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Dean CLV on Joint Ventures

[Updated: 14 October 2009]

PHILIPPINE LAW AND PRACTICE ON:

JOINT VENTURES

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1. Introduction

It is fitting that a course in Philippine Partnership Law should end

with the section on joint ventures, for it is in this field where

Supreme Court decisions have become truly transcendent when it

comes to protection of national interests or upholding the sanctity of

contractual commitments, and consequently where the essence of

partnership principles has become more lucent.

Discussions on joint ventures first appeared as a sort-of esoteric

medium of doing business in Philippine jurisprudence, with an

original impression that they were a commercial association

different from partnerships. The tendency has therefore been to

ascribe to joint venture arrangements certain legal allowances that

would never been accepted in the case of strict partnership

arrangements. This partiality for joint venture arrangements,

which still has remnants in sprinkling statutory provisions, may be

attributed to the perception that the joint venture is a more project-

oriented medium when compared to the partnership which tends to

be branded with the attributes of primarily being contractual

relationship bounded by the doctrine of delectus personae, and

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thereby being more party-oriented, person-oriented or even

personality-oriented.

Although it may not be readily apparent, but joint venture

arrangements have become fairly common medium for doing

business or undertaking projects in the Philippines, both covering

local transactions, when it comes to large infra-structure

undertakings involving the resources of big corporations; or

structuring partnership arrangements between foreign investors and

their local partners in the pursuit of local projects in the Philippines.

The Philippine Government encourages the pursuit of construction

projects and petroleum, coal, geothermal, and other energy

operations under joint venture arrangements. Under the National

Internal Revenue Code of 1997 (NIRC), joint ventures formed for

the purpose of engaging in petroleum, coal, geothermal, and other

energy operations under an operating or service contract with the

Government, or those formed for the purpose of undertaking

construction projects, are exempt from corporate income tax.

Joint venture arrangements have particularly been the more popular

medium when foreign participation is involved in local projects,

since the contractual nature of the arrangement allows the parties

flexibility in adopting special rules and procedures covering their

situations, which would otherwise not be applicable in a

purely corporate vehicle arrangement because of the restrictive

rules of the Corporation Code and jurisprudence on Philippine

Corporate Law.

2. Nature of Joint Venture in Philippine Setting

a. Joint Venture Arrangements Primarily Governed by

Partnership Law Principles

There was a time when joint ventures were treated separately from

partnerships. Take the 1954 decision of Tuason v. Bolaos, 95 Phil. 106 (1954), where the Supreme Court upheld as applicable the old

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adage in American Corporate Law that though a corporation has no

power to enter into a partnership, it may nevertheless enter into a

joint venture with another where the nature of that venture is in line

with the business authorized by its charter. (at p. 109, quoting from Wyoming-Indiana Oil Gas Co., v. Weston, 80 A.L.R., 1043, citing 2 Fletcher Cyc. of Corp., 1082).Tuason does not explain why there was a difference in treatment of corporate involvement in

partnerships as compared to that when it come to joint ventures.

If we pursue the position that joint ventures must be treated

differently from partnerships then it can be said that apart from

specific reference in the National Internal Revenue Code, there is no

statutory provision that formally governs directly joint ventures,

although they have been recognized in jurisprudence and

commonplace in commercial ventures. Consequently, joint venture

agreements fall generally within the realm of Contract Law.

Since the prevailing contract rule in the Philippines is that parties to

a contract may establish such stipulations, clauses, terms and

conditions, as they may deem convenient, provided that they are

not contrary to laws, morals, good customs, public order, or public

policy (Article 1306, New Civil Code), no model joint venture

agreements have been published by the Securities and Exchange

Commission (SEC), Board of Investments (BOI), nor any other

authority.

b. Joint Ventures Are a Species of Partnerships

The treatment of joint ventures today has come full circle, in that

the prevailing school of thought in the Philippines is that joint

ventures are a species of the partnerships falling within the

definition under Article 1767 of the New Civil Code, which provides

that when 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, then a partnership is

created.

In Kilosbayan, Inc. v. Guingona, 232 SCRA 110 (1994), the Court adopted Blacks definition of a joint venture, thus:

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Joint venture is defined as an association of persons or companies

jointly undertaking some commercial enterprisegenerally all

contribute assets and share risks. It requires a community of

interest in the performance of the subject matter, a right to direct

and govern the policy connected therewith, and duty, which may be

altered by agreement to share both in profit and losses; the acts of

working together in a joint project. (At pp. 143-44, citingBlacks Law Dictionary. Reiterated in Information Technology Foundation of the Philippines v. Commission on Elections, 419 SCRA 141 [2004])

The foregoing definition of a joint venture essentially falls within the

statutory definition of what constitutes a partnership. Other reasons

as to why a joint venture must be considered a species of

partnerships is that the Law on Partnerships 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. (Article 1771, Civil

Code). That means that no special form, even one seeking to

establish a joint venture arrangement, is necessary to give rise to a

partnership.

Following-up on the Kilosbayans definition of a joint venture, the Court inInformation Technology Foundation of the Philippines v. Commission of Elections, 419 SCRA 141 (2004), considered a consortium to be an association of corporations bound in a joint

venture arrangement, and held that the involvement of several

companies in a large project would not constitute them into a

consortium nor a joint venture when nothing shows a community of

interest, a sharing of risks, profits and losses, or even a

representation by them that they have come together in common

venture. The Court found in that case that apart from a short and

unsupported statement by one of the companies that it was

representing a consortium, no evidence was adduced covering a

joint venture agreement, or authority given by the other companies

authorizing the declaring company that to represent or bind them in

a collective basis.

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The position that a joint venture is a species of partnerships has

been upheld by the Court in Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), where it held that:

. . . The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general business

with some degree of continuity, while the joint venture is formed for

the execution of a single transaction, and is thus of a temporary

nature. . . This observation is not entirely accurate in this

jurisdiction, since under the Civil Code, a partnership may be

particular or universal, and a particular partnership may have for its

object a specific undertaking. (Art. 1783, Civil Code) It would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws of partnership. (Ibid; emphasis supplied)

Without qualms or equivocation, the Court in JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003), treated a joint venture arrangement as a partnership.

In Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), the Court observed that a joint venture is akin to a particular

partnership. InPrimelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006), the Court ruled

When the parties have entered into a Joint Venture Agreement,

they have entered into a joint venture arrangement which is a form

of partnership, and as such is to be governed by the laws on

partnership. (at p. 467)

With joint venture arrangements being clearly classified as a form of

particular partnership, there is no doubt that the incidents imposed

by the Law on Partnerships on every kind of partnership must befall

every joint venture arrangement. Only recently, in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), although the corporate parties executed the instrument as a Power

of Attorney and referred to themselves as principal and

manager, the Court held that when the essential elements of a

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partnership are present, then it would be a joint venture

arrangement, governed by the Law on Partnership, thus -

An examination of the Power of Attorney reveals that a

partnership or joint venture was indeed intended by the parties.

Under a 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.

While a corporation, like petitioner, cannot generally enter into a

contract of partnership unless authorized by law or its charter, it

has been held that it may enter into a joint venture which is akin to

a particular partnership relationship: x x x Perusal of the agreement

denominated as the Power of Attorney indicates that the parties

had intended to create a partnership and establish a common fund

for the purpose. They also had a joint interest in the profits of the

business as shown by a 50-50 sharing in the income of the mine.

(at pp. 438-439)

(1) Partnership Characteristics of Joint Venture

Arrangements

Since a joint venture is a species of partnerships, it would have the

following characteristics of a partnership, thus:

(a) It constitutes a juridical personality separate and distinct from

that of each of the co-venturers. Article 1768, of the New Civil Code

provides specifically that the partnership has a juridical personality

seprate and distinct from that of each of the partners even in case

of failure to comply with the registration requirements of law.

Therefore, a joint venture as a firm can enter into contracts and

own properties in the firms name; (cf Art. 1774, Civil Code)

(b) Each of the co-venturers would be liable with their private

property to the creditors of the joint venture beyond their

contributions to the joint venture; (Arts. 1816, 1817, 1824 to 1826,

and 1839, Civil Code)

(c) Even if a co-venturer transfers his interest to another, the

transferee does not become a co-venturer to the others in the joint

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venture unless all the other co-venturers consent. This is in

consonance with the delectus personae principle applicable to partnerships; (Arts. 1804 and 1813, Civil Code)

(d) Generally, the co-venturers acting on behalf of the joint

venture are agents of joint venture and of each other; (Arts. 1803,

1818 to 1823, Civil Code) and

(e) Death, retirement, insolvency, civil interdiction or dissolution of

a co-venturer dissolves the joint venture. (Art. 1830, Civil Code)

In Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005), the Court held that a joint venture is hardly distinguishable from, and may be

likened to, a partnership since their elements are

similar, i.e., community of interests in the business and sharing of profits and losses; and that being a form of partnership, a joint

venture is generally governed by the law on partnership.

c. Special Treatments Given to Joint Ventures

Jurisprudence, however, has tended to give joint ventures special

treatment not accorded to ordinary partnerships. Philippine

jurisprudence had adopted the prevailing rule in the United States

that a corporation cannot ordinarily enter into partnerships with

other corporations or with individuals. The basis for such prohibition

on corporations is that in entering into a partnership, the identity of

the corporation is lost or merged with that of another and the

direction of the affairs is placed in other hands than those provided

by law of its creation.

The doctrine is grounded on the theory that the stockholders of a

corporation are entitled, in the absence of any notice to the contrary

in the articles of incorporation, to assume that their directors will

conduct the corporate business without sharing that duty and

responsibility with others. (Bautista, Treatise on Philippine

Partnership Law, 1978 Ed., at p. 9)

As discussed previously, Tuason v. Bolaos, 95 Phil. 106 (1954), recognized in Philippine jurisdiction the doctrine in Anglo-American

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jurisprudence that a corporation has no power to enter into a

partnership. Nevertheless, Tuasonruled that a corporation may validly enter into a joint venture agreement, where the nature of

that venture is in line with the business authorized by its charter.

(Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletcher Cyc. of Corp., 1082)

Although Tuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement, it

would seem that the policy behind the prohibition on why a

corporation cannot be made a partner does not apply in a joint

venture arrangement. Being only a particular project or

undertaking, when the Board of Directors of a corporation evaluate

the risks and responsibilities involved, they can more or less

exercise their own business judgment is determining the extent by

which the corporation would be involved in the project and the likely

liabilities to be incurred. The situation therefore in a joint venture

arrangement, unlike in an ordinarily partnership arrangement which

may expose the corporation to any and various liabilities and risks

which cannot be evaluated and anticipated by the board, allows the

board to fully bind the corporation to matters essentially within the

boards business appreciation and anticipation.

The previous ruling of the SEC on the matter is that a corporation

cannot enter into a contract of partnership with an individual or

another corporation on the premise that if a corporation enters into

a partnership agreement, it would be bound by the acts of the

persons who are not its duly appointed and authorized agents and

officers, which is entirely inconsistent with the policy in Corporate

Law that the corporation shall be managed by its Board of

Directors. (SEC Opinion, 22 December 1966, SEC FOLIO 1960-

1976, at p. 278; citing 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl. 1950, Sec. 2520).

Later, the SEC provided for a clear exception to the foregoing ruling,

and allowed corporations to enter into partnership arrangements,

provided the following conditions are met: (SEC Opinion, 29

February 1980; SEC Opinion, dated 3 September 1984. Under Sec.

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192 of the National Internal Revenue Code, documentary stamps of

P15.00 must be affixed on each proxy)

(a) The authority to enter into a partnership relation is expressly

conferred by the charter or the articles of incorporation of the

corporation, and the nature of the business venture to be

undertaken by the partnership is in line with the business

authorized by the charter or articles of incorporation;

(b) The agreement on the articles of partnership must provide that

all the partners shall manage the partnership, and the articles of

partnership must stipulate that all the partners shall be jointly and

severally liable for all the obligations of the partners; and

(c) If it is a foreign corporation, it must obtain a license to transact

business in the country in accordance with the Philippine

Corporation Code.

In one opinion, the SEC clarified that the conditions imposed meant

that since the partners in a partnership of corporations are required

to stipulate that all of them shall manage the partnership and they

shall be jointly and severally liable for all the obligations of the

partnership, it necessarily followed that a partnership of

corporations should be organized as a general partnership. (SEC

Opinion, 23 February 1994, XXVIII SEC Quarterly Bulletin 18 [No. 3,

Sept. 1994] )

Lately, the SEC, realizing that the second condition actually

prevented a corporation from entering into a limited partnership,

which it allowed to do so would then be more congruent with the

policy that the corporation would then not be held liable for its

venture beyond the investments made and determined by its Board

of Directors, and would therefore not be held liable (beyond its

investment) for debts arising from the acts of the general partners,

reconsidered its position and ruled that a corporation may become a

limited partner in a limited partnership, since there is no existing

Philippine law that expressly prohibits a corporation from becoming

a limited partner in a partnership. In effect, the SEC dropped the

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second condition imposed previously. (SEC Opinion, 17 August

1995, XXX SEC Quarterly Bulletin 8 [No. 1, June 1996])

3. Alternative Forms in Structuring a Joint Venture

In Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), the Supreme Court discussed background of the use of joint

ventures when it comes to Filipino investors inviting foreign

participation in a local project, and the risks involved, thus

Quite often, Filipino entrepreneurs in their desire to develop the

industrial and manufacturing capacities of a local firm are

constrained to seek the technology and marketing assistance of

huge multinational corporations of the developed world.

Arrangements are formalized where a foreign group becomes a

minority owner of a firm in exchange for its manufacturing

expertise, use of its brand names, and other such assistance.

However, there is a always the danger from such arrangements.

The foreign group may, from the start, intend to establish its own

sole or monopolistic operations and merely uses the joint venture

arrangement to gain a foothold or test the Philippine waters, so to

speak. Or the covetousness may come later. As the Philippine firm

enlarges its operations and becomes profitable, the foreign group

undermines the local majority ownership and actively tries to

completely or predominantly take over the entire company. This

undermining of joint ventures is not consistent with fair dealing to

say the least. To the extent that such subversive actions can be

lawfully prevented, the courts should extend protection especially in

industries where constitutional and legal requirements reserve

controlling ownership to Filipino citizens. (at p. 142)

Parties have varied choices of legal forms in planning a joint venture

arrangement, and they can pursue the same through the following

formats:

(a) informal or contractual joint venture arrangement;

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(b) by partnership arrangement; or

(c) through a joint venture corporation.

a. Informal or Contractual Joint Venture Arrangement

In spite of the peremptory provisions under the Law of Partnerships

that any agreement by which two or more persons bind themselves

to contribute money, property or industry to a common fund (i.e., to pursue a business enterprise) with the intention of dividing the

profits among themselves, would necessarily give rise to a

partnership (Article 1767, New Civil Code), and thereby a

partnership juridical personality arises separate and distinct from

that of the partners, (Article 1768, New Civil Code), nonetheless, in

cases of corporations which come together in co-venture over a

particular project, there has been in implicit recognition that such a

venture can be pursued merely as a private enterprise with no

intention to present a new or separate firm or company, and

much less a new juridical person, to the public.

Thus, in Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), after the Court held that a joint venture is akin to a

particular partnership, it distinguished one from the other as

follows:

(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no firm name and no legal personality. In a joint account, the participating merchants

can transact business under their own name, and can be individually liable therefore.

(b) Usually, but not necessarily a joint adventure is limited to a

SINGLE TRANSACTION, although the business of pursuing to a

successful termination may continue for a number of years; a

partnership generally relates to a continuing business of various transactions of a certain kind. (At p. 753, citing V.E. PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED 546 [13th ed., 1995];

underscoring supplied)

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In such an instance, a Joint Venture Agreement or a

Memorandum of Agreement is executed by the co-venturers to

provide for the terms of arrangement, but the business enterprise

will be pursued in the names of the co-venturers through their duly

authorized representatives. No separate company office is set-up,

no separate books of accounts are kept, no formal registration of

the enterprise is made with the appropriate government agencies.

The co-venturers therefore intend their relationship to be primarily

governed by the contractual terms agreement upon them in the

joint venture agreement.

Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), has affirmed the principle that joint venture arrangements

must primarily be viewed as binding contractual commitments,

thus: Moreover, the usual rules as regards the construction and

operation of contracts generally apply to a contract of joint

venture. (At p. 147, citing OHara v. Harman, 14 App. Dev. (167) 43 NYS 556)

Even the SEC itself has recognized such an informal arrangement. It

has ruled that generally, a joint venture agreement of two

corporations need not be registered with the SEC, provided it will

not result in the formation of a new partnership or corporation.

However, should there be an intention to acquire a separate Tax

Identification Number (TIN) from the Bureau of Internal Revenue

for the business venture; the same requires registration with the

SEC in order to have a separate legal personality to obtain a

separate TIN. (SEC Opinion, 30 March 1995, XXIX SEC Quarterly

Bulletin 32 [No. 3, Sept. 1995])

The SEC has also ruled that two or more corporations may enter

into a joint venture through a contract or agreement (contractual

joint venture) if the nature of the venture is authorized by their

charters, which contract need not be registered with the SEC;

provided, however that the joint venture will not result in the

formation of a new partnership or corporation. (SEC Opinion, 29

April 1985, SEC Annual Opinions 1985, at p. 89)

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Thus, under a contractual joint-venture format, the co-venturers

pursue the joint venture arrangement by a private contract between

them, choosing not to represent to third parties or to the public a

separate firm undertaking the project. Under such an arrangement,

the relationship of the co-venturers, their rights and liabilities, are

governed by the joint venture contract executed among them.

This was the sort of arrangement sought to be pursued in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), where in the operation of a mining concession between two

corporations, they executed merely a Power of Attorney and

designated one another principal (the owner of the concession)

and manager (the entity that would directly manage development

and operations). The Court refused to consider the relationship

between the parties as debtor-creditor, principal-agent, or as

principal-manager, since by the terms of the arrangement the

essential elements of a partnership existed, thus

An examination of the Power of Attorney reveals that a

partnership or joint venture was indeed intended by the parties.

Under a 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.

While a corporation, like petitioner, cannot generally enter into a

contract of partnership unless authorized by law or its charter, it

has been held that it may enter into a joint venture which is akin to

a particular partnership relationship: x x x Perusal of the agreement

denominated as the Power of Attorney indicates that the parties

had intended to create a partnership and establish a common fund

for the purpose. They also had a joint interest in the profits of the

business as shown by a 50-50 sharing in the income of the mine.

(Ibid, at pp. 438-439)

It is clear from the ruling in Philex Mining, that the parties to a business venture may choose to treat one another as not being

bound by a partnership relationship, but when controversy arises by

which rights and obligations have to be determined, the courts

would have no choice by to impute the legal relationship of a

partnership or joint venture arrangement when the essential

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elements of a partnership are present. In Philex Mining, the Court refused to allow the parties to treat the advances made to the

venture as loans or advances to one another, holding that advances

made by a co-venturer in the joint venture business which cannot

be recovered cannot be treated as bad debts and deducted for

income tax purposes; the relationship between co-venturers in a

joint venture arrangement cannot be considered a creditor-debtor

relationship with respect to their advances and contributions to the

business enterprise.

Ultimately, the failed attempt in Philex Mining to veil the arrangement as one as not being a joint venture arrangement,

caused the mining companies the obligation to pay unpaid income

taxes in the several millions of pesos. And the hard lesson that was

learned was that since a joint venture arrangement is a species of

partnership, then the peremptory provisions and principles under

the Law on Partnerships will be the once employed by the courts to

smoke out whether the underlying agreement was a joint venture

arrangement.

A more graphical example of an attempt to hide the joint venture

arrangement can be found in Kilosbayan, Incorporated v. Guingona, Jr., 232 SCRA 110 (1994). In that case, the Philippine Charity and Sweepstakes Office (PCSO) was prohibited by its charter from

holding and conducting lotteries in collaboration, association or

joint venture with any person, association, company or entity,

whether domestic or foreign. (Sec. 1, Rep. Act No. 1169, as

amended by B.P. Blng. 42) In order not to be violate such

prohibition, PCSO entered into a Contract of Lease with the

Philippine Gaming Management Corporation (PGMC), purported for

PCSO to lease the lottery facilities of the latter in order to operate

nationally the on-line lottery system known as lotto. In finding

that notwithstanding its denomination or designation as a Contract of Lease (at p. 143), the purported lease arrangement violated the statutory prohibition, in that it actually covered a joint venture

arrangement between PCSO and PGMC, the Court held

The contemporaneous acts of the PCSO and the PGMC reveal that

the POCSO had neither funds of its own nor the expertise to operate

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and manage an on-line lottery system, and that although it wished

to have the system, it would have it at no expense or risks to the

government. x x x.

In short, the only contribution the PCSO would have is its franchise

or authority to operate the on-line lottery system; with the rest,

including the risks of the business, being borne by the proponent or bidder. x x x.

The so-called Contract of Lease is not, therefore, what is purports to

be. Its denomination as such is a crafty device, carefully conceived,

to provide a built-in defense in the event that the agreement is

questioned as violate of the exception in Section 1(b) of the PCSOs

charter. The acuity or skill of its draftsmen to accomplish that

purpose easily manifest itself in the Contract of lease. It is

outstanding for its careful and meticulous drafting designed to given

an immediate impression that it is a contract of lease. Yet, woven

therein are provisions which negate its title and betray the true

intention of the parties to be in or to have a joint venture for a period of eight years in the operation and maintenance of the on-

line lottery system. (at pp. 144-146;underscoring supplied).

The joint venture arrangement was found to exists under the

Contract of Lease with finding by the Court of the essential element

of participating in the profits of the on-line lottery system, and at

the same time bearing the risks of loss. The Court held that This

risk-bearing provision is unusual in a lessor-lessee relationship, but

inherent in a joint venture. (at p. 147). The Court observed:

All of the foregoing unmistakably confirm the indispensable role of

the PGMC in the pursuit, operation, conduct, and management of

the On-Line Lottery System. They exhibit and demonstrate the

parties indivisible community of interest in the conception, birth

and growth of the on-line lottery, and, above all, in its profits, with

each having a right in the formulation and implementation of

policies related to the business and sharing, as well, in the losses

with the PGMC bearing the greatest burden because of its

assumption of expenses and risks, and the PCSO the lease, because

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of its confessed unwillingness to bear expenses and risks. (at pp.

148-149).

b. Joint Venture Pursued under Formal Partnership

Arrangements

A second type of joint venture arrangement is to formally operate

the joint venture set-up as a partnership, with a separate and

distinct juridical personality. Under such an arrangement, the co-

venturers execute formal Articles of Partnership, which may also be

denominated as a Joint Venture Agreement, embodying their

arrangements, as well as the firm name and structure of the

company that they are forming, and register the same with the

SEC.

Such a joint venture arrangement would then be operated as, and

be governed by the legal rules and principles pertaining to,

particular partnerships.

As contrasted from the informal joint venture arrangement

discussed above, a formal joint venture pursued under formal

partnership arrangements provides better protection for the parties

in the sense that they have a set of laws by which they can base

their rights and claims. Apart from the lessons learned from the

decisions in Kilosbayan and Philex Mining already discussed above, this lesson can best be shown in the decision in Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), where the heirs of the purported co-venturer in a lumber and construction supply business

sought to recover the decedents share in the enterprise and

accumulated profits. Although the trial court found that there was a

joint venture arrangement, the Supreme Court affirmed the ruling

of the Court of Appeals that in the absence of a contract of

partnership, plus the inability of the heirs to indicate by clear

evidence the essential elements of a partnership, no joint venture

arrangement can be imputed into the business enterprise, thus

Undoubtedly, the best evidence [of a partnership] would have been

the contract of partnership itself, or the articles of partnership. . . .

The net effect, however, is that we are asked to determine whether

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a partnership existed based purely on circumstantial evidence. A

review of the record persuades us that the Court of Appeals

correctly reversed the decision of the trial court. The evidence

presented by petitioners falls short of the quantum of proof required

to establish a partnership. (at p. 754).

c. Joint Venture Arrangement Pursued Through a Joint

Venture Corporation

Equity joint ventures are also available in Philippine setting, which

may cover the formation of a new joint venture company, with each

co-venturer being allocated proportionate shareholdings in the

outstanding capital stock of the joint venture corporation.

An equity joint venture may also be pursued where a co-venturer is

allocated the agreed shares of stock in an existing corporation,

either from new issuances of the capital stock of the existing

corporation, or sold shares from those already issued in the names

of the other co-venturers.

(1) Corporate Principles versus JVA Provisions

In equity joint ventures, the rights and obligations of the parties

among themselves are covered not only in a separate joint venture

agreement, but also implemented by certain provisions of the

articles of incorporation and by-laws of the joint venture

corporation.

In a situation where a corporate vehicle is formed in pursuance of

the joint venture arrangements, ideally the joint ventures should be

able to fit into the various terms and clauses of the articles of

incorporation and by-laws (known as the charter) of the joint

venture company the salient features of their joint venture

agreements. Considering that the co-venturers have chosen the

corporate vehicle by which to pursue their business enterprise, then

it would be posited that in situations where joint venture

agreements contain provisions not covered by the charter of the

joint venture corporation or vice-versa, the resolutions of issues arising therefrom ought to be as follows:

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(a) In case of conflicts between the provisions of the joint venture

agreement and the charter of the joint venture corporation, the

provisions of the latter shall prevail;

(b) In case there are provisions or clauses in the joint venture

agreement not found in the charter of the joint venture corporation,

such provisions and clauses remain binding contracts among the

joint venture parties signatory to the agreement, but do not bind

the joint venture corporation or other parties not signatories

thereto.

The foregoing rules of resolution are based on the well-established

doctrine under Philippine Corporate Law that the articles of

incorporation form a basic contract document defining the charter of

the corporation. The articles of incorporation is characterized as a

contract between and among three parties: (a) between the State

and the corporation; (b) between the stockholders and the State;

and (c) between the corporation and its stockholders. (Government of the P.I. v. Manila Railroad Co., 52 Phil. 699 [1929]).

In addition, although the joint venture agreement may contain rules

on management and control of the joint venture corporation, it does

not authorize the co-venturers, as equity owners, to override the

business management of the corporate affairs of the joint venture

corporation by its board of directors. Any stipulation therefore in the

joint venture agreement that seeks to arrogate unto the

stockholders thereof the management prerogatives of its board of

directors would be null and void. In short, by having adopted the

corporate entity as the medium by which the co-venturers have

sought to pursue the joint venture enterprise, they are bound

Corporate Law principles under which the entity must operate.

Jurisprudence does not support the outright primacy of Corporate

Law principles in a joint venture scheme pursued through a joint

venture company.

(2) Jurisprudential Rulings on the Scheme of JV Corporation

19

The decision in Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), best illustrates the strength and weakness of a

joint venture arrangement pursued through the medium of a joint

venture corporation.

American Standards Inc. (ASI), a Delaware corporation, entered

into an Agreement with Filipino group to participate in the

ownership of an enterprise which would engage primarily in the

business of manufacturing in the Philippines and selling abroad

vitreous china and sanitary wares. The parties agreed that the

business operations in the Philippines shall be carried on by an

incorporated enterprise and that the name of the corporation shall

initially be Sanitary Wares Manufacturing Corporation. (at p. 134).

The Agreement executed between the American group taking 40%

equity in the venture, and Filipino group taking 60% equity in the

venture, provided for the particulars covering the articles of

incorporation of the joint venture company to be formed, the

manner of management thereof, as well as provisions designed to

protect [ASI] as a minority group, including the grant of veto

powers over a number of corporate acts and the right to designate

certain officers, such as a member of the Executive Committee

whose vote was required for important corporate transactions. (at

pp. 134-135). In particular, the Agreement contained the following

provision on theManagement of the joint venture corporation, and the manner by which the two groups would elected the Board of

Directors, thus:

5. Management

(a) The management of the Corporation shall be vested in a Board

of Directors, which shall consist of nine [9] individuals. As long as

American-Standard [ASI] shall own at least 30% of the outstanding

stock of the Corporation, three [3] of the nine directors shall be

designated by American-Standard [ASI], and the other six [6] shall

be designated by the other stockholders of the Corporation. (at p.

134).

The joint venture company was registered, and The joint enterprise

thus entered into by the Filipino investors and the American

20

corporation [ASI] prospered. Unfortunately, with the business

successes, there came a deterioration of the initially harmonious

relations between the two groups. According to the Filipino group, a

basic disagreement was due to their desire to expand the export

operations of the company to which ASI objected as it apparently

had other subsidiaries of joint venture groups in the countries where

Philippine exports were contemplated. (at p. 135).

In the annual stockholders meeting in 1983, the friction between

the two groups came to a head, when the American group wanted

to cast their vote, not only on their three (3) nominees, but also on

the nominees of the Filipino group on the ground that under Section

24 of the Corporation Code, which provided for cumulative voting

for stock corporations, they had a right to cast their votes on all

nominees for the Board of Directors, and not just on their allotted

three nominees.

The Court was asked to decide the issue on the nature of the

business established by the partieswhether it was a joint venture

or a corporation (at p. 139), since it was the contention of ASI

that the actual intention of the parties should be viewed strict on

the Agreement . . . wherein it is clearly stated that the parties

intention was to form a corporation and not a joint venture (at p.

139), since a particular provision in the Agreement provided that

nothing herein contained shall be construed to constitute any of the

parties hereto partners or joint venturers in respect of any

transaction hereunder.

In resolving the issues, the Court gave the basic doctrine when it

comes to joint venture arrangement, which like any partnership

arrangement, are primarily contractual in character, thus:

The rule is that whether the parties to a particular contract have

thereby established among themselves a joint venture or some

other relation depends upon the actual intention which is

determined in accordance with the rules governing the

interpretation and construction of contracts. (at p. 139, citing Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO), 65 F.

21

Suppl 678; Universal Sales Corp. v. California Press Mfg., Co., 20 Cal. 2nd 751, 128 P. 2nd 668).

The Court resolved that

In the instant cases, our examination of important provisions of the

Agreement as well as the testimonial evidence presented by the

[witnesses] shows that the parties agreed to establish a joint

venture and not a corporation. The history of the organization of

Saniwares and the unusual arrangements which govern its policy

making body are all consistent with a joint venture and not with an

ordinary corporation. (at pp. 140-141).

The Court resolved to apply the mandatory provisions of the

Corporation Code within the contractual intentions of the parties

provided in the joint venture Agreement, and affirmed the formula

adopted by the Court of Appeals that the American group can

cumulate their votes only within the nominees allotted to them, and

held:

To allow the ASI Group to vote their additional equity to help elect

even a Filipino director who would be beholden to them would

obliterate their minority status as agreed upon by the parties. As

aptly stated by the appellate court: x x x ASI, however, should not

be allowed to interfere in the voting within the Filipino group.

Otherwise, ASI would be able to designate more than the three

directors it is allowed to designate under the Agreement, and may

even be able to get a majority of the board seats, a result which is

clearly contrary to the contractual intent of the parties. x x x .

Equally important as the consideration of the contractual intent of

the parties is the consideration as regards the possible domination

by the foreign investors of the enterprise in violation of the

nationalization requirements enshrined in the Constitution and

circumvention of the Anti-Dummy Act. x x x. (at p. 148).

In essence, Aurbach emphasizes that joint venture arrangements are first and foremost contractual agreements, and as much as

possible the contractual intent of the co-venturers should be given

22

realization within the corporate medium by which they pursued the

business enterprise. Aurbachrecognized that such a principle is not alien to Corporate Law when it quoted arguments that Section 100

of the Corporation Code expressly makes binding written

agreements between the stockholders in a close corporation.

(3) JV Company Organized as a Close Corporation

Under the Corporation Code, a close corporation is one which

provides in its articles of incorporation the following three

requisites:

(a) all of the corporations issued stock of all classes, exclusive of

treasury shares, shall be held on record by not more than a

specified number of persons, not exceeding twenty (20);

(b) all of the issued stock of all classes shall be subject to one or

more specified restrictions on transfer in the nature of a right of

first refusal; and

(c) the corporation shall not list in any stock exchange or make any

public offering of any of its stock of any class (Section 96,

Corporation Code).

Under a close corporation setting, it may be provided in the articles

of incorporation that the business of the corporation shall be

managed by the stockholders of the corporation rather than by a

board of directors, and the officers and employees may be elected

or appointed directly by the stockholders (Section 97, Corporation

Code).

In particular, Section 100 of the Corporation Code provides that:

Sec. 100. Agreements by stockholders.

1. Agreements by and among stockholders executed before the

formation and organization of a close corporation, signed by all

stockholders, shall survive the incorporation of such corporation and

shall continue to be valid and binding between and among such

stockholders, if such be their intent, to the extent that such

23

agreements are not inconsistent with the articles of incorporation,

irrespective of whether the provisions of such agreements are

contained, except those required by this Title [on close

corporations] to be embodied, in said articles of incorporation.

x x x.

Although the Court in Aurbuch did not make a formal ruling on the matter, it seems to have given its imprimatur to the proposition that

even when a corporation does not comply with the definition of a

close corporation under the Corporation Code because the three

requisites are not expressly provided for in its articles of

incorporation, nonetheless, the same principles applicable to formal

close corporations, should also apply to equally closely-held

corporation, such as those organized pursuant to a formal joint

venture agreement, thus

The Lagdameo Group stated in their appellees brief in the Court of

Appeals:

x x x.

Secondly, even assuming that Saniwares is technically not a close

corporation because it has more than 20 stockholders, the

undeniable fact is that it is a close-held corporation. Surely, appellants cannot honestly claim that Saniwares is a public issue or

a widely held corporation.

In the United States, many courts have taken a realistic approach

to joint venture corporations and have not rigidly applied principles

of corporation law designed primarily for public issue corporation.

Theses courts have indicated that express arrangements between

corporate joint ventures should be construed with less emphasis on

the ordinary rules of law usually applied to corporate entities and

with more consideration given to the nature of the agreement

between the joint venturers. . . . These American cases dealt with

legal questions as to the extent to which the requirements arising

from the corporate form of joint venture corporations should

control, and the courts ruled that substantial justice lay with those

24

litigants who relied on the joint venture agreement rather than the

litigants who relied on the orthodox principles of corporation law.

x x x. (at pp. 142-144).

The provisions of the Corporation Code on close corporations, which

provides for informal management of its affairs, binding effect of

written agreements among stockholders, etc., should be deemed to

be available to resolve issues pertaining to joint venture

corporations.

(4) Right of First Refusal as a Delectus Personae Feature in

JV Company Scheme

Another reported case of a joint venture company arrangement

would be inJG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003), where the National Investment and Development

Corporation (NIDC), a government corporation, entered into a Joint

Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of

Kobe, Japan, forming the Philippine Shipyard and Engineering

Corporation (PHILSECO) to engage in operation and management of

shipyard. The JVA provided for a 60% Filipino-40% Japanese equity,

and provided a right of first refusal on the equity shares should

either of the co-venturer decide to sell, assign or transfer its

interest in the joint venture. When later on the government shares

in PHILSECO were bidded out, one of the issues that had to be

resolved was the validity of the right of first refusal clause found in

the JVA.

The Court matter-of-factly recognized the partnership

arrangement between the original parties in the joint venture

company, and characterized the right of first refusal clause in the

JVA as a protective mechanisms to preserve their respective

interests in the partnership in the event that (a) one party decides

to sell its shares to third parties; and (b) new Philseco shares are

issued. (at p. 29). The Court further held

. . . The right of first refusal is meant to protect the original or

remaining joint venturer(s) or shareholder(s) from the entry of third

25

persons who are not acceptable to it as co-venturer(s) or co-

shareholder(s). The joint venture between the Philippine

Government and KAWASAKI is in the nature of a partnership which,

unlike an ordinary corporation, is based on delectus personae. No one can become a member of the partnership association without

the consent of all the other associates. The right of first refusal thus

ensures that the parties are given control over who may become a

new partner in substitution of or in addition to the original partners.

Should the selling partner decide to dispose all its shares, the non-

selling partner may acquire all these shares and terminate the

partnership. No person or corporation can be compelled to remain

or to continue the partnership . . . (at p. 31).

What one notices clearly extant in JG Summit Holdings is that although what was bidded were shares of stock is a duly registered

corporation, and the right of first refusal was not found expressed in

any provision of the articles of incorporation and by-laws,

nonetheless, the Court applied its enforceability to a third party

bidder who was not privy to the terms of the private JVA between

the Government and the foreign investor.

4. Aspects which Influence Choice of JV Scheme

The important aspects in choosing the format or scheme by which

to pursue the joint venture arrangement would be the issues

relating to limited liability considerations, exclusion of new parties

and non-dilution of equity considerations, tax consequences, and

limitation of foreign equity.

a. Defining Joint Ventures Scope of Business Activity

The principal consideration in defining the scope of business to be

undertaken by joint venture in the Philippines basically revolves

around the issue, when it involves foreign investment, of

restrictions on foreign equity and foreign management and control

on certain restricted areas or activities. These areas must involve

foreign investments as defined under Republic Act No. 7042, known

as the Foreign Investments Act of 1991.

26

FIA 91, was enacted to promote foreign investments, and

prescribes the procedures for registering enterprises doing business

in the Philippines. It is the basic law that provides the conditions,

activities, and procedures where foreign enterprises may invest and

do business in the Philippines. It also applies to joint venture

arrangements in the Philippines. By the negative list scheme, the

Act simply established the restricted areas, and declared all other

areas as open to unlimited foreign equity participation.

Essentially, the FIA 91 provides for foreign investment negative list

which spells out the activities reserved for Philippine national.

Export enterprises may enter all activities not restricted by Lists A

and B of the negative list, and domestic enterprises, with foreign

equity, may enter all activities not restricted by Lists A, B, and C of

the negative lists.

(1) Application of the Grandfather Rule

The grandfather rule is the method by which the percentage of

Filipino equity in a corporation engaged in nationalized and/or partly

nationalized areas of activities, provided for under the Constitution

and other nationalization laws, is computed, in cases where

corporate shareholders are present in the situation, by attributing

the nationality of the second or even subsequent tier of ownership

to determine the nationality of the corporate shareholder.

In recognizing and applying the grandfather rule, the SEC has

adopted the formula of the Secretary of Justice (DOJ Opinion No.

18, s. 1989) to the effect that:

Shares belonging to corporations or partnerships at least 60% of

the capital of which is owned by Filipino citizens shall be considered

as of Philippine nationality, but if the percentage of Filipino

ownership in the corporation or partnership is less than 60% only

the number of shares corresponding to such percentage shall be

counted as of Philippine nationality. (SEC Opinion, 23 November

1993, XXVIII Sec Quarterly Bulletin 39 [No. 1, March 1994]; SEC

Opinion, 14 April 1993, XXVII Sec Quarterly Bulletin 29 [No. 3,

Sept. 1993]; SEC Opinion, 23 March 1993, XXVII Sec Quarterly

27

Bulletin 15 (No. 3, Sept. 1993); SEC Opinion, 6 August 1991, Sec

Quarterly Bulletin 44 [No. 4, Dec. 1991]; SEC Opinion, 30 May

1990, XXIV Sec Quarterly Bulletin 52 [No. 3, Sept. 1990]; SEC

Opinion, 14 December 1989, XXIV Sec Quarterly Bulletin 7 [No. 2,

June 1990]; SEC Opinion, 6 November 1989, XXIV Sec Quarterly

Bulletin 56 [No. 1, March 1990]).

It must be stressed however, that the afore-quoted SEC rule

applies for purposes of resolving issues on investments. The SEC was quick to add: However, while a corporation with 60% Filipino

and 40% Foreign equity ownership is considered a Philippine

national for purposes of investment, it is nor qualified to invest in or

enter into a joint venture agreement with corporation or

partnerships, the capital or ownership of which under the

constitution or other special laws are limited to Filipino citizens

only. (SEC Opinion, 14 December 1989, XXIV Sec Quarterly

Bulletin 7 [No. 2, June 1990]). A joint venture arrangement would

mean that such corporation has become a partner and is deemed

then to be acting or involving itself in the operations of a

nationalized activity by the acts of the local partners by virtue of the

principle of mutual agency

b. Limited Liability Feature

Whether it be the contractual joint venture arrangement or the

partnership arrangement, the co-ventures would be faced with

prospects of unlimited liability pervading in such arrangement.

Under Philippine Partnership Law, partners (except limited partner

in formally registered limited partnership) and con-venturers are

liable for partnership debts beyond their contributions to the

parternship or joint venture arrangements.

Therefore, the use of the joint venture company as the format to

pursue the joint venture arrangement allows the co-venturers to

take full advantage of the limited liability features of the corporate

vehicle especially in projects and undertakings which embody

certain risks.

c. Exclusions of New Parties; Non-Dilution of Equity

28

The ability of the co-venturers to present the venture among the

original parties through a right of first refusal clause has been

recognized as valid by the Supreme Court as a means to protect the

original or remaining joint venturer(s) or shareholder(s) from the

entry of third persons who are not acceptable to it as co-venturer(s)

or co-shareholder(s) . . . [because] The joint venture . . . is in the

nature of a partnership which, unlike an ordinary corporation, is

based on delectus personae. No one can become a member of the partnership association without the consent of all the other

associates. The right of first refusal thus ensures that the parties

are given control over who may become a new partner in

substitution of or in addition to the original partners. (JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10, 29-31 [2003]).

d. Tax Issues

In the field of Taxation, both a partnership and a joint venture are

treated as corporate taxpayers, and both are subject to corporate

income tax, except that under the National Internal Revenue Code

of 1997, a joint venture or consortium formed for the purpose of

undertaking construction projects or engaging in petroleum, coal,

geothermal and other energy operations pursuant to an operating or

consortium agreement under a service contract with the

Government, shall not be taxed separately as a corporate taxpayer

(Section 22(B), NIRC of 1997).

The contractual joint venture has the advantage of limiting the

extent of the arrangement between and among the co-venturers, as

in undertakings that require privacy. In addition, since formal joint

ventures are taxed as corporate taxpayer, the contractual joint

venture lessens the need to have to register the project as a

separate corporate taxpayer, since the private arrangements should

allow the co-venturers to continue reporting separately their

participation in the project in their own tax returns.

The corporate entity route also allows the co-venturers to take

advantage of zero rate taxability of dividends declared by

corporations in instances provided under the National Internal

Revenue Code.

29

In the Philippines, the corporation has traditionally been subjected

to heavier taxation than other forms of business organization;

dividends distributed are subject to another tax when received by

the stockholders. With the trust of Government to encourage both

local and foreign investments in the country, and to entice the use

of the corporation as the vehicle for such investment, many of the

previous tax laws that tended to make corporate vehicles expensive

had been abolished. Except for dividends declared by domestic

corporation in favor of foreign corporation (Section 25(a) and (b),

NIRC of 1977), dividends received by individuals from corporation

(Section 21, NIRC of 1977), as well as inter-corporate dividends

between domestic corporations (Section 24, NIRC of 1977), were

subject to zero-rate of income taxation. There had also been an

abolition of the personal holding companies tax and tax on

unreasonably accumulated surplus of corporations (Executive Order

No. 37 [1986]).

Lately, however, under the reforms embodied in the NIRC of 1997,

a final tax of 10% has been re-imposed on dividends received by

residents and citizens declared from corporate earnings after 1

January 1998 (Section 24(B)(2), NIRC of 1997); a final tax of 20%

on dividends received by a nonresident alien individual has been re-

imposed from corporate earnings after 1 January 1998 (Section

25(A)(1), NIRC of 1997); and the tax on improperly accumulated

earnings has likewise been re-imposed (Section 29, NIRC of 1997).

The pursuit of joint venture arrangements under a formal

partnership arrangement has the disadvantage of inviting into the

arrangement the features of unlimited liability for partnership debts

to the co-venturers, and also the inability to take advantage of the

zero-rate of dividends for corporation, when the partnership

declares and distributes profits. The aspect of double taxation looms

largely in a partnership joint venture arrangement, since

partnerships are subject to the 35% net income tax for

corporations. (Per amendment to NIRC of 1997 introduced by Rep.

Act 9337. The income tax rate will go down to 30% beginning 01

January 2009.) Nevertheless, joint ventures formed for the purpose

of undertaking construction projects (Pres. Decree 929 [1976]), and

30

those formed to engage in petroleum operations pursuant to an

operating agreement under a service contract with the Government

(Pres. Decree 1682) are exempt from corporate taxation.

oOo