The Concept of ‘The Contract of Partnership’ and the Requisite of Valid Consideration
| SUBJECT: The Concept of ‘The Contract of Partnership’ and the Requisite of Valid Consideration |
I. Introduction
This memorandum provides an exhaustive analysis of the contract of partnership under Philippine civil law, with a specific focus on the requisite of valid consideration. The inquiry centers on whether the contract of partnership, as a consensual and nominate contract, requires consideration in the common law sense, or if its binding force emanates from the mere confluence of the essential requisites prescribed by the Civil Code. This research clarifies the foundational principles governing the formation of partnerships and distinguishes the civil law concept of cause from the common law doctrine of consideration.
II. Statement of Issues
The primary issues for resolution are:
III. Applicable Laws and Doctrines
Article 1767 of the Civil Code*: “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.”
Articles 1305-1306, Civil Code*, on the definition and requisites of contracts in general.
Article 1350, Civil Code*: “In onerous contracts the cause is understood to be, for each contracting party, the prestation or promise of a thing or service by the other; in remuneratory ones, the service or benefit which is remunerated; and in contracts of pure beneficence, the mere liberality of the benefactor.”
Article 1771, Civil Code*: “A partnership may be constituted in any form, except where immovable property or real rights are contributed, in which case a public instrument shall be necessary.”
The doctrine enunciated in Tuason v. Bolanos, 95 Phil. 106 (1954), regarding the consensuality of the contract of partnership*.
The distinction between cause and consideration as discussed in Padilla v. Paredes*, 29 SCRA 134 (1969).
IV. Discussion of the Essential Elements of a Contract of Partnership
Pursuant to Article 1767, the contract of partnership has the following essential elements: (1) consent of the contracting parties, (2) object which is the establishment of a common fund or patrimony, and (3) cause which is the mutual undertaking to contribute to that common fund and to share in the resulting profits. The partnership is a consensual contract; it is perfected by mere consent, upon the express or implied agreement to place money, effects, labor, and skill in lawful commerce or business with the understanding that there shall be a proportional sharing of the profits and losses. The contributions—whether money, property, or industry—constitute the very object of the contract and are integral to its cause. The law does not prescribe a specific form for its validity, save for the exception in Article 1771 when immovable property is contributed.
V. The Requisite of Valid Consideration: An Analysis
The common law doctrine of consideration—defined as “something of value” given in exchange for a promise, which renders the promise enforceable—is not a requisite for the validity of contracts under the Philippine Civil Code. The Philippine legal system, being civil law in origin, adheres to the principle of cause or causa. Therefore, a contract of partnership does not require consideration in the common law sense. Its binding effect is derived from the presence of the essential elements of consent, object, and cause. The mutual promises of the partners to contribute to the common fund and to share in the profits constitute the cause of the contract. This reciprocal prestation is what validates the agreement and distinguishes it from a gratuitous promise. Each partner’s promise to contribute serves as the cause for the promise of every other partner. Consequently, the absence of consideration is not a ground to invalidate a partnership agreement, provided its cause is present, lawful, and not contrary to law, morals, good customs, public order, or public policy as mandated by Article 1352 of the Civil Code.
VI. The Role of Contributions as the Cause
In a contract of partnership, the cause is onerous and reciprocal. Article 1350 provides that in onerous contracts, the cause for each party is the prestation or promise of the other. Applied to partnerships, Partner A’s cause for binding himself is the prestation of Partner B (and all other partners) to contribute their respective shares to the common fund and to work towards the common economic objective. The contributions are not mere consideration; they are the very substance of the contractual prestations that define the partnership’s purpose. The cause is thus inherent in the structure of the agreement: the mutual desire to engage in business for mutual profit. If a partner fails to make his stipulated contribution, he fails in his prestation, which is a breach of the contract and a violation of his fiduciary duty, not a failure of consideration that voids the contract ab initio.
VII. Comparative Table: Cause vs. Consideration
| Aspect | Cause (Civil Law) | Consideration (Common Law) |
|---|---|---|
| Juridical Function | The essential and determining reason for the contract; the why of the obligation. | The price, motive, or inducement for the promise; the quid pro quo. |
| Requirement for Validity | An absolute requisite for all contracts. Without a lawful cause, the contract is void. | A requisite for simple contracts. Contracts under seal (deeds) may not require it. |
| Nature | Abstract and juridical. Focuses on the typology of contracts (onerous, remuneratory, gratuitous). | Concrete and economic. Focuses on the exchange of value, benefit, or detriment. |
| Motive vs. Cause | Distinguished. The specific, personal motive of a party is not the cause. The cause is the immediate, direct, and typical reason for the contract. | Often conflated with motive. The adequacy of consideration is generally not inquired into, but it must be of some value. |
| In Gratuitous Contracts | Present. The cause is the liberality or animus donandi of the benefactor (Article 1350). | Absent. Gratuitous promises require a deed or reliance under promissory estoppel to be enforceable. |
| Effect of Illegality | An unlawful cause renders the contract void (Article 1409). | Illegal consideration renders the contract unenforceable. |
| Application to Partnership | The mutual promises to contribute and share profits constitute the reciprocal cause. | The contributions (money, property, industry) are viewed as the consideration for each other’s promises. |
VIII. Relevant Jurisprudence
The Supreme Court has consistently upheld the consensual nature of partnership and the irrelevance of the common law consideration. In Tuason v. Bolanos, the Court held that a partnership is created by the contract of the parties, not by the contribution of capital. The agreement to share profits is the controlling element. In Padilla v. Paredes, the Court explicitly differentiated cause from consideration, stating that “the cause of the contract… is not the same as consideration in the common law.” The Court further explained that cause is the essential reason for the contract, while consideration is the material object of the contract. This distinction underscores that the validity of a contract of partnership rests on its cause, not on the technicalities of consideration.
IX. Conclusion
A contract of partnership under Philippine law is a consensual, onerous, and nominate contract perfected by the mere consent of the parties. It does not require valid consideration in the common law sense as a distinct element for its validity. Its binding force is derived from the presence of its essential elements: the consent of the partners, the object of establishing a common fund, and a lawful cause. The cause in a partnership is the mutual and reciprocal undertaking of the partners to contribute money, property, or industry and to divide the profits among themselves. This cause fulfills the civil law requirement and renders the common law doctrine of consideration inapplicable.