Yulo vs. Yang Chiao Seng

A written agreement denominated as a partnership is in reality a lease where one party does not contribute capital, does not participate in management, does not share in losses, and merely receives a fixed guaranteed monthly sum for the use of premises she had leased. The requisites of partnership under Article 1767 of the Civil Code—contribution to a common fund and intent to divide profits—must be actually present, not merely recited in a contract used as a subterfuge to evade a prohibition against sublease.

Rosario U. Yulo leased land in Plaza Sta. Cruz, Manila from Emilia Carrion Santa Marina and Maria Carrion Santa Marina under a lease contract that prohibited sublease of the property. Yang Chiao Seng proposed to Yulo the formation of a partnership to operate a theatre on the premises formerly occupied by Cine Oro. The lease contract between Yulo and the landowners contained an express prohibition against subleasing the property, which formed the backdrop for the parties' decision to denominate their arrangement as a "partnership" rather than a lease.

On June 17, 1945, Yang Chiao Seng wrote a letter to Rosario U. Yulo proposing the formation of a partnership to operate a theatre on premises at Plaza Sta. Cruz, Manila formerly occupied by Cine Oro. The principal conditions of the offer were that Yang would guarantee Yulo a monthly participation of ₱3,000 payable quarterly in advance, that the partnership would run from July 1, 1945 to December 31, 1947, and that the partnership would terminate if the land was expropriated, if the owner constructed a permanent building thereon, or if Yulo's right of lease was terminated by the owner. Pursuant to this offer, which Yulo accepted, the parties executed a partnership agreement establishing "Yang & Company, Limited," with capital fixed at ₱100,000—₱80,000 from Yang and ₱20,000 from Yulo. Profits were to be distributed in proportion to capital contribution, and Yulo's liability in case of loss was limited to her capital contribution. In June 1946, the parties executed a supplementary agreement extending the partnership for three years beginning January 1, 1948 to December 31, 1950, with profits to be divided 50-50 and the showhouse building to belong exclusively to Yulo after December 31, 1950.

The land on which the theatre was constructed had been leased by Yulo from Emilia Carrion Santa Marina and Maria Carrion Santa Marina under a contract stipulating an indefinite term but allowing cancellation by either party upon 90 days' written notice after one year. On April 12, 1949, the owners' attorney notified Yulo of the owners' desire to cancel the lease effective July 31, 1949. Yulo and her husband filed a civil action to contest the cancellation, but the Municipal Court of Manila rendered judgment on February 9, 1950 ordering ejectment. The cases were heard jointly in the Court of First Instance, which dismissed Yulo's complaint and declared the lease terminated as of July 31, 1949, fixing reasonable monthly rentals at ₱100. The Court of Appeals affirmed this judgment on April 30, 1955.

On October 27, 1950, Yulo demanded from Yang her share in the profits. Yang refused, stating that upon advice of counsel he had suspended payment because of the pending ejectment suit and that, as a sublessee, he was retaining rentals to cover arrears owed by Yulo to the landowners. Yulo then instituted the present action on May 26, 1954, alleging the existence of a partnership and seeking ₱35,000 as her unpaid profit share from November 1949 to October 1950, ownership of the building after December 31, 1950, ₱5,000 monthly rental thereafter, ₱160,000 in damages, ₱5,000 in exemplary damages, and ₱10,000 in attorney's fees. Yang answered that the real agreement was one of lease, not partnership, and that the partnership was adopted as a subterfuge to circumvent the prohibition against sublease in Yulo's lease with the landowners.

After an initial ex parte hearing at which only plaintiff appeared, the trial court rendered judgment in Yulo's favor, but this was set aside on Yang's motion for reconsideration, he having reasonably believed a joint motion for postponement would be granted due to a possible amicable settlement. A new trial was held, after which the court found that no partnership was created because Yang had not actually contributed the capital stated in the articles of partnership, and that the real agreement was one of lease because Yulo did not share in profits or losses as required by Article 1769 of the Civil Code. The court also found, after ocular inspection, that the supposed lobby of the theatre was too narrow to be used for business purposes under existing Manila ordinances. The complaint and the counterclaim were both dismissed.

• Propriety of New Trial: Petitioner contended that the lower court erred in setting aside its former decision rendered after an ex parte hearing and allowing a new trial, arguing that defendant's absence at the first hearing should not have excused him.
• Admissibility of Evidence: Petitioner argued that the lower court erred in not striking out the evidence offered by the defendant to prove that the relationship between them was one of sublease and not partnership.
• Nature of the Agreement: Petitioner maintained that the written contracts (Exhs. "A," "B," and "C") between the parties constituted a partnership, not a lease, and that the lower court erred in holding otherwise.
• Claim for Profits and Damages: Petitioner claimed ₱41,000 as her share or participation in the business from December 1949, as well as damages for the defendant's refusal to allow use of the theatre lobby and for alleged bad faith and malice.

• True Nature of Agreement: Respondent argued that the real agreement between the parties was one of lease, not partnership, and that the partnership was adopted as a subterfuge to circumvent the prohibition against sublease contained in the contract of lease between the landowners and the plaintiff.
• Fair Rental Value: Respondent denied the claimed rental values and alleged that the fair rental value of the land was only ₱1,100.
• Counterclaim for Damages: Respondent alleged that by reason of an attachment issued against his properties, he suffered damages amounting to ₱100,000.

• Propriety of New Trial: Whether the lower court erred in setting aside its former decision and allowing a new trial after the defendant failed to appear at the initial hearing.
• Admissibility of Evidence: Whether the lower court erred in admitting evidence to prove that the relationship between the parties was one of sublease and not partnership.
• Nature of the Agreement: Whether the written contracts between the parties constituted a partnership or a lease.

• Propriety of New Trial: No. The lower court did not err in setting aside its former judgment, as the parties had agreed to postpone the trial because of a probable amicable settlement, and the defendant's absence was therefore excusable; the setting aside served the interest of justice.
• Admissibility of Evidence: No. The admission of evidence was justified by the express allegation in the defendant's answer that the agreement was one of lease and not partnership, and that the partnership was formed to evade the prohibition against sublease.
• Nature of the Agreement: No. The agreement was a sublease, not a partnership, because the requisites of partnership under Article 1767 of the Civil Code were not satisfied: plaintiff did not contribute capital, did not participate in management, and never demanded an accounting.

• Propriety of New Trial: Because the parties had jointly sought postponement in view of a possible amicable settlement, the plaintiff could not take advantage of the defendant's absence at the time fixed for hearing. The lower court acted within its discretion in setting aside the ex parte judgment, and the final result of the new trial demonstrated that the setting aside was in the interest of justice.

• Admissibility of Evidence: The defendant's answer expressly alleged that the agreement set forth in the complaint was one of lease and not partnership, and that the partnership was adopted as a subterfuge to circumvent the prohibition against sublease in the plaintiff's lease with the landowners. This allegation properly placed the nature of the agreement in issue, justifying the admission of evidence on the point.

• Nature of the Agreement: The requisites of partnership under Article 1767 of the Civil Code are: (1) two or more persons who bind themselves to contribute money, property, or industry to a common fund, and (2) intention on the part of the partners to divide the profits among themselves. None of these requisites were actually satisfied. First, plaintiff did not furnish the supposed ₱20,000 capital. Second, she furnished no help or intervention in the management of the theatre. Third, she never demanded from defendant any accounting of the expenses and earnings of the business—conduct inconsistent with that of a true partner, whose first concern would be to ascertain how the business was progressing, whether expenses were legitimate, and whether earnings were correct. Her sole conduct was to receive ₱3,000 a month, which could only be interpreted as payment for the use of the premises she had leased from the owners. Both parties had acted in accordance with the original letter of defendant of June 17, 1945 (Exh. "A"), which reflected the real contract between them. Furthermore, the original letter expressly stated that the agreement would end upon termination of plaintiff's right to the lease. Because Yulo's lease was judicially terminated as of July 31, 1949, her right to receive the ₱3,000 monthly participation automatically ceased as of that date.

• Requisites of Partnership — Under Article 1767 of the Civil Code, a partnership requires (1) two or more persons who bind themselves to contribute money, property, or industry to a common fund, and (2) intention on the part of the partners to divide the profits among themselves. The Court applied this test to find that neither requisite was actually satisfied: the plaintiff contributed no capital and had no intention to share in profits as a partner, having merely received a fixed guaranteed monthly sum.
• Substance over Form in Characterizing Contracts — The denomination given by the parties to their agreement does not control its legal nature. A contract styled as a "partnership" may be declared a lease where the conduct of the parties and the actual terms of their arrangement demonstrate that no partnership requisites were met. The Court relied on the parties' actual conduct—absence of capital contribution, non-participation in management, and failure to demand accounting—to conclude the agreement was a sublease disguised as a partnership to evade a contractual prohibition against subleasing.

• "The following are the requisites of partnership: (1) two or more persons who bind themselves to contribute money, property, or industry to a common fund; (2) intention on the part of the partners to divide the profits among themselves. (Art. 1767, Civil Code)." — This passage states the controlling legal test the Court applied to determine whether the agreement was a partnership or a lease.
• "Were she really a partner, her first concern should have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was to receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the premises which she had leased from the owners." — This passage articulates the Court's reasoning for rejecting the partnership characterization, emphasizing conduct over contractual labels.
• "Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. 'A'), which shows that both parties considered this offer as the real contract between them." — This passage establishes that the original letter proposal, not the formal articles of partnership, reflected the parties' true agreement.

• Article 1767, Civil Code — Defines the requisites of partnership: (1) two or more persons binding themselves to contribute money, property, or industry to a common fund, and (2) intention to divide profits among themselves. The Court applied this provision as the controlling test, finding that neither requisite was actually satisfied by the parties' conduct.
• Article 1769, Civil Code — Cited by the trial court for the requirement that partners share in both profits and losses. The Court affirmed the trial court's reliance on this provision in concluding that the "guaranteed participation" arrangement belied the existence of a partnership.

Chief Justice Paras, and Justices Padilla, Bautista Angelo, Endencia, and Barrera concurred.