Bastida vs. Menzi & Co., Inc.

A contract whereby one party receives a percentage of net profits as compensation for services does not create a partnership, absent a common fund or an intent to form a partnership. The Court held that the relationship between Bastida and Menzi & Co., Inc. was one of employment, not copartnership, because there was no common fund belonging to the parties as joint owners, and the business belonged exclusively to Menzi & Co., Inc.

Francisco Bastida had experience in mixing and selling fertilizers and approached Menzi & Co., Inc., a corporation organized in 1921 for importing and selling general merchandise including fertilizers, with a proposal to assign his contract with the Philippine Sugar Centrals Agency in exchange for a share of profits. Menzi & Co., Inc. had acquired the fertilizer business, trade-marks, and assets of the old German firm of Behn, Meyer & Co., Ltd. The corporation's business was divided into departments, each managed by a manager receiving a fixed salary and a percentage of profits. The corporation's practice was to charge interest at the bank rate on daily balances to each department.

Francisco Bastida, who had experience in mixing and selling fertilizer, approached Toehl, the manager of the sundries department of Menzi & Co., Inc., in November 1921, offering to assign his contract with the Philippine Sugar Centrals Agency for 1,250 tons of mixed fertilizers and to supervise the mixing of fertilizer and obtain other orders for fifty per cent of the net profits. J.M. Menzi, the general manager, accepted the offer. On January 10, 1922, the corporation gave Bastida a letter confirming his right to 50% of the profits from the Sugar Centrals and Calamba Sugar Estates contracts. The fertilizer business was carried on with the plaintiff supervising the mixing of fertilizers, and interest on drafts for materials was charged to the business as part of the cost of materials.

On April 27, 1922, the parties executed a written contract, Exhibit A, whereby Menzi & Co., Inc. agreed to provide financial aid for the fertilizer business, and Bastida agreed to devote his full time and experience to the business, receiving 35% of the net profits, liquidated on June 30 of each year, with a monthly advance of P300. The contract was for five years. The fertilizer business was carried on after the execution of Exhibit A in practically the same manner as prior thereto, with Bastida's intervention limited to supervising the mixing of fertilizers. The trade-marks used in the sale of fertilizer were registered in the name of Menzi & Co., Inc., and the fees were paid by that company.

White, Page & Co., certified public accountants, audited the books of Menzi & Co., Inc. monthly, and at the end of each year prepared a balance sheet and profit and loss statement of the fertilizer business, which were delivered to Bastida for examination, and after he had an opportunity of verifying them, he approved them without objection and returned them. Bastida collected from Menzi & Co., Inc. as his share of 35% of the net profits the following amounts: 1922 — P1,874.73; 1923 — P30,212.62; 1924 — P101,081.56; 1925 — P35,665.03; 1926 — P27,649.98, totaling P196,483.92, plus his share from January 1 to April 27, 1927, amounting to P34,766.87, making a total of P231,250.79.

Prior to the expiration of the contract, the manager of Menzi & Co., Inc. notified Bastida that the contract for his services would not be renewed. When the contract expired on April 27, 1927, the fertilizer department had on hand materials and ingredients and two Ford trucks of the book value of approximately P75,000, and accounts receivable amounting to P103,000. Menzi & Co., Inc. prepared a balance sheet and profit and loss statement for the period from January 1 to April 27, 1927, as a basis of settlement, but Bastida refused to accept it and filed the present action. Menzi & Co., Inc. proceeded to liquidate the fertilizer business, and the final liquidation was completed in December 1928, with a final balance sheet and profit and loss statement submitted to the plaintiff during the trial. After re-auditing the books, White, Page & Co. found the balance due the plaintiff to be P21,633.20. Bastida employed a certified public accountant, Vernon Thompson, who assumed the parties were partners and reached very different conclusions from the auditors of Menzi & Co., Inc.

• Nature of the Contract: The appellant argued that the trial court erred in holding that the contract Exhibit A constituted a regular collective commercial copartnership rather than a contract of employment.
• Expense Charges: The appellant argued that the trial court erred in finding that Menzi & Co., Inc. had wrongfully charged interest and income taxes to the fertilizer business, and that the plaintiff was entitled to 35% of those amounts.
• Estoppel: The appellant argued that the plaintiff was estopped from questioning the nature of the contract or the propriety of the charges, having approved and signed the balance sheets each year with full knowledge of their contents.
• Tabacalera Contract: The appellant argued that the plaintiff was not entitled to 35% of the net profits from the contract with the Compañia General de Tabacos de Filipinas, as the contract was obtained shortly before the plaintiff's contract expired and was filled after he ceased to work for the corporation.
• Good-Will: The appellant argued that the trial court erred in valuing the good-will of the fertilizer business at P562,312 and awarding the plaintiff 35% thereof, as the trade-marks belonged exclusively to Menzi & Co., Inc.

• Partnership: The plaintiff argued that the contract Exhibit A created a partnership, relying on article 116 of the Code of Commerce, and that the use of the phrase "en sociedad con" in paragraph 6 indicated an intent to form a partnership.
• Fraudulent Charges: The plaintiff alleged that the defendants had conspired to conceal the true status of the business, made false entries in the books of account and yearly balance sheets, and charged undue interest, salaries, income taxes, commissions, and rebates to the partnership.
• Good-Will and Trade-Marks: The plaintiff claimed that the good-will and trade-marks of the fertilizer business had a value of at least P1,000,000, of which 35% belonged to him, and that the defendant corporation continued to use them for its own benefit after the contract expired.

• Nature of the Contract: Whether the contract Exhibit A between Bastida and Menzi & Co., Inc. constituted a contract of partnership or a contract of employment.
• Estoppel: Whether the plaintiff was estopped from questioning the statements of the accounts contained in the balance sheets he had signed and approved.
• Expense Charges: Whether the interest charges and income tax charges made against the fertilizer business were proper and legitimate expenses.
• Tabacalera Contract: Whether the plaintiff was entitled to 35% of the net profits derived from the contract with the Compañia General de Tabacos de Filipinas.
• Good-Will: Whether the plaintiff was entitled to 35% of the value of the good-will and trade-marks of the fertilizer business.

• Nature of the Contract: No. The contract Exhibit A was a contract of employment, not a contract of partnership, because there was no common fund and the business belonged exclusively to Menzi & Co., Inc.
• Estoppel: Yes. The plaintiff was estopped from questioning the statements of the accounts, having approved and signed the balance sheets each year without objection.
• Expense Charges: Yes. The interest charges and income tax charges were proper and legitimate expenses of the fertilizer business.
• Tabacalera Contract: No. The plaintiff was not entitled to 35% of the net profits from the Tabacalera contract, as it was obtained shortly before the plaintiff's contract expired and was filled after he ceased to work for the corporation.
• Good-Will: No. The plaintiff was not entitled to 35% of the value of the good-will and trade-marks, as they belonged exclusively to Menzi & Co., Inc.

• Nature of the Contract: The Court held that under the facts of the case, the relationship established between Menzi & Co., Inc. and the plaintiff was that the plaintiff was to receive 35% of the net profits of the fertilizer business in compensation for his services of supervising the mixing of fertilizers. Neither the provisions of the contract nor the conduct of the parties justified the finding that it was a contract of copartnership. The Court relied on article 116 of the Code of Commerce but found that there was no common fund, that is, a fund belonging to the parties as joint owners or partners. The business belonged to Menzi & Co., Inc., and the plaintiff was working for the corporation. The Court noted that the old rule that sharing profits as profits made one a partner is overthrown. The Court also found that the phrase "en sociedad con" in paragraph 6 of Exhibit A merely meant "in association with" and did not carry the meaning of "in partnership with." The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the corporation obligated itself to pay the plaintiff 35% of net profits, to advance him P300 a month on account of his share of profits, and to grant him permission to absent himself from the Philippines for not more than one year, were found to be utterly incompatible with the claim that the parties intended to form a copartnership.

• Estoppel: The Court held that the charges complained of were the same as those made under the verbal agreement, upon the termination of which the parties made a settlement. The charges were acquiesced in by the plaintiff for years, and it was too late for him to contest them. The Court cited the case of Kriedt vs. E.C. McCullough & Co. (37 Phil., 474), which held that acts done by the parties to a contract in the course of its performance are admissible in evidence upon the question of its meaning, as being their own contemporaneous interpretation of its terms, and that where one of the parties acquiesces in the interpretation placed by the other upon a provision of doubtful application, the party so acquiescing is bound by such interpretation.

• Expense Charges: The Court held that the various items of expense rejected by the trial judge were proper charges and erroneously disallowed, and this would be true even if the parties had been partners. Although Menzi & Co., Inc. agreed to furnish the necessary financial aid for the fertilizer business, it did not obligate itself to contribute any fixed sum as capital or to defray at its own expense the cost of securing the necessary credit. The Court found that the plaintiff was not prejudiced by the interest charges on drafts for materials purchased abroad, as the interest was added to the cost price. The Court also rejected the plaintiff's contention that the corporation should have furnished free of charge such financial assistance as would have made it unnecessary to discount customers' notes.

• Tabacalera Contract: The Court held that the trial court's finding that the plaintiff was entitled to P6,578.38 or 35% of the net profits derived from the contract with the Tabacalera was not justified by the evidence. This contract was obtained by Menzi & Co., Inc. shortly before the plaintiff's contract expired. The plaintiff tried to get the Tabacalera contract for himself. When this contract was filled, the plaintiff had ceased to work for Menzi & Co., Inc., and he had no right to participate in the profits derived therefrom.

• Good-Will: The Court held that the trial court erred in finding the value of the good-will of the fertilizer business to be P562,312, relying on the opinion of the accountant Vernon Thompson, who erroneously assumed that the plaintiff and Menzi & Co., Inc. were partners. The Court found that even if they had been partners, there would have been no good-will to dispose of, as the defendant corporation had a fertilizer business before it entered into any agreement with the plaintiff, and the business was carried on in the name of Menzi & Co., Inc. The trade-marks were not new, belonged to Menzi & Co., Inc., and were registered in its name. The plaintiff had no interest therein on the expiration of his contract.

• Sharing of profits does not create a partnership — The Court applied the rule that the old doctrine that sharing profits as profits made one a partner is overthrown. A contract whereby one party receives a percentage of net profits as compensation for services does not create a partnership absent a common fund or an intent to form a partnership. The Court found that there was no common fund belonging to the parties as joint owners or partners, and the business belonged exclusively to Menzi & Co., Inc.

• Contemporaneous interpretation of contracts — Acts done by the parties to a contract in the course of its performance are admissible in evidence upon the question of its meaning, as being their own contemporaneous interpretation of its terms. Where one of the parties to a contract acquiesces in the interpretation placed by the other upon a provision of doubtful application, the party so acquiescing is bound by such interpretation. The Court applied this doctrine to hold that the plaintiff, having approved and signed the balance sheets each year without objection, was estopped from questioning the charges made against the business.

• "It is now well settled that the old rule that sharing profits as profits made one a partner is overthrown. (Mechem, second edition, p. 89.)" — This passage states the controlling doctrine that sharing profits does not by itself create a partnership, which is central to the Court's holding that the contract was one of employment.

• "It is nowhere stated in Exhibit A that the parties were establishing a partnership or intended to become partners." — This passage supports the Court's finding that the contract did not evidence an intent to form a partnership, a key element in distinguishing employment from partnership.

• "The 7th, 8th, and 9th paragraphs of Exhibit A, whereby the defendant corporation obligated itself to pay to the plaintiff 35 per cent of the net profits of the fertilizer business, to advance to him P300 a month on account of his share of the profits, and to grant him permission during 1923 to absent himself from the Philippines for not more than one year are utterly incompatible with the claim that it was the intention of the parties to form a copartnership." — This passage articulates the Court's reasoning that specific contractual provisions were incompatible with a partnership relationship, forming the basis for the employment classification.

• Kriedt vs. E.C. McCullough & Co., 37 Phil., 474 — Cited as controlling precedent for the doctrine of contemporaneous interpretation of contracts and acquiescence. The Court applied this case to hold that the plaintiff, having approved and signed the balance sheets each year, was estopped from questioning the charges made against the business.

• Lucido vs. Calupitan, 27 Phil., 148 — Cited for the rule that where amended pleadings have been filed, allegations in the original pleadings are admissible but can have no effect unless formally offered in evidence. The Court applied this to reject the trial court's reliance on the defendant corporation's answer to the original complaint.

• Article 116, Code of Commerce — The Court considered this provision, which provides that 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 obtain profit, shall be commercial. The Court found that in the case at bar there was no common fund, and therefore the provision did not apply.

Street, Villamor, and Villa-Real, JJ., concurred. Justice Hull participated in the case but, on account of his absence on leave at the time of the promulgation of the decision, authorized the undersigned to certify that he voted to modify the decision of the trial court as appears in the foregoing decision of this court.