DBA 007

LEGAL ASPECTS OF BUSINESS

1. X writes B offering to sell a piece of land for P100,000, and at the same time
receives from B a letter offering to buy the same land for P100,000.
Is there a perfected contract? Explain. 20 pts.

Yes, because for a contract to be in effect, there has to be a meeting of minds

between the contracting parties. In this case, it is obvious that both X and B are
in agreement for X to sell his her land to B in the amount of Php 100,000 while B
is also in agreement to purchase the land from X for the same amount.

We are under the assumption however that X and B are of sound mind and in no
way incapacitated to make a decision in order to enter into a valid contract. We
are also under the assumption that both are of legal age and that no one is being
coerced to enter into a contract—that there no intimidation, violence, or fraud.
We are also under the assumption that the piece of land being offered for sale by
X to B is not a public domain and that it actually exists.

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2. A, B, and C are partners in X Partnership. The partnership is dissolved by

A’s death. B thereafter transacts business with D, a third person. The
transaction does not refer to winding up of partnership affairs nor is it
designed to completed transactions begun but not finished at
dissolution. May the partnership be found? Explain. 20 pts.

No because the partnership has been dissolved when A died. If B’s transaction
with D is a totally new transaction and did not take effect until after the
partnership has been dissolved, then this is just a transaction between B and D
and does not involve the partnership anymore.

However, if this transaction between B and D is a continuation of a previous

engagement of the partnership with D, then the partnership may still be found.
When a partnership is dissolved, the business, with the surviving partners,
should start winding up its affairs by finishing any pending deals, engagements,
projects, and other outstanding obligations.

Then again, the scenario above states that the transaction does not refer to
winding up partnership affairs nor it is for completing unfinished transactions. So
therefore, the transaction is not a basis for founding the partnership. But if
Partner A decides that he or she wants to continue with the partnership, then the
partnership may still be found.

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3. What is Partnership by Estoppel? 20 pts.

First, it will help if we talk about Estoppel. Estoppel is a legal principle which
protects someone from being wronged when another person makes inconsistent
words or actions. For instance, someone’s car was damaged due to the
negligence of another person and the negligent person admitted fault and said
that he would pay for damages. He also agreed that he would pay the amount of
the estimate for damages in the amount of Php 20,000. If the aggrieved party
had gone out and got his car fixed and is not seeking reimbursement from the
negligent party, the negligent party cannot turn around and say that he does not
think that the damages actually cost that much and that he should only pay half
(for instance). The negligent party has been estopped under the law. Another
element of Estoppel is that the aggrieved party has incurred expenses or
damages due to him or her relying on the statement of the other party. This is
called detrimental reliance.

The principle is similar to Partnership by Estoppel. In Partnership by Estoppel, a

legal partnership may occur even if there was no previous agreement if a person
acts, makes statements, or allows himself to be represented in a firm. If and
when this happens, that person becomes legally liable for any contract, including
loans and other types of credit, obtained by the firm. This is also referred to as
presumption of partnership. So, as with the Estoppel, that person is forbidden by
law to contradict his previous statements or actions.

a. What are the two(2) ways wherein a Partnership by estoppel is created?

(1) If a person directly represents himself as a partner to an existing or a non-

existing partnership
(2) If a person allows himself to be represented as partnership in an existing
or non-existing partnership

b. Cite a situational example for each way.

To illustrate (1) above, if for instance, my friend needs a contractor to build a

warehouse and I told him that I can refer him to ABC Construction and that I
am a partner to that firm, if ABC Construction enters on a contract with my
friend and breaches that contract and my friend incurs damages, then I may
be held liable for those damages because I explicitly represented myself as
partner of ABC Construction.

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To illustrate (2) above, if I allow a business owner to present me as a partner,

for whatever purpose, and if his business becomes liable for damages to
customers, then I may be held liable for those damages as well. For
instance, because I am a teacher, a former student who opened a restaurant
near the school where I teach asked if he can tell people that I am part owner
of that restaurant and I agreed for him to do so. He said that this way,
hopefully more people will eat at his restaurant if they know that I am a part
owner. If his restaurant becomes responsible for food poisoning and people
filed for claims to be indemnified for damages, I may be held liable for those
damages.

c. What are the eight (8) criteria in distinguishing a partnership from a

corporation? Discuss how these criteria apply for each of them
(partnership vis-a-vis corporation.

(1) In terms of formation: Business license and partnership agreement. In

order to form a corporation, there are a few more requirements such as
articles of incorporation, by-laws, shareholder agreement, and stock
certificate.
(2) In terms of Ownership: A partnership is owned by two or more people
while a corporation may be owned by one or more people and depending
on the type of corporation 100 shareholders or more.
(3) In terms of extent of liability and obligation: Partners in a partnership is
may be held liable beyond their contribution in the partnership. Their
personal assets may be attached to the claim as well. In a corporation, a
shareholder’s responsibility or liability is limited by his or her share of
ownership and his or her personal assets are not attached to a claim.
(4) In terms of Tax liability: Partners pay personal income tax. Shareholders
in a corporation pay personal income tax and corporate income tax.
Shareholders, in effect, are subject to double taxation.
(5) In terms of management: In a partnership, some roles may be blur as
partners take no responsibilities depending on their area of expertise. In a
corporation, roles and functions are clearly defined and is more structured.
(6) In terms of life: Partnership ends when a partner dies, become insolvent,
or becomes mentally incapacitated. A corporation has its own legal
personality so even if a shareholder or even the CEO dies, the
corporation, within the bounds of the law, shall continue to exist.

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(7) In terms of Capital: A partnership has way limited capital compared to a

corporation.
(8) In terms of Dissolution: A partnership may be dissolved by mere
agreement by the partners while a corporation has to go through the legal
process before a company can be dissolved. An Articles of Dissolution
has to be filed among other legal requirements.

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4. In what ways or by what means can the existence of a corporation come to an

end? 20 pts.

Dissolution of a corporation is the stage of terminating the life of a corporation.

This is also the stage where a corporation closes its affairs including settlement
of obligations to creditors, shareholders, and government agencies such as the
Bureau of Internal Revenue and the Securities and Exchange Commission.

Dissolution of a corporation in the Philippines can either be voluntary or

involuntary. If it is involuntary, the following may be the ways and means by
which a corporation may be dissolved:

(a) If a corporation no longer operates

(b) If it was established through legal proceedings and was determined by a
competent court that the corporation was fraudulent to begin with
(c) If there is a court order which states that the corporation is being dissolved
(d) If it is proven that the corporation was founded for the purpose of engaging in
illegal activities such as smuggling or money laundering

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5. Case Analysis –The X-Partnership becomes insolvent due to

mismanagement and cannot pay its liability to Y-Corp. Y-Corp
proposes to manage the partnership business, with the agreement that
50 percent of the net profits will be applied to the payment of X-
Partnership’s debt to Y-Corp. X-Partnership agrees to the
management contract. 20 pts.

a. Can the Y-Corp. validly enter into the above management contract?

Yes, Y-Corporation can enter into the above management contract.

Corporations have legal personalities and can perform activities just like
individuals—including entering into a management contract with another
company.

b. Is the Y-Corp. considered a partner of the X-Partnership by the mere fact

that it is receiving a share of the net profits?

No, just because Y-Corp is receiving a share of X-Partnership’s net profits

does not necessarily mean that there is already a partnership between the
them. Y-Corp is receiving a share of the net profits not by virtue of a
partnership but only by virtue of a management contract.

However, both parties may also agree and already consider this a
partnership. If we stick to the legal definition of a partnership, it states that a
partnership is an agreement between two or more people (and Y – Corp may
be considered a person as a corporation has legal personality) to manage
and operate a business and share in its profits.

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