– ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP

Gatchalian vs. Collector of Internal Revenue, 67 Phil. 666 (1939), where fifteen people contributed money to buy a sweepstakes

[Updated: 12 October 2009]

______

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

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

Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime. (1666a)

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are 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).

_____

Essential Elements of the Contract of Partnership

The Law on Partnership under the New Civil Code begins with its definition under Article 1776 as “contract of partnership,” emphasizing that first and foremost the nexus of the legal relationship is contractual in nature. As in any other contract, the essential elements for a contract of partnership to be valid would be as follows:

(a) CONSENT: The meeting of minds between two or more persons to form a partnership (i.e., to pursue jointly a business enterprise, or to jointly exercise a profession);

(b) SUBJECT MATTER: The “creation of a common fund” or more specifically, to undertake a business venture with the “intention of dividing the profits among themselves”, or in the case of a professional partnership, to exercise together a common profession; and

(c) CONSIDERATION: The contribution of cash, property or service to the    business venture.

1. Element of CONSENT

______

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)

_____

a.   Consent to Pursue a Business Jointly Is the Nexus of the Partnership Relationship

The agreement of two or more persons to “bind themselves” to jointly pursue a business venture constitutes the very nexus by which the contract of partnership arises under Article 1767 of the Civil Code. Under Article 1769 of the Civil Code, “in determining whether a partnership exists,” the first and foremost rule is that “persons who are not partners as to each other are not partners

as to third persons.” In other words, no person can find himself a partner in a partnership unless he previously consented to be in such contractual relationship.

One does not become a partner, nor is a partnership constituted, but the fact alone that they are associated together in situation where there is co-ownership or profits earned there from. Thus, under Article 1769(2), “Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property.” The essence of every partnership arrangement is the consent of each of the partners to be associated in a business venture.

b.   Legal Capacity to Contract

Parties to a contract of partnership must have legal capacity to contract. Under Article 1782, persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. Under Article 87 of the Family Code, a married woman may enter into a contract of partnership even without her husband’s consent, but the latter may object under certain conditions.

c.   Admission of New Partner into an Existing Partnership

Since consent is the nexus of all partnership relationships, the principle is exemplified under Article 1804 of the Civil Code which provides even in an already existing partnership, that no person shall be admitted into a partnership, or become a party to the partnership arrangement without the consent of all the partners.

2. SUBJECT MATTER:  Pursuit of a Business Enterprise

Essentially, the consent or meeting of the minds of the parties in a contract of partnership must be upon a particular type of “subject matter”, which essentially is the pursuit of a ”business enterprise”:

(a) an agreement to contribute to a common fund; and

(b) with joint interest in the profits and losses thereof.

The agreement to share profits and losses from the business venture is thellmark of a partnership arrangement. It is also the essence of the “equity” position of the partners vis-a-vis the business enterprise, as differentiated from partnership suppliers and creditors, and company employees, who bear no proprietary interest with the business enterprise they deal with.

Article 1769 of the Civil Code, in providing for the rules “In determining whether a partnership exists,” states under paragraph (4) that “The receipt by a person of a share of the profits in the business is prima facie evidence that he is a partner in the business.” In contrast, the same article provides, “The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.”

It is fairly implied under Article 1767, as it defines a contract of partnership, that the essence of the agreement among the partners is to become equity-holders in a business enterprise, because their consent must be the creation of a common fund “with the intention of dividing the profits among themselves.” The essence of an equity holder is to take the profits from the business, and consequently, to absorb also the losses sustained thereby. Therefore, when a person is entitled to share in the “gross returns” of the business venture, he is not an equity holder, and if it is operated under the medium of a partnership, such person is not a partner in the venture.

In Santos v. Reyes, 368 SCRA 261 (2001), the fact that in their “Articles of Agreement,” the parties agreed to divide the profits of a lending business “in a 70-15-15 manner, with the petitioner getting the lion’s share . . . proved the establishment of a partnership,” (Ibid, at p. 269) even when the other parties to the agreement were given separate compensations as bookkeeper and creditor investigator.

In Tocao v. Court of Appeals, 365 SCRA 463 (2001), the Court held that a creditor of a business enterprise cannot seek recovery of his claim against the partnership from a person who is without any right to participate in the profits and who cannot be deemed as a partner in the business enterprise, since the essence of partnership is that the partners share in the profits and losses.

In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court held that –

“Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a partnership. And even with an assurance made by one of the partners that they would earn a huge amount of profits, in the absence of fraud, the other partners cannot claim a right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100% profits.” (Ibid, at p. 95)

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

Nonetheless, even when a person is entitled to share in the “profits” of the business venture, when the legal basis upon such right is based by some other contractual relationship not borne out of equity or proprietary interests, such as payment of the principal and/or interest on a loan or a debt, wages of an employee, rents to a landlord, annuity to a widow or representative of a deceased partner, or as consideration for the sale of the goodwill of a business or other property by installments. In other words, the contractual agreement to share in the profits and losses of a business venture must always be based upon the assumption of equity interest in the business enterprise upon which the contract of partnership shall arise.

a.  Co-ownership or Co-Possession Do Not Necessarily Constitute a Partnership

In Navarro v. Court of Appeals, 222 SCRA 675 (1993), the Court held that mere co-ownership or co-possession of property does not necessarily constitute the co-owners or co-possessors

partners, regardless of whether or not they share any profits derived from the use of the property, when no indication is shown that the parties had intended to enter into a partnership.

In Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436 (1985), four brothers and sisters acquired lots with the original purpose to divide the lots among themselves for residential purposes; when later they found it not feasible to build their residences thereon because of the high cost of construction, they decided to resell the properties to dissolve the co-ownership. The Court ruled that no partnership was constituted among the siblings, since the original intention was merely to collectively purchase the lots and eventually to partition them among themselves to build their residences; and that in fact they had no choice but to resell the same to dissolve the co-ownership. Obillos found that the division of the profits was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state; and that there could not have been any partnership, but merely a co-ownership, since there was utter lack of intent to form a partnership or joint venture.

In contrast, in Reyes v. Commissioner of Internal Revenue,  24 SCRA 198 (1968), the Court found that where father and son purchased a lot and building and had it administered by an administrator, and divided equally the net income, there was a partnership formed because profit was the original intention for the common fund.

Likewise in Evangelista v. Collector of Internal Revenue,  102 Phil. 140 (1957), where three sisters bought four pieces of real property with every intention to lease them out, and which they in fact leased to various tenants and derived rentals therefrom, there was a partnership formed.

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

Under Article 1769(4), the receipt by a person of a share of the net profits of a business is prima facie evidence that he is a partner in the business. However, in the following cases, where there is legal and contractual basis for the receipt of the profits other than as equity holder, there is no partnership constituted, thus:

(a)  As installment payments of debt and/or interests thereof;

(b)  As wages of an employee;

(c)  As rentals paid to a landlord;

(d)  As annuity to a widow or representative of deceased partner;

(e)  As consideration of sale of goodwill or other property.

Thus, in Pastor v. Gaspar, 2 Phil. 592 (1903), the Court held that there was no new partnership formed when a loan was obtained to purchase lorchas needed to expand the shipping business of an existing shipping partnership venture under the condition that the lender would receive part of the profits of the business in lieu of interests.

In Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906), where the terms of the contract provided for the salary of the bookkeeper to be 5% of net profits of the business, the same did not make the bookkeeper a partner in the business, since it was merely a measure of his salary as an employee of the company. To the same effect is the ruling in Sardane v. Court of Appeals, 167 SCRA 524 (1988).

In Bastida v. Menzi & Co., 58 Phil. 188 (1933), the Court held that despite the agreement that Bastida was to receive 35% of the profit from the business of mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any contract of partnership constituted between them based on the following key elements: (a) there was never any common fund created between the parties, since the entire business as well as the expenses and disbursements for operating it were entirely for the account of Menzi & Co.; (b) there was no provision in the agreement for reimbursing Menzi & Co. in case there should be no profits at the end of the year; and (c) the fertilizer business was just one of the many lines of business of Menzi & Co., and there were no separate books and no separate bank accounts kept for that particular line of business. The arrangement was deemed to be one of employment, with Bastida contributing his services to manage the particular line of business of Menzi & Co.

Tocao v. Court of Appeals, 342 SCRA 20 (2001), held that “while it is true that the receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a partner in the business, the evidence in the case at bar controverts an employer-employee relationship between the parties. In the first place, private respondent had a voice in the management of the affairs of the cookware distributorship, including selection of people who would constitute the administrative staff and the sales force.” (Ibid, at pp. 33-34).

c.   Meeting of Minds on the Establishing a Common Fund Is the Essence of a Partnership Contract

All the foregoing examples indicate that what brings about a contract of partnership is essentially an agreement to constitute a common fund with the intention of dividing the profits and losses; outside of these essential elements, a contract of partnership cannot subsist.

The importance of consent, vis-a-vis the elements of common fund and intention to divide the profits among themselves, is best illustrated in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), where in fact the parties had executed formal articles of partnership, and yet the Court found that the real intention of the parties was really to constitute a relation of sublease between the parties over a commercial land where one party (the lessee) was prohibited under her main contract of lease from subleasing the property, and the other party (the sublessee) wanted to operate a threater in said premises. The Court held –

The most important issue raised in the appeal is that contained in the fourth assignment of error, to the effect that the lower court erred in holding that the written contracts, Exhs. “A”, “B”, and “C”, between plaintiff and defendant, are one of lease and not one of partnership. We have gone over the evidence and we fully agree with the conclusion of the trial court that the agreement was a sublease, not a partnership. The following are the requisites of partnership: (1) two or more persons who bind themselves to contribute money, property, or industry to a common fund; (2)

intention on the part of the partners to divide the profits among themselves. (Art. 1767, Civil Code.)

In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish any help or intervention in the management of the theatre. In the third place, it does not appear that she has ever demanded from defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was to receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the premises which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. “A”), which shows that both parties considered this offer as the real contract between them.” (Ibid, at pp. 116-117)

In the more contemporary decision in Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court affirmed the decision of the trial court “[o]rdering the defendant to execute a public instrument embodying all the provisions of the partnership agreement entered into between plaintiffs and defendant as provided for in Article 1771, Civil Code of the Philippines.” In that case, the siblings in a family leased out to SHELL a family commercial lot for the establishment of a gasoline station, and they invested the advanced rentals they received from SHELL to allow one their brother to be the registered dealer of SHELL under the latter’s policy of “one station, one dealer,” and that in fact the registered dealer had accounted for the operations to the other members of the family. When later on he stopped accounting for the operations, and refused to acknowledge the existence of a partnership over the gasoline station, the Court held –

Moreover other evidence in the record shows that there was in fact such partnership agreement between the parties. . . Petitioner submitted to private respondents periodic accounting of the business. . . gave a written authority to private respondent . . ., his sister, to examine and audit the books of their “common business” (aming negosyo). . . . There is no doubt that the parties hereto formed a partnership when they bound themselves to contribute money to a common fund with the intention of dividing the profits among themselves. The sole dealership by the petitioner and the issuance of all government permits and licenses in the name of petitioner was in compliance with the afore-stated policy of SHELL and the understanding of the parties of having only one dealer of the SHELL products. (Ibid, at p. 837)

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

Thus, in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957), three sisters borrowed a huge amount of money from their father, and with their personal funds, purchased under several transactions real estate properties, and subsequently appointed their brother as manager thereof who leased them out to various lessees. Eventually, the Collector of Internal Revenue assessed them for the payment of corporate income tax they have been operating the

real estate venture. In arguing that they have never formed a partnership, and that they merely constituted themselves a co-owners of the properties bought pro indiviso, the Court held –

Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:

1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. . . . The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit.

5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.

6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefore. (Ibid, at pp. 144-146)

In other words, the essence of the contract of partnership is that the partners “contract or bind themselves under a contractual arrangement” to be joint owners and managers of a business

enterprise, which is highlighted by the right to receive the net profits and share the losses therein. Article 1770 of the Civil Code provides that for a partnership contract to be valid it “must be established for the common benefit or interest of the partners,” which clearly indicates the equity or proprietorship position of the partners. Consequently, if there is no clear meeting of the minds to form a partnership venture, the fact that a person participates in the “gross receipts” of a business enterprise or from a property arrangement does not make him a partner because he is not made to bear the burdens of ownership, i.e., to be liable for expenses and losses of the business enterprise.

The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA 74 (1972), is illustrative of this principle. In Ona, in the project partition agreed upon by the heirs the agreed to keep the properties of the estate together and to divide the profits in proportion to their stipulated interests therein. In holding that there was thereupon constituted among the co-heirs an unregistered partnership subject to corporate income tax under the Tax Code, the Court held –

It is thus incontrovertible that petitioners did not, contrary to their contention, merely limited themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit and that with said profit, petitioners engaged, thru Lorenzo T. Ona, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. . . the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Ona as a common fund in undertaking several transactions or in business, with the intent ion of deriving profits to be shared by them proportionally, such act was tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership. (Ibid, at p. 81)

Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939), where fifteen people contributed money to buy a sweepstakes ticket with the intention to divide the prize which they may win, and in fact the ticket won third prize, the Court ruled that they had formed a partnership which was subject to tax as a corporate taxpayer. Likewise, in Gallemet v. Tabilaran, 20 Phil. 241 (1911), the Court held that when land is purchased with equal funds to be contributed by the parties, and it was the clear intention to divide the property between the two of them after acquisition, there could not have been formed a partnership.

d.  Proof of the Existence of the Business Enterprise May Support the Existence of a Partnership Even After Dissolution

There have been cases where the existence of the business enterprise became the basis by which the courts would conclude that indeed a contract of partnership had been entered into by the parties.

In Idos v. Court of Appeals,] 296 SCRA 194 (1998), 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.” (Ibid, at p. 206)

In Tocao v. Court of Appeals, 342 SCRA 20 (2000), citing the ruling in Idos, the Court held that the fact that the claiming party “had been unceremoniously booted out of the partnership . . . she still received her overriding commission (Ibid, at p. 36) . . . The winding up of partnership affairs has not yet been undertaken by the partnership. This is manifest in petitioners’ claim for stocks that had been entrusted to private respondent in the pursuit of the partnership business.” (Ibid, at p. 38)

e.  Doctrine of “Attributes of Proprietorship” as a Means to Prove or Disprove the Existence of a Partnership

There are a number of decisions that use the hazy doctrine of “attributes of proprietorship” as one of the indications of the existence of a contract of partnership or a partnership venture.

We take the decision in Tocao v. Court of Appeals, 342 SCRA 20 (2000), where the main issue was whether there existed a contract of partnership between three parties, namely Tocao, Bello and Anay, in the face of the 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 that in fact the business was registered with the government authorities as a single proprietorship in the style of “Geminesse Enteprise” 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 of the products, and not as a partner to the venture.

In brushing aside the assertions of 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 the evidence adduced exercised rights of proprietorship on the business venture as to show without doubt the existence of a partnership, thus:

Petitioners [Tocao and Belo] admit that private respondent [Anay] had the expertise to engage in the business of distributorship of cookware. Private respondent contributed such expertise to the partnership and hence, under the law, she was the industrial or managing partner. It was through her reputation with the West Bend Company that the partnership was able to pen the business of distributorship of that company’s cookware products; it was through the same efforts that the business was propelled to financial success. Petitioner Tocao herself admitted private respondent [Anay] held the positions of marketing manager and vice-president for sales . . . x x x. ( Ibid, at p. 31; underscoring supplied)

By the set-up of the business, third persons were made to believe that a partnership had indeed been forged between petitioners [Tacao and Belo] and private respondent [Anay] . . .

On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face of the established fact that he presided over meeting regarding matters affecting the operation of the business. Moreover, his having authorized in writing . . . that private respondent should receive thirty-seven (37%) of the proceeds of her personal sales, could not be interpreted otherwise than that he had a proprietary interest in the business. His claim that he was merely a guarantor is belied by that personal act of proprietorship in the business . . . (Ibid, at p. 32; underscoring supplied)

The business venture operated under Geminesse Enterprise did not result in an employer-employee relationship between petitioners and private respondent. While it is true that the receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a partners in the business, the evidence in the case at bar controverts an employer-employee relationship between the parties. In the first place, private respondent had a void in the management of the affairs of the cookware distributorship, including selection of people who would constitute the administrative staff and the sales force. . . (Ibid, at pp. 33-34; underscoring supplied)

The 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 minds to constitute a common fund and to divide the profits thereof among themselves. The reason why exercising the prerogatives of proprietorship or participating in the management of the business enterprise 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 appoint 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 venture, each acting very much a proprietor of the business venture, while at the same time as agents to one another.

The recent decision in Sy v. Court of Appeals, 398 SCRA 301 (2003), succinctly summarizes the badges that would normally accompany a partnership relationship, thus:

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 diving the profits among themselves. Not one of these circumstances is present in this case [which sought to make the truck driver of the company of many years to be characterized as an industrial partner]. 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, curing 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. (Ibid, at p. 308)

In contrast, we should consider the decision in Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), where a partnership was insisted to have been constituted yet no direct evidence of the contribution to a common fund or sharing of profits had been adduced during trial. The Court held –

Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses. Each has the right to demand an accounting as long as the partnership exists. We have allowed a scenario wherein “[i] excellent relations exists among the partners at the start of the business and all the partners are more interested in seeing the firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible.” [Fue Lung v. IAC, 169 SCRA 764, 755 (1989)]. But in the situation in the case at bar, the deferment, if any, had gone too long to be plausible. A person is presumed to take ordinary care of his concerns. . . A demand for periodic accounting is evidence of a partnership. ( Ibid , at pp. 755-756, citing Estanislao, Jr. v. Court of Appeals , 160 SCRA 830, 837 [1988]) .

f.    When Subject Matter (the Business Venture) Is Unlawful or Against Public Policy

When the subject matter of a contract of partnership is unlawful, Article 1770 of the Civil Code 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 v. Polistico, 53 Phil. 489 (1929), 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 to 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 for said profits, shows that in consequence of said exclusion, the general rules of law must be followed, and hence, the partners must be reimbursed the amount of their respective contributions. Any other solution would be 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. (Ibid, at p. 495, quoting from MANRESA, COMMENTARIES ON THE SPANISH CIVIL CODE, Vol. XI, pp. 262-264)

In Deluao v. Casteel, 26 SCRA 475 (1968), 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:  Promised Contributions

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 (i.e., to the business venture). Being essentially a consensual is characteristic, a contract of partnership is perfected by the agreement by the partners to make such contribution ( i.e., by the 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:

(a) Article 1786, which declares every partner to be a debtor of the partnership for whatever he may have promised to contribute;

(b) Article 1787, which makes a partner liable for interest and damages for failing to contribute the sum of money he was bound to pay under the articles of partnership;

(c) Article 1789, which prohibits an industrial partner from engaging in business for himself, since he bound himself to contribute service to the partnership;

(d) Article 1790, which presumes an obligation to contribute equal shares among the partners when there is no stipulation as to manner and amount of contribution; and

(e) Article 1830(4), which decrees the dissolution of a partnership when the specific thing, which a partner had promised to contribute to the partnership, perishes before the delivery.

City of Manila v. Cumbe, 13 Phil. 677 (1909), held that “credit”, such as a promissory note or other evidence of obligation, or even a mere goodwill, may be validly contributed into the partnership. In other words, if service is a valid contribution to the common fund, then more so when it comes to intangible things, rights and chooses in action.

4. Other Essential Elements of Partnership

Although American jurisprudence would consider two other elements to be essential for the contract of partnership to exist, namely:

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

(b)   the element of joint control (BAUTISTA, at p. 4);

the same are also present in Philippine Partnership Law.

As discussed above, the subject matter of every contract of partnership must be the agreement to jointly pursue a business enterprise. Thus, in Fernandez v. De la Rosa, 1 Phil. 671 (1903), it was 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.” (Ibid, at pp. 675-676) The element of “joint control” is embodied in the provisions of law that provides for mutual agency in a partnership arrangement. (Art. 1810(3) provides that one of the property rights of a partner is

“His right to participate in the management.” Art. 1818 of the Civil Code provides that “Every partner is an agent of the partnership for the purpose 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 usual way the business of the partnership of which he is a member binds the partnership.”

In Council of Red Men v. Veterans Army, 7 Phil. 685 (1907), Article 3 of the constitution of the Veteran Army of the Philippines provides as follows: “The constitution of the association 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.’” (Ibid, at p. 686). The Court had raised the point that: “It seems to be the opinion of the commentators that where the society is not constituted for the purpose of gain, it does not fall within this article of the Civil Code. Such an organization is fully covered by the Law of Associations of 1887, but that law was never extended to the Philippine Islands.” (Ibid, at p. 687). Nonetheless, Council of Red Men applied the then old Civil Code rule on civil partnership.

The only form of partnership where “business consideration” or the “gaining of profits” is not the primary consideration for the common fund would be the authorized professional partnerships; but even in such cases the Court has considered that a profession is pursued as part of the livelihood undertaking of the partners. (In the Matter of the Petition for Authority to Continue Use of Firm Name “Sycip, Salazar, et.al. Ozaeta, Romulo, etc.,” 92 SCRA 1 [1979])

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 the 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 usual way the business of the partnership of which he is a member binds the partnership.”