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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.,

4

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

5

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).

15

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

16

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

17

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

18

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

19

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

20

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

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

22

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)

_____

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

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

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

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

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

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

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

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

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

32

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

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.

34

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;

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

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

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

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

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;

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.

41

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

43

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

44

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.

45

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

46

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