MAURICIO AGAD, PLAINTIFF-APPELLANT VS. SEVERINO MABATO & MABATO & AGAD COMPANY, DEFENDANTS-APPELLEES.

Agad versus Mabato

The Case

This is an appeal by Mauricio Agad from an order of dismissal issued by the Court of First Instance of Davao. Agad sued Severino Mabato and Mabato and Agad Company, alleging that he and Mabato were partners in a fishpond business under a public instrument, that Mabato handled the partnership funds and rendered yearly accounts from 1952 to 1956, and that Mabato refused to render accounts for the years 1957 to 1963. Agad prayed for his share in the profits, for attorney's fees, and for the dissolution of the partnership and the winding up of its affairs by a receiver. The case matters because it fixes the line between a partnership formed to operate a fishpond and one formed to engage in a fishpond business, and it teaches when the inventory requirement for partnerships contributing immovable property does not apply.

Procedural History

Agad filed his complaint against Mabato and Mabato and Agad Company in the Court of First Instance of Davao on June 9, 1964. Mabato answered, admitting the formal allegations but denying the existence of the partnership on the ground that the contract had not been perfected because Agad allegedly failed to give his one thousand peso contribution. Mabato later filed a motion to dismiss, arguing that the complaint states no cause of action and that the lower court had no jurisdiction over the subject matter because the case involves principally the determination of rights over public lands. After due hearing, the lower court granted the motion to dismiss for failure to state a cause of action, holding that the contract of partnership, Annex A, is null and void under Article 1773 of the Civil Code because an inventory of the fishpond referred to in the instrument had not been attached to it. Agad moved for reconsideration, which was denied. He then brought the matter to the Supreme Court for review by record on appeal.

Facts

Agad alleged that he and Mabato were partners in a fishpond business under a public instrument dated August 29, 1952, a copy of which was attached to the complaint as Annex A. Agad contributed one thousand pesos to the capital, with the right to receive fifty percent of the profits. From 1952 up to and including 1956, Mabato, who handled the partnership funds, rendered yearly accounts of the operations of the partnership.

Despite repeated demands, Mabato failed and refused to render accounts for the years 1957 to 1963. Agad then sued for fourteen thousand pesos as his share in the profits for that period, plus one thousand pesos as attorney's fees, and asked for dissolution of the partnership and the winding up of its affairs by a receiver.

Mabato denied the existence of the partnership, claiming that the contract had not been perfected despite the execution of Annex A because Agad had allegedly failed to give his one thousand peso contribution. The lower court dismissed the complaint, ruling that the partnership contract was void under Article 1773 of the Civil Code because no inventory of the fishpond had been attached to the public instrument.

Issues

• Whether or not immovable property or real rights have been contributed to the partnership under consideration, such that Article 1773 of the Civil Code applies and renders the contract of partnership void for lack of an inventory attached to the public instrument.
• Whether or not the order of dismissal should be set aside and the case remanded to the lower court for further proceedings.

Applicable Provisions

Article 1771 of the Civil Code provides:

Article 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

This provision establishes the general rule that a partnership may be constituted in any form, and the exception requiring a public instrument when immovable property or real rights are contributed.

Article 1773 of the Civil Code provides:

Article 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if inventory of said property is not made, signed by the parties, and attached to the Public instrument.

This is the provision the lower court applied in dismissing the complaint, and the provision the Supreme Court construes in this case.

Ruling

On the first issue, the Court held that Article 1773 of the Civil Code is not in point because no immovable property or real right was contributed to the partnership. The Court noted that, as stated in Annex A, the partnership was established to operate a fishpond, not to engage in a fishpond business. None of the partners contributed either a fishpond or a real right to any fishpond. Their contributions were limited to the sum of one thousand pesos each. Paragraph 4 of Annex A provides:

That the capital of the said partnership is Two Thousand (P2,000.00) Pesos Philippine Currency, of which One Thousand (P1,000.00) pesos has been contributed by Severino Mabato and One Thousand (P1,000.00) Pesos has been contributed by Mauricio Agad.

The Court explained that the operation of the fishpond mentioned in Annex A was the purpose of the partnership. Neither the fishpond nor a real right thereto was contributed to the partnership or became part of its capital, even if a fishpond or a real right thereto could become part of its assets. Since no immovable property or real right was contributed, the inventory requirement in Article 1773 does not apply, and the contract of partnership is not void on that ground.

On the second issue, the Court set aside the order appealed from and remanded the case to the lower court for further proceedings, with costs against Severino Mabato.

Doctrine

The inventory requirement in Article 1773 of the Civil Code, which voids a contract of partnership when immovable property is contributed without an inventory signed by the parties and attached to the public instrument, applies only when immovable property or real rights are actually contributed to the partnership or become part of its capital. The purpose for which the partnership is formed is distinct from the contributions made to it. A partnership formed to operate a fishpond, where the partners contribute only cash to the capital, does not fall under Article 1773, even if the fishpond may later become part of the partnership's assets. The controlling test is whether immovable property or real rights were contributed, not whether the partnership's business involves or relates to immovable property.

Disposition

The Supreme Court set aside the order of dismissal and remanded the case to the lower court for further proceedings, with costs against Severino Mabato.

Remember This

The single line worth memorizing is that Article 1773 of the Civil Code voids a partnership for lack of an inventory only when immovable property or real rights are actually contributed to it, not merely because the partnership's purpose involves immovable property. Examiners like to use this case to test the distinction between the purpose of a partnership and the contributions made to it, and to test the applicability of the inventory requirement in Article 1773.