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Partnership Atty. Delson

Can a corporation enter into a contract of partnership? Why or Why not?

Partnership, as defined by the New Civil Code, particularly Article 1767, is formed when two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of dividing the profits among themselves.

Corporation, on the other hand, defined in the Corporation Code of the Philippines, particularly Section 1 of Title 1, is an artificial being created by operation of law, having the right of succession and the powers, attributes and properties expressly authorized by law or incident to its existence.

Based on the above-mentioned definitions of partnership and corporation, it may be deduced that there is no conflict as to a corporation entering into a contract of partnership. A partnership, in order to exist needs, among others, at least two persons; without specification as to whether it is natural or artificial. Ubi lex non distinguit, nec nos dissinguere debemus or where the law does not distinguish, we ought not to distinguish. Hence, a corporation treated as an artificial being or person by law, falls within the purview of partnership, thus may enter into such contract.

However, our Supreme Court, in a number of cases1, has upheld the doctrine that unless authorized by statute or by its charter, a corporation is without capacity or power to enter into a contract of partnership. This limitation is based on public policy since in a partnership the corporation would be bound by the acts of persons who are not its duly appointed and authorized agents and officers, which would be entirely inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively.2 It is also worthy to note that a partnership is created by mere agreement of the parties and may be established for any period of time stipulated by the partners while a corporation is created by law or by operation of law wherein its existence is limited by law to a term of 50 years extendible to not more than 50 years in any one instance. Therefore, a corporation, being limited by law in its existence is also limited in its right to enter into a partnership agreement whereby the existence of the latter is not limited by any law and is only dependent upon the parties. Should the law allow a corporation to enter into a contract of partnership dependent upon its will, it will thus permit the same to stipulate with a partner any number of years which may be in excess to what the law grants a corporations existence. In addition, management of a partnership, if not agreed upon, lies in every partner for they are agents of each other. In a corporation, management is vested upon the Board of Directors, therefore not a singular person, hence, if a corporation must enter into a partnership agreement, the corporation in itself cannot be an agent of its partners since it is controlled by a group of directors acting not as one but separately for the benefit of their corporation. A corporation cannot manage, control or be an agent of a partner without the Board of Directors. It is logical therefore that the Board of Directors, in its personal capacity, enter into a partnership agreement, and not the corporation itself.

But like all general rule, this doctrine is not without exception. As enunciated in the case of Tuason vs. Bolanos,

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Tuason vs. Bolanos 95 Phil 106, Philex Mining Corporation vs. Commissioner of Internal Revenue G.R. 148187 Comments and Cases on Partnership, Agency and Trusts 2010 Edition, De Leon, De Leon Jr.

x x x on the theory that it is illegal for two corporations to enter into a partnership is without merit, for the true rule is that "though a corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter.

It was also held in the case of Philex Mining Corporation vs. Commissioner of Internal Revenue that,

While a corporation, like petitioner, cannot generally enter into a contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin to a particular partnership The legal concept of a joint venture is of common law origin. It has no precise legal definition, but it has been generally understood to mean an organization formed for some temporary purpose. It is in fact hardly distinguishable from the partnership, since their elements are similar community of interest in the business, sharing of profits and losses, and a mutual right of control. The main distinction cited by most opinions in common law jurisdictions is that the partnership contemplates a general business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of a temporary nature. This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may be particular or universal, and a particular partnership may have for its object a specific undertaking. It would seem therefore that under Philippine law, a joint venture is a form of partnership and should be governed by the law of partnerships. The Supreme Court has however recognized a distinction between these two business forms, and

has held that although a corporation cannot enter into a partnership contract, it may however engage in a joint venture with others.3

Hence, the exception to the general rule that a corporation is without power to enter into a contract of partnership is when it enters into a joint venture with another where the nature of that venture is in line with the business authorized by its charter.

There is no general principle of law which prevents a corporation from being a partner with another corporation or with ordinary individuals, except the principle that a corporation cannot lawfully employ its funds for purposes not authorized by its constitution. Having regard, however, to this principle, it may be considered as prima facie ultra vires for an incorporated company to enter into partnership with other persons.4

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Aurbach v. Sanitary Wares Manufacturing Corporation, G.R. No. 75875

Lindley on Partnership http://statutelaw.blogspot.com/2011/03/54-can-company-bepartner-in-other.html