1

Dean CLV on Joint Ventures

[Updated: 14 October 2009]

PHILIPPINE LAW AND PRACTICE ON:

JOINT VENTURES
________________________________________________

1. Introduction
It is fitting that a course in Philippine Partnership Law should end
with the section on joint ventures, for it is in this field where
Supreme Court decisions have become truly transcendent when it
comes to protection of national interests or upholding the sanctity of
contractual commitments, and consequently where the essence of
partnership principles has become more lucent.
Discussions on joint ventures first appeared as a sort-of esoteric
medium of doing business in Philippine jurisprudence, with an
original impression that they were a commercial association
different from partnerships. The tendency has therefore been to
ascribe to joint venture arrangements certain legal allowances that
would never been accepted in the case of strict partnership
arrangements. This partiality for joint venture arrangements,
which still has remnants in sprinkling statutory provisions, may be
attributed to the perception that the joint venture is a more projectoriented medium when compared to the partnership which tends to
be branded with the attributes of primarily being contractual
relationship bounded by the doctrine of delectus personae, and

thereby being more party-oriented, person-oriented or even

personality-oriented.
Although it may not be readily apparent, but joint venture
arrangements have become fairly common medium for doing
business or undertaking projects in the Philippines, both covering
local transactions, when it comes to large infra-structure
undertakings involving the resources of big corporations; or
structuring partnership arrangements between foreign investors and
their local partners in the pursuit of local projects in the Philippines.
The Philippine Government encourages the pursuit of construction
projects and petroleum, coal, geothermal, and other energy
operations under joint venture arrangements. Under the National
Internal Revenue Code of 1997 (NIRC), joint ventures formed for
the purpose of engaging in petroleum, coal, geothermal, and other
energy operations under an operating or service contract with the
Government, or those formed for the purpose of undertaking
construction projects, are exempt from corporate income tax.
Joint venture arrangements have particularly been the more popular
medium when foreign participation is involved in local projects,
since the contractual nature of the arrangement allows the parties
flexibility in adopting special rules and procedures covering their
situations, which would otherwise not be applicable in a
purely corporate vehicle arrangement because of the restrictive
rules of the Corporation Code and jurisprudence on Philippine
Corporate Law.

2. Nature of Joint Venture in Philippine Setting

a. Joint Venture Arrangements
Partnership Law Principles

Primarily

Governed

by

There was a time when joint ventures were treated separately from
partnerships. Take the 1954 decision of Tuason v. Bolaos, 95 Phil.
106 (1954), where the Supreme Court upheld as applicable the old

adage in American Corporate Law that though a corporation has no

power to enter into a partnership, it may nevertheless enter into a
joint venture with another where the nature of that venture is in line
with the business authorized by its charter. (at p. 109, quoting
from Wyoming-Indiana Oil Gas Co., v. Weston, 80 A.L.R.,
1043, citing 2 Fletcher Cyc. of Corp., 1082).Tuason does not explain
why there was a difference in treatment of corporate involvement in
partnerships as compared to that when it come to joint ventures.
If we pursue the position that joint ventures must be treated
differently from partnerships then it can be said that apart from
specific reference in the National Internal Revenue Code, there is no
statutory provision that formally governs directly joint ventures,
although they have been recognized in jurisprudence and
commonplace in commercial ventures. Consequently, joint venture
agreements fall generally within the realm of Contract Law.
Since the prevailing contract rule in the Philippines is that parties to
a contract may establish such stipulations, clauses, terms and
conditions, as they may deem convenient, provided that they are
not contrary to laws, morals, good customs, public order, or public
policy (Article 1306, New Civil Code), no model joint venture
agreements have been published by the Securities and Exchange
Commission (SEC), Board of Investments (BOI), nor any other
authority.
b. Joint Ventures Are a Species of Partnerships
The treatment of joint ventures today has come full circle, in that
the prevailing school of thought in the Philippines is that joint
ventures are a species of the partnerships falling within the
definition under Article 1767 of the New Civil Code, which provides
that when 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, then a partnership is
created.
In Kilosbayan, Inc. v. Guingona, 232 SCRA 110 (1994), the Court
adopted Blacks definition of a joint venture, thus:

Joint venture is defined as an association of persons or companies

jointly undertaking some commercial enterprisegenerally all
contribute assets and share risks. It requires a community of
interest in the performance of the subject matter, a right to direct
and govern the policy connected therewith, and duty, which may be
altered by agreement to share both in profit and losses; the acts of
working together in a joint project. (At pp. 143-44, citingBlacks
Law Dictionary. Reiterated in Information Technology Foundation of
the Philippines v. Commission on Elections, 419 SCRA 141 [2004])
The foregoing definition of a joint venture essentially falls within the
statutory definition of what constitutes a partnership. Other reasons
as to why a joint venture must be considered a species of
partnerships is that the Law on Partnerships provides that 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. (Article 1771, Civil
Code). That means that no special form, even one seeking to
establish a joint venture arrangement, is necessary to give rise to a
partnership.
Following-up on the Kilosbayans definition of a joint venture, the
Court inInformation Technology Foundation of the Philippines v.
Commission of Elections, 419 SCRA 141 (2004), considered a
consortium to be an association of corporations bound in a joint
venture arrangement, and held that the involvement of several
companies in a large project would not constitute them into a
consortium nor a joint venture when nothing shows a community of
interest, a sharing of risks, profits and losses, or even a
representation by them that they have come together in common
venture. The Court found in that case that apart from a short and
unsupported statement by one of the companies that it was
representing a consortium, no evidence was adduced covering a
joint venture agreement, or authority given by the other companies
authorizing the declaring company that to represent or bind them in
a collective basis.

The position that a joint venture is a species of partnerships has

been upheld by the Court in Aurbach v. Sanitary Wares
Manufacturing Corp., 180 SCRA 130 (1989), where it held that:
. . . The main distinction cited by most opinions in common law
jurisdiction is that the partnership contemplates a general business
with some degree of continuity, while the joint venture is formed for
the execution of a single transaction, and is thus of a temporary
nature. . . This observation is not entirely accurate in this
jurisdiction, since under the Civil Code, a partnership may be
particular or universal, and a particular partnership may have for its
object a specific undertaking. (Art. 1783, Civil Code) It would seem
therefore that under Philippine law, a joint venture is a form of
partnership and should thus be governed by the laws of
partnership. (Ibid; emphasis supplied)
Without qualms or equivocation, the Court in JG Summit Holdings,
Inc. v. Court of Appeals, 412 SCRA 10 (2003), treated a joint
venture arrangement as a partnership.
In Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000),
the Court observed that a joint venture is akin to a particular
partnership. InPrimelink Properties and Dev. Corp. v. Lazatin-Magat,
493 SCRA 444 (2006), the Court ruled
When the parties have entered into a Joint Venture Agreement,
they have entered into a joint venture arrangement which is a form
of partnership, and as such is to be governed by the laws on
partnership. (at p. 467)
With joint venture arrangements being clearly classified as a form of
particular partnership, there is no doubt that the incidents imposed
by the Law on Partnerships on every kind of partnership must befall
every joint venture arrangement. Only recently, in Philex Mining
Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008),
although the corporate parties executed the instrument as a Power
of Attorney and referred to themselves as principal and
manager, the Court held that when the essential elements of a

partnership are present, then it would be a joint

arrangement, governed by the Law on Partnership, thus -

venture

An examination of the Power of Attorney reveals that a

partnership or joint venture was indeed intended by the parties.
Under a 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.
While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it
has been held that it may enter into a joint venture which is akin to
a particular partnership relationship: x x x Perusal of the agreement
denominated as the Power of Attorney indicates that the parties
had intended to create a partnership and establish a common fund
for the purpose. They also had a joint interest in the profits of the
business as shown by a 50-50 sharing in the income of the mine.
(at pp. 438-439)
(1) Partnership
Arrangements

Characteristics

of

Joint

Venture

Since a joint venture is a species of partnerships, it would have the

following characteristics of a partnership, thus:
(a) It constitutes a juridical personality separate and distinct from
that of each of the co-venturers. Article 1768, of the New Civil Code
provides specifically that the partnership has a juridical personality
seprate and distinct from that of each of the partners even in case
of failure to comply with the registration requirements of law.
Therefore, a joint venture as a firm can enter into contracts and
own properties in the firms name; (cf Art. 1774, Civil Code)
(b) Each of the co-venturers would be liable with their private
property to the creditors of the joint venture beyond their
contributions to the joint venture; (Arts. 1816, 1817, 1824 to 1826,
and 1839, Civil Code)
(c) Even if a co-venturer transfers his interest to another, the
transferee does not become a co-venturer to the others in the joint

venture unless all the other co-venturers consent. This is in

consonance with the delectus personae principle applicable to
partnerships; (Arts. 1804 and 1813, Civil Code)
(d) Generally, the co-venturers acting on behalf of the joint
venture are agents of joint venture and of each other; (Arts. 1803,
1818 to 1823, Civil Code) and
(e) Death, retirement, insolvency, civil interdiction or dissolution of
a co-venturer dissolves the joint venture. (Art. 1830, Civil Code)
In Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005), the Court
held that a joint venture is hardly distinguishable from, and may be
likened
to,
a
partnership
since
their
elements
are
similar, i.e., community of interests in the business and sharing of
profits and losses; and that being a form of partnership, a joint
venture is generally governed by the law on partnership.
c. Special Treatments Given to Joint Ventures
Jurisprudence, however, has tended to give joint ventures special
treatment not accorded to ordinary partnerships. Philippine
jurisprudence had adopted the prevailing rule in the United States
that a corporation cannot ordinarily enter into partnerships with
other corporations or with individuals. The basis for such prohibition
on corporations is that in entering into a partnership, the identity of
the corporation is lost or merged with that of another and the
direction of the affairs is placed in other hands than those provided
by law of its creation.
The doctrine is grounded on the theory that the stockholders of a
corporation are entitled, in the absence of any notice to the contrary
in the articles of incorporation, to assume that their directors will
conduct the corporate business without sharing that duty and
responsibility with others. (Bautista, Treatise on Philippine
Partnership Law, 1978 Ed., at p. 9)
As discussed previously, Tuason v. Bolaos, 95 Phil. 106 (1954),
recognized in Philippine jurisdiction the doctrine in Anglo-American

jurisprudence that a corporation has no power to enter into a

partnership. Nevertheless, Tuasonruled that a corporation may
validly enter into a joint venture agreement, where the nature of
that venture is in line with the business authorized by its charter.
(Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80
A.L.R., 1043, citing Fletcher Cyc. of Corp., 1082)
Although Tuason does not elaborate on why a corporation may
become a co-venturer or partner in a joint venture arrangement, it
would seem that the policy behind the prohibition on why a
corporation cannot be made a partner does not apply in a joint
venture arrangement. Being only a particular project or
undertaking, when the Board of Directors of a corporation evaluate
the risks and responsibilities involved, they can more or less
exercise their own business judgment is determining the extent by
which the corporation would be involved in the project and the likely
liabilities to be incurred. The situation therefore in a joint venture
arrangement, unlike in an ordinarily partnership arrangement which
may expose the corporation to any and various liabilities and risks
which cannot be evaluated and anticipated by the board, allows the
board to fully bind the corporation to matters essentially within the
boards business appreciation and anticipation.
The previous ruling of the SEC on the matter is that a corporation
cannot enter into a contract of partnership with an individual or
another corporation on the premise that if a corporation enters into
a partnership agreement, it would be bound by the acts of the
persons who are not its duly appointed and authorized agents and
officers, which is entirely inconsistent with the policy in Corporate
Law that the corporation shall be managed by its Board of
Directors. (SEC Opinion, 22 December 1966, SEC FOLIO 19601976, at p. 278; citing 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl.
1950, Sec. 2520).
Later, the SEC provided for a clear exception to the foregoing ruling,
and allowed corporations to enter into partnership arrangements,
provided the following conditions are met: (SEC Opinion, 29
February 1980; SEC Opinion, dated 3 September 1984. Under Sec.

192 of the National Internal Revenue Code, documentary stamps of

P15.00 must be affixed on each proxy)
(a) The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the
corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business
authorized by the charter or articles of incorporation;
(b) The agreement on the articles of partnership must provide that
all the partners shall manage the partnership, and the articles of
partnership must stipulate that all the partners shall be jointly and
severally liable for all the obligations of the partners; and
(c) If it is a foreign corporation, it must obtain a license to transact
business in the country in accordance with the Philippine
Corporation Code.
In one opinion, the SEC clarified that the conditions imposed meant
that since the partners in a partnership of corporations are required
to stipulate that all of them shall manage the partnership and they
shall be jointly and severally liable for all the obligations of the
partnership, it necessarily followed that a partnership of
corporations should be organized as a general partnership. (SEC
Opinion, 23 February 1994, XXVIII SEC Quarterly Bulletin 18 [No. 3,
Sept. 1994] )
Lately, the SEC, realizing that the second condition actually
prevented a corporation from entering into a limited partnership,
which it allowed to do so would then be more congruent with the
policy that the corporation would then not be held liable for its
venture beyond the investments made and determined by its Board
of Directors, and would therefore not be held liable (beyond its
investment) for debts arising from the acts of the general partners,
reconsidered its position and ruled that a corporation may become a
limited partner in a limited partnership, since there is no existing
Philippine law that expressly prohibits a corporation from becoming
a limited partner in a partnership. In effect, the SEC dropped the

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second condition imposed previously. (SEC Opinion, 17 August

1995, XXX SEC Quarterly Bulletin 8 [No. 1, June 1996])

3. Alternative Forms in Structuring a Joint Venture

In Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130
(1989), the Supreme Court discussed background of the use of joint
ventures when it comes to Filipino investors inviting foreign
participation in a local project, and the risks involved, thus
Quite often, Filipino entrepreneurs in their desire to develop the
industrial and manufacturing capacities of a local firm are
constrained to seek the technology and marketing assistance of
huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a
minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance.
However, there is a always the danger from such arrangements.
The foreign group may, from the start, intend to establish its own
sole or monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to
speak. Or the covetousness may come later. As the Philippine firm
enlarges its operations and becomes profitable, the foreign group
undermines the local majority ownership and actively tries to
completely or predominantly take over the entire company. This
undermining of joint ventures is not consistent with fair dealing to
say the least. To the extent that such subversive actions can be
lawfully prevented, the courts should extend protection especially in
industries where constitutional and legal requirements reserve
controlling ownership to Filipino citizens. (at p. 142)
Parties have varied choices of legal forms in planning a joint venture
arrangement, and they can pursue the same through the following
formats:
(a) informal or contractual joint venture arrangement;

11

(b) by partnership arrangement; or

(c) through a joint venture corporation.
a. Informal or Contractual Joint Venture Arrangement
In spite of the peremptory provisions under the Law of Partnerships
that any agreement by which two or more persons bind themselves
to contribute money, property or industry to a common fund (i.e.,
to pursue a business enterprise) with the intention of dividing the
profits among themselves, would necessarily give rise to a
partnership (Article 1767, New Civil Code), and thereby a
partnership juridical personality arises separate and distinct from
that of the partners, (Article 1768, New Civil Code), nonetheless, in
cases of corporations which come together in co-venture over a
particular project, there has been in implicit recognition that such a
venture can be pursued merely as a private enterprise with no
intention to present a new or separate firm or company, and
much less a new juridical person, to the public.
Thus, in Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740
(2000), after the Court held that a joint venture is akin to a
particular partnership, it distinguished one from the other as
follows:
(a) A joint adventure (an American concept similar to our joint
accounts) is a sort of informal partnership, with no firm name and
no legal personality. In a joint account, the participating merchants
can transact business under their own name, and can be individually
liable therefore.
(b) Usually, but not necessarily a joint adventure is limited to a
SINGLE TRANSACTION, although the business of pursuing to a
successful termination may continue for a number of years; a
partnership generally relates to a continuing business of various
transactions of a certain kind. (At p. 753, citing V.E. PARAS, CIVIL
CODE OF THE PHILIPPINES ANNOTATED 546 [13th ed., 1995];
underscoring supplied)

12

In such an instance, a Joint Venture Agreement or a

Memorandum of Agreement is executed by the co-venturers to
provide for the terms of arrangement, but the business enterprise
will be pursued in the names of the co-venturers through their duly
authorized representatives. No separate company office is set-up,
no separate books of accounts are kept, no formal registration of
the enterprise is made with the appropriate government agencies.
The co-venturers therefore intend their relationship to be primarily
governed by the contractual terms agreement upon them in the
joint venture agreement.
Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130
(1989), has affirmed the principle that joint venture arrangements
must primarily be viewed as binding contractual commitments,
thus: Moreover, the usual rules as regards the construction and
operation of contracts generally apply to a contract of joint
venture. (At p. 147, citing OHara v. Harman, 14 App. Dev. (167)
43 NYS 556)
Even the SEC itself has recognized such an informal arrangement. It
has ruled that generally, a joint venture agreement of two
corporations need not be registered with the SEC, provided it will
not result in the formation of a new partnership or corporation.
However, should there be an intention to acquire a separate Tax
Identification Number (TIN) from the Bureau of Internal Revenue
for the business venture; the same requires registration with the
SEC in order to have a separate legal personality to obtain a
separate TIN. (SEC Opinion, 30 March 1995, XXIX SEC Quarterly
Bulletin 32 [No. 3, Sept. 1995])
The SEC has also ruled that two or more corporations may enter
into a joint venture through a contract or agreement (contractual
joint venture) if the nature of the venture is authorized by their
charters, which contract need not be registered with the SEC;
provided, however that the joint venture will not result in the
formation of a new partnership or corporation. (SEC Opinion, 29
April 1985, SEC Annual Opinions 1985, at p. 89)

13

Thus, under a contractual joint-venture format, the co-venturers

pursue the joint venture arrangement by a private contract between
them, choosing not to represent to third parties or to the public a
separate firm undertaking the project. Under such an arrangement,
the relationship of the co-venturers, their rights and liabilities, are
governed by the joint venture contract executed among them.
This was the sort of arrangement sought to be pursued in Philex
Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428
(2008), where in the operation of a mining concession between two
corporations, they executed merely a Power of Attorney and
designated one another principal (the owner of the concession)
and manager (the entity that would directly manage development
and operations). The Court refused to consider the relationship
between the parties as debtor-creditor, principal-agent, or as
principal-manager, since by the terms of the arrangement the
essential elements of a partnership existed, thus
An examination of the Power of Attorney reveals that a
partnership or joint venture was indeed intended by the parties.
Under a 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.
While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it
has been held that it may enter into a joint venture which is akin to
a particular partnership relationship: x x x Perusal of the agreement
denominated as the Power of Attorney indicates that the parties
had intended to create a partnership and establish a common fund
for the purpose. They also had a joint interest in the profits of the
business as shown by a 50-50 sharing in the income of the mine.
(Ibid, at pp. 438-439)
It is clear from the ruling in Philex Mining, that the parties to a
business venture may choose to treat one another as not being
bound by a partnership relationship, but when controversy arises by
which rights and obligations have to be determined, the courts
would have no choice by to impute the legal relationship of a
partnership or joint venture arrangement when the essential

14

elements of a partnership are present. In Philex Mining, the Court

refused to allow the parties to treat the advances made to the
venture as loans or advances to one another, holding that advances
made by a co-venturer in the joint venture business which cannot
be recovered cannot be treated as bad debts and deducted for
income tax purposes; the relationship between co-venturers in a
joint venture arrangement cannot be considered a creditor-debtor
relationship with respect to their advances and contributions to the
business enterprise.
Ultimately, the failed attempt in Philex Mining to veil the
arrangement as one as not being a joint venture arrangement,
caused the mining companies the obligation to pay unpaid income
taxes in the several millions of pesos. And the hard lesson that was
learned was that since a joint venture arrangement is a species of
partnership, then the peremptory provisions and principles under
the Law on Partnerships will be the once employed by the courts to
smoke out whether the underlying agreement was a joint venture
arrangement.
A more graphical example of an attempt to hide the joint venture
arrangement can be found in Kilosbayan, Incorporated v. Guingona,
Jr., 232 SCRA 110 (1994). In that case, the Philippine Charity and
Sweepstakes Office (PCSO) was prohibited by its charter from
holding and conducting lotteries in collaboration, association or
joint venture with any person, association, company or entity,
whether domestic or foreign. (Sec. 1, Rep. Act No. 1169, as
amended by B.P. Blng. 42) In order not to be violate such
prohibition, PCSO entered into a Contract of Lease with the
Philippine Gaming Management Corporation (PGMC), purported for
PCSO to lease the lottery facilities of the latter in order to operate
nationally the on-line lottery system known as lotto. In finding
that notwithstanding its denomination or designation as a Contract
of Lease (at p. 143), the purported lease arrangement violated the
statutory prohibition, in that it actually covered a joint venture
arrangement between PCSO and PGMC, the Court held
The contemporaneous acts of the PCSO and the PGMC reveal that
the POCSO had neither funds of its own nor the expertise to operate

15

and manage an on-line lottery system, and that although it wished

to have the system, it would have it at no expense or risks to the
government. x x x.
In short, the only contribution the PCSO would have is its franchise
or authority to operate the on-line lottery system; with the rest,
including the risks of the business, being borne by the proponent or
bidder. x x x.
The so-called Contract of Lease is not, therefore, what is purports to
be. Its denomination as such is a crafty device, carefully conceived,
to provide a built-in defense in the event that the agreement is
questioned as violate of the exception in Section 1(b) of the PCSOs
charter. The acuity or skill of its draftsmen to accomplish that
purpose easily manifest itself in the Contract of lease. It is
outstanding for its careful and meticulous drafting designed to given
an immediate impression that it is a contract of lease. Yet, woven
therein are provisions which negate its title and betray the true
intention of the parties to be in or to have a joint venture for a
period of eight years in the operation and maintenance of the online lottery system. (at pp. 144-146;underscoring supplied).
The joint venture arrangement was found to exists under the
Contract of Lease with finding by the Court of the essential element
of participating in the profits of the on-line lottery system, and at
the same time bearing the risks of loss. The Court held that This
risk-bearing provision is unusual in a lessor-lessee relationship, but
inherent in a joint venture. (at p. 147). The Court observed:
All of the foregoing unmistakably confirm the indispensable role of
the PGMC in the pursuit, operation, conduct, and management of
the On-Line Lottery System. They exhibit and demonstrate the
parties indivisible community of interest in the conception, birth
and growth of the on-line lottery, and, above all, in its profits, with
each having a right in the formulation and implementation of
policies related to the business and sharing, as well, in the losses
with the PGMC bearing the greatest burden because of its
assumption of expenses and risks, and the PCSO the lease, because

16

of its confessed unwillingness to bear expenses and risks. (at pp.

148-149).
b.
Joint Venture
Arrangements

Pursued

under

Formal

Partnership

A second type of joint venture arrangement is to formally operate

the joint venture set-up as a partnership, with a separate and
distinct juridical personality. Under such an arrangement, the coventurers execute formal Articles of Partnership, which may also be
denominated as a Joint Venture Agreement, embodying their
arrangements, as well as the firm name and structure of the
company that they are forming, and register the same with the
SEC.
Such a joint venture arrangement would then be operated as, and
be governed by the legal rules and principles pertaining to,
particular partnerships.
As contrasted from the informal joint venture arrangement
discussed above, a formal joint venture pursued under formal
partnership arrangements provides better protection for the parties
in the sense that they have a set of laws by which they can base
their rights and claims. Apart from the lessons learned from the
decisions in Kilosbayan and Philex Mining already discussed above,
this lesson can best be shown in the decision in Tan Eng Kee v.
Court of Appeals, 341 SCRA 740 (2000), where the heirs of the
purported co-venturer in a lumber and construction supply business
sought to recover the decedents share in the enterprise and
accumulated profits. Although the trial court found that there was a
joint venture arrangement, the Supreme Court affirmed the ruling
of the Court of Appeals that in the absence of a contract of
partnership, plus the inability of the heirs to indicate by clear
evidence the essential elements of a partnership, no joint venture
arrangement can be imputed into the business enterprise, thus
Undoubtedly, the best evidence [of a partnership] would have been
the contract of partnership itself, or the articles of partnership. . . .
The net effect, however, is that we are asked to determine whether

17

a partnership existed based purely on circumstantial evidence. A

review of the record persuades us that the Court of Appeals
correctly reversed the decision of the trial court. The evidence
presented by petitioners falls short of the quantum of proof required
to establish a partnership. (at p. 754).
c. Joint Venture Arrangement Pursued Through a Joint
Venture Corporation
Equity joint ventures are also available in Philippine setting, which
may cover the formation of a new joint venture company, with each
co-venturer being allocated proportionate shareholdings in the
outstanding capital stock of the joint venture corporation.
An equity joint venture may also be pursued where a co-venturer is
allocated the agreed shares of stock in an existing corporation,
either from new issuances of the capital stock of the existing
corporation, or sold shares from those already issued in the names
of the other co-venturers.
(1) Corporate Principles versus JVA Provisions
In equity joint ventures, the rights and obligations of the parties
among themselves are covered not only in a separate joint venture
agreement, but also implemented by certain provisions of the
articles of incorporation and by-laws of the joint venture
corporation.
In a situation where a corporate vehicle is formed in pursuance of
the joint venture arrangements, ideally the joint ventures should be
able to fit into the various terms and clauses of the articles of
incorporation and by-laws (known as the charter) of the joint
venture company the salient features of their joint venture
agreements. Considering that the co-venturers have chosen the
corporate vehicle by which to pursue their business enterprise, then
it would be posited that in situations where joint venture
agreements contain provisions not covered by the charter of the
joint venture corporation or vice-versa, the resolutions of issues
arising therefrom ought to be as follows:

18

(a) In case of conflicts between the provisions of the joint venture

agreement and the charter of the joint venture corporation, the
provisions of the latter shall prevail;
(b) In case there are provisions or clauses in the joint venture
agreement not found in the charter of the joint venture corporation,
such provisions and clauses remain binding contracts among the
joint venture parties signatory to the agreement, but do not bind
the joint venture corporation or other parties not signatories
thereto.
The foregoing rules of resolution are based on the well-established
doctrine under Philippine Corporate Law that the articles of
incorporation form a basic contract document defining the charter of
the corporation. The articles of incorporation is characterized as a
contract between and among three parties: (a) between the State
and the corporation; (b) between the stockholders and the State;
and (c) between the corporation and its stockholders. (Government
of the P.I. v. Manila Railroad Co., 52 Phil. 699 [1929]).
In addition, although the joint venture agreement may contain rules
on management and control of the joint venture corporation, it does
not authorize the co-venturers, as equity owners, to override the
business management of the corporate affairs of the joint venture
corporation by its board of directors. Any stipulation therefore in the
joint venture agreement that seeks to arrogate unto the
stockholders thereof the management prerogatives of its board of
directors would be null and void. In short, by having adopted the
corporate entity as the medium by which the co-venturers have
sought to pursue the joint venture enterprise, they are bound
Corporate Law principles under which the entity must operate.
Jurisprudence does not support the outright primacy of Corporate
Law principles in a joint venture scheme pursued through a joint
venture company.
(2) Jurisprudential Rulings on the Scheme of JV Corporation

19

The decision in Aurbach v. Sanitary Wares Manufacturing Corp., 180

SCRA 130 (1989), best illustrates the strength and weakness of a
joint venture arrangement pursued through the medium of a joint
venture corporation.
American Standards Inc. (ASI), a Delaware corporation, entered
into an Agreement with Filipino group to participate in the
ownership of an enterprise which would engage primarily in the
business of manufacturing in the Philippines and selling abroad
vitreous china and sanitary wares. The parties agreed that the
business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall
initially be Sanitary Wares Manufacturing Corporation. (at p. 134).
The Agreement executed between the American group taking 40%
equity in the venture, and Filipino group taking 60% equity in the
venture, provided for the particulars covering the articles of
incorporation of the joint venture company to be formed, the
manner of management thereof, as well as provisions designed to
protect [ASI] as a minority group, including the grant of veto
powers over a number of corporate acts and the right to designate
certain officers, such as a member of the Executive Committee
whose vote was required for important corporate transactions. (at
pp. 134-135). In particular, the Agreement contained the following
provision on theManagement of the joint venture corporation, and
the manner by which the two groups would elected the Board of
Directors, thus:
5. Management
(a) The management of the Corporation shall be vested in a Board
of Directors, which shall consist of nine [9] individuals. As long as
American-Standard [ASI] shall own at least 30% of the outstanding
stock of the Corporation, three [3] of the nine directors shall be
designated by American-Standard [ASI], and the other six [6] shall
be designated by the other stockholders of the Corporation. (at p.
134).
The joint venture company was registered, and The joint enterprise
thus entered into by the Filipino investors and the American

20

corporation [ASI] prospered. Unfortunately, with the business

successes, there came a deterioration of the initially harmonious
relations between the two groups. According to the Filipino group, a
basic disagreement was due to their desire to expand the export
operations of the company to which ASI objected as it apparently
had other subsidiaries of joint venture groups in the countries where
Philippine exports were contemplated. (at p. 135).
In the annual stockholders meeting in 1983, the friction between
the two groups came to a head, when the American group wanted
to cast their vote, not only on their three (3) nominees, but also on
the nominees of the Filipino group on the ground that under Section
24 of the Corporation Code, which provided for cumulative voting
for stock corporations, they had a right to cast their votes on all
nominees for the Board of Directors, and not just on their allotted
three nominees.
The Court was asked to decide the issue on the nature of the
business established by the partieswhether it was a joint venture
or a corporation (at p. 139), since it was the contention of ASI
that the actual intention of the parties should be viewed strict on
the Agreement . . . wherein it is clearly stated that the parties
intention was to form a corporation and not a joint venture (at p.
139), since a particular provision in the Agreement provided that
nothing herein contained shall be construed to constitute any of the
parties hereto partners or joint venturers in respect of any
transaction hereunder.
In resolving the issues, the Court gave the basic doctrine when it
comes to joint venture arrangement, which like any partnership
arrangement, are primarily contractual in character, thus:
The rule is that whether the parties to a particular contract have
thereby established among themselves a joint venture or some
other relation depends upon the actual intention which is
determined in accordance with the rules governing the
interpretation and construction of contracts. (at p. 139, citing
Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO), 65 F.

21

Suppl 678; Universal Sales Corp. v. California Press Mfg., Co., 20

Cal. 2nd 751, 128 P. 2nd 668).
The Court resolved that
In the instant cases, our examination of important provisions of the
Agreement as well as the testimonial evidence presented by the
[witnesses] shows that the parties agreed to establish a joint
venture and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its policy
making body are all consistent with a joint venture and not with an
ordinary corporation. (at pp. 140-141).
The Court resolved to apply the mandatory provisions of the
Corporation Code within the contractual intentions of the parties
provided in the joint venture Agreement, and affirmed the formula
adopted by the Court of Appeals that the American group can
cumulate their votes only within the nominees allotted to them, and
held:
To allow the ASI Group to vote their additional equity to help elect
even a Filipino director who would be beholden to them would
obliterate their minority status as agreed upon by the parties. As
aptly stated by the appellate court: x x x ASI, however, should not
be allowed to interfere in the voting within the Filipino group.
Otherwise, ASI would be able to designate more than the three
directors it is allowed to designate under the Agreement, and may
even be able to get a majority of the board seats, a result which is
clearly contrary to the contractual intent of the parties. x x x .
Equally important as the consideration of the contractual intent of
the parties is the consideration as regards the possible domination
by the foreign investors of the enterprise in violation of the
nationalization requirements enshrined in the Constitution and
circumvention of the Anti-Dummy Act. x x x. (at p. 148).
In essence, Aurbach emphasizes that joint venture arrangements
are first and foremost contractual agreements, and as much as
possible the contractual intent of the co-venturers should be given

22

realization within the corporate medium by which they pursued the

business enterprise. Aurbachrecognized that such a principle is not
alien to Corporate Law when it quoted arguments that Section 100
of the Corporation Code expressly makes binding written
agreements between the stockholders in a close corporation.
(3) JV Company Organized as a Close Corporation
Under the Corporation Code, a close corporation is one which
provides in its articles of incorporation the following three
requisites:
(a) all of the corporations issued stock of all classes, exclusive of
treasury shares, shall be held on record by not more than a
specified number of persons, not exceeding twenty (20);
(b) all of the issued stock of all classes shall be subject to one or
more specified restrictions on transfer in the nature of a right of
first refusal; and
(c) the corporation shall not list in any stock exchange or make any
public offering of any of its stock of any class (Section 96,
Corporation Code).
Under a close corporation setting, it may be provided in the articles
of incorporation that the business of the corporation shall be
managed by the stockholders of the corporation rather than by a
board of directors, and the officers and employees may be elected
or appointed directly by the stockholders (Section 97, Corporation
Code).
In particular, Section 100 of the Corporation Code provides that:
Sec. 100. Agreements by stockholders.
1. Agreements by and among stockholders executed before the
formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and
shall continue to be valid and binding between and among such
stockholders, if such be their intent, to the extent that such

23

agreements are not inconsistent with the articles of incorporation,

irrespective of whether the provisions of such agreements are
contained, except those required by this Title [on close
corporations] to be embodied, in said articles of incorporation.
x x x.
Although the Court in Aurbuch did not make a formal ruling on the
matter, it seems to have given its imprimatur to the proposition that
even when a corporation does not comply with the definition of a
close corporation under the Corporation Code because the three
requisites are not expressly provided for in its articles of
incorporation, nonetheless, the same principles applicable to formal
close corporations, should also apply to equally closely-held
corporation, such as those organized pursuant to a formal joint
venture agreement, thus
The Lagdameo Group stated in their appellees brief in the Court of
Appeals:
x x x.
Secondly, even assuming that Saniwares is technically not a close
corporation because it has more than 20 stockholders, the
undeniable fact is that it is a close-held corporation. Surely,
appellants cannot honestly claim that Saniwares is a public issue or
a widely held corporation.
In the United States, many courts have taken a realistic approach
to joint venture corporations and have not rigidly applied principles
of corporation law designed primarily for public issue corporation.
Theses courts have indicated that express arrangements between
corporate joint ventures should be construed with less emphasis on
the ordinary rules of law usually applied to corporate entities and
with more consideration given to the nature of the agreement
between the joint venturers. . . . These American cases dealt with
legal questions as to the extent to which the requirements arising
from the corporate form of joint venture corporations should
control, and the courts ruled that substantial justice lay with those

24

litigants who relied on the joint venture agreement rather than the
litigants who relied on the orthodox principles of corporation law.
x x x. (at pp. 142-144).
The provisions of the Corporation Code on close corporations, which
provides for informal management of its affairs, binding effect of
written agreements among stockholders, etc., should be deemed to
be available to resolve issues pertaining to joint venture
corporations.
(4) Right of First Refusal as a Delectus Personae Feature in
JV Company Scheme
Another reported case of a joint venture company arrangement
would be inJG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA
10 (2003), where the National Investment and Development
Corporation (NIDC), a government corporation, entered into a Joint
Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of
Kobe, Japan, forming the Philippine Shipyard and Engineering
Corporation (PHILSECO) to engage in operation and management of
shipyard. The JVA provided for a 60% Filipino-40% Japanese equity,
and provided a right of first refusal on the equity shares should
either of the co-venturer decide to sell, assign or transfer its
interest in the joint venture. When later on the government shares
in PHILSECO were bidded out, one of the issues that had to be
resolved was the validity of the right of first refusal clause found in
the JVA.
The
Court
matter-of-factly
recognized
the
partnership
arrangement between the original parties in the joint venture
company, and characterized the right of first refusal clause in the
JVA as a protective mechanisms to preserve their respective
interests in the partnership in the event that (a) one party decides
to sell its shares to third parties; and (b) new Philseco shares are
issued. (at p. 29). The Court further held
. . . The right of first refusal is meant to protect the original or
remaining joint venturer(s) or shareholder(s) from the entry of third

25

persons who are not acceptable to it as co-venturer(s) or coshareholder(s). The joint venture between the Philippine
Government and KAWASAKI is in the nature of a partnership which,
unlike an ordinary corporation, is based on delectus personae. No
one can become a member of the partnership association without
the consent of all the other associates. The right of first refusal thus
ensures that the parties are given control over who may become a
new partner in substitution of or in addition to the original partners.
Should the selling partner decide to dispose all its shares, the nonselling partner may acquire all these shares and terminate the
partnership. No person or corporation can be compelled to remain
or to continue the partnership . . . (at p. 31).
What one notices clearly extant in JG Summit Holdings is that
although what was bidded were shares of stock is a duly registered
corporation, and the right of first refusal was not found expressed in
any provision of the articles of incorporation and by-laws,
nonetheless, the Court applied its enforceability to a third party
bidder who was not privy to the terms of the private JVA between
the Government and the foreign investor.

4. Aspects which Influence Choice of JV Scheme

The important aspects in choosing the format or scheme by which
to pursue the joint venture arrangement would be the issues
relating to limited liability considerations, exclusion of new parties
and non-dilution of equity considerations, tax consequences, and
limitation of foreign equity.
a. Defining Joint Ventures Scope of Business Activity
The principal consideration in defining the scope of business to be
undertaken by joint venture in the Philippines basically revolves
around the issue, when it involves foreign investment, of
restrictions on foreign equity and foreign management and control
on certain restricted areas or activities. These areas must involve
foreign investments as defined under Republic Act No. 7042, known
as the Foreign Investments Act of 1991.

26

FIA 91, was enacted to promote foreign investments, and

prescribes the procedures for registering enterprises doing business
in the Philippines. It is the basic law that provides the conditions,
activities, and procedures where foreign enterprises may invest and
do business in the Philippines. It also applies to joint venture
arrangements in the Philippines. By the negative list scheme, the
Act simply established the restricted areas, and declared all other
areas as open to unlimited foreign equity participation.
Essentially, the FIA 91 provides for foreign investment negative list
which spells out the activities reserved for Philippine national.
Export enterprises may enter all activities not restricted by Lists A
and B of the negative list, and domestic enterprises, with foreign
equity, may enter all activities not restricted by Lists A, B, and C of
the negative lists.
(1) Application of the Grandfather Rule
The grandfather rule is the method by which the percentage of
Filipino equity in a corporation engaged in nationalized and/or partly
nationalized areas of activities, provided for under the Constitution
and other nationalization laws, is computed, in cases where
corporate shareholders are present in the situation, by attributing
the nationality of the second or even subsequent tier of ownership
to determine the nationality of the corporate shareholder.
In recognizing and applying the grandfather rule, the SEC has
adopted the formula of the Secretary of Justice (DOJ Opinion No.
18, s. 1989) to the effect that:
Shares belonging to corporations or partnerships at least 60% of
the capital of which is owned by Filipino citizens shall be considered
as of Philippine nationality, but if the percentage of Filipino
ownership in the corporation or partnership is less than 60% only
the number of shares corresponding to such percentage shall be
counted as of Philippine nationality. (SEC Opinion, 23 November
1993, XXVIII Sec Quarterly Bulletin 39 [No. 1, March 1994]; SEC
Opinion, 14 April 1993, XXVII Sec Quarterly Bulletin 29 [No. 3,
Sept. 1993]; SEC Opinion, 23 March 1993, XXVII Sec Quarterly

27

Bulletin 15 (No. 3, Sept. 1993); SEC Opinion, 6 August 1991, Sec

Quarterly Bulletin 44 [No. 4, Dec. 1991]; SEC Opinion, 30 May
1990, XXIV Sec Quarterly Bulletin 52 [No. 3, Sept. 1990]; SEC
Opinion, 14 December 1989, XXIV Sec Quarterly Bulletin 7 [No. 2,
June 1990]; SEC Opinion, 6 November 1989, XXIV Sec Quarterly
Bulletin 56 [No. 1, March 1990]).
It must be stressed however, that the afore-quoted SEC rule
applies for purposes of resolving issues on investments. The SEC
was quick to add: However, while a corporation with 60% Filipino
and 40% Foreign equity ownership is considered a Philippine
national for purposes of investment, it is nor qualified to invest in or
enter into a joint venture agreement with corporation or
partnerships, the capital or ownership of which under the
constitution or other special laws are limited to Filipino citizens
only. (SEC Opinion, 14 December 1989, XXIV Sec Quarterly
Bulletin 7 [No. 2, June 1990]). A joint venture arrangement would
mean that such corporation has become a partner and is deemed
then to be acting or involving itself in the operations of a
nationalized activity by the acts of the local partners by virtue of the
principle of mutual agency
b. Limited Liability Feature
Whether it be the contractual joint venture arrangement or the
partnership arrangement, the co-ventures would be faced with
prospects of unlimited liability pervading in such arrangement.
Under Philippine Partnership Law, partners (except limited partner
in formally registered limited partnership) and con-venturers are
liable for partnership debts beyond their contributions to the
parternship or joint venture arrangements.
Therefore, the use of the joint venture company as the format to
pursue the joint venture arrangement allows the co-venturers to
take full advantage of the limited liability features of the corporate
vehicle especially in projects and undertakings which embody
certain risks.
c. Exclusions of New Parties; Non-Dilution of Equity

28

The ability of the co-venturers to present the venture among the

original parties through a right of first refusal clause has been
recognized as valid by the Supreme Court as a means to protect the
original or remaining joint venturer(s) or shareholder(s) from the
entry of third persons who are not acceptable to it as co-venturer(s)
or co-shareholder(s) . . . [because] The joint venture . . . is in the
nature of a partnership which, unlike an ordinary corporation, is
based on delectus personae. No one can become a member of the
partnership association without the consent of all the other
associates. The right of first refusal thus ensures that the parties
are given control over who may become a new partner in
substitution of or in addition to the original partners. (JG Summit
Holdings, Inc. v. Court of Appeals, 412 SCRA 10, 29-31 [2003]).
d. Tax Issues
In the field of Taxation, both a partnership and a joint venture are
treated as corporate taxpayers, and both are subject to corporate
income tax, except that under the National Internal Revenue Code
of 1997, a joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in petroleum, coal,
geothermal and other energy operations pursuant to an operating or
consortium agreement under a service contract with the
Government, shall not be taxed separately as a corporate taxpayer
(Section 22(B), NIRC of 1997).
The contractual joint venture has the advantage of limiting the
extent of the arrangement between and among the co-venturers, as
in undertakings that require privacy. In addition, since formal joint
ventures are taxed as corporate taxpayer, the contractual joint
venture lessens the need to have to register the project as a
separate corporate taxpayer, since the private arrangements should
allow the co-venturers to continue reporting separately their
participation in the project in their own tax returns.
The corporate entity route also allows the co-venturers to take
advantage of zero rate taxability of dividends declared by
corporations in instances provided under the National Internal
Revenue Code.

29

In the Philippines, the corporation has traditionally been subjected

to heavier taxation than other forms of business organization;
dividends distributed are subject to another tax when received by
the stockholders. With the trust of Government to encourage both
local and foreign investments in the country, and to entice the use
of the corporation as the vehicle for such investment, many of the
previous tax laws that tended to make corporate vehicles expensive
had been abolished. Except for dividends declared by domestic
corporation in favor of foreign corporation (Section 25(a) and (b),
NIRC of 1977), dividends received by individuals from corporation
(Section 21, NIRC of 1977), as well as inter-corporate dividends
between domestic corporations (Section 24, NIRC of 1977), were
subject to zero-rate of income taxation. There had also been an
abolition of the personal holding companies tax and tax on
unreasonably accumulated surplus of corporations (Executive Order
No. 37 [1986]).
Lately, however, under the reforms embodied in the NIRC of 1997,
a final tax of 10% has been re-imposed on dividends received by
residents and citizens declared from corporate earnings after 1
January 1998 (Section 24(B)(2), NIRC of 1997); a final tax of 20%
on dividends received by a nonresident alien individual has been reimposed from corporate earnings after 1 January 1998 (Section
25(A)(1), NIRC of 1997); and the tax on improperly accumulated
earnings has likewise been re-imposed (Section 29, NIRC of 1997).
The pursuit of joint venture arrangements under a formal
partnership arrangement has the disadvantage of inviting into the
arrangement the features of unlimited liability for partnership debts
to the co-venturers, and also the inability to take advantage of the
zero-rate of dividends for corporation, when the partnership
declares and distributes profits. The aspect of double taxation looms
largely in a partnership joint venture arrangement, since
partnerships are subject to the 35% net income tax for
corporations. (Per amendment to NIRC of 1997 introduced by Rep.
Act 9337. The income tax rate will go down to 30% beginning 01
January 2009.) Nevertheless, joint ventures formed for the purpose
of undertaking construction projects (Pres. Decree 929 [1976]), and

30

those formed to engage in petroleum operations pursuant to an

operating agreement under a service contract with the Government
(Pres. Decree 1682) are exempt from corporate taxation.
oOo