– 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]

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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).
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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
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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)
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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.”