THE CONTRACT OF PARTNERSHIP

ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP

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

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

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.

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.

ART. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise
stipulated.

The Law on Partnerships under the New Civil Code begins with its definition under Article 1776 as a "contract
of partnership" emphasizing that first and foremost the nexus of the legal relationship between and among the
partners 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) SUBJECTMATTER: 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.

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 New Civil Code. Under Article
1769 of New 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.

A group of individuals do not become partners to one another, nor is a partnership constituted, by the fact alone
that they are associated together in situation where there is co-ownership or profits earned therefrom. Thus,
under Article 1769(2) of the New Civil Code, "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."

In Ortega v. Court of Appeals,' the Supreme Court held that "The birth and life of a partnership at will is
predicated on the mutual desire and consent of the partners." Thus, 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 of the New Civil
Code, persons who are prohibited from giving each other any donation or advantage cannot enter into a
universal partnership.

On the other hand, 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
New Civil Code which provides that even in an already existing partnership, 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." This is embodied
in the elements provided in Article 1767 of the New Civil Code as it defines a partnership, thus:
 1. (a) An agreement to contribute to a common fund; and
2. (b) With joint interest in the profits and losses thereof.

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

Article 1769 of New 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 that, "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 implied under Article 1767 of the New Civil Code, 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 the position of an equity holder is to participate in the profits of the business, and consequently,
he ought to be ready to absorb the losses that may be sustained thereby. When a person is entitled to share in
the "gross returns" of the business venture, he is not necessarily 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, 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," even when the other parties to the agreement were given separate compensations as
bookkeeper and credit investigator.

In Tocao v. Court of Appeals, 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, 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.

The Court also held in Moran, Jr. that any stipulation on the payment of a high commission to one of the partners
must be understood to 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 reason
upon such right is based on 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, then he is not deem to be a partner as indicated in
Article 1769(4) of the New Civil Code. 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 Does Not Necessarily Constitute a Partnership

In Navarro v. Court of Appeals, 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, 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.

In contrast, in Reyes v. Commissioner of Internal Revenue, 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, 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, it was ruled that a partnership was 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.

In 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.

In Fortis v. Gutierrez Hermanos, 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.'

In Bastida v. Menzi & Co.,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 no
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.

In Heirs of Tang Eng Kee v. Court of Appeals, it was held that in a situation where the payroll of the company
indicated that the brother was listed as an employee and receiving only wages from the company, there was no
basis to rule that he was a partner in the business enterprise of his elder brother.

Tocao v. Court of Appeals," 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."

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.

This doctrine is best illustrated in Yulo v. Yang Chiao Seng, TM where in fact the parties had executed formal
articles of partnership, and yet the Supreme 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 theater 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.

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
cannot 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.

In the more contemporary decision in Estanislao, Jr. v. Court of Appeals, the Court affirmed the decision of the
trial court "Ordering the defendant to execute a public instrument embodying all the provisions of the
partnership agreement entered into between plaintiffs and defendant as provided for in Article 1771, Civil Code
of the Philippines." In that case, the siblings 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 aforestated policy of SHELL and the understanding of the parties of having only one
dealer of the SHELL products.

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 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, 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. Theyinvested 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. Theforegoing 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.

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 New 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, is illustrative of this principle. In Ona, in the project
partition 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 intention 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.

In Gatchalian v. Collector of Internal Revenue, 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, 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 was formed a partnership.

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

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 "if 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." But in the situation in the case at bar, the deferment, if any, had gone on
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. During his lifetime, Tan Eng Kee appeared never
to have made any such demand for accounting from his brother, Tan Eng Lay.

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

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

In Idos v. Court of Appeals, 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."

In Tocao v. Court of Appeals, 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. 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."

e. Doctrine of "Attributes of Proprietorship" as a Means to Prove 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, 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 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 of the products, and not as a 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 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 .

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 percent (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 .

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.

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 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 decision in Sy v. Court of Appeals, 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 dividing 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.

In contrast, we should consider the decision in Heirs of Tan Eng Kee v. Court of Appeals, where a 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.

The same principle was applied in the recent case of Heirs of Jose Lim v. Lim, where the issue evolved 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 of the New Civil Code were in favor the son being
the partner in the partnership business enterprise, the Court noted that the son [Elfledo] 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; (2) Elfledo ran the affairs of the partnerships, wielding control, power and authority,
without any intervention or opposition whatsoever from any of petitioners herein; (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 no receive wages or salaries from the partnership, indicating that what he actually received were
shares of the profits of the business, 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,
a demand for periodic accounting is evidence of a partnership.

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 New 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, 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.

In Deluao v. 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: 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 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 the
following provisions of the New Civil Code, thus:

1. (a) Article 1786, which declares that every partner to be a debtor of the partnership for whatever he
may have promised to contribute;
2. (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;
3. (c) Article 1789, which prohibits an industrial partner from engaging in business for himself, since he
bound himself to contribute service to the partnership;
4. (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
5. (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, 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 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:

1. (a) the purpose of a partnership must be to engage in some business enterprise; and
2. (b) the element of joint control;

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. The element of "joint control" is embodied in the provisions of law that provides for
mutual agency in a partnership arrangement. Thus, Article 1810(3) of the New Civil Code provides that one of
the property rights of a partner is "His right to participate in the management." Article 1818 of the New Civil
Code in turn 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 Fernandez v. 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 v. 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 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 New 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. "Nonetheless, Council of Red
Men applied the 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.

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."

1. Nominate and Principal

The contract of partnership is a nominate contract, not only because it has been given a specific name under
the New Civil Code, but it is a principal contract and can exist on its own upon the essential elements coming
together at perfection; and that once created there is a set of rules (Law on Partnerships of the New Civil Code)
that govern such contract, and the parties to such contract cannot refuse generally to be governed by such
provisions. Thus, Article 45 of New Civil Code provides that "Partnerships and associations for private interest
or purpose are governed by the provisions of this Code concerning partnerships."

To illustrate the "nominate and principal' nature of the contract of partnership, Fernandez v. Dela Rosa TM 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."

In resolving the motion for reconsideration on its original decision, the Court even held that "It is of no
importance that the parties have failed to reach an agreement with respect to the minor details of contract.
These details pertain to the accidental and not to the essential part of the contract."

2. Consensual

A contract of partnership is essentially consensual, it is perfected upon meeting of the minds of the parties of
the subject matter to undertake a business venture, and the consideration, which is the obligation to contribute
of money, property or service to a common fund. Whether the business enterprise is actually constituted or
set-up, or whether or not the contributions have been made into the partnership coffers, do not detract from
the coming into existence of a valid partnership contract. The failure to comply with the undertaking to deliver
the promised contribution does not make a contract of partnership void, but merely gives a ground for its
dissolution.

Thus, in the early decision in Fernandez v. De la Rosa, the Court held that "The execution of a written agreement
was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the
contributions of the partners not having been in the form of immovables or rights in immovables."

This feature of consensuality of a contract of partnership is now embodied in Article 1772 of the New Civil Code
which provides that "A partnership may be constituted in any form except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary."

Although Articles 1772 and 1773 of the New Civil Code provide for public instrument and registration when
the capital contribution is more than P3.000.00, and that of an inventory attached to the public instrument
whenever immovable property is contributed, nonetheless jurisprudence even discount the nullity of the
resulting contract of partnership, as will be discussed hereunder.
In Estanislao, Jr. v. Court of Appeals, the Court held that when members of the family leased out 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. The sole dealership by
the petitioner and the issuance of all government permits and licenses in the name of petitioner was in
compliance with the [policy] of SHELL that a dealership can only be granted to one person and the
understanding of the parties of having only one dealer of the SHELL products.

In essence, Estanislao demonstrates that it is the true meeting of the minds of the parties (in this case, to pursue
a common venture as a family group) that shall govern the rights and obligations of the contracting parties, and
not the evidence of a purported agreement (in this case the dealership agreement being registered only in the
name of a brother).

In contrast, in Yulo v. Yang Chiao Seng, the parties executed a "partnership agreement," to conduct and carry
on the business of operating a theatre for the exhibition of motion and talking pictures; nonetheless, the Court
held that the real intention of the parties was to effect a sub-lease of the property and the partnership
agreement was resorted to in order to avoid the provision in the main lease agreement prohibiting a sublease
of the premises. The Court took into consideration the following actuations of the supposed Yulo partner to
show that there was never a real agreement to form a partnership, thus:

In the first place, plaintiff did not furnish the supposed P20.000 capital. In the second place, she did not furnish
any help or intervention in the management of the theatre. In the third place, it 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.

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

In contrast, we view the decision in Woodhouse v. Halili as a little dubious when it distinguished between the
obligation to enter into a contract of partnership, from that of executing the certificate of partnership itself.

In Woodhouse, the plaintiff and the defendant had come to an agreement to enter into a partnership business
to bottle and distribute an American brand softdrinks in the Philippines; and that defendant, who would
primarily finance the business, agreed to grant plaintiff the right to receive 30% of the profits under his
obligation to secure the bottling franchise for the venture. When the venture was eventually set-up, the
defendant had refused to finalize the articles of partnership when he learned during the negotiations in the
United States that plaintiff did not have for himself the bottling franchise he promised he had secured. The
plaintiff brought action to have the articles of partnership executed and to receive his 30% share in the
earnings.

Prescinding from the language of the original agreement executed between the parties that the very language
of the agreement that the parties intended that the execution of the agreement to form a partnership was to be
carried out at a later date. They expressly agreed that they shall form a partnership," the Court held —
As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the
agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation
to do, not to give. The law recognizes the individual's freedom or liberty to do an act he has promised to do, or
not to do it, as he pleases. It falls within what Spanish commentators call a very personal act (acta
personalisimo), of which courts may not compel compliance, as it is considered an act of violence, to do so.

We disagree with the afore-quoted ruling of the Court in that it fails to appreciate the consensual nature of a
contract of partnership, and that the moment the parties come to an agreement which basically embodies the
formation of a common fund with the intention of dividing the profits, as was the case between the parties in
Woodhouse, a contract of partnership arises, and the incidents thereof governed by Partnership Law, even in
the absence of a formal certificate or articles of co-partnership. In any event, we now have the provisions under
Article 1358 of the New Civil Code providing that acts and contracts which have "for their object the creation,
transmission, modification or extinguishment of real rights over immovable property, sale or real property or
of an interest therein ... power to administer property, or any other power which has for its object an act
appearing or which should appear in a public document, or should prejudice third person;" and which has been
interpreted by the Supreme Court as granting a cause of action to one party to seek the execution of such public
instrument as against the other party to the contract.

n
Only recently, Tocao v. Court of Appeals, summarized the prevailing doctrine on the nature of the contract of
partners, thus —

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more persons
bind themselves to contribute money, property or industry to a common fund; and (2) intention on the part of
the partners to divide the profits among themselves. It may be constituted in any form; a public instrument is
necessary only where immovable property or real rights are contributed thereto. This implies that since a
contract of partnership is consensual, an oral contract of partnership is as good as a written one. Where no
immovable property or real rights are involved, what matters 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.

Tocao 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 sole proprietorship was of no moment, especially when
the registration of the business name with the Bureau of Domestic Trade was only for purpose of protecting
the business name of the company.

3. Onerous and Bilateral

The onerous and bilateral characteristics of the contract of partnership are demonstrated by the fact that the
existence of a partnership requires an agreement for the creation of a common fund from the contributions of
the partners, which may either be in money, property or industry. Under Article 1786 of the New Civil Code, 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.

4. Preparatory and Progressive

A contract of partnership is not entered into merely for the sake of creating a contractual relationship between
and among the partners, but primarily to pursue a business enterprise (i.e., creation of a common fund with
intent to share profits and losses). Consequently, falling within the contractual meeting of the minds of the
parties is that the inter-partnership relationship continues to evolve as the underlying business enterprise
itself evolves and progresses. In other words, the contract of partnership is simply the base upon which other
contracts and various other transactions are to be pursued with the public, and for which the partners shall
continually adjust their working relationships. The operation of the underlying business enterprise also
determines the nature and value of the equity of the partners. Thus, when the nexus of the contract of
partnership (the common fund and intention to divide the profits and losses) have been constituted, other
contractual relationships are expected to flow therefrom as a matter of course.

An early illustration of the "preparatory and progressive" nature of the contract of partnership can be found in
the decision in Fernandez v. De la Rosa, where once the elements of contribution to a common fund and
understanding of sharing of profits had been clearly established between the parties, a contract of partnership
arose and all the incidents arising therefrom automatically engendered even if the parties have not yet decided
upon the details of their relationship, thus —

. . . We have already stated in the opinion what are the essential requisites of a contract of partnership . . .

Considering as a whole the probatory facts which appears from the record, we have reached the conclusion
that plaintiff and the defendant agreed to the essential parts of that contract, and did in fact constitute a
partnership, with the funds of which were purchased the cascoes with which this litigation deals, although it is
true that they did not take precaution to precisely establish and determine from the beginning the conditions
with respect to the participation of each partner in the profits or losses of the partnership. The disagreements
subsequently arising between them, when endeavoring to fix these conditions, should not and cannot produce
the effect of destroying that which has been done, to the prejudice of one of the partners, nor could it divest his
rights under the partnership which had accrued by the actual contribution of capital which followed the
agreement to enter into a partnership, together with the transactions effected with partnership funds. The law
has foreseen the possibility of the constitution of a partnership without an express stipulation by the partners
upon those conditions, and has established rules which may serve as a basis for the distribution of profits and
losses among the partners... We consider that the partnership entered into by the plaintiff and the defendant
falls within the provision of this article.