Case Digests for Partnership

8/10/2019 Case Digests for Partnership

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ASSIGNED CASESBUSORG

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1. FERNANDO SANTOS, Petitioner , v. Spouses ARSENIO and NIEVES REYES, Respondents.

Facts: In June 1986, Fernando Santos, Nieves Reyes and Melton Zabat orally agreed to form a

partnership – a lending business. Santos contributed 70% (as financier) while Reyes and Zabat shared

30% (as industrial partners). Later, Reyes introduced Cesar Gragera whom they would

provide loans t o Gragera’s corporation particularly its employees. In return Gragera shall have acommission based on the loan payments. The partners d ecided on August 1986 to have a written

agreement but they found out that Zabat engaged in a competitor venture thus expelled him. The two

had Arsenio Reyes (husband of Nieves) replaced Zabat.

However, Santos accused the Spouses of not remitting the loans payments. He argued that the couple

were only his employees and there was a special arrangement between him and Gragera. The trial

court and the Court of Appeals ruled against Santos.

Issue: Whether or not there was a partnership formed between Santos and the Spouses Reyes?

Held: YES. The original partnership with Zabat continued even after the expulsion of the latter from

the partnership because there was no intent to dissolve the (partnership) relationship.

” [Respondents] were industrial partners of [petitioner]. . . . Nieves herself provided the initiative in the

lending activities with Monte Maria. In consonance with the agreement between appellant, Nieves and Zabat (later replaced by Arsenio), [respondents] contributed industry to the common fund with the

intention of sharing in the profits of the partnership. [Respondents] provided services without which the partnership would not have [had] the wherewithal to carry on the purpose for which it was organizedand as such [were] considered industrial partners (Evangelista v. Abad Santos, 51 SCRA 416 [1973]).

“While concededly, the partnership between [ petitioner,] Nieves and Zabat was technically

dissolved by the expulsion of Zabat therefrom, the remaining partners simply continued the

business of the partnership without undergoing the procedure relative to dissolution. Instead,they invited Arsenio to participate as a partner in their operations. There was therefore, no intent

to dissolve the earlier partnership. The partnership between [petitioner,] Nieves and Arsenio simply

took over and continued the business of the former partnership with Zabat, one of the incidents of whichwas the lending operations with Monte Maria.”

2. MORAN JR. VS. COURT OF APPEALS

In February 1971, Isabelo Moran and Mariano Pecson entered into a partnership agreement where

they agreed to contribute P15k each for the purpose of printing 95k posters of the delegates to the

then 1971 Constitutional Commission. Moran shall be in charge in managing the printing of theposters. It was further agreed that Pecson will receive a commission of P1k a month starting from

April 1971 to December 1971; that the partnership is to be liquidated on December 15, 1971.

Pecson partially fulfilled his obligation to the partnership when he issued P10k in favor of the

partnership. He gave the P10k to Moran as the managing partner. Moran however did not addanything and, instead, he only used P4k out of the P10k in printing 2,000 posters. He only printed

2,000 posters because he felt that printing all 95k posters is a losing venture because of the delay by

the COMELEC in announcing the full delegates. All the posters were sold for a total of P10k.

Pecson sued Moran. The trial court ordered Moran to pay Pecson damages. The Court of

Appealsaffirmed the decision of the trial court but modified the same as it ordered Moran to pay

P47.5k for unrealized profit; P8k for Pecson’s monthly commissions; P7k as return of investmentbecause the venture never took off; plus interest.

ISSUE: Whether or not the CA judgment is correct.

HELD: No. The award of P47.5k for unrealized profit is speculative. There is no evidence whatsoeverthat the partnership between the Moran and Pecson would have been a profitable venture (because

base on the circumstances then i.e. the delay of the COMELEC in proclaiming the candidates, profit is

highly unlikely). In fact, it was a failure doomed from the start. There is therefore no basis for theaward of speculative damages in favor of Pecson. Further, there is mutual breach in this case, Pecson

only gave P10k instead of P15k while Moran gave nothing at all.

As for the P8k monthly commission, this is without basis. The agreement does not state the basis ofthe commission. The payment of the commission could only have been predicated on relatively

extravagant profits. The parties could not have intended the giving of a commission inspite of loss or

failure of the venture. Since the venture was a failure, Pecson is not entitled to the P8k commission.

As for the P7k award as return for Pecson’s investment, the CA erred in his ruling too. Though theventure failed, it did took off the ground as evidenced by the 2,000 posters printed. Hence, return of

investment is not proper in this case. There are risks in any business venture and the failure of the

undertaking cannot entirely be blamed on the managing partner alone, specially if the latter exercisedhis best business judgment, which seems to be true in this case.

Moran must however return the unused P6k of Pecson’s contribution to the partnership plus P3krepresenting Pecson’s profit share in the sale of the printed posters. Computation of P3k profit share is

as follows: (P10k profit from the sale of the 2,000 posters printed) – (P4k expense in printing the 2k

posters) = (P6k profit); Profit ÷ 2 = P3k each.

3. BASTIDA VS MENZI AND CO.

Facts: Bastida offered to assign to Menzi & Co. his contract with Phil Sugar Centrals Agency and tosupervise the mixing of the fertilizer and to obtain other orders for 50 % of the net profit that Menzi &

Co., Inc., might derive therefrom. J. M. Menzi (gen. manager of Menzi & Co.) accepted the offer. The

agreement between the parties was verbal and was confirmed by the letter of Menzi to the plaintiff on

January 10, 1922.Pursuant to the verbal agreement, the defendant corporation on April 27, 1922

entered into a written contract with the plaintiff, marked Exhibit A, which is the basis of the presentaction. Still, the fertilizer business as carried on in the same manner as it was prior to the written

contract, but the net profit that the plaintiff herein shall get would only be 35%. The intervention of

the plaintiff was limited to supervising the mixing of the fertilizers in the bodegas of Menzi. Prior tothe expiration of the contract (April 27, 1927), the manager of Menzi notified the plaintiff that the

contract for his services would not be renewed. Subsequently, when the contract expired, Menzi

proceeded to liquidate the fertilizer business in question. The plaintiff refused to agree to this. Itargued, among others, that the written contract entered into by the parties is a contract of general

regular commercial partnership, wherein Menzi was the capitalist and the plaintiff the industrialpartner.

Issue: Is the relationship between the petitioner and Menzi that of partners?

Held: The relationship established between the parties was not that of partners, but that of employer

and employee, whereby the plaintiff was to receive 35% of the net profits of the fertilizer business ofMenzi in compensation for his services for supervising the mixing of the fertilizers. Neither the




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provisions of the contract nor the conduct of the parties prior or subsequent to its execution justifiedthe finding that it was a contract of co- partnership. The written contract was, in fact, a continuation of

the verbal agreement between the parties, whereby the plaintiff worked for the defendant corporation

for one-half of the net profits derived by the corporation form certain fertilizer contracts. According to

Art. 116 of the Code of Commerce, articles of association by which two or more persons obligate

themselves to place in a common fund any property, industry, or any of these things, in order to obtainprofit, shall be commercial, no matter what it class may be, provided it has been established in

accordance with the provisions of the Code. However in this case, there was no common fund. The

business belonged to Menzi & Co. The plaintiff was working for Menzi, and instead of receiving a fixedsalary; he was to receive 35% of the net profits as compensation for his services. The phrase in the

written contract “en sociedad con”, which is used as a basis of the plaint iff to prove partnership in this

case, merely means “en reunion con” or in association with. It is also important to note that although

Menzi agreed to furnish the necessary financial aid for the fertilizer business, it did not obligate itselfto contribute any fixed sum as capital or to defray at its own expense the cost of securing

the necessary credit

4. HEIRS OF TAN ENG KEE VS. COURT OF APPEALS

Benguet Lumber has been around even before World War II but during the war, its stocks wereconfiscated by the Japanese. After the war, the brothers Tan Eng Lay and Tan Eng Kee pooled their

resources in order to revive the business. In 1981, Tan Eng Lay caused the conversion of Benguet

Lumber into a corporation called Benguet Lumber and Hardware Company, with him and his family asthe incorporators. In 1983, Tan Eng Kee died. Thereafter, the heirs of Tan Eng Kee demanded for an

accounting and the liquidation of the partnership.

Tan Eng Lay denied that there was a partnership between him and his brother. He said that Tan Eng

Kee was merely an employee of Benguet Lumber. He showed evidence consisting of Tan Eng Kee’spayroll; his SSS as an employee and Benguet Lumber being the employee. As a result of the

presentation of said evidence, the heirs of Tan Eng Kee filed a criminal case against Tan Eng Lay for

allegedly fabricating those evidence. Said criminal case was however dismissed for lack of evidence.

ISSUE: Whether or not Tan Eng Kee is a partner.

HELD: No. There was no certificate of partnership between the brothers. The heirs were not able to

show what was the agreement between the brothers as to the sharing of profits. All they presented

were circumstantial evidence which in no way proved partnership.

It is obvious that there was no partnership whatsoever. Except for a firm name, there was no firm

account, no firm letterheads submitted as evidence, no certificate of partnership, no agreement as toprofits and losses, and no time fixed for the duration of the partnership. There was even no attempt to

submit an accounting corresponding to the period after the war until Kee’s death in 1984. It had no

business book, no written account nor any memorandum for that matter and no license mentioningthe existence of a partnership.

In fact, Tan Eng Lay was able to show evidence that Benguet Lumber is a sole proprietorship. Heregistered the same as such in 1954; that Kee was just an employee based on the latter’s payroll and

SSS coverage, and other records indicating Tan Eng Lay as the proprietor.Also, the business definitely amounted to more P3,000.00 hence if there was a partnership, it should

have been made in a public instrument.

But the business was started after the war (1945) prior to the publication of the New Civil Code in 1950?

Even so, nothing prevented the parties from complying with this requirement.

Also, the Supreme Court emphasized that for 40 years, 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. Even if it can be speculated that a scenario

wherein “if excellent relations exist among the partners at the start of the business and all the partnersare 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. Ademand for periodic accounting is evidence of a partnership, which Kee never did.

The Supreme Court also noted:

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 suchco-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 notthe persons sharing them have a joint or common right or interest in any property which

the returns are derived;(4) The receipt by a person of a share of the profits of a business is prima facie evidencethat 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 installment 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 otherproperty by installments or otherwise.

5. ESTANISLAO JR. VS COURT OF APPEALS

Facts: The petitioner and private respondents are brothers and sisters who are co-owners of certain

lots at the in Quezon City which were then being leased to SHELL. They agreed to open and operate a

gas station thereat to be known as Estanislao Shell Service Station with an initial investment ofPhP15,000.00 to be taken from the advance rentals due to them from SHELL for the occupancy of the

said lots owned in common by them. A joint affidavit was executed by them on April 11, 1966. The

respondents agreed to help their brother, petitioner therein, by allowing him to operate and managethe gasoline service station of the family. In order not to run counter to the company’s policy of

appointing only one dealer, it was agreed that petitioner would apply for the dealership. RespondentRemedios helped in co-managing the business with petitioner from May 1966 up to February 1967.

On May 1966, the parties entered into an Additional Cash Pledge Agreement with SHELL wherein itwas reiterated that the P15,000.00 advance rental shall be deposited with SHELL to cover advances of

fuel to petitioner as dealer with a proviso that said agreement “cancels and supersedes the Joint

Affidavit.” For sometime, the petitioner submitted financial statement regarding the operation of thebusiness to the private respondents, but thereafter petitioner failed to render subsequent accounting.




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Hence, the private respondents filed a complaint against the petitioner praying among others that thelatter be ordered:

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

entered into;(2) To render a formal accounting of the business operation veering the period from May 6, 1966 up to

December 21, 1968, and from January 1, 1969 up to the time the order is issued and that the same be

subject to proper audit;

(3) To pay the plaintiffs their lawful shares and participation in the net profits of the business; and(4) To pay the plaintiffs attorney’s fees and costs of the suit.

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

of certain properties?

Trial Court: The complaint (of the respondents) was dismissed. But upon a motion for reconsideration

of the decision, another decision was rendered in favor of the respondents.

CA: Affirmed in toto

Petitioner: The CA erred in interpreting the legal import of the Joint Affidavit vis-à-vis the Additional

Cash Pledge Agreement. Because of the stipulation cancelling and superseding the Joint Affidavit,whatever partnership agreement there was in said previous agreement had thereby been abrogated.

Also, the CA erred in declaring that a partnership was established by and among the petitioner and theprivate respondents as regards the ownership and /or operation of the gasoline service stationbusiness.

Held: There is no merit in the petitioner’s contention that because of the stipulation cancelling andsuperseding the previous joint affidavit, whatever partnership agreement there was in said previous

agreement had thereby been abrogated. Said cancelling provision was necessary for the Joint Affidavitspeaks of P15,000.00 advance rental starting May 25, 1966 while the latter agreement also refers to

advance rentals of the same amount starting May 24, 1966. There is therefore a duplication of

reference to the P15,000.00 hence the need to provide in the subsequent document that it “cancels andsupersedes” the previous none.

Indeed, it is true that the latter document is silent as to the statement in the Join Affidavit that the

value represents the “capital investment” of the parties in the business and it speaks of the petitioneras the sole dealer, but this is as it should be for in the latter document, SHELL was a signatory and it

would be against their policy if in the agreement it should be stated that the business is a partnership

with private respondents and not a sol e proprietorship of the petitioner.

Furthermore, there are other evidences in the record, which show that there was in fact suchpartnership agreement between parties. The petitioner submitted to the private respondents periodic

accounting of the business and gave a written authority to the private respondent Remedios

Estanislao to examine and audit the books of their “common business” (aming negosyo). The respondent Remedios, on the other hand, assisted in the running of the business. Indeed, the parties

hereto formed a partnership when they bound themselves to contribute money in a common fund

with the intention of dividing the profits among themselves.

6. SY VS. COURT OF APPEALS

FACTS: Private respondent Jaime Sahot started working as a truck helper for petitioners’ family -

owned trucking business named Vicente Sy Trucking. Throughout all the changes in names and for 36

years, private respondent continuously served the trucking business of petitioners. When Sahot wasalready 59 years old, he had been incurring absences as he was suffering from various

ailments. Particularly causing him pain was his left thigh, which greatly affected the performance of

his task as a driver. Sahot had filed a week-long leave sometime in May 1994. On May 27th, he was

medically examined and treated for EOR, presleyopia, hypertensive retinopathy G II), HPM, UTI,Osteoarthritis and heart enlargement. On said grounds, Belen Paulino of the SBT Trucking Service

management told him to file a formal request for extension of his leave. At the end of his week-long

absence, Sahot applied for extension of his leave for the whole month of June, 1994. It was at this time

when petitioners allegedly threatened to terminate his employment should he refuse to go back towork. They carried out their threat and dismissed him from work, effective June 30, 1994. He ended

up sick, jobless and penniless.

On September 13, 1994, Sahot filed with the NLRC NCR Arbitration Branch, a complaint for illegal

dismissal for recovery of separation pay against Vicente Sy and Trinidad Paulino-Sy, Belen Paulino,Vicente Sy Trucking, T. Paulino Trucking Service, 6B’s Trucking and SBT Trucking, herein petitioners.

Petitioners, on their part, claimed that sometime prior to June 1, 1994, Sahot went on leave and wasnot able to report for work for almost seven days. On June 1, 1994, Sahot asked permission to extend

his leave of absence until June 30, 1994. It appeared that from the expiration of his leave, privaterespondent never reported back to work nor did he file an extension of his leave. Instead, he filed thecomplaint for illegal dismissal against the trucking company and its owners. Petitioners add that due

to Sahot’s refusal to work after the expiration of his authorized leave of absence, he should be deemed

to have voluntarily resigned from his work. They contended that Sahot had all the time to extend hisleave or at least inform petitioners of his health condition.

The Labor Arbiter ruled in favor of the company. It held that Sahot failed to return to work. However,

upon appeal, the NLRC modified the LA’s decision, ruling that Sahot did no t abandon his job but his

employment was terminated on account of his illness, pursuant to Article 284 of the Labor Code.

ISSUE: Whether or not there was valid termination of employment due to his illness.

HELD: The SC held that although illness can be a valid ground for terminating an employee, thedismissal was invalid. Article 284 of the Labor Code authorizes an employer to terminate an employee

on the ground of disease. However, in order to validly terminate employment on this ground, Book VI,

Rule I, Section 8 of the Omnibus Implementing Rules of the Labor Code requires:

Sec. 8. Disease as a ground for dismissal- Where the employee suffers from a disease and his continuedemployment is prohibited by law or prejudicial to his health or to the health of his co-employees, the

employer shall not terminate his employment unless there is a certification by competent public

health authority that the disease is of such nature or at such a stage that it cannot be cured within aperiod of six (6) months even with proper medical treatment. If the disease or ailment can be cured

within the period, the employer shall not terminate the employee but shall ask the employee to take a

leave. The employer shall reinstate such employee to his former position immediately upon therestoration of his normal health.

The requirement for a medical certificate under Article 284 of the Labor Code cannot be dispensed

with; otherwise, it would sanction the unilateral and arbitrary determination by the employer of the

gravity or ext ent of the employee’s illness and thus defeat the public policy in the protection of labor.




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In the case at bar, the employer clearly did not comply with the medical certificate requirement beforeSahot’s dismissal was effected. Since the burden of proving the validity of the dismissal of the

employee rests on the employer, the latter should likewise bear the burden of showing that the

requisites for a valid dismissal due to a disease have been complied with. In the absence of the

required certification by a competent public health authority, this Court has ruled against the validityof the employee’s dismissal. It is therefore incumbent upon the private respondents to prove by the

quantum of evidence required by law that petitioner was not dismissed, or if dismissed, that the

dismissal was not illegal; otherwise, the dismissal would be unjustified. This Court will not sanction a

dismissal premised on mere conjectures and suspicions, the evidence must be substantial and notarbitrary and must be founded on clearly established facts sufficient to warrant his separation from

work.

In addition, we must likewise determine if the procedural aspect of due process had been compliedwith by the employer. From the records, it clearly appears that procedural due process was not

observed in the separation of private respondent by the management of the trucking company. The

employer is required to furnish an employee with two written notices before the latter is dismissed:

(1) the notice to apprise the employee of the particular acts or omissions for which his dismissal is

sought, which is the equivalent of a charge; and (2) the notice informing the employee of his dismissal,to be issued after the employee has been given reasonable opportunity to answer and to be heard on

his defense. These, the petitioners failed to do, even only for record purposes. What management did

was to threaten the employee with dismissal, then actually implement the threat when the occasionpresented itself because of private respondent’s painful left thigh.

All told, both the substantive and procedural aspects of due process were violated. Clearly, therefore,Sahot’s dismissal is tainted with invalidity.

Petition is denied.

7. HEIRS OF JOSE LIM VS. LIM

In 1980, the heirs of Jose Lim alleged that Jose Lim entered into a partnership agreement with Jimmy

Yu and Norberto Uy. The three contributed P50,000.00 each and used the funds to purchase a truck tostart their trucking business. A year later however, Jose Lim died. The eldest son of Jose Lim, Elfledo

Lim, took over the trucking business and under his management, the trucking business prospered.

Elfledo was able to but real properties in his name. From one truck, he increased it to 9 trucks, all

trucks were in his name however. He also acquired other motor vehicles in his name.

In 1993, Norberto Uy was killed. In 1995, Elfledo Lim died of a heart attack. Elfledo’s wife, Juliet Lim,

took over the properties but she intimated to Jimmy and the heirs of Norberto that she could not go on

with the business. So the properties in the partnership were divided among them.

Now the other heirs of Jose Lim, represented by Elenito Lim, required Juliet to do an accounting of all

income, profits, and properties from the estate of Elfledo Lim as they claimed that they are co-ownersthereof. Juliet refused hence they sued her.

The heirs of Jose Lim argued that Elfledo Lim acquired his properties from the partnership that Jose

Lim formed with Norberto and Jimmy. In court, Jimmy Yu testified that Jose Lim was the partner and

not Elfledo Lim. The heirs testified that Elfledo was merely the driver of Jose Lim.

ISSUE: Who is the “partner” between Jose Lim and Elfledo Lim?

HELD: It is Elfledo Lim based on the evidence presented regardless of Jimmy Yu’s testimony in courtthat Jose Lim was the partner. If Jose Lim was the partner, then the partnership would have been

dissolved upon his death (in fact, though the SC did not say so, I believe it should have been dissolvedupon Norberto’s death in 1993). A partnership is dissolved upon the death of the partner. Further, no

evidence was presented as to the articles of partnership or contract of partnership between Jose,

Norberto and Jimmy. Unfortunately, there is none in this case, because the alleged partnership was

never formally organized.

But at any rate, the Supreme Court noted that based on the functions performed by Elfledo, he is the

actual partner.

The following circumstances tend to prove that Elfledo was himself the partner of Jimmy and

Norberto:

1.) Cresencia testified that Jose gave Elfledo P50,000.00, as share in the partnership, on a date thatcoincided with the payment of the initial capital in the partnership;

2.) Elfledo ran the affairs of the partnership, wielding absolute control, power and authority, without

any intervention or opposition whatsoever from any of petitioners herein;

3.) all of the properties, particularly the nine trucks of the partnership, were registered in the name of

Elfledo;4.) Jimmy testified that Elfledo did not receive wages or salaries from the partnership, indicating that

what he actually received were shares of the profits of the business; and

5.) none of the heirs of Jose, the alleged partner, demanded periodic accounting from Elfledo duringhis lifetime. As repeatedly stressed in the case of Heirs of Tan Eng Kee, a demand for periodic

accounting is evidence of a partnership.

Furthermore, petitioners failed to adduce any evidence to show that the real and personal properties

acquired and registered in the names of Elfledo and Juliet formed part of the estate of Jose, having

been derived from Jose’s alleged p artnership with Jimmy and Norbert o.

Elfledo was not just a hired help but one of the partners in the trucking business, active and visible inthe running of its affairs from day one until this ceased operations upon his demise. The extent of his

control, administration and management of the partnership and its business, the fact that its

properties were placed in his name, and that he was not paid salary or other compensation by thepartners, are indicative of the fact that Elfledo was a partner and a controlling one at that. It is

apparent that the other partners only contributed in the initial capital but had no say thereafter on

how the business was ran. Evidently it was through Elfredo’s efforts and hard work that the

partnership was able to acquire more trucks and otherwise prosper. Even the appellant participated inthe affairs of the partnership by acting as the bookkeeper sans salary.

8. ARBES VS. POLISTICO

FACTS:

This is an action to bring about liquidation of the funds and property of the association called

"Turnuhan Polistico & Co." The plaintiffs were members or shareholders, and the defendants weredesignated as president-treasurer, directors and secretary of said association. By agreement of the

parties, the court appointed a commissioner to examine all the books, documents, and accounts of

"Turnuhan Polistico & Co. The commissioner rendered his report, showing a balance of the cash onhand in the amount of P24,607.80. The trial court in accepting the report, rendered judgment, holding

that the association "Turnuhan Polistico & Co." is unlawful, and sentencing the defendants jointly and

severally to return the amount of P24,607.80, as well as the documents showing the uncollected

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credits of the association, to the plaintiffs in this case, and to the rest of the members of the saidassociation represented by said plaintiffs.

There is no question that "Turnuhan Polistico & Co." is an unlawful partnership, but the appellants

allege that because it is so, some charitable institution to whom the partnership funds may be orderedto be turned over, should be included, as a party defendant. The appellants refer to article 1666 of the

Civil Code, particularly the second paragraph, which provides: “When the dissolution of an unlawful

partnership is decreed, the profits shall be given to charitable institutions of the domicile of the

partnership, or, in default of such, to those of the province.”

ISSUE: WHETHER OR NOT A CHARITABLE INSTITUTION IS A NECESSARY PARTY IN THIS CASE.

RULING: NO, no charitable institution is a necessary party in the present case of determination of therights of the parties. The action, which may arise from said article, in the case of unlawful partnership,

is that for the recovery of the amounts paid by the member from those in charge of the administration

of said partnership, and it is not necessary for the said parties to base their action to the existence of

the partnership, but on the fact that of having contributed some money to the partnership capital.

Hence, the charitable institution of the domicile of the partnership, and in the default thereof, those ofthe province is not necessary parties in this case.

In so ruling, the court had the occasion of explaining the scope and spirit of the provision of Article1666 of the Civil Code (now Article 1770 of the New Civil Code).

With regard to Contributions of an Illegal Partnership: the court holds that –

(1) The partner who limits himself to demanding only the amount contributed by him need not resort

to the partnership contract on which to base his action sincesaid contract does not exist in the eyes ofthe law, the purpose from which the contribution was made has not come into existence, and the

administrator of the partnership holding said contribution retains what belongs to others, without anyconsideration; for which reason he is not bound to return it and he who has paid in his share is

entitled to recover it.

(2) Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts

contributed are to be returned by the partners, because it only deals with the disposition of the profits;

but the fact that said contributions are not included in the disposal prescribed profits, shows that in

consequences of said exclusion, the general law must be followed, and hence the partners shouldreimburse the amount of their respective contributions.

(3) Any other solution is immoral, and the law will not consent to the latter remaining in the

possession of the manager or administrator who has refused to return them, by denying to thepartners the action to demand them. With regard to Profits of an Illegal Partnership: the court holdsthat –

(1) The article cited above permits no action for the purpose of obtaining the earnings made by theunlawful partnership, during its existence as result of the business in which it was engaged, because

for the purpose, the partner will have to base his action upon the partnership contract, which is to

annul and without legal existence by reason of its unlawful object; and it is self evident that what doesnot exist cannot be a cause of action.

(2) Profits earned in the course of the partnership, because they do not constitute or represent the

partner's contribution but are the result of the industry, business or speculation which is the object of

the partnership, and therefor, in order to demand the proportional part of the said profits, the partner

would have to base his action on the contract which is null and void, since this partition or distributionof the profits is one of the juridical effects thereof.

(3) Furthermore, it would be immoral and unjust for the law to permit a profit from an industry

prohibited by it.

9. WOODHOUSE VS. HALILI

FACTS: On November 29, 1947, plaintiff Woodhouse entered into a written agreement with defendant

Halili stating among others that: 1) that they shall organize a partnership for the bottling and

distribution of Mission soft drinks, plaintiff to act as industrial partner or manager, and the defendant

as a capitalist, furnishing the capital necessary therefore; 2) that plaintiff was to secure the Mission

Soft Drinks franchise for and in behalf of the proposed partnership and 3) that the plaintiff was toreceive 30 per cent of the net profits of the business.

Prior to entering into this agreement, plaintiff had informed the Mission Dry Corporation of LosAngeles, California, that he had interested a prominent financier (defendant herein) in the business,

who was willing to invest half a million dollars in the bottling and distribution of the said beverages,

and requested, in order that he may close the deal with him, that the right to bottle and distribute begranted him for a limited time under the condition that it will finally be transferred to the corporation.

Pursuant to this request, plaintiff was given “a thirty days’ option on exclusive bottling and

distribution rights for the Philippines”. The contract was finally signed by plaintiff on December 3,1947.

When the bottling plant was already in operation, plaintiff demanded of defendant that the

partnership papers be executed. Defendant Halili gave excuses and would not execute said agreement,

thus the complaint by the plaintiff.

Plaintiff prays for the : 1.execution of the contract of partnership; 2) accounting of profits and 3)share

thereof of 30 percent with 4) damages in the amount of P200,000. The Defendant on the other hand

claims that: 1) the defendant’s consent to the agreement, was secured by the representation ofplaintiff that he was the owner, or was about to become owner of an exclusive bottling franchise,

which representation was false, and that plaintiff did not secure the franchise but was given to

defendant himself 2) that defendant did not fail to carry out his undertakings, but that it was plaintiff

who failed and 3)that plaintiff agreed to contribute to the exclusive franchise to the partnership, but

plaintiff failed to do so with a 4) counterclaim for P200,00 as damages.The CFI ruling: 1) accounting of profits and to pay plaintiff 15 % of the profits and that the 2)

execution of contract cannot be enforced upon parties. Lastly, the 3) fraud wasn’t proved

ISSUES

1. WON plaintiff falsely represented that he had an exclusive franchise to bottle Mission beverages2. WON false representation, if it existed, annuls the agreement to form th e partnership

HELD

1. Yes. Plaintiff did make false representations and this can be seen through his letters to Mission DryCorporation asking for the latter to grant him temporary franchise so that he could settle the

agreement with defendant. The trial court reasoned, and the plaintiff on this appeal argues, that

plaintiff only undertook in the agreement “to secure the Mission Dry franchise for and in behalf of theproposed partnership.” The existence of this provision in the final agreement does not milit ate against




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plaintiff having represented that he had the exclusive franchise; it rather strengthens belief that he didactually make the representation. The defendant believed, or was made to believe, that plaintiff was

the grantee of an exclusive franchise. Thus it is that it was also agreed upon that the franchise was to

be transferred to the name of the partnership, and that, upon its dissolution or termination, the same

shall be reassigned to the plaintiff.

Again, the immediate reaction of defendant, when in California he learned that plaintiff did not have

the exclusive franchise, was to reduce, as he himself testified, plaintiff’s participation in the net profits

to one half of that agreed upon. He could not have had such a feeling had not plaintiff actually madehim believe that he(plaintiff) was the exclusive grantee of the f ranchise.

2. No. In consequence, article 1270 of the Spanish Civil Code distinguishes two kinds of (civil) fraud, the

causal fraud, which may be ground for the annulment of a contract, and the incidental deceit, whichonly renders the party who employs it liable for damages only. The Supreme Court has held that in

order that fraud may vitiate consent, it must be the causal (dolo causante), not merely the incidental

(dolo incidente) inducement to the making of the contract.

The record abounds with circumstances indicative of the fact that the principal consideration, themain cause that induced defendant to enter into the partnership agreement with plaintiff, was the

ability of plaintiff to get the exclusive franchise to bottle and distribute for the defendant or for the

partnership. The original draft prepared by defendant’s counsel was to the effect that plaintiffobligated himself to secure a franchise for the defendant. But if plaintiff was guilty of a false

representation, this was not the causal consideration, or the principal inducement, that led plaintiff to

enter into the partnership agreement. On the other hand, this supposed ownership of an exclusivefranchise was actually the consideration or price plaintiff gave in exchange for the share of 30 per cent

granted him in the net profits of the partnership business. Defendant agreed to give plaintiff 30 per

cent share in the net profits because he was transferring his exclusive franchise to the partnership.Having arrived at the conclusion that the contract cannot be declared null and void, may the

agreement be carried out or executed? The SC finds no merit in the claim of plaintiff that thepartnership was already a fait accompli from the time of the operation of the plant, as it is evident

from 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. , The defendant may not be compelledagainst his will to carry out the agreement nor execute the partnership papers. 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.

Dispostive Postion: With modification above indicated, the judgment appealed from is herebyaffirmed.

10, LITONJUA JR. VS. LITONJUA SR.

Aurelio and Eduardo are brothers. In 1973, Aurelio alleged that Eduardo entered into a contract of

partnership with him. Aurelio showed as evidence a letter sent to him by Eduardo that the latter isallowing Aurelio to manage their family business (if Eduardo’s away) and in exchange thereof he will

be giving Aurelio P1 million or 10% equity, whichever is higher. A memorandum was subsequentlymade for the said partnership agreement. The memorandum this time stated that in exchange of

Aurelio, who just got married, retaining his share in the family business (movie theatres, shipping and

land development) and some other immovable properties, he will be given P1 Million or 10% equity inall these businesses and those to be subsequently acquired by them whichever is greater.

In 1992 however, the relationship between the brothers went sour. And so Aurelio demanded an

accounting and the liquidation of his share in the partnership. Eduardo did not heed and so Aureliosued Eduardo.

ISSUE: Whether or not there exists a partnership.

HELD: No. The partnership is void and legally nonexistent. The documentary evidence presented by

Aurelio, i.e. the letter from Eduardo and the Memorandum, did not prove partnership.

The 1973 letter from Eduardo on its face, contains typewritten entries, personal in tone, but is

unsigned and undated. As an unsigned document, there can be no quibbling that said letter does not

meet the public instrumentation requirements exacted under Article 1771 (how partnership isconstituted) of the Civil Code. Moreover, being unsigned and doubtless referring to a partnership

involving more than P3,000.00 in money or property, said letter cannot be presented for notarization,

let alone registered with the Securities and Exchange Commission (SEC), as called for un der the Article

1772 (capitalization of a partnership) of the Code. And inasmuch as the inventory requirement underthe succeeding Article 1773 goes into the matter of validity when immovable property is contributed

to the partnership, the next logical point of inquiry turns on the nature of Aurelio’s contribution, if any,

to the supposed partnership.

The Memorandum is also not a proof of the partnership for the same is not a public instrument andagain, no inventory was made of the immovable property and no inventory was attached to the

Memorandum. Article 1773 of the Civil Code requires that if immovable property is contributed to the

partnership an inventory shall be had and attached to the contract.

Case Digests for Partnership

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