BUSORG_1st Examnotes

1 | B U S O R G _ 1 s t E x a m P a r t I

Learn the rules like a pro, so you can break them like an artist.- Pablo Picasso

General Provisions

A. Three Levels of Existence of Partnership

YU v NLRC

The SC 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partners and the juridical personality that arose from the nexus of that contract, and that when the contract was rescinded with the withdrawal of the majority of the partners, then the partnership was dissolved and its separate juridical personality ceased to exist to cover the new set of partners.

The essence of the ruling is that Mr. Yu could not recover his claims through the medium of the separate juridical personality of the company which the court held had been extinguished with the withdrawal of the original partners who were his employers; but could recover his claims against the new company on the basis that it was handling exactly the same business enterprise that remained unchanged with the transfer of its ownership from the old partners to the new investors.

B.What is a 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)

C. Elements of Partnership:

1. Consent

a. Consent to pursue business:

Art. 1769. In determining whether a partnership exists, these rules shall apply:

(1) Except as provided by Article 1825, persons 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;

(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)

b. Legal capacity to contract

Art. 1782. Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership.

Cf: Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses during the marriage shall be void, except moderate gifts which the spouses may give each other on the occasion of any family rejoicing. The prohibition shall also apply to persons living together as husband and wife without a valid marriage. (133a)

c. Admission of new partner

Art. 1804. Every partner may associate another person with him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager.

2. Subject Matter: Pursuit of Business Enterprise

Santos vs Reyes

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, even where the other parties tothe agreement were given separate compensations as bookkeeper and credit investigator.

Tocao vs CA(read ft)

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.

Moran vs CA

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 absence of fraud, the other partners cannot claim a right to recover highly speculative profits. It is a rare business venture guaranteed to give 100% profits.

Further, the court said that any stipulation on the payment of a high commission to one of the partners must be understood to have been basedon an anticipation of large profits being made from the venture; and since the venture sustained losses, then there is no basis to demand for payment of the commissions.



a. Co-ownership/ co-possession do not necessarily constitute a partnership

Navarro vs CA

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 partners had intended to enter into partnership.

Obillos, Jr. vs CIR

Facts: 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 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 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.

Reyes vs CIR

Facts: 1. Petitioners Florencio and Angel Reyes, father and son, purchased a lot and building for P 835,000.00. 2. The amount of P 375,000.00 was paid. 3. The balance of P 460,000.00 was left, which represents the mortgage obligation of thevendors with the China Banking Corporation, which mortgage obligations were assumed by the vendees. 4. The initial payment of P 375,000.00 was shared equally by the petitioners. 5. At the time of the purchase, the building was leased to various tenants, whose rights under the lease contracts with the original owners, the purchaser, petitioners herein, agreed to respect. 6. Petitioners divided equally the income of operation and maintenance. 7. The gross income from rentals of the building amounted to about P 90,000.00 annually. 8. An assessment was made against petitioners by the CIR. 9. The assessment sought to be reconsidered was futile. 10. On appeal to the Court of Tax Appeals, the CTA ruled that petitioners are liable for the income tax due from the partnership formedby petitioners.

Held: The court found that where the 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.

Evangelista vs CIR

Facts:Petitioners borrowed sum of money from their father and together with their own personal funds they used said money to buy several real properties. They then appointed their brother (Simeon) as manager of the said real properties with powers and authority to sell, lease or rent out said properties to third persons.

They realized rental income from the said properties for the period 1945-1949.

On September 24, 1954 respondent Collector of Internal Revenue demanded the payment of income tax on corporations, real estate dealer's fixed tax and corporation residence tax for the years 1945-1949.

Held: 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 contractingparties

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.

Upon consideration of all the facts andcircumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estatetransactions for monetary gain and then divide the same among themselves, because of the followingobservations, among others: (1) Said common fund was not something they found already in existence; (2)They invested the same, not merely in one transaction, but in a series of transactions; (3) The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein.

Although, taken singly, they might not suffice to establish the intent necessary to constitute a partnership, thecollective effect of these circumstances is such as to leave no room for doubt on the existence of said intent inpetitioners herein.

b. Receipt by a Person of a Share of the Net Profit

Art 1769 (4)

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In determining whether a partnership exists, these rules shall apply:

(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;

(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)



Pastor v Gaspar

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.

Fortis v Gutierrez Hermanos

Plaintiff Fortis is an employee of defendant Gutierrez Hermanos. Theformer brought an action to recover a balance due him as salary forthe year 1902. He also alleged that he was entitled, as salary, to 5 percent of the net profits of the business of the defendants for said year. The complaint also contained a cause of action for the sum of 600pesos, money expended by plaintiff for the defendants during the year1903. The lower court ruled in favor of the plaintiff. The total judgmentrendered amounted to P13, 025.40, which was reduced to Philippinecurrency. The defendants moved for new trial but were denied. They brought the case in the SC thru bill of exceptions; the appellants(defendants) alleged that that the contract made the plaintiff acopartner of the defendants in the business, which they were carrying on.

Issue: WON the plaintiff is a co-partner of the

defendants in the business.Ruling: NO. It was a mere contract of

employment. The plaintiff had neithervoice nor vote in the management of the affairs of the company. Thefact that the compensation received by him was to be determined withreference to the profits made by the defendants in their business didnot in any sense make by a partner therein. The articles of partnershipbetween the defendants provided that the profits should be dividedamong the partners

named in a certain proportion. The contract madebetween the plaintiff and the then manager of the defendantpartnership did not in any way vary or modify this provision of thearticles of partnership.

Bastida v Menzi & Co

Facts:Bastida offered to assign to Menzi & Co. his contract with Phil Sugar Centrals Agencyand to supervise the mixing of the fertilizer and to obtainother orders for 50 % of the net profit that Menzi & Co., Inc., might derive therefrom. J. M. Menzi (gen. manager of Menzi & Co.) accepted the offer. The agreement between the parties was verbal and wasconfirmed by the letter of Menzi to the plaintiff on January 10, 1922.

Pursuant to the verbal agreement, the defendant corporation on April 27, 1922 enteredinto a written contract with the plaintiff, marked Exhibit A, which is the basis of the present action. Still, the fertilizer business as carried on in the same manner as it was prior to the written contract, but the net profit that the plaintiff herein shall get wouldonly be 35%.

The intervention of the plaintiff was limited to supervising the mixing of the fertilizers in the bodegas of Menzi.Prior to the expiration of the contract (April 27, 1927), the manager of Menzi notified the plaintiff that the contract for his services would not be renewed. Subsequently, when thecontract expired, Menzi proceeded to liquidate the fertilizer business in question.

The plaintiff refused to agree to this. It argued, among others, that the written contract enteredinto by the parties is a contract of general regular commercial partnership, wherein Menziwas the capitalist and the plaintiff the industrial partner.Issue: Is the relationship between the petitioner and Menzi that of partners?Held:The relationship established between the parties was not that of partners, but that of employer and employee, whereby the plaintiff was to receive 35% of the net profits of thefertilizer business of Menzi in compensation for his services for supervising the mixingof the fertilizers.

Neither the provisions of the contract nor the conduct of the parties prior or subsequent to its execution justified the finding that it was a contract of co- partnership. The written contract was, in fact, a continuation of the verbal agreement between the parties, whereby the plaintiff worked for the defendant corporation for one-half of the net profits derived by the corporation form certain fertilizer contracts.

According to Art. 116 of the Code of Commerce, articles of association by which two or more persons obligate themselves to place in a common fund any property, industry, or any of these things, in order to obtain profit, shall be commercial, no matter what it classmay be, provided it has been established in accordance with the provisions of the Code.However in this case, there was no common fund.

The business belonged to Menzi & Co.The plaintiff was working for Menzi, and instead of receiving a fixed salary, he was to receive 35% of the net profits as compensation for his services. The phrase in the writtencontract en sociedad con, which is used as a basis of the plaintiff to prove partnershipin this case, merely means en reunion con or in association with.It is also important to note that although Menzi agreed to furnish the necessary financialaid for the fertilizer business, it did not obligate itself to contribute any fixed sum ascapital or to defray at its own expense the cost of securing the necessary credit.

c. Meeting of the Minds

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)

Estanislao vs CA

Facts: The petitioner and private respondents are brothers and sisters who are co-owners of certain lots at the in Quezon City which were then being leased to SHELL. They agreed to open and operate



a gas station thereat to be known as Estanislao Shell Service Station with an initial investment of PhP15,000.00 to be taken from the advance rentals due to them from SHELL for the occupancy of the said lots owned in common by them. A joint affidavit was executed by them on April 11, 1966. The respondents agreed to help their brother, petitioner therein, by allowing him to operate and manage the gasoline service station of the family. In order not to run counter to the companys policy of appointing only one dealer, it was agreed that petitioner would apply for the dealership.

On May 1966, the parties entered into an Additional Cash Pledge Agreement with SHELL wherein it was reiterated that the P15,000.00 advance rental shall be deposited with SHELL to cover advances of fuel to petitioner as dealer with a proviso that said agreement cancels and supersedes the Joint Affidavit.

For some time, the petitioner submitted financial statement regarding the operation of the business to the private respondents, but thereafter petitioner failed to render subsequent accounting. Hence , the private respondents filed a complaint against the petitioner praying among others that the latter be ordered:

(1) To execute a public document embodying all the provisions of the partnership agreement they entered into;

(2) To render a formal accounting of the business operation veering the period from May 6, 1966 up to December 21, 1968, and from January 1, 1969 up to the time the order is issued and that the same be subject to proper audit;

(3) To pay the plaintiffs their lawful shares and participation in the net profits of the business; and

(4) To pay the plaintiffs attorneys fees and costs of the suit.

Issue: Can a partnership exist between members of the same family arising from their joint ownership of certain properties?

Held: Held: There is no merit in the petitioners contention that because of the stipulation cancelling and superseding the previous joint affidavit, whatever partnership agreement there was in said previous agreement had thereby been abrogated.

Said cancelling provision was necessary for the Joint Affidavit speaks of P15,000.00 advance rental starting May 25, 1966 while the latter agreement also refers to advance rentals of the same amount starting May 24, 1966.

There is therefore a duplication of reference to the P15,000.00 hence the need to provide in the subsequent document that it cancels and supercedes the previous none. Indeed, it is true that the latter document is silent as to the statement in the Join Affidavit that the value represents the capital investment of the parties in the business and it speaks of the petitioner as the sole dealer, but this is as it should be for in the latter document, SHELL was a signatory and it would be against their policy if in the agreement it should be stated that the business is a partnership with private

respondents and not a sole proprietorship of the petitioner.

Furthermore, there are other evidences in the record which show that there was in fact such partnership agreement between parties. The petitioner submitted to the private respondents periodic accounting of the business and gave a written authority to the private respondent Remedios Estanislao to examine and audit the books of their common business (aming negosyo). The respondent Remedios, on the other hand, assisted in the running of the business. Indeed, the parties hereto formed a partnership when they bound themselves to contribute money in a common fund with the intention of dividing the profits among themselves.

Villanueva: The other important aspect in determining whether a partnership has been constituted among several persons, is that under our tax laws, a partnership is treated like corporate taxpayer liable separately for income tax for its operations apart from the individual income tax liabilities of each of the partners.

Evangelista vs CIR

Facts: The petitioners borrowed from their father PhP 59,140.00 which amount together with their personal monies was used by them for the purpose of buying and selling real properties. From 1943 to 1944, they bought 24 parcels of land (including the improvements thereon) on four different occasions. In 1945, they appointed their brother Simeon to manage their properties with full power to lease; to collect and receive rents; to issue receipts therefore; in default of such payment, to bring suits against the defaulting tenant; and to endorse and deposit all notes and checks for them. In 1948, their net rental income amounted to PhP12,615.35.

On September 1954, the respondent Collector of Internal Revenue demanded the payment of (1) income tax on corporations, (2) real estate dealers fixed tax, and (3) corporation residence tax for the years 1945-1949, computed according to the assessments made on their properties.

Because of this, the petitioners filed a case against the respondents in the Court of Tax Appeals, praying that the decision of the respondent contained in its letter of demand be reversed and that they be absolved from the payment of the taxes in question.

Issue: WON there is partnership

Held: Also, Article 1767 of the Civil Code provides: 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. Pursuant to this article, the essential elements of a partnership are two, namely: (1) an agreement to contribute money, property or industry to a common fund; and (2) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, the petitioners have agreed to, and did, contribute money and property to a common fund.



Also, it can be said that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves because: (1) they created the common fund purposely; (2) they invested the same, not merely in one transaction, but in a series of transactions; (3) the parcels of land that they bought were not devoted to residential purposes, or to otherpersonal uses of the petitioners but were leased separately to several persons; (4) the properties have been under the management of one person, namely Simeon Evangelista, making the affairs relative to the said properties appear to have been handled as if the same belonged to a corporation or business enterprise operated for profit; and (5) the 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.

Hence, the petitioners herein constitute a partnership, and in so far as the National Internal Revenue Code is concerned, they are subject to the income tax for corporations.

Villanueva: The essence of 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.

Art. 1770 provides that for 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 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.

Ona vs CIR

Facts: Julia Buales died leaving as heirs her surviving spouse, Lorenzo Oa and her five children. A civil case was instituted for the settlement of her state, in which Oa was appointed administrator and later on the guardian of the three heirs who were still minors when the project for partition was approved. This shows that the heirs have undivided interest in 10 parcels of land, 6 houses and money from the War Damage Commission.

Although the project of partition was approved by the Court, no attempt was made to divide the properties and they remained under the management of Oa who used said properties in business by leasing or selling them and investing the income derived therefrom and the proceeds from the sales thereof in real properties and securities. As a result, petitioners properties and investments gradually increased. Petitioners returned for income tax purposes their shares in the net income but they did not actually receive their

shares because this left with Oa who invested them.

Based on these facts, CIR decided that petitioners formed an unregistered partnership and therefore, subject to the corporate income tax, particularly for years 1955 and 1956. Petitioners asked for reconsideration, which was denied hence this petition for review from CTAs decision.

Issue:WON there was a co-ownership or an unregistered partnership

Held: Unregistered partnership. The Tax Court found that instead of actually distributing the estate of the deceased among themselves pursuant to the project of partition, the heirs allowed their properties to remain under the management of Oa and let him use their shares as part of the common fund for their ventures, even as they paid corresponding income taxes on their respective shares.

Yes. For tax purposes, the co-ownership of inherited properties is automatically converted into an unregistered partnership the moment the said common properties and/or the incomes derived therefrom are used as a common fund with intent to produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding testate or intestate proceeding. The reason is simple. From the moment of such partition, the heirs are entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly, he becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be held in common with his co-heirs under a single management to be used with the intent of making profit thereby in proportion to his share, there can be no doubt that, even if no document or instrument were executed, for the purpose, for tax purposes, at least, an unregistered partnership is formed.

For purposes of the tax on corporations, our National Internal Revenue Code includes these partnerships

The term partnership includes a syndicate, group, pool, joint venture or other unincorporated organization, through or by means of which any business, financial operation, or venture is carried on (8 Mertens Law of Federal Income Taxation, p. 562 Note 63; emphasis ours.) with the exception only of duly registered general copartnerships within the purview of the term corporation. It is, therefore, clear to our mind that petitioners herein constitute a partnership, insofar as said Code is concerned, and are subject to the income tax for corporations. Judgment affirmed.

Gatchalian vs CIR

Facts: Plaintiffs purchased, in the ordinary course of business, from one of the duly authorized agents



of the National Charity Sweepstakes Office one ticket for the sum of two pesos (P2), said ticket was registered in the name of Jose Gatchalian and Company. The ticket won one of the third-prizes in the amount of P50,000. Jose Gatchalian was required to file the corresponding income tax return covering the prize won. Defendant-Collector made an assessment against Jose Gatchalian and Co. requesting the payment of the sum of P1,499.94 to the deputy provincial treasurer of Pulilan, Bulacan. Plaintiffs, however through counsel made a request for exemption. It was denied.

Plaintiffs failed to pay the amount due, hence a warrant of distraint and levy was issued. Plaintiffs paid under protest a part of the tax and penalties to avoid the effects of the warrant. A request that the balance be paid by plaintiffs in installments was made. This was granted on the condition that a bond be filed.

Plaintiffs failed in their installment payments. Hence a request for execution of the warrant of distraint and levy was made. Plaintiffs paid under protest to avoid the execution.

A claim for refund was made by the plaintiffs, which was dismissed, hence the appeal.

Issue: Whether the plaintiffs formed a partnership hence liable for income tax.

Held: Yes. According to the stipulation facts the plaintiffs organized a partnership of a civil nature because each of them put up money to buy a sweepstakes ticket for the sole purpose of dividing equally the prize which they may win, as they did in fact in the amount of P50,000. The partnership was not only formed, but upon the organization thereof and the winning of the prize, Jose Gatchalian personally appeared in the office of the Philippines Charity Sweepstakes, in his capacity as co-partner, as such collection the prize, the office issued the check for P50,000 in favor of Jose Gatchalian and company, and the said partner, in the same capacity, collected the said check. All these circumstances repel the idea that the plaintiffs organized and formed a community of property only.

Villanueva: We can end this section by looking at the decision of Tan Eng Kee vs CA, where the main issue was whether there was constituted between two brothers apartnership involving a lumber and a hardware business registered as a sole proprietorship in the name of the older brother in the absence of formal articles of partnership having been executed between them. The court considered the fact that during the entire period of alleged partnership, the brother seeking the declaration of such partnership never exercised any of the rights and prerogatives of a partner, thus:

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A demand for periodic accounting is evidence of a partnership. During his lifetime, Tan Eng Kee appeared never to have made any such demand for accounting from his brother, Tan Eng Lay.

d. Existence of Business Enterprise

Idos vs CA

Facts: In 1985, Eddie Alarilla and Irma Idos formed a partnership which they decided to terminate after a year. To pay Alarillas share of the asset, Idos issued 4 post dated checks. Alarilla was able to encash the first, second and fourth checks but the third was dishonored for insufficiency of funds. He demanded payment but Idos failed to pay. She claimed that the checks were issued as assurance of Alarillas share in the assets of the partnership and that it was supposed to be deposited until the stocks were sold. He filed an information for violation of BP blg. 22 against Idos in which she was found guilty by the trial court.

Held: In determining whether the partnership enterprise continued to exist and has not been terminated, the Court ruled that the best evidence of the existence of the partnership, which was not yet terminated (though in the winding up stage), were the unsold goods and uncollected receivables, which were presented to the trial court. Since the partnership has not been terminated, the petitioner and private complainant remained as co-partners.

e. Doctrine of Attributes of Proprietorship as means to prove existence of partnership

Villanueva:

In Tocao vs CA, where the main issue was whether there existed a contract of partnership between the three parties, namely, Tocao, Bello and Anay, in the face of assertions of both Tocao and Bello that there was no partnership agreement entered into considering that:

a. there was no written agreement embodying the alleged partnership agreement, and thus in fact the business was registered with the government authorities as a single proprietorship in the style of Geminesse Enterprise in the name of Tocao;

b. Bello asserts that he never gave any contribution to the venture, but merely guaranteed its credit standing; and

c. Anay never contributed anything to the business, and she was receiving overriding commission and participation in profits directly as a result of her handling the marketing products, and not as partner to the venture.

In brushing aside the assertions that there was no contract of partnership, the Court, apart from holding that a contract of partnership need not be in writing to be valid and enforceable, held that all three parties had by evidence adduced exercised rights of proprietorship on the business venture as to show without doubt the existence of a partnership.

The doctrine of exercise of the prerogatives of a proprietor should be viewed as merely collaborative evidence of the partnership relationship between the parties in a business venture; in the end the existence of the contract of



partnership must be located in the actual meeting of the minds to constitute a common fund to divide the profits thereof among themselves.

The reason why exercising the prerogatives of proprietorship or participating in a management cannot on their own be weighty evidence to prove the existence of a partnership agreement is because, it is logical for a business enterprise, whether it is operated as a partnership or a single proprietorship, to actually point a manager or other agents, authorized to exercise acts of management, without being owners or partners of the business venture.

In any event, the application of the suppletory doctrine of attributes of proprietorship in jurisprudence is a recognition that a partnership arrangement is in essence a contractual aggregation of sole proprietors, who come together to form a common business venture, while at the same time as agents to one another.

The decision in Sy vs CA succinctly summarizes the badges that would normally accompany a partnership:

Article 1767 of the Civil Code states that in 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. Not one of these circumstances is present in this case. No written agreement exists to prove the partnership between the parties. Private respondent did not contribute money, property or industry for the purpose of engaging in the supposed business. There is no proof that he was receiving a share in the profits as a matter of course, during the period when the trucking business was under operation. Neither is there any proof that he had actively participated in the management, administration and adoption of policies of the business.

In contrast, we should consider the decision in Heirs of Tan Eng Kee vs CA, where the partnership was insisted to have been constituted from a proven set of circumstances where the brother claiming to be a partner in the business enterprise is proven to exercise managerial and important roles in the day-to-day operations. The court found such legal position to be well-taken in that where circumstances taken singly may be inadequate to prove the intent to form a partnership, nevertheless, the collective effect of these circumstances may be such as to support a finding of the existence of the parties intent. Nonetheless, in that decision the court ruled against the existence of the partnership since ----

Yet, in the case at bench, even the aforesaid circumstances when taken together are not persuasive indicia of a partnership. They only tend to show that Tan Eng Kee was involved in the operations of Benguet Lumber, but in what capacity is unclear. We cannot discount the likelihood that as a member of the family, he occupied a niche above the rank-and-file employees. He would have enjoyed liberties otherwise unavailable were he not kin, such as his residence in the Benguet Lumber Company compound. He would have moral, if not actual, superiority over his fellow employees, thereby entitling him to exercise powers of supervision. It may even be that among his duties is to place orders with suppliers. Again, the circumstances proffered by petitioners do not provide a logical nexus to the conclusion desired; these are not inconsistent with the powers and duties of a manager, even in a business organized and run as informally as Benguet Lumber Company.

There being no partnership, it follows that there is no dissolution, winding up or liquidation to speak of. Hence, the petition must fail.

The same principle was applied in the recent case of Heirs of Jose Lim v Lim, where the issue involved was whether it was the father (Jose) who gave the investment money to a son (Efledo), or it was the son, who actually entered into a partnership arrangement with two other individuals. It confirming that the weight of evidence showed the indications provided under Article 1769 were in favor of the son being the partner in the partnership business enterprise, the court noted that the son was the person who exercised the prerogatives of a partner and not the father, thus:

Applying the legal provision to the facts of this case, the following circumstances tend to prove that Elfledo was himself the partner of Jimmy and Norberto: 1) Cresencia testified that Jose gave Elfledo P50,000.00, as share in the partnership, on a date that coincided with the payment of the initial capital in the partnership; (2) Elfledo ran the affairs of the partnership, wielding absolute control, power and authority, without any intervention or opposition whatsoever from any of petitioners herein;[16] (3) all of the properties, particularly the nine trucks of the partnership, were registered in the name of Elfledo; (4) Jimmy testified that Elfledo did not receive wages or salaries from the partnership, indicating that what he actually received were shares of the profits of the business;[17] and (5) none of the petitioners, as heirs of Jose, the alleged partner, demanded periodic accounting from Elfledo during his lifetime. As repeatedly stressed in Heirs of Tan Eng Kee,[18] a demand for periodic accounting is evidence of a partnership.

f. When Subject Matter (the Business Venture) is Unlawful or Against Public Publicy

When the subject matter of a contract of partnership is unlawful, Article 1770 provides that the contract is void; and being void the purported partners have no right to participate in any profits that may have been earned by the partnership enterprise. Thus, the article provides that the profits shall be confiscated in favor of the state.

In Arbes vs Polistico, a partnership organized to engage in illegal gambling was declared void by judicial order, and pursuant to the provisions of Article 1770, all the profits earned were deemed confiscated in favor of the state. However, it decreed that the partners had a right to recover their contributions, thus:

Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to be returned by the partners, because it only deals with the disposition of the profits; but the fact that said contributions are not included in the disposal prescribed profits, shows that in consequences of said exclusion, the general law must be followed, and hence the partners should reimburse the amount of their respective contributions. Any other solution is immoral, and the law will not consent to the latter remaining in the possession of the manager or administrator who has refused to return them, by denying to the partners the action to demand them.

In Deluao vs Casteel, the court held that a contract of partnership that sought to divide between the two partners-applicants the fishpond in contravention of the prohibitory provisions of law was deemed dissolved when the government did finally issue a fishpond permit to one of the partners.



3. Cause or Consideration

In a contract of partnership, it is held that the cause or consideration for each partner is the undertaking of the other or others to contribute money, property or industry to a common fund. Being essentially consensual is characteristic, a contract of partnership is perfected by the agreement by the partners to make such contribution by assumption of the obligation to contribute or to render service.

The essence of the element of cause or consideration in every contract of partnership is emphasized in the following provisions:

Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.

He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand. (1681a)

Art. 1787. When the capital or a part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for account of the partnership. (n)

Art. 1789. An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case. (n)

Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. (n)

Art. 1830. Dissolution is caused:

(4) When a specific thing which a partner had promised to contribute to the partnership, perishes before the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved the ownership thereof, has only transferred to the partnership the use or enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has acquired the ownership thereof.

City of Manila vs Cumbe, held that credit, such as a promissory note or other evidence of obligation, or even goodwill, may validly be contributed into the partnership. In other words, if service is valid contribution to the common fund, then more so when it comes to the intangible things, rights and chooses in action.

Other Essential Elements of Partnership

(a) the purpose of partnership must be to engage in some business enterprise;

Fernandez vs De la Rosa, the court held that a joint interest in the profits would constitute one of the essential points upon which the minds of the parties must meet in a contract of partnership.

In Council of Red Men vs Veterans Army, the constitution of the Veteran Army of the Philippines provided for the following purpose:

The object of this association shall be to perpetuate the spirit of patriotism and fraternity those men who upheld the Stars and Stripes in the Philippine Islands during the Spanish war and the

Philippine insurrection, and to promote the welfare of its members in every just and honorable way; to assist the sick and afflicted and to bury the dead, to maintain among its members in time of peace the same union and harmony with which they served their country in times of war and insurrection.

The court raised the point that: it seems to be the opinion if the commentators that where the society is not constituted for the purpose of gain, it does not fall within this article of New Civil Code.

Such an organization is fully covered by the Law of Associations of 1887, but the law was never extended to the Philippine Islands. Nonetheless, Council of Red Men applied the old civil code rule on partnership.

Exception: In the Matter of Sycip, Salazar, etc

Facts: Two petitions were filed, one by the surviving partners of Atty. Herminio Ozaeta and the other by the surviving partners of Atty. Alexander Sycip praying that they be allowed to continue using the names of partners who had passed away in their firm names. Both petitions were consolidated.

Issue: Whether or not a firm name engaged in the legal profession should continue using the name of partners who had passed away.

SC ruling: No.

The use in partnership names of the names of deceased partners will run counter to Article 1825 of the CC which provides that names in a firm name of a partnership must either be those of living partners and, in the case of non partners, should be living persons who can be subjected to liability. In fact, art. 1825 prohibits a third person from including his name in the firm name under pain of assuming the liability of a partner. The heirs of a deceased partner in a law firm cannot be held liable as the old members to the creditors of a firm particularly where they are non-lawyers. With regard to art. 1840, it treats more of a commercial partnership with a good will to protect rather than a professional partnership, with no saleable good will but whose reputation depends on the personal qualifications of its individual members. Thus, it has been held that a saleable goodwill can exist only in a commercial partnership and cannot arise in a professional partnership consisting of lawyers.

A partnership for the practice of law cannot be likened to partnerships formed by other professionals or for business. For one thing, the law on accountancy specifically allows the use of a trade name in connection with the practice of accountancy. A partnership for the practice of law is not a legal entity. It is a mere relationship or association for a particular purpose. It is not a partnership formed for the purpose of carrying in a trade or business or of holding property. Thus, it has been stated that the used of an assumed or trade name in law practice is improper.

The right to practice law is not a natural or constitutional right but is in the nature of a



privilege or franchise. It is limited to persons of good moral character with special qualifications duly ascertained and certified. The right does not only presuppose in its possessor integrity, legal standing and attainment but also the exercise of a special privilege, highly personal and partaking of the nature of a public trust.

Note: the only form of partnership were business consideration or the gaining of profits is not primary consideration for the common fund would be the authorized professional partnerships; but even is such cases the Court has considered that a profession is pursued as part of the livelihood undertaking of the partners.

(b) the element of joint control

The element of joint control is actually specified as the property rights of a partner under Article 1810 to participate in the management, as well as the confirmation of the attribute of mutual agency under Article 1818 confirming that every partner is an agent of partnership for the purposes of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the ususal way the business of the partnership of which he is a member binds the partnership.

D. Characteristics11

1. Primarily Contractual


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 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)

Lyons vs Rosenstock

Facts: During his lifetime, Henry Elser got engaged in the real estate business. Petitioner Lyons, on the other hand, joined Elser in some of his ventures and they equally divided profits gained from these. In 1919, Lyons needed to go back to the United States for a year and a half and by reason of which he executed a general power of attorney in favor of Elser, empowering the latter to manage and dispose the properties owned by them.

In 1920, Elser was drawn to a piece of land, the San Juan Estate, and he perceived an opportunity to develop it into a suburban community. The Estate was offered by its owners for P570,000 with an initial payment of P150,000. In May 1920, Elser wrote a letter to Lyons inducing the latter to join him in this venture and to likewise supply the means necessary for the fulfillment of this project. In the meantime, Elser raised P120,000 from his own funds and loaned P50,000 from Uy Siolong to pay for the initial payment. However in order to obtain the loan he had to give a personal note signed by himself, by his other associates and by the Fidelity and Surety

Company. Then again, in order to obtain the signature of the Fidelity and Surety Company Elser had to execute a mortgage on one of the properties owned by him and Lyons on Carriedo Street.

Lyons replied to the letter of Elser only in July 1920 and he expressed in it his unwillingness to join the latter in this venture. Because of this Elser relieved the Carriedo property of the encumbrance which he had placed upon it and requested the Fidelity and Surety Company to allow him to substitute another property for it. However the release of the old mortgage and the recording of the new were never registered because in September 1920, when Lyons returned to Manila, he allowed the mortgage to remain on the Carriedo property. But in January 1921, Elser was able to pay the note executed by him to Uy Siolong which enabled the release of the Carriedo Property.

Issue: W/N Lyons, as half owner of the Carriedo property, involuntarily became the owner or a co-partner of an undivided interest in the San Juan Estate, which was acquired partly by the money obtained through an encumbrance placed on the Carriedo property. No.

Held: Under our law, a trust does not necessarily attach with respect to property acquired by a person who uses money belonging to another. In the case at bar, there was clearly no general relation of partnership between Lyons and Elser and the most that can be said is that they had been co-participants in various transactions involving real estate. It is clear the Elser, in buying the San Juan Estate, was not acting for any partnership composed for himself and Lyons, especially that the latter expressly communicated his desire not to participate in this venture. Lastly, it should be noted that no money belonging to Lyons or any partnership composed by Lyons and Elser was in fact used by the latter in the purchase of the San Juan Estate.

2. Nominate and Principal

The contract of partnership is a nominate contract, not only because it has been given a specific name under NCC, but it is principal contract and can exist on its own upon the essential elements coming together at perfection; and that once created there is a set of rules that govern such contract, and the parties to such contract cannot refuse generally to be governed by such provisions.

To illustrate, the the nominate and principal nature of contract of partnership, Fernandez v De la Rosa, 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 parties fail to do so.

3. 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 the existence of a valid partnership contract. The failure to comply with the undertaking to deliver the promised contribution does not make



a contract of partnership void, but merely gives ground for its dissolution.

In Estanislao, Jr vs CA, the court held that when members of the family leased out of a parcel of land to SHELL, 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, thus:

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. 6 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.

In essence, Estanislao demonstrates that is the true meeting of the minds of the parties that shall govern the rights and obligations of the contracting parties, and not the evidence of a purported agreement.

Yulo vs Yang Chiao Seng

Facts: Yang Chiao Seng proposed to form a partnership with Rosario Yulo to run and operate a theatre on the premises occupied by Cine Oro, Plaza Sta. Cruz, Manila, the principal conditions of the offer being (1) Yang guarantees Yulo a monthly participation of P3,000 (2) partnership shall be for a period of 2 years and 6 months with the condition that if the land is expropriated, rendered impracticable for business, owner constructs a permanent building, then Yulos right to lease and partnership even if period agreed upon has not yet expired; (3) Yulo is authorized to personally conduct business in the lobby of the building; and (4) after Dec 31, 1947, all improvements placed by partnership shall belong to Yulo but if partnership is terminated before lapse of 1 and years, Yang shall have right to remove improvements. Parties established, Yang and Co. Ltd., to exist from July 1, 1945 Dec 31, 1947.

In June 1946, they executed a supplementary agreement extending the partnership for 3 years beginning Jan 1, 1948 to Dec 31, 1950.

The land on which the theater was constructed was leased by Yulo from owners, Emilia Carrion and Maria Carrion Santa Marina for an indefinite period but that after 1 year, such lease may be cancelled by either party upon 90-day notice. In Apr 1949, the owners notified Yulo of their desire to cancel the lease contract come July. Yulo and husband brought a civil action to declare the lease for a indefinite period. Owners brought their own civil action for ejectment upon Yulo and Yang.

Issue: Was the agreement a contract a lease or a partnership?

Ruling: The agreement was a sublease not a partnership. The following are the requisites of partnership: (1) two or more persons who bind themselves to contribute money, property or industry to a common fund; (2) the intention on the

part of the partners to divide the profits among themselves (Article 1761, CC)

Plaintiff did not furnish the supposed P20,000 capital nor did she furnish any help or intervention in the management of the theatre. Neither has she demanded from defendant any accounting of the expenses and earnings of the business. She was absolutely silent with respect to any of the acts that a partner should have done; all she did was to receive her share of P3,000 a month which cannot be interpreted in any manner than a payment for the use of premises which she had leased from the owners.

Villanueva: Yulo demonstrates the principle that a contract of partnership is consensual in nature is constituted by the actual meeting of the minds; such that even when formal articles of partnership are drawn-up between the parties, when in fact the evidence shows that they never intended to enter into a partnership, where there has never been a meeting of minds to constitute one.

Tocao vs CA

Facts: William Belo introduced Nenita Anay to his girlfriend, Marjorie Tocao. The three agreed to form a joint venture for the sale of cooking wares. Belo was to contribute P2.5 million; Tocao also contributed some cash and she shall also act as president and general manager; and Anay shall be in charge of marketing. Belo and Tocao specifically asked Anay because of her experience and connections as a marketer. They agreed further that Anay shall receive the following:

10% share of annual net profits

6% overriding commission for weekly sales

30% of sales Anay will make herself

2% share for her demo services

They operated under the name Geminesse Enterprise, this name was however registered as a sole proprietorship with the Bureau of Domestic Trade under Tocao. The joint venture agreement was not reduced to writing because Anay trusted Belos assurances.

The venture succeeded under Anays marketing prowess.

But then the relationship between Anay and Tocao soured. One day, Tocao advised one of the branch managers that Anay was no longer a part of the company. Anay then demanded that the company be audited and her shares be given to her.

Issue: Whether or not there is a partnership.

Held: Yes, even though it was not reduced to writing, for a partnership can be instituted in any form. The fact that it was registered as a sole proprietorship is of no moment for such registration was only for the companys trade name.

Anay was not even an employee because when they ventured into the agreement, they explicitly agreed to profit sharing this is even though Anay was receiving commissions because this is only incidental to her efforts as a head marketer.



The Supreme Court also noted that a partner who is excluded wrongfully from a partnership is an innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the partnership as well as damages or share in the profits realized from the appropriation of the partnership business and goodwill. An innocent partner thus possesses pecuniary interest in every existing contract that was incomplete and in the trade name of the co-partnership and assets at the time he was wrongfully expelled.

Villanueva: Tocao also summarized the prevailing doctrine on the nature of contract of partners, --

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.[15] It may be constituted in any form; a public instrument is necessary only where immovable property or real rights are contributed thereto.[16] 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 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.

It also 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 soleproprietorship was of no moment, especially when the registration of the business name with the Bureau of Domestic Trade was only for the purpose of protecting the business name of the company.

4. Onerous and Bilateral

De Leon:

Onerous, because each of the parties aspires to procure for himself through the giving of something;

Bilateral, because it is entered into by two or more persons and the rights and obligations arising therefrom are always reciprocal.

Villanueva: the onerous and bilateral characteristics of 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.

5. Preparatory and Progressive

De Leon: Preparatory, because it is entered into as a means to an end, i.e, to engage in business or specific venture for the realization of profits with the view of dividing them among the contracting parties. A partnership contract, in its essence, is acontract of agency. (Article 1818)

Villanueva: The contract of partnership 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.

Thus, when the nexus of the contract of partnership (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.

This characteristics is illustrated in the case of Fernandez vs De la Rosa, 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.

6. Separate Juridical Personality

Art. 1768. The partnership has a judicial personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph. (n)

Jarantilla vs Jarantilla

Facts: The present case stems from the complaintfiled by Antonieta Jarantilla againstBuenaventura Remotigue, Cynthia Remotigue, Federico Jarantilla, Jr., Doroteo Jarantilla andTomas Jarantilla, for the accounting of the assets and income of the co-ownership, for itspartition and the delivery of her share corresponding to eight percent (8%), and for damages. Antonieta claimed that in 1946, she had entered into an agreement with the defendants toengage in business through the execution of a document denominated as "Acknowledgement of Participating Capital.

Antonieta also alleged that she had helped in the management of thebusiness they co-owned without receiving any salary. Antonieta further claimed co-ownership of certain properties (the subject real properties) in the name of the defendants since the only waythe defendants could have purchased these properties were through the partnership as theyhad no other source of income.

The respondents did not deny the existence and validity of the"Acknowledgement of Participating Capital" and in fact used this as evidence to support their claim that Antonietas 8% share was limited to the businesses enumerated therein. The respondents denied using the partnerships income to purchase the subject real properties.During the course of the trial at the RTC, petitioner Federico Jarantilla, Jr., who was one of theoriginal defendants, entered into a compromise agreement with Antonieta Jarantilla wherein he supported



Antonietas claims and asserted that he too was entitled to six percent

(6%) of thesupposed partnership in the same manner as Antonieta was.

Both the petitioner and Antonieta Jarantilla characterize their relationship with the respondents as a co-ownership, but in the same breath, assert that a verbal partnership was formed in 1946 and was affirmed in the 1957 Acknowledgement of Participating Capital.

There is a co-ownership when an undivided thing or right belongs to different persons. It is a partnership 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.35 The Court, in Pascual v. The Commissioner of Internal Revenue,36 quoted the concurring opinion of Mr. Justice Angelo Bautista in Evangelista v. The Collector of Internal Revenue37 to further elucidate on the distinctions between a co-ownership and a partnership, to wit:

I wish however to make the following observation: Article 1769 of the new Civil Code lays down the rule for determining when a transaction should be deemed a partnership or a co-ownership. Said article paragraphs 2 and 3, provides;

(2) Co-ownership or co-possession does not 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;

From the above it appears that the fact that those who agree to form a co- ownership share or do not share any profits made by the use of the property held in common does not convert their venture into a partnership. Or the sharing of the gross returns does not of itself establish a partnership whether or not the persons sharing therein have a joint or common right or interest in the property.

This only means that, aside from the circumstance of profit, the presence of other elements constituting partnership is necessary, such as the clear intent to form a partnership, the existence of a juridical personality different from that of the individual partners, and the freedom to transfer or assign any interest in the property by one with the consent of the others.

7. Delectus Personae

De Leon: The Latin phrase, sometimes written delectus personarum which is the plural of the phrase, may be literally translated- choice of the person or choices of the persons.

It is because of this delectus personae that the law gives such wide authority to one partner, to bind another by contract or otherwise.

It is so unnatural that one party should give another wide authority to make contracts, incur obligations, possibly commit binding torts, pledge personal credit, without first ascertaining the character of that individual. Where such choice of person is lacking,the law presumes a lack of partnership.

Note: the element of delectus personae, however, is, true only in the case of a general partners, but not as regards a limited partner.

Bautista: One selects his partners on the basis of their persona; qualifications and qualities, such as, solvency, ability, honesty, and trustworthiness, among others. It is for this reason that there is mutual representation among partners so that the act of one is considered the act and responsibility of the others as well.

The best way to define concept of delectus personae is that the contract of partnership creates the most personal relationship between and among the partners which when broken, also breaks the bond of partnership.

The doctrine emphasizes the personal-contractual relationship between and among the partners asbeing more important that the property rights and the business enterprise created in the partnership.

8. Mutual Agency

Art. 1803. When the manner of management has not been agreed upon, the following rules shall be observed:

(1) All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to the provisions of Article 1801.

(2) None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court's intervention may be sought. (1695a)

9. Personal Liability of Partners for Partnership Debts

Art. 1816. All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership, under its signature and by a person authorized to act for the partnership. However, any partner may enter into a separate obligation to perform a partnership contract. (n)

E. Partnership as Juridical Entity

Art. 1768. The partnership has a judicial personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1772, first paragraph. (n)

Art. 44. The following are juridical persons:

(3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member.

Art. 45. Juridical persons mentioned in Nos. 1 and 2 of the preceding article are governed by the laws creating or recognizing them.



Private corporations are regulated by laws of general application on the subject.

Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. (36 and 37a)

Art. 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. (38a)

Art. 1774. Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. (n)


Two or more persons may also form a partnership for the exercise of a profession. (1665a)

The Juridical personality of the partnership has been characterized as being weak (compared to corporation) in the sense that it can easily be dissolved. The reason for that is because a partnerships juridical personality is inextricably linked with the perfection of the underlying contract of partnership, and rises and fall with the privity of contract existing between and among the partners.

The importance of the grant of separate juridical personality to the partnership is to make it an efficient means by which several persons can collectively pursue business.

In the Law on Partnerships, the business purpose of the partnership juridical person is best exemplified by Article 1774, to avoid the cumbersome need of having all the names of the partners listed in the title of the property. Consequently, the article provides that title to real property acquired in the partnership name may be conveyed only in partnership name.

Although a partnership is treated as a person before the law, such juridical personality does not occupy the same hierarchical level as the person of an individual. The person of a partnership is a legislative grant by the State or fiction created by law, not for the benefit of the juridical person, but precisely as the means or medium by which individuals in society may achieve certain business or commercial ends.

1. Re: Secret Associations

Art. 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership. (1669)

Bautista: The rationale and effects of Article 1775 is intended to preserve the equality which must exist among the partners and to prevent any of them from defrauding the partnership or the other members.

This being the case, it does not prohibit secret stipulations which are not designed to produce this result. It would, not, for instance, have the effect of rendering invalid a separate agreement between two members of a partnership pursuant to which

one guarantees the other against the loss of his capital contribution or assures him of profit. Neither can the rule be invoked as against third persons by the partners entering into the secret stipulations, in consonance with the general principle that a party should not be allowed to take advantage of a nullity which he himself has caused.

2.Re: Separate Juridical Personality

Vargas & Co. vs Chan

In denying the contention that since the defendant sued was a partnership that summons must be served upon each of the partners, the court held-

it has been the universal practice in the Philippine Islands since American occupation, and was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as legal or juridicial entities and to permit them to sue and be sued in the name of the company, the summons being served solely on the managing agent or other official of the company specified by the section of the Code of Civil Procedure referred to.

Ngo Tian Tek v Phil. Education Co.

The court held that the death of either of the two partners is not a ground for the dismissal of a pending suit against the partnership, as a partnership possesses a personality distinct from any of the partners.

Tai Tong Chuache vs Insurance

The court held that a partnership may sue and be sued in its name or by its duly authorized representative, and when it has designated managing partner, he may execute all acts od administration including the right to sue debtors of the partnership.

Campos vs Rueda

A petition for involuntary insolvency was filed by the creditors of the limited partnership for an act of insolvency provided for Insolvency Act. The trial court denied the petition on the ground that it was not proven, nor alleged, that the partners of the firm were insolvent at the time the application was filed; and that as said partners are personally and solidary liable for the consequences of the transactions of the partnership, it cannot be adjudged insolvent so long as the partners are not alleged and proven to be insolvent. In ruling that the denial of the petition for insolvency was in error, the court held-

Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This being so and the juridical personality of a limited partnership being different from that of its members, it must, on general principle, answer for, and suffer, the consequence of its acts as such an entity capable of being the subject of rights and obligations. If, as in the instant case, the limited partnership of Campos Rueda & Co. Failed to pay its obligations with three creditors for a period of more than thirty days, which failure constitutes, under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication of involuntary insolvency can be predicated, this partnership must suffer the consequences of such a failure, and must be adjudged insolvent. We are not unmindful of the fact that some courts of the United States have held that a partnership may not be adjudged insolvent in an involuntary



insolvency proceeding unless all of its members are insolvent, while others have maintained a contrary view. But it must be borne in mind that under the American common law, partnerships have no juridical personality independent from that of its members; and if now they have such personality for the purpose of the insolvency law.

3. Doctrine of Piercing the Veil of Separate Juridical Fiction

It is a means by which to by-pass the effects of the doctrine of limited liability, and through piercing the acting stockholders and/or officers may be held personally liable for corporate debts.

In spite of the partnership being accorder also a separate juridical partnership, the piercing doctrine has less application in Partnership Law because the partners are unlimitedly liable for partnership debts. Yet, the doctrine found application to partnerships in CIR vs Suter, where the court addressed the legal position of the Tax Commissioner seeking to make the individual partners liable for income tax for the income earned by the limited partnership, thus:

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own, distinct and separate from that of its partners (unlike American and English law that does not recognize such separate juridical personality), the bypassing of the existence of the limited partnership as a taxpayer can only be done by ignoring or disregarding clear statutory mandates and basic principles of our law. The limited partnership's separate individuality makes it impossible to equate its income with that of the component members.

X x x

In the cited cases, the corporations were already subject to tax when the fiction of their corporate personality was pierced; in the present case, to do so would exempt the limited partnership from income taxation but would throw the tax burden upon the partners-spouses in their individual capacities. The corporations, in the cases cited, merely served as business conduits or alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is not true in the present case. Here, the limited partnership is not a mere business conduit of the partner-spouses; it was organized for legitimate business purposes; it conducted its own dealings with its customers prior to appellee's marriage, and had been filing its own income tax returns as such independent entity. The change in its membership, brought about by the marriage of the partners and their subsequent acquisition of all interest therein, is no ground for withdrawing the partnership from the coverage of Section 24 of the tax code, requiring it to pay income tax. As far as the records show, the partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed.

In other words, Suter holds that when the facts show that the juridical personality of the partnership is but a means to evade the law or a sham, then the courts will pierce the veil of its separate juridical personality to treat the partners as directly liable or accountable for the consequences of the acts or contracts done in the partnership name.

Aguila, Jr. vs CA

The complaint was filed against the partners and officers to enforce essentially a partnership obligation. In ruling that the judgment rendered by the trial court against defendants was void, the court held

Under Art. 1768 of the Civil Code, a partnership has a juridical personality separate and distinct from that of each of the partners. The partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for fraudulent, unfair, or illegal purposes.[10] In this case, private respondent has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent, unfair, or illegal purposes. Moreover, the title to the subject property is in the name of A.C. Aguila & Sons, Co. and the Memorandum of Agreement was executed between private respondent, with the consent of her late husband, and A. C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its officers or agents, which should be impleaded in any litigation involving property registered in its name. A violation of this rule will result in the dismissal of the complaint.[11] We cannot understand why both the Regional Trial Court and the Court of Appeals sidestepped this issue when it was squarely raised before them by petitioner.

4. Entitlement to Constitutional Rights and Guarantees

Q: WON partnerships are entitled to the constitutional rights to due process, equal protection, unreasonable searches and seizures and the right against self-incrimination.

A: It is well established in Phil. Corporate Law, that corporations as persons before the law are entitled to the constitutional guarantee to due process and equal protection, the rights against unreasonable searches and seizure, but not to right against self-incrimination.

Due Process and Equal Protection: Smith, Bell & Co vs Natividad

Facts: Smith, Bell & Co., (Ltd.), is a corporation organized and existing under the laws of the Philippine Islands. A majority of its stockholders are British subjects. It is the owner of a motor vessel known as the Bato built for it in the Philippine Islands in 1916, of more than fifteen tons gross The Bato was brought to Cebu in the present year for the purpose of transporting plaintiffs merchandise between ports in the Islands. Application was made at Cebu, the home port of the vessel, to the Collector of Customs for a certificate of Philippine registry. The Collector refused to issue the certificate, giving as his reason that all the stockholders of Smith, Bell & Co., Ltd., were not citizens either of the United States or of the Philippine Islands. The instant action is the result.

Held: The guaranties of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights, are universal in their application to all person within the territorial jurisdiction, without regard to any differences of race, color, or nationality. The word person includes aliens. (Yick Wo vs. Hopkins [1886], 118 U. S., 356; Truax vs. Raich [1915], 239 U. S., 33.) Private corporations, likewise, are persons within the scope of the guaranties in so far as their property is concerned



Right vs Unreasonable Searches and Seizure: Bache & Co. vs Ruiz

Facts: On 24 Feb 1970, Commissioner Vera of Internal Revenue, wrote a letter addressed to J Ruiz requesting the issuance of a search warrant against petitioners for violation of Sec 46(a) of the NIRC, in relation to all other pertinent provisions thereof, particularly Sects 53, 72, 73, 208 and 209, and authorizing Revenue Examiner de Leon make and file the application for search warrant which was attached to the letter. The next day, de Leon and his witnesses went to CFI Rizal to obtain the search warrant. At that time J Ruiz was hearing a certain case; so, by means of a note, he instructed his Deputy Clerk of Court to take the depositions of De Leon and Logronio. After the session had adjourned, J Ruiz was informed that the depositions had already been taken. The stenographer read to him her stenographic notes; and thereafter, J Ruiz asked respondent Logronio to take the oath and warned him that if his deposition was found to be false and without legal basis, he could be charged for perjury. J Ruiz signed de Leons application for search warrant and Logronios deposition. The search was subsequently conducted.

Issue: WON corporation is entitled to immunity against unreasonable searches and seizure.

Held: Corporation is entitled to immunity against unreasonable searches and seizures because A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and it is protected, under the 14th Amendment, against unlawful discrimination.

No Right Against Sellf-Incrimination

Bataan Shipyard & Engineering vs PCGG

In this case the court held that the right against self-incrimination has no application to corporation, thus:

* * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It received certain special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its powers are limited by law. It can make no contract not authorized by its charter. Its rights to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate itscontracts and find out whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a corporation, vested with special privileges and franchises may refuse to show its hand when charged with an

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