agpart 925- partnership and jv digest

PARTNERSHIP/JOINT VENTURE DIGESTS ATTY. COCHINGYAN ALS2014B

ALS2014B 1 of 69 sof

Evangelista vs. CIR (1957) (habitually peculiar to business) Doctrines:

Art. 1767: By the contract of partnership two or more persons bind themselves to contribute money, properly, or industry to a common fund, with the intention of dividing the profits among themselves.

Essential elements of a partnership:

o An agreement to contribute money, property, or industry to a common fund o Intent to divide the profit among the contracting parties.

A partnership is established when one cannot but perceive a character of habitually peculiar to business transactions engaged in purpose of gain.

Facts:

(This case heavily had elements of Taxation which I filtered out to focus on our topic of Partnership.)

Eufemia, Manuela, and Francisca Evangelista are sisters who borrowed a sum of money (P591,400) from their father in February 1943 which, together with their own personal monies, they used to consummate four (4) transactions of purchasing parcels of land. Subsequently, they appointed their brother Simeon to manage these properties with full power to lease, collect and receive rents, and to take proper action in cases of non-payment. These real properties earned income by being rented out to various tenants.

In 1954, the Collector of Internal Revenue (CIR) demanded payment of income tax for the period of 1945 to 1949. A letter of demand corresponding to this was sent to the petitioners and they instituted a case in the Court of Tax Appeals in which their petition was subsequently denied.

Upon review of the SC, the petitioners averred that they are mere co-owners, not copartners, for, in consequence of the acts performed by them, a legal entity, with a personality independent of that of its members, did not come into existence, and some of the characteristics of partnerships are lacking in the case at bar.

Issues:

1. MAIN ISSUE: W/N There was a partnership formed by the petitioners.

2. On Tax: W/N The petitioners are liable for the taxes demanded by the CIR (esp. Residence Tax on Corporations)

Held/Ratio:

1. YES. A partnership was formed due to the following reasons:

a) The common fund was not something they found already in existence. It was not property inherited by them. They created it purposely. They jointly borrowed a substantial portion thereof in order to establish said common fund.

b) They invested such fund, 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 the petitioners in February, 1943. In other words, one cannot but perceive a character of habitually peculiar to business transactions engaged in the purpose of gain.

c) The aforesaid lots were not devoted to residential purposes, or to other personal uses. The properties were leased separately to several persons

d) The affairs relative to said properties have been handled as if the same belonged to a corporation or business and enterprise operated for profit. Since it was managed in such a way by Simeon.



e) The foregoing conditions have existed for over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.

f) 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 therefor.

2. YES. They are liable for taxes INCLUDING Residence Taxes on Corporations (RToC)

Basically, since they were engaged in business and even earning income, they ought to be liable for taxes. Their contention was they are not a corporation, yet they are made liable for RToC. The court held that our National Internal Revenue Code along with the Commonwealth Act. 465 used the terms Corporations and Partnership with substantially the same meaning.

Yulo vs. Yang Chiao Seng (1959) (lessor-lessee; theater) Doctrine:

If a person is 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. If she is absolutely silent with respect to any of the acts that a partner should have done all she did was receive a certain sum, which cannot be interpreted in any manner than a payment for the use of the premises, then it is a lessor-lessee relationship under a contract of lease.

The requisites of 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.

Facts:

On June 17, 1945, Yang Chiao Send wrote a letter to Rosario Yulo and proposed to form a partnership between them to run an operate a theater on the premises occupied by former Cine Oro at Plaza Sta. Cruz, Manila.

The principal conditions of the offer are:

(1) that Yang Chiao Seng guarantees Mrs. Yulo a monthly participation of P3,000 payable quarterly in advance within the first 15 days of each quarter

(2) that the partnership shall be for a period of two years and six months, starting from July 1, 1945 to December 31, 1947, with the condition that if the land is expropriated or rendered impracticable for the business, or if the owner constructs a permanent building thereon, or Mrs. Yulo's right of lease is terminated by the owner, then the partnership shall be terminated even if the period for which the partnership was agreed to be established has not yet expired

(3) that Mrs. Yulo is authorized personally to conduct such business in the lobby of the building as is ordinarily carried on in lobbies of theatres in operation, provided the said business may not obstruct the free ingress and agrees of patrons of the theatre

(4) that after December 31, 1947, all improvements placed by the partnership shall belong to Mrs. Yulo, but if the partnership agreement is terminated before the lapse of one and a half years period under any of the causes mentioned in paragraph (2), then Yang Chiao Seng shall have the right to remove and take away all improvements that the partnership may place in the premises.

Yulo accepted the offer and they executed a partnership agreement establishing the Yang and Company, Ltd. The agreement further states that it will conduct the business of operating a theater for the exhibition of motion and talking pictures. The capital is fixed at P100,000 (Yang Chiao Seng P80,000 and Yulo P20,000). All gains and profits will be distributed in the same proportion as their capital contribution.



In June 1946, they entered into a supplementary agreement. This extended the partnership for three more years. The benefits were to be divided on a 50-50 basis. After December 31, 1950, the building shall exclusively belong to Yulo.

Yulo leased the land where the theater was constructer from the Santa Marinas. The lease contract stated that the lease shall continue for an indefinite time but may be cancelled after one year by either party. The party must inform the other by written notice at least 90 days before the cancellation. After a year, the lawyers of the Santa Marinas informed Yulo of their desire to cancel the contract. Yulo filed an action in the CFI of Manila to declare the lease of the premises. However, the court ordered the ejectment of Yulo and Yang. Yang and Yulo appealed. The CA affirmed the judgment.

Yulo demanded from Yang her share in the profits of the business (P35,000). Yang said that he had to suspend payment of the rentals because of the pendency of the ejectment suit. Yang claims that he is a mere sublessee and inasmuch as Yulo has not paid the Santa Marinas the rentals for the land, he was retaining the rentals to make good to the landowners the rentals due from Yulo in arrears.

Yulo filed a suit against Yang on the ground that Yang failed to pay her the share. Moreover, as a result of the termination of the partnership (December 31, 1959), Yulo became the sole owner of the building and claimed that reasonable rental (P5000) should be paid by Yang. Yang, on the other hand, claims that they entered into a contract of lease and not of partnership. He alleged that a partnership was adopted in order to get around the prohibition contained in the contract of lease between the owners and the plaintiff against the sublease of the property.

Issues:

1. W/N the parties entered into contract of partnership

Held:

1. NO.

The agreement is one of lease and not of partnership. The requisites of partnership are as follows: (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.

In this case, Yulo never furnished the supposed P20,000 capital. Also, she did not provide any help or intervention in the management of the theater and it does not appear that she ever demanded any accounting of the expenses and earnings of the business. If she were 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. All she did was to receive her share of P3,000 per month.

Pursuant to the letter drafted by Yang, the agreement between the parties was to end upon the termination of the right of Yulo to the lease. Her right terminated in July 1949. Therefore, she may not receive the monthly amount of P3,000 after this date.



Eligio Estanislao, Jr. vs. CA (1988) (Cash Pledge Agreement, siblings-partners, Shell) Doctrine

The registered dealer can be compelled to execute the covering articles of partnership, for accounting and distribution of the shares in profits of other partners.

Art 1770 1st paragraph A partnership must have a lawful 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 real property or real rights are contributed thereto, in which case a public instrument shall be necessary.

Facts

Petitioners and private respondents are brothers and sisters who are co-owners of lots in Annapolis and Aurora Blvd., Quezon City. These two parcels of lands were being leased by Shell. The Estanislaos executed an affidavit on April 11, 1966, where they agreed to help their brother (petitioner) by allowing him to negotiate and manage the gasoline station of the family. They negotiated with Shell, which had a policy of one station, one dealer; it was agreed that petitioner would apply for the dealership. On May 26, 1966, petitioner and respondents entered into an Additional Cash Pledge Agreement with Shell. For some time, petitioner had been diligent in submitting financial statements regarding the business operations, but subsequently failed to render accounting. Respondents, through counsel, wrote to petitioner a formal demand for accounting of profits.

When demand was unheeded, respondents filed a complaint in the CFI of Rizal, asking among others, that petitioner be ordered to 1.) execute the articles of partnership as provided in Art 1771 of the Civil Code, 2.) to render a formal accounting of the business, 3.) to pay the respondents their lawful share in the profits and 4.) to pay the respondents damages and attorneys fees.

The CFI decided in favor of petitioner, but subsequently, the newly appointed presiding judge reversed and rendered judgment in favor of respondents. On appeal, the CA affirmed. Hence, the present action.

Issue

1. W/N a partnership exists between petitioner and respondents arising from their joint ownership of the parcels of land leased by Shell.

Held

1. YES.

In arguing for the contrary, petitioner relies on the Additional Cash Pledge Agreement of May 20, 1966.

The joint affidavit of April 11, 1966 states:

a. That we are the Lessors of two parcels of land fully describe in Transfer Certificates of Title Nos. 45071 and 71244 of the Register of Deeds of Quezon City, in favor of the LESSEE - SHELL COMPANY OF THE PHILIPPINES LIMITED a corporation duly licensed to do business in the Philippines;

b. That we have requested the said SHELL COMPANY OF THE PHILIPPINE LIMITED advanced rentals in the total amount of FIFTEEN THOUSAND PESOS (Pl5,000.00) Philippine Currency, so that we can use the said amount to augment our capital investment in the operation of that gasoline station constructed ,by the said company on our two lots aforesaid by virtue of an outstanding Lease Agreement we have entered into with the said company;

c. That the SHELL COMPANY OF THE PHILIPPINE LIMITED out of its benevolence and desire to help us in augmenting our capital investment in the operation of the said gasoline station, has agreed to give us the said amount of P15,000.00, which amount will partake the nature of ADVANCED RENTALS;

d. That we have freely and voluntarily agreed that upon receipt of the said amount of FIFTEEN THOUSAND PESOS (Pl5,000.00) from the SHELL COMPANY OF THE PHILIPPINES



LIMITED, the said sum as ADVANCED RENTALS to us be applied as monthly rentals for the said two lots under our Lease Agreement starting on the 25th of May, 1966 until such time that the said of P15,000.00 be applicable, which time to our estimate and one-half months from May 25, 1966 or until the 10th of October, 1966 more or less;

e. That we have likewise agreed among ourselves that the SHELL COMPANY OF THE PHILIPPINES LIMITED execute an instrument for us to sign embodying our conformity that the said amount that it will generously grant us as requested be applied as ADVANCED RENTALS; and

(6) FURTHER AFFIANTS SAYETH NOT.,

While the Additional Cash Pledge Agreements states:

xxx

b. The above stated monthly rentals accumulated shall be treated as additional cash deposit by DEALER to SHELL, thereby in increasing his credit limit from P10,000 to P25,000. This agreement, therefore, cancels and supersedes the Joint affidavit dated 11 April 1966 executed by the CO-OWNERS.

xxx

Petitioner is saying that by virtue of the lone paragraph in the Additional Cash Pledge Agreement, whatever partnership there was in the joint affidavit was also cancelled. However, the SC rejected this because the cancelling proviso in the Cash Pledge Agreement was for the P15,000 mentioned in the joint affidavit regarding the advance rentals starting on May 25. The cash pledge agreement also mentioned this, and it was a repetition that had to be stricken out.

Other evidence on the record also support the partnership agreement between petitioner and respondents. Petitioner had also rendered accounting initially of the business to his siblings. 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.



Isabelo Moran Jr. vs. CA and Mariano Pecson (1984) (ConCon Poster + Voice of the Veteran Magazine) Doctrine:

The essence of partnership is the sharing of profits and losses.

Facts:

Pecson and Moran entered into an agreement whereby both would contribute P15,000 each for the purpose of printing 95,000 posters featuring the delegates of the 1971 Constitutional Convention. Moran would act as a managing partner. According to the agreement, Pecson would receive a commission of P1000 a month from April to December (8 months). Pecson gave Moran P10,000 as part of his share. Only 2,000 posters were printed. The printing cost P4,000. Pecson gave another P7000 for the printing of The Voice of the Veteran Magazine which they also agreed upon. Moran gave Pecson a promissory note amounting to P20,000 in consideration of Pecsons contributions and commission for three months.

Pecson filed a case for an action of recovery of sum of money based on the alleged partnership agreement, whereby he seeks the return of his 10K contribution, and based on the promissory note.

The CFI held that, there is indeed a partnership agreement, and that based on this Pecson gave 10K, and gave another 7K for the Voice of the Veteran Magazine. The CFI ruled that because Pecson also failed to give the full amount of 15 thousand for the posters, both Moran and Pecson is entitled to rescind the contract. Moran was asked to return to Pecson the 17K received by him. Both parties appealed to the CA. The CA ruled against Moran. He was ordered to pay:

P 47,500 the amount which, according to the CA, would have accrued in favor of Pecson if the agreement was honored;

P 8000 , as commission from April to December;

P 7000, as return of Pecsons investment for the Voice of the Veterans because the project never took off.

From this judgment, Moran appealed to the Supreme Court.

Issue:

1. W/N the CA erred in ordering Moran to pay the abovementioned amounts.

2. W/N Moran is liable to pay the promissory note executed by him

Held:

1. YES. (As to the P47,500 and the P8000) - When partner who has undertaken to contribute a sum of money fails to do so, he becomes a debtor of the partnership for whatever he may have promised to contribute and for interests and damages from the time he should have complied with his obligation. In the case at bar, there was no evidence that the partnership would have been a profitable venture, in fact it was a failure doomed from the start. Therefore there is no basis for the award of speculative damages. Moreover, both parties were in breach of their duties as Pecson also failed to pay in full his obligation to the partnership.

Art 1797 provides that the shares and losses shall be governed by the agreement, in the absence of an agreement regarding the losses, it shall be borne proportionately. Being a contract of partnership, each partner must bear the losses and profits of the venture that is the essence of partnership. Even under the assurance of the other party that the venture would become successful, in the absence of fraud, the other party has no right to claim highly speculative profits. Hidden risks such as the failure of the COMELEC to proclaim the candidates in the ConCon on time, etc. should be considered.

(As to the P 7000) The fact that respondent presented in Court as evidence the book Voice of the Veterans is sufficient proof that the project took off and therefore, the assertion of the CA in awarding the P7000 in favor of Pecson is baseless.



2. NO. Because of the circumstances mentioned above, Moran should only pay Pecson 6K representing the unused balance of his 10K share (4k was for the printing), and another 3K representing of the profits earned from the sale of the printed posters.

(NOTE THAT THE 20K WAS FOR: P10,000 CONTRIBUTION OF PECSON FOR THE POSTERS, P7000 CONTRIBUTION FOR THE VETERANS MAGAZINE, P3000 FOR 3 MONTHS WORTH OF COMMISSION)

Pascual vs CIR (1998) Doctrines:

The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.

Facts:

On 1965, Pascual and Dragon bought two parcels of land from Santiago Bernardino, et al. On the following year, they bought another three parcels of land from Juan Roque. All the five lots were subsequently sold in 1968 and 1970 respectively. They realized substantial profit for their transactions (165 k and 60 k). The corresponding capital gains tax was paid in 1973 and 1974.

In 1979, Acting BIR Commissioner Plana assessed and required the petitioners to pay for alleged deficiency corporate taxes. According to him, in the land transactions that the petitioners engaged, they formed an unregistered partnership or joint venture, taxable as a corporation which is subject to individual tax income.

The Court of Tax Appeals affirmed the decision and action of the CIR on the basis of the principle enunciated by the Evangelista case.

Issues:

1. W/N the petitioners formed a partnership in their transactions as to make them liable for the corporate income tax, similar to Evangelista

Held/Ratio:

1. In contrast to the Evangelista case, there is no evidence that petitioners entered into an agreement to contribute money, property or industry to a common fund, and that they intended to divide the profits among themselves. Respondent commissioner and/ or his representative just assumed these conditions to be present on the basis of the fact that petitioners purchased certain parcels of land and became co-owners thereof.

In the Evangelista case, 24 lands were sold which makes the purpose of gain evident. In this case, there were only five isolated transactions. The sharing of returns does not in itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property. There must be a clear intent to form a partnership, the existence of a juridical personality different from the individual partners, and the freedom of each party to transfer or assign the whole property.

In the present case, there is clear evidence of co-ownership between the petitioners. The two isolated transactions whereby they purchased properties and sold the same a few years thereafter did not thereby make them partners. They shared in the gross profits as co-owners and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby. Under the circumstances, they cannot be considered to have formed an unregistered partnership which is thereby liable for corporate income tax, as the respondent commissioner proposes.



Mendoza vs. Paule (2009) (Partnership with SPA) Doctrine:

Every partner is an agent of the partnership for the purpose of its business; each one may separately execute all acts of administration, unless a specification of their respective duties has been agreed upon, or else it is stipulated that any one of them shall not act without the consent of all the others.

When the principal and the agent have entered into a power of attorney covering a construction project, with the principal contributing thereto his contractors license and expertise, while the agent would provide and secure the needed funds for labor, materials, and services; deal with the suppliers and sub-contractors; and in general and together with the principal, oversee the effective implementation of the project, ... the parties have in effect entered into a partnership, and the revocation of the powers of management of the agent is deemed a breach of contract.

Facts:

Engineer Eduardo Paule (Paule) is the proprietor of EM Paule Construction and Trading (EMPCT). Paule executed an SPA authorizing Zenaida Mendoza (Mendoza) to participate in the pre-qualification and bidding of National Irrigation Administration (NIA) project and to represent him in all transactions related thereto.

Hence, EMPCT through Mendoza participated and was awarded in the bidding of the NIA-Casecnan Multi- Purpose Irrigation and Power Project (NIA-CMIPP) and was awarded Packages A-10 and B-11 (road system, canal structures and drainage box culverts with a project cost of P5,613,591.69). Mendoza received the Notice of Award which was signed by Engineer Coloma (Acting Project Manager).

When Cruz learned that Mendoza is in need of heavy material equipment for the use of NIA project, he met up with Mendoza in an apartment where the latter was holding office under an EMPTC signboard. A series of meetings followed. Later on Mendoza and Cruz signed 2 Job Orders/Assignments for the lease of the latters heavy equipment to EMPCT.

After such transactions, Paule revoked the SPA he previously issued in favor of Mendoza. Hence NIA refused to make payment to Mendoza on her billings. As such, Cruz could not be paid for the rental of the heavy equipment. Upon the advice of Mendoza, Cruz addressed his demands for payment of lease rentals directly to NIA but the latter informed Cruz that it would only be remitting the payment to EMPCT as the winning contactor for the project.

Cruz demanded from Mendoza and/or EMPCT payment for the outstanding rentals amounting to P726,000.00. A suit was filed of the RTC of Nueva Ecija, for collection of sum of money plus damages and prayer for writ of preliminary injunction against Paule, Coloma and the NIA.

Paule then filed a third-party complaint against Mendoza, who filed her answers with a cross-claim against Paule.

In holding PAULE liable, the trial court found that MENDOZA was duly constituted as EMPCTs agent for purposes of the NIA project and that MENDOZA validly contracted with CRUZ for the rental of heavy equipment that was to be used therefor.

PAULE and MENDOZA both appealed the trial courts decision to the Court of Appeals.

The Court of Appeals rendered the assailed Decision which dismissed CRUZs complaint, as well as MENDOZAs appeal.

The appellate court held that the SPAs issued in MENDOZAs favor did not grant the latter the authority to enter into contract with CRUZ for hauling services; the SPAs limit MENDOZAs authority to only represent EMPCT in its business transactions with NIA, to participate in the bidding of the project, to receive and collect payment in behalf of EMPCT, and to perform such acts as may be necessary and/or required to make the said authority effective. Thus, the engagement of CRUZs hauling services was done beyond the scope of MENDOZAs authority.

As for CRUZ, the Court of Appeals held that he knew the limits of MENDOZAs authority under the SPAs yet he still transacted with her, hence he has no right of action against Paule.



CRUZ and MENDOZAs motions for reconsideration were denied; hence, these consolidated petitions:

Issues:

1. W/N Cruz has a right of action against Paule and Mendoza?

2. W/N a partnership or agency relation existed between Paule (EMPCT) and Mendoza?

Held/Ratio:

1. YES, Cruz has a cause of action against Paule and Mendoza. The Court of Appeals erred in dismissing Cruz complaint on a finding of exceeded agency. Besides, PAULE could be held liable under the SPAs for transactions entered into by MENDOZA with laborers, suppliers of materials and services for use in the NIA project, has been settled with finality in another case.

Wherefore, the petitions are GRANTED and the trial court is ORDERED to receive evidence on the counterclaim of petitioner Zenaida G. Mendoza.

2. YES, records show that Paule (or, more appropriately, EMPCT) and Mendoza had entered into a partnership in regard to the NIA project. Paules contribution thereto is his contractors license and expertise, while Mendoza would provide and secure the needed funds for labor, materials and services; deal with the suppliers and sub- contractors; and in general and together with Paule, oversee the effective implementation of the project. For this, Paule would receive as his share three per cent (3%) of the project cost while the rest of the profits shall go to Mendoza. Paule admits to this arrangement in all his pleadings.

Although the SPAs limit MENDOZAs authority the evidence shows that when MENDOZA and CRUZ met and discussed (at the EMPCT office in Bayuga, Muoz, Nueva Ecija) the lease of the latters heavy equipment for use in the project, PAULE was present and interposed no objection to MENDOZAs actuations.

Under the Civil Code, every partner is an agent of the partnership for the purpose of its business; each one may separately execute all acts of administration, unless a specification of their respective duties has been agreed upon, or else it is stipulated that any one of them shall not act without the consent of all the others.

Further, there was no valid reason for Paule to revoke Mendozas SPAs. Since Mendoza took care of the funding and sourcing of labor, materials and equipment for the project, it is only logical that she controls the finances, which means that the SPAs issued to her were necessary for the proper performance of her role in the partnership, and to discharge the obligations she had already contracted prior to revocation. Without the SPAs, she could not collect from NIA, because as far as it is concerned, EMPCT and not the Paule-Mendoza partnership is the entity it had contracted with. Without these payments from NIA, there would be no source of funds to complete the project and to pay off obligations incurred. As Mendoza correctly argues, an agency cannot be revoked if a bilateral contract depends upon it, or if it is the means of fulfilling an obligation already contracted, or if a partner is appointed manager of a partnership in the contract of partnership and his removal from the management is unjustifiable.

PAULEs revocation of the SPAs was done in evident bad faith. From the way he conducted himself, PAULE committed a willful and deliberate breach of his contractual duty to his partner and those with whom the partnership had contracted. Thus, PAULE should be made liable for moral damages.

Moreover, PAULE should be made civilly liable for abandoning the partnership, leaving MENDOZA to fend for her own, and for unduly revoking her authority to collect payments from NIA, payments which were necessary for the settlement of obligations contracted for and already owing to laborers and suppliers of materials and equipment like CRUZ, not to mention the agreed profits to be derived from the venture that are owing to MENDOZA by reason of their partnership agreement.



Ortega v. CA (1995) (law firm) Doctrine:

The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner's capability to give it, and the absence of a cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages.

In passing, neither would the presence of a period for its specific duration or the statement of a particular purpose for its creation prevent the dissolution of any partnership by an act or will of a partner. Among partners, mutual agency arises and the doctrine of delectus personae allows them to have the power, although not necessarily the right, to dissolve the partnership. An unjustified dissolution by the partner can subject him to a possible action for damages.

Facts:

The law firm of ROSS, LAWRENCE, SELPH and CARRASCOSO was registered in the Mercantile Registry and reconstituted with the SEC in 1948. There were several subsequent amendments to the articles of partnership, and several changes in its name. In 1977 it was named BITO, MISA & LOZADA; on 1980, the firm composed of Joaquin Misa (private respondent) Bito and Lozada associated themselves together, as senior partners with, "petitioners Ortega, del Castillo, Jr., and Bacorro", as junior partners.

In 1988, Misa, wrote 3 letters to the petitioners. The 1st letter stated, that Misa was withdrawing and retiring from the firm, trusting to have a proper liquidation of his participation in the firm. the 2nd letter requested for a meeting. The third letter stated that, the partnership has ceased to be mutually satisfactory because of the working conditions of our employees. and Misas efforts to improve the below subsistence pay of employees have been thwarted by the other partners. and employees even attorneys, are dressed down publicly in a loud voice in a manner that deprived them of their self-respect. That the result of such policies is a formation of a union.

Later, Misa filed with this Commission's Securities Investigation and Clearing Department (SICD) a petition for dissolution and liquidation of partnership.

Misa, lost to the hearing officer but won, in the SEC en banc and in CA.

The firm is now called Bito, Lozada, Ortega and Castillo. During the pendency of the case in the CA, Senior partners Bito and Lozada died.

Issues:

1. W/N the partnership of Bito, Lozada, Ortega & Castillo is a partnership at will?

2. W/N the withdrawal of private respondent dissolved the partnership regardless of his good or bad faith?

3. W/N private respondent's demand for the dissolution of the partnership so that he can get a physical partition of partnership was made in bad faith?

Held:

1. YES, a partnership that does not fix its term is a partnership at will. The partnership agreement does not provide for a specified period or undertaking. The "DURATION" clause simply states, the partnership shall continue so long as mutually satisfactory. Altough there is a clause called "Purpose" which states: "The purpose for which the partnership is formed, is to act as legal adviser and representative." The "purpose" of the partnership is not the specific undertaking referred to in the law. Otherwise, all partnerships, which necessarily must have a purpose, would all be considered as partnerships for a definite undertaking. There would therefore be no need to provide



for articles on partnership at will as none would so exist. Apparently what the law contemplates is a specific undertaking or "project" which has a definite or definable period of completion.

The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner's capability to give it, and the absence of a cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages.

The dissolution of a partnership is the change in the relation of the parties caused by any partner ceasing to be associated in the carrying on. Upon its dissolution, the partnership continues and its legal personality is retained until the complete winding up of its business culminating in its termination.

The term "retirement" used in the articles, means the dissociation by a partner, inclusive of resignation or withdrawal, from the partnership that thereby dissolves it.

2. YES, as said in the argument above, in a partnership at will, any partner may, at his sole pleasure, dictate a dissolution of the partnership at will, and bad faith cannot prevent its dissolution, but can result in damages.

3. NO, it was made in good faith, as held by the CA and SEC, Attorney Misa did not act in bad faith because it would not be right, we agree, to let any of the partners remain in the partnership under such an atmosphere of animosity; certainly, not against their will for as long as the reason for withdrawal of a partner is not contrary to the dictates of justice and fairness, nor for the purpose of unduly visiting harm and damage upon the partnership, bad faith cannot be said to characterize the act.



Lyons v. Rosenstock (1932) (San Juan Estate) Doctrine:

A particular partnership has for its object determinate things, their use or fruits, or specific undertaking, or the exercise of a profession or vocation.

Facts:

Prior to his death, Henry Elser resided in the City of Manila, where he engaged in the real estate business. Lyons joined Elser in the latters business of buying and selling property. The two shared the profits in equal shares.

Lyons was a missionary of the Methodist Episcopal Church. To fulfill his duties, he had to leave for the United States and stay there for nearly a year and a half. Prior to his departure, Elser executed statements attesting that he and Lyons owned 3 pieces of real property in common. Lyons then executed a general power of attorney, empowering Elser to manage and dispose of the properties at will. This GPA facilitated the disposal of 2 out of 3 of the properties by sale during the Lyons absence. Thus, only a single piece of real estate was left a property situated along Carriedo street.

Meanwhile, Elser came to know of the sale of the San Juan Estate. He wanted to buy it and develop it into a suburban community. Because he did not have enough funds at that time, he paid P5,000 for an option to buy, and an additional P15,000 for the extension of the option period, to be applied to the purchase price upon exercise of the option.

To raise enough money to pay the first installment of P150,000, Elser obtained a loan from Uy, a Chinese merchant. As security, Elser had to exercise a personal note, co-signed by his two associates in the projected enterprise and Fidelity and Surety Co. Fidelity, prior to signing, insisted on being given a security for the liability it was to assume. To meet this requirement, Elser mortgaged the Carriedo property he owned with Lyons believing that Lyons would eventually join him in the venture.

Elser was then able to purchase the Estate. For the purpose of the development of the Estate, Elser formed a limited partnership with three associates under the name of J.K. Pickering and Company.

Meanwhile, in concluding the purchase of the San Juan Estate, Elser discovered that he was indebted to Lyons to the extent of about P11,668.72 as earnings derived from other properties. Because of this, Elser indorsed to Lyons 200 of the shares allocated to himself, believing that Lyons would be one of his associates in the venture. The shares were worth P8,000 more than what Elser owed Lyons. (The total value of the shares would be approximately P19,669.72)

However, Lyons did not join Elser in the venture. Lyons refused primarily because the board of mission and missionary associates of his church criticized his commercial activities. Thus, Elser moved to relieve the Carriedo property of the encumbrance he placed upon it. He substituted the old mortgage with a new mortgage over another property in Manila, together with 1,000 J.K Pickering shares. While the old mortgage was cancelled, the new mortgage was never registered.

Later on, Elser returned the cancelled mortgage to Fidelity, and took back the new mortgage. The court found that the reason behind this was the fact that Lyons, at this point in time, returned to Manila and gave Elser verbal permission to let the mortgage remain on the Carriedo property. The trial court found that the P8,000 excess mentioned above was the consideration for this concession that Lyons extended to Elser.

Eventually, Elser was able to satisfy the loan extended to him by Uy. No liability fell on Fidelity. In turn, the Carriedo property was released.

Upon the death of Elser, Lyons instituted this action against Rosenstock, executor of Elsers estate. Lyons claims that because he was part owner of the Carriedo property that was mortgaged for the purpose of obtaining a loan from Uy, he became an involuntary owner of an undivided interest in the San Juan Estate, which acquired from the loan proceeds. Lyons claims that he is entitled to 446 shares of J.K. Pickering stock, together with P125,000 worth of dividends. He claims that he granted permission to mortgage the Carriedo property because Elser led him to believe that the proceeds would be applied to the purchase of another property, known as the Ronquillo property through various correspondences.



Issue:

1. W/N Lyons can claim against the estate of Elser

Held/Ratio:

1. No, Lyons cannot claim against the estate of Elser. The Supreme Court denied the claim of Lyons based on three primary grounds.

a. First, the Court ruled that Lyons was inattentive to the contents of the correspondences. Evidence proved that Elser informed Lyons that because the value of the Ronquillo property had gone up, the former doubted that he could still push through with its purchase.

b. Second, it appears that Elser sent Lyons a cablegram informing him that he had mortgaged the Carriedo property. While Lyons denies that he received the cablegram, circumstances show that he had knowledge of the mortgage since he even allowed the mortgage to remain on the property when he returned to Manila. Elser did not act in bad faith nor did he employ fraud in securing Lyons consent.

c. Third, despite the insistence of Lyons, there was clearly no general relation of partnership between him and Elser. It is clear that Elser, in buying the San Juan Estate was not acting for any partnership composed of him and Lyons. Moreover, it is clear that no money belonging to Lyons was ever applied to the purchase of the San Juan Estate. As discussed, the Carriedo property owned by Lyons and Elser was released scratch free from the mortgage.

It must be noted that J.K. Pickering and Co was formed for a specific undertaking the development of the San Juan Estate. Lyons turned down Elsers offer to join this venture. Thus, he cannot belatedly claim to be entitled to its proceeds.



Rojas v. Maglana (1990) (logging partnership, additional industrial partner) Doctrine:

When there has been duly registered articles of partnership, and subsequently the original partners accept an industrial partner but do not register a new partnership, and thereafter the industrial partner retires from the business, and the original partners continue under the same set-up as the original partnership, then although the second partnership was dissolved with the withdrawal of the industrial partner, there resulted a reversion back into the original partnership under the terms of the registered articles of partnership. There is not constituted a new partnership at will.

Facts:

In January 1955, Maglana and Rojas entered into a partnership called Eastcoast Development Enterprises (EDE) with only the two of them as partners. EDE, with an indefinite term of existence, was duly registered a week later with the SEC. Under the Articles of Co-Partnership, Maglana shall manage the business affairs of the partnership, while appellant Rojas shall be the logging superintendent and shall manage the logging operations of the partnership.

Eventually, because of the difficulties encountered, Rojas and Maglana decided to avail of the services of Pahamotang as industrial partner. In March 1956, Maglana, Rojas and Agustin Pahamotang executed their Articles of Co-Partnership under the same firm name, but the same was not registered. Aside from a couple of insignificant differences in the two articles, everything is essentially the same.

The second partnership started operation in May 1956, and was able to ship logs and realizes profits. In October 1956, Pahamotang, Maglana and Rojas agreed in an instrument among themselves that Maglana and Rojas shall purchase the interest, share and participation in the Partnership of Pahamotang. After the withdrawal of Pahamotang, the partnership was continued by Maglana and Rojas without the benefit of any written agreement or reconstitution of their written Articles of Partnership.

A year later, Rojas left and abandoned the partnership for another logging enterprise; he withdrew his equipment from the partnership for use in the new endeavor. Because of this, Maglana wrote Rojas reminding the latter of his obligation to contribute, either in cash or in equipment, to the capital investments of the partnership as well as his obligation to perform his duties as logging superintendent. Two weeks after, Rojas told Maglana that he will not be able to comply with the promised contributions and he will not work as logging superintendent. Maglana then told Rojas that the latter's share will just be 20% of the net profits. Such was the sharing from 1957 to 1959 without complaint or dispute. Meanwhile, Rojas took funds from the partnership more than his contribution. Frustrated, Maglana notified Rojas that he dissolved the partnership, which in turn prompted Rojas to file an action before the Court of First Instance of Davao against Maglana for the recovery of properties, accounting, receivership and damages.

Issues:

1. W/N the first partnership continued after the dissolution of the second partnership.

2. W/N Maglana can unilaterally dissolve the partnership.

3. W/N Maglana is liable for damages for the dissolution.

Held/Ratio:

1. YES. It appears evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution of the second one. Except for the fact that they took in one industrial partner, everything else was the same. They even adopted the same name; they pursued the same purposes; and maintained the same amounts of capital contribution. Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of Pahamotang can neither be considered as a de facto partnership, nor a partnership at will, for there is an existing partnership, duly registered. The withdrawal of Pahamotang (dissolution of the second partnership) therefore resulted in the continuation of the first one.



2. YES. Under Article 1830, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. If the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm.

3. NO. A withdrawing partner will only be liable for damages if there is no cause given, or even if there is one, the same is not justified. In this case, there was more than good cause. After the withdrawal of Pahamotang, Rojas entered into a management contract with another logging enterprise (CMS) engaged in the same business as the partnership. He withdrew his equipment, refused to contribute either in cash or in equipment to the capital investment and to perform his duties as logging superintendent, as stipulated in their partnership agreement. The records also show that Rojas not only abandoned the partnership but also took funds in an amount more than his contribution. Thus, Maglana is cannot be held to be in bad faith nor can he be held liable for damages.



Philex Mining Corp v. CIR (2008) (Power of Attorney, PARTNERSHIP compared to AGENCY) Doctrines:

The essence of an agency, even one that is coupled with interest, is the agent's ability to represent his principal and bring about business relations between the latter and third persons. Where representation for and in behalf of the principal is merely incidental or necessary for the proper discharge of one's paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but some other agreement depending on the ultimate undertaking of the parties.

Article 1769(4) of the Civil Code explicitly provides that the receipt by a person of a share in the profits of a business is prima facie evidence that he is a partner in the business. In an agency coupled with interest, it is the agency that cannot be revoked or withdrawn by the principal due to an interest of a third party that depends upon it, or the mutual interest of both principal and agent.

Facts:

On April 16, 1971, petitioner Philex Mining Corporation, entered into an agreement with Baguio Gold Mining Company for the former to manage and operate the latter's mining claim, known as the Sto. Nino mine, located in Atok and Tublay, Benguet Province.

[Next two paragraphs are important. These contain their agreement.] Their agreement was denominated as Power of Attorney and provides, among others, that Baguio Gold would provide up to P11M in such amounts as from time to time may be required by Philex for use in the management of the Sto. Nino mine. Also, that whenever Philex deems it necessary in connection with the management of such mine, it may transfer its own funds or property to the Sto. Nino project "the ratio which the MANAGER'S (Philex) account has to the owner's account will be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding the claims."

The agreement also provided that the compensation of the Philex shall be fifty per cent (50%) of the net profit of the Sto. Nino PROJECT before income tax. That the Philex shall pay income tax on their compensation, while Baguio Gold shall pay income tax on the net profit of the Sto. Nino project after deduction therefrom of the Philexs compensation. Pursuant to such agreement, Philex made advances in cash and property. However, the mind suffered continued losses over the years which resulted to petitioners withdrawal as manager of the mine on January 28, 1982 and in the eventual cessation of the mine operations on February 20, 1982. Thereafter, the parties executed a Compromise with Dation in Payment wherein Baguio Gold admitted its indebtedness to petitioner in the amount of P179,394,000.00. Subsequently, the parties executed an AMENDMENT to such compromise in which the amount of indebtedness was increased to P259,137,245.00.

Baguio Gold undertook to pay the petitioner in two segments by first assigning tangible assets for P127,838,051.00 and then transferring its equitable title in its Philadrill assets for P16,302,426.00. The parties then ascertained that Baguio Gold had a remaining outstanding indebtedness to petitioner in the amount of P114,996,768.00. The petitioner subsequently wrote off in its 1982 books the remaining outstanding indebtedness by charging P112,136,000.00 to allowances and reserves that were set up in 1981 and P2,860,768.00 to the 1982 operations. In its 1982 annual income tax return, petitioner deducted from its gross income the amount of P112,136,000.00 as loss on settlement of receivables from Baguio Gold against reserves and allowances. However, the BIR disallowed the amount as deduction for bad debt and assessed petitioner a deficiency income tax of P62,811,161.39.

Petitioner protested before the BIR arguing that the deduction must be allowed since all requisites for a bad debt deduction were satisfied. Furthermore, petitioner emphasized that the debt arose out of a valid management contract it entered into with Baguio Gold. The bad debt deduction represented advances made by petitioner which, pursuant to the management contract, formed part of Baguio Gold's "pecuniary obligations" to petitioner. It also included payments made by petitioner as guarantor of Baguio Gold's long-term loans which legally entitled petitioner to be subrogated to the rights of the original creditor.



Petitioner also asserted that due to Baguio Gold's irreversible losses, it became evident that it would not be able to recover the advances and payments it had made in behalf of Baguio Gold. For a debt to be considered worthless, petitioner claimed that it was neither required to institute a judicial action for collection against the debtor nor to sell or dispose of collateral assets in satisfaction of the debt. It is enough that a taxpayer exerted diligent efforts to enforce collection and exhausted all reasonable means to collect.

BIR denied petitioner's protest for lack of legal and factual basis. It held that the alleged debt was not ascertained to be worthless since Baguio Gold remained existing and had not filed a petition for bankruptcy; and that the deduction did not consist of a valid and subsisting debt considering that, under the management contract, petitioner was to be paid fifty percent (50%) of the project's net profit.

CTA affirmed BIRs decision.

The CTA rejected petitioner's assertion that the advances it made for the Sto. Nino mine were in the nature of a loan. It instead characterized the advances as petitioner's investment in a partnership with Baguio Gold for the development and exploitation of the Sto. Nino mine. The CTA held that the "Power of Attorney" executed by petitioner and Baguio Gold was actually a partnership agreement. Since the advanced amount partook of the nature of an investment, it could not be deducted as a bad debt from petitioner's gross income.

CA affirmed.

Issues: 1. Whether there was a partnership agreement between the parties as opposed to an agency coupled with

interest. (PARTNERSHIP RELATED) 2. W/N the amount should be considered as bad debt.

Held/Ratio:

1. PARTNERSHIP AGREEMENT. The main object of the "Power of Attorney" was not to confer a power in favor of petitioner to contract with third persons on behalf of Baguio Gold but to create a business relationship between petitioner and Baguio Gold, in which the former was to manage and operate the latter's mine through the parties' mutual contribution of material resources and industry. The essence of an agency, even one that is coupled with interest, is the agent's ability to represent his principal and bring about business relations between the latter and third persons. Where representation for and in behalf of the principal is merely incidental or necessary for the proper discharge of one's paramount undertaking under a contract, the latter may not necessarily be a contract of agency, but some other agreement depending on the ultimate undertaking of the parties.

The SC also stated that the circumstances and the stipulations in the parties agreement indubitable lead to the conclusion that a partnership was formed between the parties. First, it does not appear that Baguio Gold was unconditionally obligated to return the advances made by petitioner under the agreement. Paragraph 5 (d) thereof provides that upon termination of the parties' business relations, "the ratio which the MANAGER'S account has to the owner's account will be determined, and the corresponding proportion of the entire assets of the STO. NINO MINE, excluding the claims" shall be transferred to petitioner. As pointed out by the Court of Tax Appeals, petitioner was merely entitled to a proportionate return of the mine's assets upon dissolution of the parties' business relations. There was nothing in the agreement that would require Baguio Gold to make payments of the advances to petitioner as would be recognized as an item of obligation or "accounts payable" for Baguio Gold.

Next, the tax court correctly observed that it was unlikely for a business corporation to lend hundreds of millions of pesos to another corporation with neither security, or collateral, nor a specific deed evidencing the terms and conditions of such loans. The parties also did not provide a specific maturity date for the advances to become due and demandable, and the manner of payment was unclear. All these point to the inevitable conclusion that the advances were not loans but capital contributions to a partnership. The strongest indication that petitioner was a partner in the Sto. Nino mine is the fact that it would receive 50% of the net profits as "compensation" under paragraph 12 of the agreement. The entirety of the parties' contractual



stipulations simply leads to no other conclusion than that petitioner's "compensation" is actually its share in the income of the joint venture.

2. NO. Petitioner cannot claim the advances as a bad debt deduction from its gross income. Deductions for income tax purposes partake of the nature of tax exemptions and are strictly construed against the taxpayer, who must prove by convincing evidence that he is entitled to the deduction claimed. In this case, petitioner failed to substantiate its assertion that the advances were subsisting debts of Baguio Gold that could be deducted from its gross income. Consequently, it could not claim the advances as a valid bad debt deduction.

Jose Fernandez v. Francisco de la Rosa (1903) Doctrines:

The essential elements upon which the parties must meet in a contract of partnership are: (1) mutual contribution to a common stock, and (2) a joint interest in the profits.

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.

The execution of a written agreement is not necessary 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.

Facts:

Fernandez alleges that in January 1900, he entered into a verbal agreement with Dela Rosa to form a partnership for the purchase of cascoes (a boat that was once used to ferry goods between ship and shore) and the carrying on of the business of letting the same for hire in Manila. Dela Rosa was to buy the cascoes and each partner was to furnish an amount of money as he could, the profits to be divided proportionately. Fernandez gave Dela Rosa P300 to purchase a casco. Dela Rosa did purchase one for P500, taking the title in his own name. Fernandez gave another P300 for repairs on such casco. Later on, Fernandez gave Dela Rosa P825 to purchase another casco. Dela Rosa did so for P1000, again taking the title in his own name. In April, Fernandez and Dela Rosa decided to draw up articles of partnership for purposes of having it embodied in a document. However, no written document was drawn up considering that Dela Rosa proposed a draft of the articles of partnership which differed materially from the terms of their verbal agreement. Dela Rosa and Fernandez could not agree on the conditions with respect to the participation of each partner in the profits or losses of the partnership. Fernandez then demanded an accounting from Dela Rosa, which he refused to render.

Later, Dela Rosa denied the existence of the partnership. He further denied that Fernandez ever gave him money. Dela Rosa continued administering the business on his own. At some time after the failure to agree upon the partnership articles, Dela Rosa gave Fernandez P1125. Fernandez claimed that he received the money with an express reservation on his part of all rights as a partner. Issues:

1. W/N there was a partnership? 2. And if there was one, W/N it was terminated as a result of the act of the Fernandez in receiving back the P1125?

Held/Ratio: 1. YES

Partnership is a contract by which two ore more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves. Hence, the essential points upon which the minds of the parties must meet in a contract of partnership are: (1) mutual contribution to a common stock and (2) joint interest in the profits. If the contract contains these two elements, the partnership relation results and the law fixes the incidents of this relation if the parties fail to do so. Although the court was unable to find evidence that there was any specific verbal agreement of partnership, a partnership may be implied from the purchase of the casco. Fernandez and Dela Rosa agreed on the mutual



contribution to a common stock. The intention to share profits appears to be implied from the fact of the purchase of the cascoes in common. Nothing suggests that the parties intended joint ownership of the cascoes. Hence, there was a complete and perfect contract of partnership. 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. (Dela Rosa moved for a rehearing based on the conclusion of the court that it was unable to find evidence that there was a verbal agreement. The court dismissed such, saying that the evidence at hand led them to rule that a partnership actually did exist. The court also said that it is of no importance that the parties have failed to reach an agreement with respect to the minor details of the contract. These details pertain to the accidental and not essential part of the contract. The parties involved in the case did in fact agree to the essential requisites of a partnership.)

2. NO The amount returned to Fernandez fell short of what he actually contributed to the capital. It did not include the sum he had furnished for the repairs of the casco. Besides, it is quite possible that a profit may have been realized from the business during Dela Rosa administered the business prior to returning the money. In receiving the money, Fernandez had no intention to relinquish his rights as a partner. Dela Rosa might have terminated the partnership at any time, if he had chosen to do so, by recognizing the plaintiffs right in the partnership property and in the profits. Having failed to do so, Dela Rosa cannot be permitted to force a dissolution upon his co-partner upon terms which the latter is unwilling to accept.

Woodhouse v. Halili (1953) Doctrines:

To agreement or to execute the partnership papers falls within what Spanish commentators call a very personal act (acto personalismo), of which courts may not compel compliance.

Facts:

Plaintiff entered on a written agreement, with the defendant and with the aid of their lawyers. The most important provisions of which are:

1. That they shall organize a partnership for the bottling and distribution of Mision soft drinks, plaintiff to act as industrial partner or manager, and the defendant as a capitalist

2. plaintiff was to secure the Mission Soft Drinks franchise for and in behalf of the proposed partnership

3. plaintiff was to receive 30 per cent of the net profits of the business

A (draft) contract was then signed by the plaintiff. He then subsequently went to the United States. A franchise agreement was entered into the Mission Dry Corporation and Fortunato F. Halili and/or Charles F. Woodhouse, granted defendant the exclusive right, license, and authority to produce, bottle, distribute, and sell Mision beverages in the Philippines.

When the bottling plant was already on operation, plaintiff demanded of defendant that the partnership papers be executed. At first defendant executed himself, saying there was no hurry. Then he promised to do so after the sales of the product had been increased to P50,000. After this condition was attained, and as defendant refused to give further allowances to plaintiff, the latter caused his attorneys to take up the matter with the defendant with a view to a possible settlement.

In his complaint plaintiff asks for the execution of the contract of partnership, an accounting of the profits, and a share thereof of 30 per cent, as well as damages in the amount of P200,000. Defendant, on the other hand, alleges that it was the plaintiff who was unable to comply with his obligations to the partnership as he misrepresented that he is the owner or about to be an owner of a bottling franchise.



Issues:

1. W/N defendant had falsely represented that he had an exclusive franchise to bottle Mission beverages

2. W/N this false representation or fraud, if it existed, annuls the agreement to form the partnership.

3. W/N agreement be carried out or executed 4. W/N the plaintiff is entitled to damages

Held/Ratio:

1. There is proof that the defendant false represented himself as having an exclusive franchise when he no longer had one. This is proven by the testimony of the defendants lawyer as well as expressly stated in the first draft of the agreement. It is improbable and incredible for the defendant to disclose the fact that he had only an option to the exclusive franchise, which was to last thirty days only, and still more improbable for him to have disclosed that, at the time of the signing of the formal agreement, his option had already expired.

Also, defendant would not have gone into the business unless the franchise was raised in his name, or at least in the name of the partnership. Plaintiff assured defendant he could get the franchise. Thus, plaintiff did actually represent to defendant that he was the holder of the exclusive franchise.

2. This Court had held that in order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental (dolo incidente), inducement to the making of the contract.

In this case, the main cause that induced defendant to enter into the partnership agreement with plaintiff, was the ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the partnership. However, the principal obligation that the defendant assumed or undertook was to secure said franchise for the partnership, as the bottler and distributor for the Mission Dry Corporation. Therefore, he is guilty only of incidental fraud.

3. 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. It falls within what Spanish commentators call a very personal act (acto personalismo), of which courts may not compel compliance.

4. Plaintiff is entitled to receive because of defendant's refusal to form the partnership, and damages that defendant is also entitled to collect because of the falsity of plaintiff's representation. Under article 1106 of the Spanish Civil Code the measure of damages is the actual loss suffered and the profits reasonably expected to be received, embraced in the terms dao emergente and lucro cesante.



Lorenzo Oa and the Heirs of Julia Banules v. Commissioner of Internal Revenue (1972) (partition+ unregistered partnership)

Doctrine:

When co-owners agree, after partition of the estate, to use common properties and income as a common fund with the intention of making profit for them in proportion to their shares, the co-ownership was converted into a partnership.

Facts:

Julia Baules died leaving her spouse, Oa, and her five children as heirs. Oa was appointed administrator of the estate. In 1949, the heirs applied for partition of the estate. Oa as father, was appointed guardian of the three minor heirs and their property. The project of partition shows that the heirs have an undivided interest in ten parcels of land, six houses, and P50,000 from the War Damage Commission, and in an obligation of P94,973 based on several loans contracted by the deceased. However, although the partition was approved by the Court, no attempt was made by the heirs to divide the property. Instead, the properties were placed under the management of Oa who invested the properties in several businesses (selling of properties, stocks, rents etc.). As a result, the heirs properties increased from P105,000 to P480,005.20 from 1949-1956. These were recorded in the books of account kept by Oa where the corresponding shares of the heirs in the net income were also recorded. The heirs also paid their corresponding income taxes derived from the investments individually. However, the net income was not held by the heirs individually but was managed by Oa. Based on these facts, respondent CIR decided that the petitioners formed an unregistered partnership and should therefore be subject to corporate income tax. Accordingly, he assessed against them the amounts of P8,092 and P13,899 for the years 1955 and 1956, respectively. They assailed this decision in the Court of Tax Appeals, but the latter rejected the appeal. Petitioners now assail the decision of the CTA and of the CIR that they formed an unregistered partnership. They also rely on article 1769, which provides that the mere sharing of gross income does not in itself constitute a partnership.

Issue:

1. W/N the heirs formed an unregistered partnership.

2. W/N they are liable for corporate income tax as an unregistered partnership.

3. W/N the various income tax they paid individually should be deducted from the corporate income tax

Held:

1. YES. It is the view of the Court that from the time the petitioners allowed Oa to use their respective shares in the inheritance but also the inherited properties themselves to be used by Oa as common fund for the undertaking of several businesses, with the intention of deriving profit to be shared by them proportionally, such act amounted to forming an unregistered partnership. It is true that there exists a period of time wherein the heirs shall be considered co-owners of the partnership, however, from the time the partition was executed they constitute as individual owners of their respective shares. The act of putting their shares under a common administrator for management constitutes a partnership.

As already indicated, for tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding.

2. YES. Petitioners reliance on 1769 and other civil code provisions on partnership is unavailing because there is a difference between the concept of partnership under the Civil Code and unregistered partnerships under the National Internal Revenue Code (used within the purview of the term corporations). Partnerships under the NIRC refer to partnerships which are not exactly constituted in the technical sense. It refers to any joint venture



by which financial or business operations are carried on. On the other hand, duly registered general partnerships under the civil code are exempt from corporate income tax.

3. NO. It should be the other way around. The corporate income tax should be deducted from the individual income tax the heirs paid. But since the individual income taxes paid by each are not assailed in this case, the Court cannot pass upon them.

Bastida v. Menzi and Co. (1933) (fertilizer) Doctrine:

Despite the agreement that Bastida was to receive 35% 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 a 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 nor 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.

Facts:

Menzi, together with his wife and daughter, own Menzi & Co., Inc. The company, through its president and general manager, J.M. Menzi, and under the authority of the board of directors, entered into a contract with Bastida to engage in the business of exploiting prepared fertilizers. Under the terms of the agreement, Bastida was to receive 35% of the profits.

Pursuant to the said contract, Menzi & Co., Inc., began to manufacture prepared fertilizers. Menzi and Schlobohm managed the business and opened an account entitled "FERTILIZERS" on the books of the defendant Menzi & Co., Inc., where all the accounts of the partnership business were supposed to be kept. Bastida supervised the manufacturing and mixing of the fertilizers and had no participation in the making of these entries, which were wholly in Menzi's charge, under whose orders every entry was made.

Prior to the termination of their agreement, Menzi & Co., Inc. duly notified the plaintiff that it would not, under any conditions, renew his said agreement or continue his said employment with it after its expiration, and after the termination of said agreement.

Thereafter, Menzi & Co. liquidated the fertilizer business. During liquidation, Menzi employed White, Page and Co. to re-audit the books. The auditors found errors in the bookkeeping and determined that the balance due to Bastida is P21,633.20.

Bastida, in turn, employed his own auditors to examine the books. Thompson assumed that Menzi and Bastida were partners and estimated the amount which was wholly different from those determine by Menzis auditors.

Issues:

1. W/N a partnership existed which would allow Bastida to demand P220,000 from Menzi.

Held/Ratio:

1. NO. Menzi & Co. had a fertilizer business before it entered into any agreement with Bastida. Bastida's agreement was for a fixed period, five years, and during that time the business was carried on in the name of Menzi & Co., Inc., and in Menzi & Co.'s warehouses. After the expiration of plaintiff's contract, Menzi & Co., Inc. continued its fertilizer business, as it had a perfect right to do. There was really nothing to which any good-will could attach.



Bastida maintains, however, that the trade-marks used in the fertilizer business during the time that he was connected with it acquired great value, and that they have been appropriated by the appellant to its own use. That seems to be the only basis of the alleged good-will, to which a fabulous valuation was given. As we have seen, the trade-marks were not new. They belonged to Menzi & Co., Inc. and were registered in its name; only the expense of registering the formulas in the Bureau of Science was charged to the business in which the plaintiff was interested. These trade-marks remained the exclusive property of Menzi & Co., and the plaintiff had no interest therein on the expiration of his contract.

[The following exhibits are translated by Atty. Cochingyan from Spanish]

Exhibit A:

This contract is celebrated between Messrs. Menzi and Company of Manila as the First Party and Don Francisco Bastida, also of Manila, of the Second Party, as follows:

Conditions:

1. The object of the contract is the operation of the business of fertilizers and processed fertilizers for various agricultural applications;

2. The duration of this contract shall be five years from the date of execution;

3. The First Party undertakes to provide the necessary financial support for business;

4. The Second Party undertakes to put his entire time and all his experience at the disposal of the business;

5. The Second Party may not, directly or indirectly, engage alone or in partnership with others, or in any manner other than with the First Party, the fertilizer business, simple or processed, or any material that is commonly applied to the fertilization of soils and plants during the validity of this contract, unless the express authorization of the First Party is secured for this;

6. The First Party may not engage, alone nor in association/partnership (en sociedad), or combination with other persons or entities, nor in modes other than in association/partnership (en sociedad) with the Second Party, the business of fertilizers or prepared fertilizers, they be already imported, they be already prepared in the Philippines, nor may engage in the selling or business of materials or products that has application as fertilizer, or that is used in the composition of fertilizer or manure, if they are products manufactured on Filipino soil, nevertheless may sell or negotiate on materials for simple fertilizers imported from the United States or abroad;

7. The First Party is obliged to cede and make effective to the Second Party thirty-five per cent (35%) of the net profits of the fertilizer business, to be liquidated on the 30th of June of each year;

8. The First Party will deliver unto the Second Party a monthly sum of P300 for the account of his share of benefits;

9. During the year 1923, the First Party will grant unto the Second Party the permission for him to be absent from the Philippines for a period of time not exceeding one year, without prejudice to the rights of the Second Party in accordance with this contract.

In witness whereof, signed in his presence in the City of Manila, I.F., 27th of April, 1922. MENZI & CO., INC. Por (Fdo.) J. MENZI

General Manager First Party

(Fdo.) F. BASTIDA Second Party

MENZI & CO., INC. (Fdo.) MAX KAEGI

Acting Secretary



On January 10, 1922, the defendant corporation, at plaintiffs request, gave him the following letter.

Exhibit B:

Manila, 10th of January, 1922 Sr. FRANCISCO BASTIDA Manila Dear Sir:

In the interim while we formalize the contract, where in principle, we have agreed to engage in the business of manure and fertilizer, pursuant to this, we come to confirm your right to fifty per cent (50%) of the profits that is derived from the contract obtained by you from the Philippine Sugar Centrals (1250 per barrel). And the contract with the Calamba Sugar Estates, as well as such contracts that may be closed with buyers of prepared fertilizers before the final formalization of our mutual agreement, as a guarantee and security for you.

MENZI & CO. Por (Fdo.) W. TOEHL

Oscar Angeles and Ermita Angeles v. The Hon. Sec. of Justice and Felino Mercado (2005) (lanzones trees) Doctrines:

Failure to register the contract of partnership with the SEC does not invalidate a contract that has the essential requisites of a partnership.

The purpose of registration of the contract of partnership is to give notice to third parties, and does not affect the liability of the partnership and the partners to third persons.

A partnership may exist even if the partners do not use the words partner or partnership.

Facts:

On November 1996, Spouses Angeles filed a complaint for estafa against Mercado (brother-in-law of the spouses, married to the sister Emerita Angeles, Laura). Sps. Angeles claim that on November 1992, Mercado convinced them to enter into a contract of antichresis, aka sanglaang-perde, covering 8 parcels of land with lanzones trees located in Laguna, owned by Suazo.

The contract was to last for 5 years, with P210,000 as consideration. As the Sps. Angeles stayed in Manila during weekdays and went to Laguna only on weekends, the parties agreed that Mercado would administer the lands and complete the necessary paperwork. After 3 years, the Sps. Angeles asked for an accounting from Mercado. Mercado explained that the land earned P46,210 in 1993, which he used to buy more lanzones trees. He also reported that the trees bore no fruit in 1994. Mercado gave no accounting for the year 1995. The Sps. Angeles claim that only after this demand for an accounting did they discover that Mercado had put the contract of sanglaang-perde/antichresis under his and his spouses names.

Mercado claims that there exists an industrial partnership, aka sosyo industrial, between him and his spouse as partners and Sps. Angeles as the financiers. The industrial partnership had existed since 1991, before the contract of antichresis over the land. As the years passed, Mercado used his and his spouses earnings as part of the capital in the business transactions which he entered into in behalf of the Sps. Angeles. It was their practice to enter into business transactions with other people under the name of Mercado because the Sps. Angeles did not want to be identified as the financiers.

Issues:

1. W/N a partnership existed between Sps. Angeles and Mercado

2. W/N there was misappropriation by Mercado of the proceeds of the lanzones (estafa part)



Held/Ratio:

1. YES.

The Sps. Angeles position that there is no partnership because of the lack of a public instrument indicating the same and a lack of registration with Securities and Exchange Commission (SEC) holds no water. First, the Sps. Angeles contributed money to the partnership and not immovable property. Second, mere failure to register the contract of partnership with the SEC does not invalidate a contract that has the essential requisites of a partnership. The purpose of registration of the contract of partnership is to give notice to third parties. Failure to register the contract of partnership does not affect the liability of the partnership and of the partners to third persons. Neither does such failure to register affect the partnerships juridical personality. A partnership may exist even if the partners do not use the words partners or partnership.

Indeed, the Sps. Angeles admit to facts that prove the existence of a partnership: a contract showing a sosyo industrial or industrial partnership, contribution of money and industry to a common fund, and division of profits between the Sps. Angeles and Mercado

2. NO.

The Secretary of Justice adequately explained the alleged misappropriation by Mercado: The document alone, which was in the name of Mercado and his spouse, failed to convince us that there was deceit or false representation on the part of Mercado that induced the Sps. Angeles to part with their money. Mercado satisfactorily explained that the Sps. Angeles do not want to be revealed as the financiers.

It was the practice to have all the contracts of antichresis of their partnership secured in Mercados name as the Angeles spouses are apprehensive that, if they come out into the open as financiers of said contracts, they might be kidnapped by the New Peoples Army or their business deals questioned by the Bureau of Internal Revenue or worse, their assets and unexplained income sequestered, as Oscar Angeles was then working with the government.

Furthermore, accounting of the proceeds is not a proper subject for the present case.



Agad v. Mabato (1968) "operate a fishpond" Doctrine:

When the articles of partnership provides that the venture is established "to operate a fishpond," it does not necessarily mean that immovable properties or real rights have been contributed into the partnership which would trigger the operation of Art. 1773

Facts:

Mauricio Agad alleges that he and Severino Mabato, pursuant to a public instrument, are partners in a fishpond business. He contributed P1,000 to the business and is entitled to 50% of the profits. According to Agad, it was Mabato who handled partnership funds. For the years 1952-56, Mabato was faithful in rendering accounts. However, Mabato refused to render accounts for the years 1957-62.

Mabato contends that the complaint should be dismissed because of want of cause of action. He alleges that Agad failed to give his P1,000 contribution to the partnership and that the public instrument is null and void pursuant to Art. 1773 of the Civil Code because an inventory of the fishpond was not attached thereto. (Art. 1773: A contract of partnership is void, whenever immovable property is contributed thereto, if inventory of said property is not made, signed by the parties, and attached to the public instrument.) The lower courts granted the motion to dismiss. After reconsideration was denied, Agad brought the matter to the SC for review by record on appeal.

Issue:

1. W/N "immovable property or real rights" have been contributed to the partnership under consideration.

2. W/N Article 1773 of our Civil Code is applicable to the contract of partnership on which the complaint herein is based.

Held:

1. NO. What is stated in the public instrument is that the partnership was established "to operate a fishpond" not to "engage in a fishpond business." None of the partners contributed either a fishpond or a real right to any fishpond. Their contributions were limited to the sum of P1,000 each.

2. NO. Since both Agad and Mabato did not contribute any real property but only P1,000 each, Art. 1773 of the Civil Code is not applicable. The operation of the fishpond mentioned in the public instrument was the purpose of the partnership. Neither said fishpond nor a real right thereto was contributed to the partnership or became part of the capital thereof, even if a fishpond or a real right thereto could become part of its assets. The case is remanded for further proceedings.



Torres v. CA (1999) Doctrine:

Partnership voi

agpart 925- partnership and jv digest

Documents

aforementioned common

business transactions

common fund o intent

common design

contract of partnership

topic of partnership

series of transactions

residence tax