Pastor vs. Gaspar

A contract whereby one party furnishes money to another, with the latter binding itself to repay the amount and pledging specific property as security, while sharing profits and losses from the property's exploitation, is a loan and not a partnership where the parties' intention, as shown by the contract's terms, was to avoid creating a partnership. As between the parties themselves, they may contract freely, taking provisions from the law of partnership and the law of loans, provided the contract is not illegal.

The parties were connected through a business arrangement involving the steam launch Luisa, owned by the partnership "Nicasio and Gaspar," composed of Macario Nicasio and defendant Manuel Gaspar. In November 1900, desiring to expand their business, Nicasio and Gaspar entered into a contract with the plaintiff, the defendants Eguia, Iboleon, and Monserrat, and one Hermoso, whereby the latter parties furnished 28,000 pesos as a loan for the purchase of six lorchas. The contract was executed against the backdrop of the Civil Code provisions on contracts and partnership, with the parties seeking to structure their relationship in a manner that would not make the investors partners.

In November 1900, there existed in Manila a partnership composed of Macario Nicasio and the defendant Gaspar under the name "Nicasio and Gaspar," which owned the steam launch Luisa, its only business relating to this launch. Desiring to increase this business, on November 24, 1900, a contract was made between the firm of Nicasio and Gaspar on one side, and on the other side the plaintiff, the defendants Eguia, Iboleon, and Monserrat, and one Hermoso. The contract recited that Nicasio and Gaspar had enlarged the business of their partnership, bought six lorchas, and that, needing money to pay for the lorchas and necessary repairs, the parties of the second part furnished them 28,000 pesos as a loan, the amount furnished by each being named.

The fifth clause of the contract provided that the partnership of Nicasio and Gaspar undertook to return the total sum of 28,000 pesos within ten years, pledging the lorchas Pepay, Lola, Consuelo, India, Niceta, and Castellana to guarantee payment, ceding and assigning to the parties the profits and gains realized from the exploitation of the vessels in like proportions. The clause further stated that the vessels were to be the property of all parties proportionate with their investments, that management of the vessels during the time the debt remained unpaid would remain with the partnership of Nicasio and Gaspar, that neither the partnership nor the parties of the first part would be responsible for payment of the debt except insofar as the vessels would respond therefor, that injuries to and losses of the lorchas would be shared by all parties, and that the parties of the first part bound themselves not to encumber or pledge the vessels while the debt remained unsatisfied. The seventh clause provided that the launch Luisa was not included in the contract.

It was alleged in the complaint, and not denied by the answer, that the contract of November 24, 1900, was in July 1901 dissolved and terminated, and the lorchas sold by mutual consent. The plaintiff claimed that there was actually a partnership between the parties and that the consent of his agent to the dissolution and sale was obtained by fraud of the defendants. The plaintiff also claimed that even if the transaction was a loan, it could not be terminated without his consent until the expiration of the ten-year period, and that there was a verbal agreement that the parties should be partners. The trial court refused to allow the plaintiff to testify regarding verbal agreements, refused to receive a letter written by Hermoso to the plaintiff, and excluded several other pieces of evidence, to which the plaintiff excepted.

• Existence of Partnership: Plaintiff claimed that the contract of November 24, 1900, created a partnership between the parties, pointing to provisions that he was to share in the profits and losses of the business and that Nicasio and Gaspar should answer for the payment of the debt only with the lorchas and not with their own property.
• Verbal Agreement: Plaintiff claimed that even if the contract itself did not make the parties partners, there was a verbal agreement that they should be partners, and that the trial court erred in refusing to allow him to testify regarding these verbal agreements.
• Ten-Year Period: Plaintiff claimed that even if the transaction was a loan, it could not be terminated without his consent until the expiration of the ten-year period, citing Article 1127 of the Civil Code.
• Fraud in Dissolution: Plaintiff claimed that the dissolution of the partnership and the sale of the lorchas were obtained by fraud of the defendants, and that his agent's consent to the dissolution was procured through such fraud.
• Evidentiary Errors: Plaintiff assigned as error the trial court's refusal to admit certain evidence, including a letter from Hermoso, testimony regarding who was entrusted with the purchase of the lorchas, and questions directed to witnesses Nicasio and Joaquin Salvador.

• Nature of the Contract: Defendants maintained that the contract was a loan, not a partnership, pointing to the express stipulations that the money was furnished "as a loan," that Nicasio and Gaspar bound themselves to repay the amount, and that a pledge was created over the lorchas.
• Consent to Dissolution: Defendants argued that the plaintiff, through his agent, consented to the dissolution of the contract and the sale of the lorchas, and that no fraud was shown in obtaining such consent.

• Existence of Partnership: Whether the contract of November 24, 1900, created a partnership between the parties or merely a creditor-debtor relationship.
• Ten-Year Period: Whether the ten-year period for repayment of the loan was for the benefit of both the creditor and the debtor, such that the contract could not be terminated before its expiration without the plaintiff's consent.
• Admissibility of Parol Evidence: Whether the trial court erred in refusing to allow the plaintiff to testify regarding verbal agreements allegedly made prior to the execution of the written contract.
• Admissibility of the Hermoso Letter: Whether the trial court erred in refusing to receive in evidence a letter written by Hermoso to the plaintiff.
• Admissibility of Other Evidence: Whether the trial court erred in excluding questions to Lino Eguia, Nicasio, and Joaquin Salvador.
• Fraud in Dissolution: Whether the dissolution of the contract and the sale of the lorchas were obtained by fraud of the defendants.

• Existence of Partnership: No. The contract of November 24, 1900, created a creditor-debtor relationship, not a partnership, as the express terms of the contract indicated a loan secured by a pledge.
• Ten-Year Period: No. The ten-year period was for the benefit of the debtors alone, as the contract's provisions allowing them to sell the property upon repayment indicated that the period could be shortened by payment.
• Admissibility of Parol Evidence: No. The trial court correctly excluded parol evidence of verbal agreements, as Section 285 of the Code of Civil Procedure prohibits parol evidence as to terms not contained in the writing.
• Admissibility of the Hermoso Letter: No. The trial court correctly excluded the letter, as the plaintiff should have called Hermoso or other persons as witnesses to prove the facts stated therein.
• Admissibility of Other Evidence: No. The trial court correctly excluded the questions to Eguia, Nicasio, and Salvador, as the plaintiff was not prejudiced by the rulings.
• Fraud in Dissolution: No. The facts admitted in the pleadings showed that the plaintiff had surrendered his rights through his agent's consent, and there was no finding that such surrender was obtained by fraud.

• Existence of Partnership: The Court reasoned that the contract's terms indicated a loan rather than a partnership: (1) the contract twice stated positively that Nicasio and Gaspar were the only partners; (2) the money was furnished "as a loan"; (3) Nicasio and Gaspar bound themselves to repay the amount, which they would not be bound to do under a partnership; (4) a right of pledge was created over the lorchas, inconsistent with partnership; (5) Nicasio and Gaspar were to be considered consignees only as long as they did not pay the debt, indicating they had a right to pay it; (6) they bound themselves not to alienate the lorchas until they had paid the debt, indicating that by paying the debt they could do so; and (7) the launch Luisa was not included in the contract. The Court further noted that the plaintiff believed he could not be a partner because he was a Spanish subject, and that if he had believed the contract made him a partner, he would not have signed it. The Court concluded that the plaintiff wished to secure the rights of a partner without making himself one, and that as between the parties, they could make any contract that pleased them, provided it was not illegal, under Article 1255 of the Civil Code.

• Ten-Year Period: The Court held that Article 1127 of the Civil Code does not say that the period allowed for the performance of an obligation is for the benefit of the creditor as well as the debtor; it says that it shall be so presumed unless the contrary appears. The contrary appeared in the contract's clauses allowing the debtors to sell the lorchas upon payment, which could only be explained on the theory that the period was for the benefit of the debtors alone.

• Admissibility of Parol Evidence: The Court held that the trial court correctly excluded the plaintiff's testimony regarding verbal agreements, as all the rights and obligations verbally agreed to were afterwards embodied in a written instrument, and Section 285 of the Code of Civil Procedure prohibits parol evidence as to other terms not contained in the writing. The Court noted that while evidence of surrounding circumstances is permissible under Section 289, there was no intrinsic ambiguity in the contract requiring explanation.

• Admissibility of the Hermoso Letter: The Court held that the plaintiff could not prove the facts stated in the letter through the letter itself; he should have called Hermoso or other persons as witnesses, giving the defendants the right to cross-examine them, pursuant to Section 381 of the Code of Civil Procedure.

• Admissibility of Other Evidence: The Court held that the question to Eguia was correctly excluded because the documents themselves showed the facts and the plaintiff had already testified without objection on the matter. The question to Nicasio was correctly excluded because the plaintiff could not have been prejudiced, as the witness had already testified that the capital was contributed by the plaintiff. The question to Salvador was correctly excluded because what Salvador would have done was of no importance, and the plaintiff's agent was allowed to testify that he would not have given consent had he known of the defendants' intentions.

• Fraud in Dissolution: The Court held that although the judge should have made a finding on the fraud claim, the omission did not require reversal. The facts admitted by the pleadings showed that the contract was canceled and the arrangement dissolved, and that the plaintiff through his agent consented to the dissolution. There being no finding that such surrender was obtained by fraud, the defendants were entitled to judgment. The Court noted that a majority of the court was of the opinion that the evidence was not sufficient to show any fraud on the part of the defendants.

• Loan vs. Partnership — A contract whereby one party furnishes money to another, with the latter binding itself to repay the amount and pledging specific property as security, while sharing profits and losses from the property's exploitation, is a loan and not a partnership where the parties' intention, as shown by the contract's terms, was to avoid creating a partnership. The Court applied this doctrine by examining the contract's express stipulations—the obligation to repay, the creation of a pledge, and the parties' belief that they could not be partners—to conclude that the transaction was a loan.

• Freedom of Contract (Article 1255, Civil Code) — As between the parties themselves, they could make any contract that pleased them, provided that it was not illegal. They could take some provisions from the law of partnership and others from the law of loans. The Court applied this doctrine to hold that loans with a right to receive a part of the profits in lieu of interest are not uncommon and, as between the parties, such a contract is not one of partnership.

• Parol Evidence Rule (Section 285, Code of Civil Procedure) — Parol evidence is prohibited as to other terms not contained in a written agreement that the parties reduced to writing. The Court applied this doctrine to exclude the plaintiff's testimony regarding verbal agreements, as all the rights and obligations verbally agreed to were embodied in the written contract.

• Period for Performance of Obligations (Article 1127, Civil Code) — The period allowed for the performance of an obligation is presumed to be for the benefit of both the creditor and the debtor, unless the contrary appears. The Court applied this doctrine to hold that the ten-year period in the contract was for the benefit of the debtors alone, as the contract's provisions allowing them to sell the property upon repayment indicated that the period could be shortened by payment.

• "The contract is not clearly drawn, but the following seem to indicate that the transaction was rather a loan than a contract of partnership: (1) In the beginning it is twice stated positively that Nicasio and Gaspar are the only partners and the only persons interested in the partnership of Nicasio and Gaspar." — This passage articulates the Court's primary reasoning for construing the contract as a loan, enumerating the factors that indicated a creditor-debtor relationship rather than a partnership.

• "As between themselves the parties could make any contract that pleased them, provided that it was not illegal (art. 1255, Civil Code). They could, in making this contract, if they chose, take some provision from the law of partnership and others from the law of loans. Loans with a right to receive a part of the profits in lieu of interest are not uncommon. As between the parties, such contract is not one of partnership." — This passage states the controlling doctrine on freedom of contract and the distinction between loans and partnerships, which is central to the Court's holding.

• "The plaintiff undoubtedly wished to secure, as far as he could, the rights of a partner without making himself one." — This passage captures the Court's assessment of the plaintiff's intention in signing the contract, supporting the conclusion that the transaction was a loan rather than a partnership.

• "The facts admitted in the pleadings and stated in the decision showing, therefore, that the plaintiff had surrendered his rights, and there being no finding that such surrender was obtained by fraud, the defendants are, on such admissions and findings, entitled to judgment." — This passage states the Court's reasoning for affirming the judgment despite the lower court's failure to make a finding on the fraud claim.

N/A — The decision does not cite any prior case law.

• Article 1255, Civil Code — The Court applied this provision to hold that as between the parties, they could make any contract that pleased them, provided it was not illegal, and could take provisions from both the law of partnership and the law of loans.
• Article 1127, Civil Code — The Court applied this provision to hold that the period allowed for the performance of an obligation is presumed to be for the benefit of both the creditor and the debtor, unless the contrary appears, and found that the contrary appeared in the contract's terms.
• Article 1665, Civil Code — Cited in the concurring opinion to define a partnership as "a contract by which two or more persons bind themselves to place money, property, or industry in common with the intention of dividing the profits among themselves."
• Section 285, Code of Civil Procedure — The Court applied this provision to exclude parol evidence as to other terms not contained in the written contract.
• Section 289, Code of Civil Procedure — The Court noted that this provision allows a vague and indefinite written contract to be explained by showing surrounding circumstances, but not by showing by parol what the prior agreement in fact was.
• Section 381, Code of Civil Procedure — The Court applied this provision to hold that the plaintiff could not prove the facts stated in the Hermoso letter through the letter itself, but should have called witnesses to testify.
• Section 497, Code of Civil Procedure — Cited in the concurring opinion to hold that the Supreme Court shall not review the evidence taken in the court below nor retry questions of fact, except in certain cases, and that no motion for a new trial was filed in this case.

Arellano, C.J., Torres, Mapa, and McDonough, JJ., concurred in the decision.

• Cooper, J., concurring — Justice Cooper concurred in the decision but on different grounds. He held that the Supreme Court could not review the evidence because no motion for a new trial was filed in the Court of First Instance, as required by Section 497 of the Code of Civil Procedure. He expressed the opinion that the fifth clause of the agreement was sufficient to show that a partnership existed between the parties, as the plaintiff was to share in the profits and losses of the business, which indicated he was a partner. He further held that the fact that the lorchas were to remain the property of Nicasio and Gaspar and were pledged for the return of the 28,000 pesos would not have the effect of changing the nature of the agreement, and that the stipulations contained in the contract were such as might be lawfully made between the parties themselves, though they may not have been binding with respect to third persons.