable for partnership debts (Co-Pitco v. Yulo, 8 Phil. 544 [1907]); and
(c) Commercial partnerships were deemed to be, and subject to
Code of Commerce provisions for, merchants.
As was aptly observed in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the distinction between civil and commercial
partnerships was critical under the old set-up because it determined
the applicable rules for registration, liability for the members, and
the rights and manner of dissolution.
At the onset of Philippine jurisprudential development, it was
recognized inPrautch v. Hernandez, 1 Phil. 705 (1903), that a commercial or mercantile partnership had for its object the pursuit of industry or commerce, and was then treated like a merchant that must necessarily be governed by the Code of Commerce and had to
comply with the registration requirements thereof to lawfully come
into existence.
In a commercial partnership, both the partnership and the separate
partners thereof may be joined in one action, but the private
property of the partners could be taken in payment of the
partnership debts only after the common property of the
partnership had been exhausted. (La Compaia Maritima v. Muoz, 9 Phil. 326 [1907]).
The commercial partnership under the Code of Commerce tended to
be a more solemn affair, and when it failed to register its articles of
partnership in the mercantile registry, it did not become a juridical
person nor did it have any personality distinct from the personality
of the individuals who composed it (Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 [1906];Bourns v. Carman, 7 Phil. 117 [1906]; Ang Seng Quen v. Te Chico, 7 Phil. 541 [1907]); and therefore could not also maintain an action in its namePrautch, etc. v. Hernandez, 1 Phil. 705 [1903]).
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In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), which involved a commercial partnership, but the requirements of the
Code of Commerce for the execution of public document and
registration in the mercantile registry (Art. 119, Code of Commerce)
were not complied with, the Supreme Court held that the alleged
partnership never had any legal existence nor has it acquired any
juridical personality in the acts and contracted executed and made
by it, (Ibid, at pp. 500-501) and what was applied was Article 119 of the Code of Commerce which made liable for the debts incurred
by such partnership de facto the persons in charge of the
management of the association . . . together with persons not
members of the association with whom they may have transaction
business in the name of the same. (Ibid, at p. 500.) Thus, the legal consequence of failing to comply with the registration
requirements under the Code of Commerce was to make the acting
partners personally and primarily liable for all partnership debts.
The doctrine is similar to the agency doctrine that an agent who
enters into a transaction on behalf of a non-existing principal
becomes personally liable for the obligations incurred thereby.
In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the civil partnership was engaged in the laundry business and governed
by the provisions of the Civil Code, it was held that the partnership
existed as a separate juridical person even when no formal
partnership agreement was entered into and registered, and
thereby the obligations of the partners for partnership debts were
held to be pro-rata.
Nonetheless, the registration requirements under the Code of
Commerce were never interpreted to undermine the obligatory force
of contracts entered into in the name of the commercial partners.
Thus, it was held inPrautch, etc. v. Jones, 8 Phil. 1 (1907), and affirmed in Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909), that while an unregistered commercial partnership and association has
no juridical personality, and as such cannot maintain an action in
the partnership name, nevertheless, the individual members may
sue jointly as individuals, and persons dealing with them in their
joint capacity will not be permitted to deny their right to do so.
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It was held in De los Reyes v. Lukban, 35 Phil. 757 (1916), and affirmed in Philippine National Bank v. Lo, 50 Phil. 802 (1927), that under the Code of Commerce, where the partners liability for a
partnership debt was only secondary or subsidiary, their right of
excussion was deemed already satisfied where at the time the
judgment was executed against the partnership they were unable to
show that there were still partnership assets, or when a writ of
execution against the partnership had been returned not fully
satisfied.
There was under the old set-up the debate of whether a partnership
can choose which set of laws should govern it; or whether a group
of co-venturers can choose by the expediency of registration under
the old Civil Code or under the Code of Commerce, of whether to
organize a civil or a commercial partnership. In Prautch, et. v. Hernandez, 1 Phil. 705 (1903), it was held
If that section includes commercial partnerships then such a
partnership can be organized under it selecting from the Code of
Commerce such of its provisions as are favorable to the partners
and rejecting such as are not, and even including in its articles of
agreement the right to do things which by that Code are expressly
prohibited. Such a construction would allow a commercial
partnership to use or dispense with the Code of Commerce as best
suited its own ends. (Ibid, at pp. 707-708)
. . . Is a commercial partnership distinguished from a civil one by
the object to which it is devoted or by the machinery with which it is
organized? We think that the former distinction is the true one. The
Code of Commerce of 1829 distinctly provided that those
partnership were mercantile which had for their object an operation
of commerce. (Art. 264.). x x x . The Code of Commerce declares
the manner in which commercial partnerships can be organized.
Such organization can be effected only in certain well-defined ways.
The provisions of this Code were well known when the Civil Code
was adopted. The author of that Code when writing article 1667,
having in mind the provisions of the Code of Commerce, did not say
that a partnership may be organized in any form, which would have
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repealed the said provisions of the Code of Commerce, but did say
instead that a civil partnership may be organized in any form.
Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), what the Supreme Court held critical was proper application
of Article 1670 of the old Civil Code which provided that civil
partnerships, on account of the objects to which they are devoted,
may adopt all the forms recognized by the Commercial Code, and
thereby held that
It will be seen from this provision that whether or not partnerships
shall adopt the forms provided for by the Civil or Commercial Codes
is left entirely to their discretion. And furthermore, that such civil
partnerships shall only be governed by the forms and provisions of
the Commercial Code when they expressly adopt them, and then
only in so far as they (rules of the Commercial Code) do not conflict
with the provisions of the Civil Code. In this provision the legislature
expressly indicates that there may exist two classes of commercial
associations, depending not upon the business in which they are
engaged but upon the particular form adopted in their organization.
. . We are inclined to the belief that the respective codes, Civil and
Commercial, have adopted a complete system for the organization,
control, continuance, liabilities, dissolutions, and juristic
personalities of associations organized under each. . . It is our
opinion that associations organized under the different codes are
governed by the provisions of the respective code. (Ibid, at pp. 10-11)
b. Significance of Knowing the Historical Distinctions
Between Civil and Commercial Partnerships
What may be considered as a good development in our present Law
on Partnerships is the removal of the distinctions between civil and
commercial partnerships, and which are now governed by a
common set of laws, i.e., the relevant provisions of the New Civil Code. The main drawback of such a development is that even
commercial partnerships (and admittedly there may not be quite a
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number operating due to the availability of the corporate medium),
would find themselves governed by non-commercial doctrines, such
as the non-central role of the institution of registration. And in fact,
many issues have arisen under our current Law on Partnerships
arising from having adopted in the New Civil Code provisions from
the Code of Commerce on registration requirements.
In addition, the civil-coding of some of the provisions of the Code
of Commerce which were copied into the New Civil Code, should
provide a better understanding of the legal consequences of current
provisions of the Philippine Law on Partnerships, and a better
constructions of the effects they have on the commercial field, by
providing a comparison with the old jurisprudential rulings for
commercial partnerships under the provisions of the Code of
Commerce.
oOo
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2 THREE LEVELS OF EXISTENCE OF PARTNERSHIPS
[Updated: 23 August 2010]
III. THREE LEVELS OF EXISTENCE OF PARTNERSHIPS
The Law on Partnerships under the New Civil Code treats of the
partnership in three levels of existence, namely:
(a) As a contractual relationship between and among the partners;
(b) As a means or medium of doing business, through the structure of separate juridical personality, or as the basis of creating multi-
leveled contractual relations among various parties; and
(c) As a business enterprise, or a business venture, or what is termed in other disciplines as a going concern.
Knowing the three levels at which the Law on Partnerships treats
the partnership arrangement is important in determining the legal
significance of the various provisions of the New Civil Code
regulating partnerships, as well as a manner of appreciating the
doctrinal value of such provisions.
1. Illustrative Interplay of the Tri-Level Existence of the
Partnership
It would be important to illustrate the legal interplay between the
three (3) levels of partnership existence, and the legal doctrines
that result from such interplay. For this purpose we will use the
decision of the Supreme Court inYu v. NLRC, 224 SCRA 75 (1993).
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In that decision, the facts indicated that a limited partnership was
duly registered with the firm name of Jade Mountain Products Company Limited (Jade Mountain), with the partnership business consisting of exploiting a marble deposit found on land
situated in Bulacan, but with the partnership having its main office
in Makati, Metropolitan Manila. Benjamin Yu was for many years the
Assistant General Manager of the partnership business, but only half
of his contracted salary was paid under the agreement that the rest
would be paid when the partnership is able to source more funding.
Majority of the partners eventually sold their equity (about 82%)
and the business to a new set of investors who retained the
business enterprise under the original name of Jade Mountain, but
moved the head office to Mandaluyong. When Benjamin Yu learned
later of the new address he proceeded to Mandaluyong but was told
that the new partnership did not wish to retain his services. He then
sought to recover from the new partnership his salary claims which
accrued with the original partnership.
Benjamin Yu filed a complaint for illegal dismissal and recovery of
unpaid salaries accruing from November 1984 to October 1988,
moral and exemplary damages and attorneys fees, against Jade
Mountain under the new partnership. The new partners contended
that Mr. Yu was never hired as an employee by the present or new
partnership. One of the issues raised was whether the new
partnership could be held liable for the claims of Yu pertaining to
the old partnership which had been dissolved due to the withdrawal
of the leading partners.
The basic contention of Mr. Yu was the principle that a partnership
has a juridical personality separate and distinct from that of each of
its members, which subsisted notwithstanding changes in the
identities of the partners. Consequently, the employment contract
between Benjamin Yu and the partnership and the partnership Jade
Mountain could not have been affected by changes in the latters
membership.
The Court defined the inextricable link of the contract of partnership
between the original partners and the juridical personality that
arose from the nexus of that contract, and that when the contract
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was rescinded with the withdrawal of the majority of the partners,
then the partnership was dissolved and its separate juridical
personality ceased to exists to cover the new set of partners, thus:
Two (2) main issues are thus posed for our consideration in the case
at bar:
(1) whether the partnership which had hired petitioner Yu as
Assistant General Manager had been extinguished and replaced by a
new partnership composed of Willy Co and Emmanuel Zapanta; and
(2) if indeed a new partnership had come into existence, whether
petitioner Yu could nonetheless assert his rights under his
employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the
NLRC, that is, that the legal effect of the changes in the
membership of the partnership was the dissolution of the old
partnership which had hired petitioner in 1984 and the emergence
of a new firm composed of Willy Co and Emmanuel Zapanta in
1987. (Ibid, at p. 80.)
The Court held that the applicable rule would be Article 1828 of the
Civil Code which defines dissolution of a partnership [as] the
change in the relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from the
winding up of the business. Nonetheless, the determination of the
right of Mr. Yu to recover from the new partnership which
constituted its own separate juridical personality was based on the
fact that it continued the old business enterprise of the dissolved
partnership, thus:
In the ordinary course of events, the legal personality of the
expiring partnership persists for the limited purpose of winding up
and closing of the affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business of the old
partnership was simply continued by the new partners, without the
old partnership undergoing the procedures relating to dissolution
and winding up of its business affairs. In other words, the new
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partnership simply took over the business enterprise owned by the
preceding partnership, and continued using the old name of Jade
Mountain Products Company Limited, without winding up the
business affairs of the old partnership, paying off its debts,
liquidating and distributing its net assets, and then re-assembling
the said assets or most of them and opening a new business
enterprise. There were, no doubt, powerful tax considerations which
underlay such an informal approach to business on the part of the
retiring and the incoming partners. It is not, however, necessary to
inquire into such matters.
What is important for present purposes is that, under the above
described situation, not only the retiring partners (Rhodora Bendal,
et al.) but also the new partnership itself which continued the
business of the old, dissolved, one, are liable for the debts of the
preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al., the Court held that under facts very similar to those in the case at
bar, a withdrawing partner remains liable to a third party creditor of
the old partnership. The liability of the new partnership, upon the
other hand, in the set of circumstances obtaining in the case at bar,
is established in Article 1840 of the Civil Code. . .(Ibid, at pp. 81-82)
Yu therefore recognized the applicability of the successor liability arising from business enterprise transfer (i.e., that the creditors of the business enterprise have a right to recover payment of their
claims against the transferee of the business enterprise), and
recognized that the business enterprise transfer doctrine is
governed in details under Article 1840 of the Civil Code.
Yu also recognized one of the principles in business enterprise transfers, that the new owners of the business enterprise do have a
right to choose who would be employed in their newly acquired
business, and they cannot be compelled to maintain the
employment contracts of the managers and employees existing with
the transferor, thus:
It is at the same time also evident to the Court that the new
partnership was entitled to appoint and hire a new general or
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assistant general manager to run the affairs of the business
enterprise taken over. An assistant general manager belongs to the
most senior ranks of management and a new partnership is entitled
to appoint a top manager of its own choice and confidence. The
non-retention of Benjamin Yu as Assistant General Manager did not
therefore constitute unlawful termination, or termination without
just or authorized cause. We think that the precise authorized cause
for termination in the case at bar was redundancy. 10 The new
partnership had its own new General Manager, apparently Mr. Willy
Co, the principal new owner himself, who personally ran the
business of Jade Mountain. Benjamin Yus old position as Assistant
General Manager thus became superfluous or redundant. 11 It
follows that petitioner Benjamin Yu is entitled to separation pay at
the rate of one months pay for each year of service that he had
rendered to the old partnership, a fraction of at least six (6) months
being considered as a whole year. (Ibid, at p. 83-84.)
Another illustrative case is the decision in United States v. Clarin, 17 Phil. 84 (1910), where a partner filed estafa charges against his co-
partners for the latters failure to deliver to him his half of the
profits from the partnership venture. In denying the applicability of
the charges of estafa the Court held
The P172 having been received by the partnership, the business
commenced and profits accrued, the action that lies with the
partner who furnished the capital for the recovery of his money is
not a criminal action for estafa, but a civil one arising from the
partnership contract for a liquidation of the partnership and a levy
on its assets if there should be any. x x x [Estafa] . . . does not
include money received for a partnership; otherwise the result
would be that, if the partnership, instead of obtaining profits,
suffered losses, as it could not be held liable civilly for the share of
the capitalist partner who reserved the ownership of the money
brought in by him, it would have to answer to the charge of estafa,
for which would be sufficient to argue that the partnership had
received money under the obligation to return it. The complaint for
estafa is dismissed without prejudice to the institution of a civil
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action. (Ibid, at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 [1952]).
The ruling in Clarin should be distinguished from that in People v. de la Cruz, (G.R. No. 21732 [1957], 03 September 1924, cited in People v. Campos, (CA) 54 O.G. 681 [1957]) where the industrial partner was held liable for estafa for appropriating money that has
been given to him by the capitalist partner for a particular
transaction. The doctrine was reiterated in Liwanag v. Court of Appeals, 281 SCRA 255 (1997), Thus, even assuming that a contract of partnership was indeed entered into by and between the
parties, we have ruled that when money or property have been
received by a partner for a specific purpose (such as that obtaining
in the instant case) and he later misappropriated it, such partner is
guilty of estafa.
Perhaps the interplay of the various levels of existence of the
partnership arrangement is best exemplified by the decision of the
Supreme Court inRojas v. Maglana, 192 SCRA 110 (1990). In that case, a partnership was constituted between Rojas and Maglana to
operate timber forest products concession, and articles of co-
partnership were duly executed and registered with the SEC using
the firm name Eastcoast Development Enterprises. Later, the partners took in an industrial partner, whereby they executed an
Additional Agreement which essentially adopted the registered
articles but covering the acceptance of an industrial partner, which
agreement was not duly registered with the SEC, and the
partnership operated under the original registered firm name.
Shortly thereafter, the original partners bought out the interest,
share and participation of the industrial partner in the firm, and the
partnership was continued without the benefit of any written
agreement or reconstitution of their written articles of co-
partnership.
When Rojas entered into a separate management contract with
another logging enterprise and withdrew his equipment from the
partnership, Maglana made a formal demand against Rojas for the
payment of his promised contribution to the partnership and
compliance with his obligation to perform the duties of logging
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superintendent as provided expressly in the registered articles of
co-partnership. When Rojas responded that he would not be able to
comply with his promised contribution and will not work as logging
superintendent for the partnership, Maglana gave notice of the
dissolution of the partnership. In the suit that ensued between the
partners, one of the issues that had to be resolved by the Court was
the nature of the partnership and the legal relationship of Rojas and
Maglana after the retirement of the industrial partner from the
second partnership.
On this issue, the trial court ruled that the second partnership
superseded the first partnership, so that when the second
partnership was dissolved by the withdrawal of the industrial
partner, there being no written contract of co-partnership when it
was continued by the two original partners, there was no
reconstitution of the original partnership, and consequently the
partnership that was continued between Rojas and Maglana was
a de factopartnership at will. In overruling the court a quo, the Court held
. . . [I]t appears evident that it was not the intention of the partners
to dissolve the first partnership, upon the constitution of the second
one, which they unmistakable called an Additional Agreement . . .
Except for the fact that they took in one industrial partner, gave him
an equal share in the profits and fixed the term of the second
partnership to thirty (30) years, everything else was the same.
Thus, they adopted the same name, . . . they pursued the same
purposes and the capital contributions of Rojas and Maglana as
stipulated in both partnership call for the same amounts. Just as
important is the fact that all subsequent renewal of Timber License
No. 35-36 were secured in favor of the First Partnership, the original
licensee. . . To all intents and purpose therefore, the First Articles of
Partnership were only amended, in the form of Supplementary
Articles of Co-Partnership . . . which was never registered . . .
Otherwise stated, even during the existence of the second
partnership, all business transactions were carried out under the
duly registered articles. (Ibid, at pp. 117-118)
The Court then proceeded to hold that
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21
On the other hand, there is no dispute that the second partnership
was dissolved by common consent. Said dissolution did not affect
the first partnership which continued to exist as shown by the
subsequent acts of the original partners carrying one with the
original partnership business and confirming the obligations
constituted under the original articles of partnership. The conclusion
of the Court was thus: Under the circumstances, the relationship of
Rojas and Maglana after the withdrawal of [the industrial partner]
can neither be considered as a de facto partnership, nor a
partnership at will, for as stressed, there is an existing partnership,
duly registered. (Ibid, at p. 118)
Rojas therefore affirms two important aspects in Partnership Law: Firstly, that registration of the contract of partnership with the SEC has the legal effect of binding the partners (and perhaps even
third parties dealing with the partnership), as to the contractual
obligations, the rights and duties of the partners, and which has
effective force even as the partnership undergoes changes within its
constitution by the acceptance into and withdrawal of partners into
the venture. Secondly, the underlying business enterprise, the manner of its operation, has much legal influence of determining
the contractual intents of the partners in the determination of inter-
partnership rights and obligations.
oOo
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3 PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP
[Updated: 23 August 2010]
III. PARTNERSHIP IS PRIMARILY A CONTRACTUAL
RELATIONSHIP
_____
Art. 1767. By the 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.
Two or more persons may also form a partnership for
the exercise of a profession. (1665a)
Art. 1770. A partnership must have a lawfu object or
purpose, and must be established for the common benefit or
interest of the partners.
Art. 1771. A partnership may be constituted in any
form, except where immovable property or real rights are
contributed thereto, in which case a public instrument shall
be necessary. (1667a)
Art. 1784. A partnership begins from the moment of
the execution of the contract, unless it is otherwise
stipulated. (1679)
_____
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23
Article 1767 of the Civil Code defines a contract of partnership as
one where 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, and includes in its
coverage the exercise of a profession pursued in partnership form.
The fact that a partnership is first and foremost a contractual
relationship, means that it is subject to the rules, principles and
doctrines pertaining to contracts in general, but modified in the
sense that a partnership is at the same time a medium of doing
business or a device for undertaking a venture. This means that
the Law on Partnerships must balance between the principles
governing the relationship of partners among themselves as
contractual parties, and also their rights and obligations with
respect to the business venture or undertaking that brought them
together in the first place. In other words, parties to a partnership
do not come together for the sake of coming together, but in order
to achieve as a group, a business venture or undertaking. The
various provisions of the Law on Partnerships embodied in the Civil
Code address either separately or coordinately these levels of
existence of a partnership: as contractual relationship, and as a
means of doing business.
An example showing the essence of a partnership as a contract is
provided under Article 1771 which bears the doctrine of
consensuality governing contracts in general: A partnership may
be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public
instrument shall be necessary. Article 1770 also embodies the
principle that the provisions of law are deemed incorporated into
every contract, even a contract of partnership as it provides that A
partnership must have a lawful object or purpose.
The primary doctrine that first and foremost the partnership must
find its nexus in a contractual relationship is exemplified in the
decision in Lyons v. Rosentock, 56 Phil. 632 (1932). In that case, Lyons and Elser were already partners in particular real estate
undertakings. Subsequently, Lyons became interested in purchasing
for the venture the San Juan estate, and moved forward towards
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24
negotiating its acquisition and communicating to Elser in the United
States to join him in the venture. Elser wrote back clearly indicating
that he was not joining Lyons in the San Juan estate venture. The
Court held that the fact that Lyons had used as security for the
acquisition of the San Juan estate one of the partnership properties
in anticipation that Elser would accept the partnership arrangement,
but which Elser definitive refused and the partnership property was
substituted by Lyons separate property to secure the venture, did
not make Lyons a partner in the San Juan estate venture, since
there was never any meeting of minds to constitute such
partnership. Lyons demonstrate that before there can be a partnership enterprise, it is necessary that there must having been
a meeting of minds to constitute a contract of partnership.
1. Characteristics of the Partnership Contract
a. Nominate and Principal
The contract of partnership is a nominate contract, not only because
it has been given a specific name under the New Civil Code, but it is
a principal contract and can exists on its own upon the essential
elements coming together at perfection; and that once created
there is a set of rules (Law on Partnerships of the New Civil Code)
that govern such contract, and the parties to such contract cannot
refuse generally to be governed by such provisions. Thus, Article 45
of the Civil Code provides that Partnerships and associations for
private interest or purpose are governed by the provisions of this
Code concerning partnerships.
To illustrate the nominate and principal nature of the contract of
partnership,Fernandez v. Dela Rosa, 1 Phil. 671 (1903), held that
The essential points upon which the minds of the parties must meet
in a contract of partnership are, therefore, (1) mutual contribution
to a common stock, and (2) a joint interest in the profits. If the
contract contains these two elements the partnership relation
results, and the law itself fixes the incidents of this relation if the
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25
parties fail to do so. In resolving the motion for reconsideration on
in original decision, the Court even held that It is of no importance
that the parties have failed to reach an agreement with respect to
the minor details of contract. These details pertain to the accidental
and not to the essential part of the contract.(Ibid, at p. 680. Also Fue Leung v. IAC, 169 SCRA 746 [1989]).
b. Consensual
A contract of partnership is essentially consensual, it is perfected
upon meeting of the minds of the parties of the subject matter to
undertake a business venture, and the consideration, which is the
obligation to contribute of money, property or service to a common
fund. Whether the business enterprise is actually constituted or set-
up, or whether or not the contributions have been made into the
partnership coffers, do not detract from the coming into existence of
a valid partnership contract. And failure to comply with the
undertaking to deliver the promised contribution does not make a
contract of partnership void, but merely gives a ground for its
dissolution.
Thus, in the early decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), the Court held that The execution of a written agreement
was not necessary in order to give efficacy to the verbal contract of
partnership as a civil contract, the contributions of the partners not
having been in the form of immovables or rights in
immovables. (Ibid, at p. 677). This feature of consensuality of a contract of partnership is now embodied in Article 1772 which
provides that A partnership may be constituted in any form except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary.
Although Articles 1772 and 1773 provide for public instrument and
registration when the capital contribution is more than P3,000.00,
and that of an inventory attached to the public instrument whenever
immovable property is contributed, nonetheless jurisprudence even
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26
discount the nullity of the resulting contract of partnership, as will
be discussed hereunder.
In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court held that when members of the family leased out a parcel of
land to SHELL Company, and used the advance rentals paid them to
allow one of their members to capitalize the dealership with SHELL,
then a partnership has been constituted among them:
There is no doubt that the parties hereto formed a partnership when
they bound themselves to contribute money to a common fund with
the intention of dividing the profits among themselves. The sole
dealership by the petitioner and the issuance of all government
permits and licenses in the name of petitioner was in compliance
with the [policy that a dealership can only be granted to one
person] of SHELL and the understanding of the parties of having
only one dealer of the SHELL products. (Ibid, at p. 837.)
In essence, Estanislao demonstrates that it is the true meeting of the minds of the parties (in this case, to pursue a common venture
as a family group) that shall govern the rights and obligations of the
contracting parties, and not the evidence of a purported agreement
(in this case the dealership agreement being registered only in the
name of a brother).
In contrast, in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), the parties executed a partnership agreement, to conduct and carry
on the business of operating a theatre for the exhibition of motion
and talking pictures; nonetheless, the Court held that the real
intention of the parties was to effect a sub-lease of the property and
the partnership agreement was resorted to in order to avoid the
provision in the main lease agreement prohibiting a sublease of the
premises. The Court took into consideration the following actuations
of the supposed Yulo partner to show that there as never a real
agreement to form a partnership, thus:
In the first place, plaintiff did not furnish the supposed P20,000
capital. In the second place, she did not furnish any help or
intervention in the management of the theatre. In the third place, it
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27
does not appear that she has ever demanded from defendant any
accounting of the expenses and earnings of the business. Were she
really a partner, her first concern should have been to find out how
the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was
absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of
P3,000 a month, which can not be interpreted in any manner than a
payment for the use of the premises which she had leased from the
owners. Clearly, plaintiff had always acted in accordance with the
original letter of defendant of June 17, 1945 (Exh. A), which
shows that both parties considered this offer as the real contract
between them. (Ibid, at p. 117.)
Yulo demonstrates the principle that a contract of partnership is consensual in nature and is constituted by the real meeting of the
minds; such that even when formal articles of partnership are
drawn-up between the parties, when it fact the evidence shows that
they never intended to enter into a partnership, the article of
partnership cannot create a partnership when in fact there has
never been a meeting of minds to constitute one.
In contrast, we view the decision in Woodhouse v. Halili, 93 Phil. 526 (1953), as a little dubious when it distinguishes between the
obligation to enter into a contract of partnership, from that of
executing the certificate of partnership itself. In Woodhouse, the plaintiff and the defendant had come to an agreement to enter into
a partnership business to bottle and distribute an American brand
softdrinks in the Philippines; and that defendant, who would
primarily finance the business, agreed to grant plaintiff the right to
receive 30% of the profits under his obligation to secure the bottling
franchise for the venture. When the venture was eventually set-up,
the defendant had refused to finalize the articles of partnership
when he learned during the negotiations in the United States that
plaintiff did not have for himself the bottling franchise he promised
he had secured. The plaintiff brought action to have the articles of
partnership executed and to receive his 30% share in the earnings.
Prescinding from the language of the original agreement executed
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28
between the parties that the very language of the agreement that
the parties intended that the execution of the agreement to form a
partnership was to be carried out at a later date. They expressly
agreed that they shall form a partnership, (Ibid, at p. 539) the Court held
As the trial court correctly concluded, the defendant may not be
compelled against his will to carry out the agreement nor execute
the partnership papers. Under the Spanish Civil Code, the defendant
has an obligation to do, not to give. The law recognizes the
individuals freedom or liberty to do an act he has promised to do,
or not to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto personalisimo), of
which courts may not compel compliance, as it is considered an act
of violence, to do so. (Ibid, at p. 539.)
We disagree with the afore-quoted ruling of the Court in that it fails
to appreciate the consensual nature of a contract of partnership,
and that the moment the parties come to an agreement which
basically embodies the formation of a common fund with the
intention of dividing the profits, as was the case between the parties
in Woodhouse, a contract of partnership arises, and the incidents thereof governed by Partnership Law, even in the absence of a
formal certificate or articles of co-partnership.
Only recently, Tocao v. Court of Appeals, 342 SCRA 20 (2000), summarized the prevailing doctrine on the nature of the contract of
partners, thus
To be considered a juridical personality, a partnership must fulfill
these requisites: (1) two or more persons bind themselves to
contribute money, property or industry to a common fund; and (2)
intention on the part of the partners to divide the profits among
themselves. It may be constituted in any form; a public instrument
is necessary only where immovable property or real rights are
contributed thereto. This implies that since a contract of partnership
is consensual, an oral contract of partnership is as good as a written
one. Where no immovable property or real rights are involved, what
matters is that the parties have complied with the requisites of a
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29
partnership. The fact that there appears to be no record in the
Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of
the Civil Code did not cause the nullification of the partnership. . .
(Ibid, at pp. 30-31.)
Tocao held that so long as the two essential elements of a partnership are present, then the fact that the business was
operated under the name of a registered sole proprietorship was of
no moment, especially when the registration of the business name
with the Bureau of Domestic Trade was only for purpose of being
able to secure such business name. (Ibid, at p. 36.)
c. Onerous and Bilateral
The onerous and bilateral characteristics of the contract of
partnership are demonstrated by the fact that the existence of a
partnership requires an agreement for the creation of a common
fund from the contributions of the partners, which may either be in
money, property or industry. Under Article 1786, a partner becomes
by its very constitution, a debtor of the partnership for whatever he
may have promised to contribute thereto. All partners are bound to
contribute to the common fund, or to the partnership, including
even the industrial partner who is bound to contribute his service.
d. Preparatory and Progressive
A contract of partnership is not entered into for the sake of merely
creating a contractual relationship between and among the
partners, but primarily to pursue a business enterprise
(i.e., creation of a common fund with intent to share profits and losses). Consequently, falling within the contractual meeting of the
minds of the parties is that the inter-partnership relationship
continues to evolve as the underlying business enterprise itself
evolves and progresses. In other words, the contract of partnership
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30
is simply the base upon which other contracts and various other
transactions are to be pursued with the public, and for which the
partners shall continually adjust their working relationships. The
operation of the underlying business enterprise also determines the
nature and value of the equity of the partners. Thus, when the
nexus of the contract of partnership (the common fund and
intention to divide the profits and losses) have been constituted,
other contractual relationships are expected to flow therefrom as a
matter of course.
An early illustration of the preparatory and progressive nature of the
contract of partnership can be found in the decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), where once the elements of contribution to a common fund and understanding of sharing of
profits had been clearly established between the parties, a contract
of partnership arose and all the incidents arising therefrom
automatically engendered even if the parties have not yet decided
upon the details of their relationship, thus
. . . We have already stated in the opinion what are the essential
requisites of a contract of partnership . . . Considering as a whole
the probatory facts which appears from the record, we have
reached the conclusion that plaintiff and the defendant agreed to
the essential parts of that contract, and did in fact constitute a
partnership, with the funds of which were purchased the cascoes
with which this litigation deals, although it is true that they did not
take precaution to precisely establish and determine from the
beginning the conditions with respect to the participation of each
partner in the profits or losses of the partnership. The
disagreements subsequently arising between them, when
endeavoring to fix these conditions, should not and cannot produce
the effect of destroying that which has been done, to the prejudice
of one of the partners, nor could it divest his rights under the
partnership which had accrued by the actual contribution of capital
which followed the agreement to enter into a partnership, together
with the transactions effected with partnership funds. The law has
foreseen the possibility of the constitution of a partnership without
an express stipulation by the partners upon those conditions, and
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31
has established rules which may serve as a basis for the distribution
of profits and losses among the partners. . . We consider that the
partnership entered into by the plaintiff and the defendant falls
within the provision of this article. (Ibid, at pp. 680-681.)
oOo
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4 ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP
[Updated: 12 October 2009]
IV. ESSENTIAL ELEMENTS OF THE CONTRACT OF
PARTNERSHIP
______
Art. 1767. By the 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.
Two or more persons may also form a partnership for
the exercise of a profession. (1665a).
Art. 1770. A partnership must have a lawful object or
purpose, and must be established for the common benefit or
interest of the partners.
When an unlawful partnership is dissolved by a judicial
decree, the profits shall be confiscated in favor of the State,
without prejudice to the provisions of the Penal Code
governing the confiscation of the instruments and effects of
a crime. (1666a)
Art. 1771. A partnership may be constituted in any
form, except where immovable property or real rights are
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33
contributed thereto, in which case a public instrument shall
be necessary. (1667a)
Art. 1784. A partnership begins from the moment of
the executio of the contract, unless it is otherwise stipulated.
(1679).
_____
The Law on Partnership under the New Civil Code begins with its
definition under Article 1776 as contract of partnership,
emphasizing that first and foremost the nexus of the legal
relationship is contractual in nature. As in any other contract, the
essential elements for a contract of partnership to be valid would be
as follows:
(a) CONSENT: The meeting of minds between two or more persons
to form a partnership (i.e., to pursue jointly a business enterprise, or to jointly exercise a profession);
(b) SUBJECT MATTER: The creation of a common fund or more
specifically, to undertake a business venture with the intention of
dividing the profits among themselves, or in the case of a
professional partnership, to exercise together a common
profession; and
(c) CONSIDERATION: The contribution of cash, property or
service to the business venture.
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1. Element of CONSENT
______
Art. 1769. In determining whether a partnership
exists, these rules shall apply:
(1) Except as provided by Article 1825, pesons who
are not partners as to each other are not partners as to third
persons;
(2) Co-ownership or co-possession does not of itself
establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself
establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any
property from which the returns are derived;
(4) The receipt by a person of a share of the profits of
a business is prima facie evidence that he is a partner in the
business, but no such inference shall be drawn if such profits
were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a
deceased partner;
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35
(d) As interest on a loan, though the amount of
payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a
business or other property by installments or otherwise. (n)
_____
a. Consent to Pursue a Business Jointly Is the Nexus of the
Partnership Relationship
The agreement of two or more persons to bind themselves to
jointly pursue a business venture constitutes the very nexus by
which the contract of partnership arises under Article 1767 of the
Civil Code. Under Article 1769 of the Civil Code, in determining
whether a partnership exists, the first and foremost rule is that
persons who are not partners as to each other are not partners as
to third persons. In other words, the general rules is that no
person can find himself a partner in a partnership, even as to third
parties, unless he previously consented to be in such contractual
relationship.
One does not become a partner, nor is a partnership constituted,
but the fact alone that they are associated together in situation
where there is co-ownership or profits earned therefrom. Thus,
under Article 1769(2), Co-ownership or co-possession does not of
itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the
property. The essence of every partnership arrangement is
the consent of each of the partners to be associated in a business venture.
b. Legal Capacity to Contract
Parties to a contract of partnership must have legal capacity to
contract. Under Article 1782, persons who are prohibited from
giving each other any donation or advantage cannot enter into a
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36
universal partnership. Under Article 87 of the Family Code, a
married woman may enter into a contract of partnership even
without her husbands consent, but the latter may object under
certain conditions.
c. Admission of New Partner into an Existing Partnership
Since consent is the nexus of all partnership relationships, the
principle is exemplified under Article 1804 of the Civil Code which
provides even in an already existing partnership, that no person
shall be admitted into a partnership, or become a party to the
partnership arrangement without the consent of all the partners.
2. SUBJECT MATTER: Pursuit of a Business Enterprise
Essentially, the consent or meeting of the minds of the parties in a
contract of partnership must be upon a particular type of subject
matter, which essentially is the pursuit of a business enterprise:
(a) an agreement to contribute to a common fund; and
(b) with joint interest in the profits and losses thereof.
The agreement to share profits and losses from the business
venture is the hallmark of a partnership arrangement. It is also the
essence of the equity position of the partners vis-a-vis the
business enterprise, as differentiated from partnership suppliers and
creditors, and company employees, who bear no proprietary
interest with the business enterprise they deal with.
Article 1769 of the Civil Code, in providing for the rules In
determining whether a partnership exists, states under paragraph
(4) that The receipt by a person of a share of the profits in
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37
the business is prima facie evidence that he is a partner in the business. In contrast, the same article provides, The sharing of
gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived.
It is fairly implied under Article 1767, as it defines a contract of
partnership, that the essence of the agreement among the partners
is to become equity-holders in a business enterprise, because their
consent must be the creation of a common fund with the intention
of dividing the profits among themselves. The essence of an equity
holder is to take the profits from the business, and consequently, to
absorb also the losses sustained thereby. Therefore, when a person
is entitled to share in the gross returns of the business venture,
he is not an equity holder, and if it is operated under the medium of
a partnership, such person is not a partner in the venture.
In Santos v. Reyes, 368 SCRA 261 (2001), the fact that in their Articles of Agreement, the parties agreed to divide the profits of a
lending business in a 70-15-15 manner, with the petitioner getting
the lions share . . . proved the establishment of a
partnership, (Ibid, at p. 269.) even when the other parties to the agreement were given separate compensations as bookkeeper and
creditor investigator.
In Tocao v. Court of Appeals, 365 SCRA 463 (2001), the Court held that a creditor of a business enterprise cannot seek recovery of his
claim against the partnership from a person who is without any
right to participate in the profits and who cannot be deemed as a
partner in the business enterprise, since the essence of partnership
is that the partners share in the profits and losses.
In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court held that
Being a contract of partnership, each partner must share in the
profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the
partners that they would earn a huge amount of profits, in the
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38
absence of fraud, the other partners cannot claim a right to recover
the highly speculative profits. It is a rare business venture
guaranteed to give 100% profits. (Ibid, at p. 95)
The Court also held that any stipulation on the payment of a high
commission to one of the partners must be understood have been
based on an anticipation of large profits being made from the
venture; and since the venture sustained losses, then there is no
basis to demand for the payment of the commissions.
Nonetheless, even when a person is entitled to share in the profits
of the business venture, when the legal basis upon such right is
based by some other contractual relationship not borne out of
equity or proprietary interests, such as payment of the principal
and/or interest on a loan or a debt, wages of an employee, rents
to a landlord, annuity to a widow or representative of a deceased
partner, or as consideration for the sale of the goodwill of a
business or other property by installments. In other words, the
contractual agreement to share in the profits and losses of a
business venture must always be based upon the assumption of
equity interest in the business enterprise upon which the contract of
partnership shall arise.
a. Co-ownership or Co-Possession Do Not Necessarily
Constitute a Partnership
In Navarro v. Court of Appeals, 222 SCRA 675 (1993), the Court held that mere co-ownership or co-possession of property does not
necessarily constitute the co-owners or co-possessors partners,
regardless of whether or not they share any profits derived from the
use of the property, when no indication is shown that the parties
had intended to enter into a partnership.
In Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436 (1985), four brothers and sisters acquired lots with the original
purpose to divide the lots among themselves for residential
purposes; when later they found it not feasible to build their
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39
residences thereon because of the high cost of construction, they
decided to resell the properties to dissolve the co-ownership. The
Court ruled that no partnership was constituted among the siblings,
since the original intention was merely to collectively purchase the
lots and eventually to partition them among themselves to build
their residences; and that in fact they had no choice but to resell
the same to dissolve the co-ownership. Obillos found that the division of the profits was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state;
and that there could not have been any partnership, but merely a
co-ownership, since there was utter lack of intent to form a
partnership or joint venture.
In contrast, in Reyes v. Commissioner of Internal Revenue, 24 SCRA 198 (1968), the Court found that where father and son
purchased a lot and building and had it administered by an
administrator, and divided equally the net income, there was a
partnership formed because profit was the original intention for the
common fund.
Likewise in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957), where three sisters bought four pieces of real property
with every intention to lease them out, and which they in fact
leased to various tenants and derived rentals therefrom, there was
a partnership formed.
b. Receipt By a Person of a Share of the Net Profit
Under Article 1769(4), the receipt by a person of a share of the net
profits of a business is prima facie evidence that he is a partner in the business. However, in the following cases, where there is legal
and contractual basis for the receipt of the profits other than as
equity holder, there is no partnership constituted, thus:
(a) As installment payments of debt and/or interests thereof;
(b) As wages of an employee;
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40
(c) As rentals paid to a landlord;
(d) As annuity to a widow or representative of deceased partner;
(e) As consideration of sale of goodwill or other property.
Thus, in Pastor v. Gaspar, 2 Phil. 592 (1903), the Court held that there was no new partnership formed when a loan was obtained to
purchase lorchas needed to expand the shipping business of an
existing shipping partnership venture under the condition that the
lender would receive part of the profits of the business in lieu of
interests.
In Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906), where the terms of the contract provided for the salary of the bookkeeper to be 5%
of net profits of the business, the same did not make the
bookkeeper a partner in the business, since it was merely a
measure of his salary as an employee of the company. To the same
effect is the ruling in Sardane v. Court of Appeals, 167 SCRA 524 (1988).
In Bastida v. Menzi & Co., 58 Phil. 188 (1933), the Court held that despite the agreement that Bastida was to receive 35% of the profit
from the business of mixing and distributing fertilizer registered in
the name of Menzi & Co., there was never any contract of
partnership constituted between them based on the following key
elements: (a) there was never any common fund created between
the parties, since the entire business as well as the expenses and
disbursements for operating it were entirely for the account of Menzi
& Co.; (b) there was no provision in the agreement for reimbursing
Menzi & Co. in case there should be no profits at the end of the
year; and (c) the fertilizer business was just one of the many lines
of business of Menzi & Co., and there were no separate books and
no separate bank accounts kept for that particular line of business.
The arrangement was deemed to be one of employment, with
Bastida contributing his services to manage the particular line of
business of Menzi & Co.
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Tocao v. Court of Appeals, 342 SCRA 20 (2001), held that while it is true that the receipt of a percentage of net profits constitutes
only prima facieevidence that the recipient is a partner in the business, the evidence in the case at bar controverts an employer-
employee relationship between the parties. In the first place,
private respondent had a voice in the management of the affairs of
the cookware distributorship, including selection of people who
would constitute the administrative staff and the sales force.
(Ibid, at pp. 33-34).
c. Meeting of Minds on the Establishing a Common Fund Is
the Essence of a Partnership Contract
All the foregoing examples indicate that what brings about a
contract of partnership is essentially an agreement to constitute a
common fund with the intention of dividing the profits and losses;
outside of these essential elements, a contract of partnership cannot
subsist.
The importance of consent, vis-a-vis the elements of common fund
and intention to divide the profits among themselves, is best
illustrated in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), where in fact the parties had executed formal articles of partnership, and
yet the Court found that the real intention of the parties was really
to constitute a relation of sublease between the parties over a
commercial land where one party (the lessee) was prohibited under
her main contract of lease from subleasing the property, and the
other party (the sublessee) wanted to operate a threater in said
premises. The Court held
The most important issue raised in the appeal is that contained in
the fourth assignment of error, to the effect that the lower court
erred in holding that the written contracts, Exhs. A, B, and C,
between plaintiff and defendant, are one of lease and not one of
partnership. We have gone over the evidence and we fully agree
with the conclusion of the trial court that the agreement was a
sublease, not a partnership. The following are the requisites of
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partnership: (1) two or more persons who bind themselves to
contribute money, property, or industry to a common fund; (2)
intention on the part of the partners to divide the profits among
themselves. (Art. 1767, Civil Code.)
In the first place, plaintiff did not furnish the supposed P20,000
capital. In the second place, she did not furnish any help or
intervention in the management of the theatre. In the third place, it
does not appear that she has ever demanded from defendant any
accounting of the expenses and earnings of the business. Were she
really a partner, her first concern should have been to find out how
the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was
absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of
P3,000 a month, which can not be interpreted in any manner than a
payment for the use of the premises which she had leased from the
owners. Clearly, plaintiff had always acted in accordance with the
original letter of defendant of June 17, 1945 (Exh. A), which
shows that both parties considered this offer as the real contract
between them. (Ibid, at pp. 116-117)
In the more contemporary decision in Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court affirmed the decision of the trial court Ordering the defendant to execute a public
instrument embodying all the provisions of the partnership
agreement entered into between plaintiffs and defendant as
provided for in Article 1771, Civil Code of the Philippines. In that
case, the siblings in a family leased out to SHELL a family
commercial lot for the establishment of a gasoline station, and they
invested the advanced rentals they received from SHELL to allow
one their brother to be the registered dealer of SHELL under the
latters policy of one station, one dealer, and that in fact the
registered dealer had accounted for the operations to the other
members of the family. When later on he stopped accounting for the
operations, and refused to acknowledge the existence of a
partnership over the gasoline station, the Court held
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Moreover other evidence in the record shows that there was in fact
such partnership agreement between the parties. . . Petitioner
submitted to private respondents periodic accounting of the
business. . . gave a written authority to private respondent . . ., his
sister, to examine and audit the books of their common business
(aming negosyo). . . . There is no doubt that the parties hereto formed a partnership when they bound themselves to contribute
money to a common fund with the intention of dividing the profits
among themselves. The sole dealership by the petitioner and the
issuance of all government permits and licenses in the name of
petitioner was in compliance with the afore-stated policy of SHELL
and the understanding of the parties of having only one dealer of
the SHELL products. (Ibid, at p. 837)
The other important aspect is determining whether a partnership
has been constituted among several persons, is that under our tax
laws, a partnership is treated like a corporate taxpayer and liable
separately for income tax for its operations apart from the individual
income tax liabilities of each of the partners.
Thus, in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957), three sisters borrowed a huge amount of money from their
father, and with their personal funds, purchased under several
transactions real estate properties, and subsequently appointed
their brother as manager thereof who leased them out to various
lessees. Eventually, the Collector of Internal Revenue assessed
them for the payment of corporate income tax they have been
operating the real estate venture. In arguing that they have never
formed a partnership, and that they merely constituted themselves
a co-owners of the properties bought pro indiviso, the Court held
Pursuant to this article, the essential elements of a partnership are
two, namely: (a) an agreement to contribute money, property or
industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed
to, and did, contribute money and property to a common fund.
Hence, the issue narrows down to their intent in acting as they did.
Upon consideration of all the facts and circumstances surrounding
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the case, we are fully satisfied that their purpose was to engage in
real estate transactions for monetary gain and then divide the same
among themselves, because:
1. Said common fund was not something they found already in
existence. It was not a property inherited by them pro indiviso.
They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a
series of transactions. . . . The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of
the property acquired by petitioners in February, 1943. In other
words, one cannot but perceive a character of habituality peculiar to
business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to
other personal uses, of petitioners herein. The properties were
leased separately to several persons, who, from 1945 to 1948
inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the
management of one person, namely, Simeon Evangelista, with full
power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10)
years, or, to be exact, over fifteen (15) years, since the first
property was acquired, and over twelve (12) years, since Simeon
Evangelista became the manager.
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6. Petitioners have not testified or introduced any evidence, either
on their purpose in creating the set up already adverted to, or on
the causes for its continued existence. They did not even try to offer
an explanation therefore. (Ibid, at pp. 144-146.)
In other words, the essence of the contract of partnership is that
the partners contract or bind themselves under a contractual
arrangement to be joint owners and managers of a business
enterprise, which is highlighted by the right to receive the net
profits and share the losses therein. Article 1770 of the Civil Code
provides that for a partnership contract to be valid it must be
established for the common benefit or interest of the partners,
which clearly indicates the equity or proprietorship position of the
partners. Consequently, if there is no clear meeting of the minds to
form a partnership venture, the fact that a person participates in
the gross receipts of a business enterprise or from a property
arrangement does not make him a partner because he is not made
to bear the burdens of ownership, i.e., to be liable for expenses and losses of the business enterprise.
The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA 74 (1972), is illustrative of this principle. In Ona, in the project partition agreed upon by the heirs the agreed to keep the properties
of the estate together and to divide the profits in proportion to their
stipulated interests therein. In holding that there was thereupon
constituted among the co-heirs an unregistered partnership subject
to corporate income tax under the Tax Code, the Court held
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limited themselves to holding the properties
inherited by them. Indeed, it is admitted that during the material
years herein involved, some of the said properties were sold at
considerable profit and that with said profit, petitioners engaged,
thru Lorenzo T. Ona, in the purchase and sale of corporate
securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. . . the
moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited
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properties themselves to be used by Lorenzo T. Ona as a common
fund in undertaking several transactions or in business, with the
intent ion of deriving profits to be shared by them proportionally,
such act was t