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1 PARTNERSHIP NOTES By: Atty. Cesar Villanueva b. Civil and Common Law Bases of Partnership Laws 1 – HISTORICAL BACKGROUND ON PHILIPPINE PARTNERSHIP LAW The De Leons trace the origins of the modern-day partnership through the English commercials courts which eventually was integrated by then Chief Justice Lord Mansfield into the common law system and that it “was not until the latter years of the 18th century that the law of partnership as we know it today began to assume both form and substance.” (DE LEONS, at p. 3) I. HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW They write that eventually in the United States, in 1914 the Uniform Partnerships Act was endorsed by the National 1. Historical Background and Sources of Philippine Law on Partnership
Conference of Commissioners on Uniform State Laws, which had many points of similarity with the English Partnership Act of 1890, and that “For this reason, the practical operation of the Uniform Partnership Act has a background of application in the
a. Notion of Partnership Is of Ancient Origins
workings of the English Act.” (DE LEONS, at p. 5)
Prof. Esteban B. Bautista wrote that as a business device, the partnership “was well known among the ancients and
Bautista suggested that “the modern world provisions on partnership of every legal system providing for and regulating this
apparently occupied such an important place in their social and economic life that they made provision for it in their laws—
type of business organization are based upon the Roman law, of course with several important modifications;” . . . and
among the Babylonians from the time of Hammurabi, among the Babylonian Jews as early as the fourth century, and among
that ”civil law countries or jurisdiction regard the partnership as a legal entity, while the common law ones generally do
the Romans almost from the time they laid the foundation of their monumental legal system.” (BAUTISTA, ESTEBAN B.,
not.” (BAUTISTA, at p. 1, citing 17 ENCYCLOPEDIA BRITANNICA 420 ). The De Leons observe that “In fine, modern
TREATISE ON PHILIPPINE PARTNERSHIP LAW, Rex Book Store, 1995 Ed., at p. 1, hereinafter referred to as
partnership law may be said to contain combination of principles and concepts developed from three sources: the Roman Law,
“BAUTISTA”; citing 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 3 ). He also wrote that “in medieval times, the device
the law [on] merchant and equity, and the common law courts.” (DE LEONS, at p. 5)
was prominent among the merchant princes in the Italian cities; it also thrived in thirteenth century England where it was regulated by guilds merchant.” (BAUTISTA, at p. 1, citing 4 COLLIERS ENCYCLOPEDIA 257  and 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 4 ) c. Particular Bases of Philippine Law on Partnerships Professors Hector S. de Leon and Hector M. de Leon, Jr. write that “As early as 2300 B.C., Hammurabi, the famous king of Babylon, in his compilation of the system of laws of that time, provided for the regulation of the relation called partnership.
Before the promulgation of the New Civil Code, the Philippine partnership laws formerly distinguished between civil partnership
Commercial partnerships of that time were generally for single transactions or undertakings.” (DE LEON, HECTOR S., and DE
and commercial partnerships. Civil partnerships were governed in Title VIII of Book IV of the old Civil Code of 1889 (Articles
LEON, HECTOR M., JR., COMMENTS AND CASES ON PARTNERSHIP, AGENCY AND TRUST, Rex Book Store, Inc.,
1665 to 1708); while commercial or mercantile partnership were governed by Title I of Book II of the Code of Commerce
Manila, Philippines, 2005 ed. , at p. 2, hereinafter referred to as “DE LEONS”). They also write that “Following the Babylonian
(Articles 116 to 238). According to Bautista, both sets of laws “had their origin in the Roman Law.” (BAUTISTA, at p. 2)
period, we find clear-cut references to partnerships in Jewish law . . . however, it must be remembered that the ancient Jews were a pastoral people, and, therefore, the partnership as a business organization under Jewish law was concerned with the holding of title to land by two or more persons.” (DE LEONS, at p. 2)
The present Philippine Law on Partnership is provided under Title IX, Book V of the New Civil Code (Republic Act No. 386), which took effect on 30 August 1950, superseding the old Civil Code and repealed in toto the provisions of the Code of Commerce on partnerships, which “has resulted in the abolition of the distinction between civil and commercial partnerships.”
2 (BAUTISTA, at p. 2). In particular, Article 45 of the New Civil Code expressly provides that “Partnerships and associations for
The other significant reason coming from the historical background of our Philippine Law on Partnerships is that it draws it
private interest or purpose are governed by the provisions of this Code concerning partnerships.”
strength and its weakness from the fact that it is really an amalgam between two sets of legal traditions: the Civil Law system upon which most of the provisions of the New Civil Code had been drawn, and from the Common Law tradition, particularly
While the bulk of the present provisions in the Civil Code were taken from the old Civil Code provisions, the Code Commission
from the Uniform Partnership Act of the United States. Properly appreciated, that means that the Philippine Law on
reported that “some provisions were taken from the Code of Commerce,” and other rules were adopted from the Uniform
Partnerships can truly be molded into a framework that provides a stability from the set of rules and principles that are laid out
Partnership Act and the Uniform Limited Partnership Act of the United States. Bautista assessed that “[o]n the whole, it may be
in the provisions of the New Civil Code, and yet be dynamic and progressive in characteristic to allow Filipino businessmen
stated that the bulk of the provisions of the New Civil Code on this subject are of American origin, i.e., based on the United
and the legal profession to be able to evolve them effectively through application in the business world of innovative changes
States’ ‘Uniform Partnership Act and Uniform Limited Partnership Act.’” (BAUTISTA, at p. 2)
and advances, confirmed and made “precedential” in decisions of our courts resolving the acceptability of such cutting-edge innovations.
d. The Significance of Knowing the Historical Background of Philippine Partnership Law 2. Old Branches of Partnership Law The historical background of Philippine Law on Partnerships, finding its source from ancient times, indicate to us the relative efficiency of the medium as it is able to survive up to the modern times. The longevity of the partnership as a medium of doing
a. Distinguishing Between Civil and Commercial Partnerships
business can be drawn from two characteristics. Before the New Civil Code, resolution of partnership issues depended on whether it covered a civil partnership for which the Firstly, that society considers it important enough to provide a legal framework by which entrepreneurs, merchants and
provisions of the old Civil Code were made to apply, or commercial partnership, and therefore covered by the Code of
businessmen may draw upon a set of rules to govern the medium by which to pursue a venture, without having to enter into
Commerce. There was even a third type of partnerships, the industrial partnerships, which may have the characteristics of
costly and time-consuming negotiations and contract drafting. The essential characteristics of partnership as governed by law
commercial or civil partnerships, according to whether they have been established in accordance with the requirements of the
(under modern settings, they would be: juridical personality, mutual agency, delectus personae and unlimited liability of
Code of Commerce or without regard to the latter. (Prautch, etc. v. Hernandez, 1 Phil. 705, 709-710 ).
partners); and allow would-be partners the ability to rely upon the default legal rules, with the assurance of the backings of the State by which to enforce such default rules. This is what may be termed as the “ nominate and principal” characteristic of the
The essence of a commercial partnership was that it was undertaken by merchants, and essentially possessed of the
contract of partnership.
characteristic of “habitualness” (or more properly referred to as “pursued as a going concern”) to be governed under the provisions of the Code of Commerce. Article 1 of the Code of Commerce provided that “For purposes of this Code, the
Secondly, that the partnership relationship being essentially contractual in nature, assures would-be partners of the
following are merchants: 1. Those who, having legal capacity to engage in commerce, habitually devote themselves
expedience of contractual stipulation, to be able to tailor-fit their relationships in a way that would best address their individual
thereto. . .”
needs and their working relationships with their co-partners, as well as the demands of the business enterprise they have decided to embark upon.
To illustrate, Evangelista v. Commissioner of Internal Revenue, 102 Phil. 140 (1957), held that there would exists the elements of common fund and intention to divide the profits among the members of the family who borrowed money as a group, when
Partnership Law therefore provides a stable platform by which individuals may provide an active means to pursue jointly a business enterprise.
the facts showed that the
3 1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso.
At the onset of Philippine jurisprudential development, it was recognized in Prautch v. Hernandez, 1 Phil. 705 (1903), that a
They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common
commercial or mercantile partnership had for its object the pursuit of industry or commerce, and was then treated like a
merchant that must necessarily be governed by the Code of Commerce and had to comply with the registration requirements thereof to lawfully come into existence.
2. They invested the same, not merely in one transaction, but in a series of transactions. x x x The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is
In a commercial partnership, both the partnership and the separate partners thereof may be joined in one action, but the
strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the
private property of the partners could be taken in payment of the partnership debts only after the common property of the
aforementioned common fund or even of the property acquired . . . In other words, one cannot but perceive a character
partnership had been exhausted. (La Compañia Maritima v. Muñoz, 9 Phil. 326 ).
of habituality peculiar tobusiness transactions engaged in for purposes of gain. The commercial partnership under the Code of Commerce tended to be a more solemn affair, and when it failed to register its 3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties
articles of partnership in the mercantile registry, it did not become a juridical person nor did it have any personality distinct from
were leased separately to several persons who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of
the personality of the individuals who composed it (Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 ; Bourns v.
rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the
Carman, 7 Phil. 117 ; Ang Seng Quen v. Te Chico, 7 Phil. 541 ); and therefore could not also maintain an action in
utilization thereof. (Ibid, at p. 145).
its name Prautch, etc. v. Hernandez, 1 Phil. 705 ).
Prior to the New Civil Code, the significant distinctions between civil partnerships from commercial partnerships were as
In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), which involved a commercial partnership, but the requirements
of the Code of Commerce for the execution of public document and registration in the mercantile registry (Art. 119, Code of Commerce) were not complied with, the Supreme Court held that the “alleged partnership never had any legal existence nor
(a) Registration was essential for the coming into existence of commercial partnerships and their acquisition of juridical
has it acquired any juridical personality in the acts and contracted executed and made by it,” (Ibid, at pp. 500-501) and what
personalities (Arts. 118-119, Code of Commerce; Hung-Man-Yoc v. Kieng-Chiong Seng, 6 Phil. 498 ); whereas, it was
was applied was Article 119 of the Code of Commerce which made liable for the debts incurred by such “partnership de facto”
the perfection of a contract of partnership which under the old Civil Code brought about the separate juridical personality of a
the “persons in charge of the management of the association . . . together with persons not members of the association with
whom they may have transaction business in the name of the same.” (Ibid, at p. 500.) Thus, the legal consequence of failing to comply with the registration requirements under the Code of Commerce was to make the acting partners personally and
(b) Commercial partners were solidarily liable for partnership debts, albeit in a subsidiary manner, and therefore had the benefit of excussion (Viuda de Chan Diaco v. Peng, 53 Phil. 906 ); while civil partners were primarily but only jointly (pro-
primarily liable for all partnership debts. The doctrine is similar to the agency doctrine that an agent who enters into a transaction on behalf of a non-existing principal becomes personally liable for the obligations incurred thereby.
rata) liable for partnership debts (Co-Pitco v. Yulo, 8 Phil. 544 ); and In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the civil partnership was engaged in the laundry business and (c) Commercial partnerships were deemed to be, and subject to Code of Commerce provisions for, merchants. As was aptly observed in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the distinction between civil and commercial partnerships was critical under the old set-up because it determined the applicable rules for registration, liability for the members, and the rights and manner of dissolution.
governed by the provisions of the Civil Code, it was held that the partnership existed as a separate juridical person even when no formal partnership agreement was entered into and registered, and thereby the obligations of the partners for partnership debts were held to be pro-rata.
4 Nonetheless, the registration requirements under the Code of Commerce were never interpreted to undermine the obligatory
Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), what the Supreme Court held critical was proper
force of contracts entered into in the name of the commercial partners. Thus, it was held in Prautch, etc. v. Jones, 8 Phil. 1
application of Article 1670 of the old Civil Code which provided that civil partnerships, on account of the objects to which they
(1907), and affirmed in Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909), that while an unregistered commercial partnership
are devoted, may adopt all the forms recognized by the Commercial Code, and thereby held that –
and association has no juridical personality, and as such cannot maintain an action in the partnership name, nevertheless, the individual members may sue jointly as individuals, and persons dealing with them in their joint capacity will not be permitted to
It will be seen from this provision that whether or not partnerships shall adopt the forms provided for by the Civil or Commercial
deny their right to do so.
Codes is left entirely to their discretion. And furthermore, that such civil partnerships shall only be governed by the forms and provisions of the Commercial Code when they expressly adopt them, and then only in so far as they (rules of the Commercial
It was held in De los Reyes v. Lukban, 35 Phil. 757 (1916), and affirmed in Philippine National Bank v. Lo, 50 Phil. 802 (1927),
Code) do not conflict with the provisions of the Civil Code. In this provision the legislature expressly indicates that there may
that under the Code of Commerce, where the partners’ liability for a partnership debt was only secondary or subsidiary, their
exist two classes of commercial associations, depending not upon the business in which they are engaged but upon the
right of excussion was deemed already satisfied where at the time the judgment was executed against the partnership they
particular form adopted in their organization. . . We are inclined to the belief that the respective codes, Civil and Commercial,
were unable to show that there were still partnership assets, or when a writ of execution against the partnership had been
have adopted a complete system for the organization, control, continuance, liabilities, dissolutions, and juristic personalities of
returned not fully satisfied.
associations organized under each. . . It is our opinion that associations organized under the different codes are governed by the provisions of the respective code. (Ibid, at pp. 10-11)
There was under the old set-up the debate of whether a partnership can choose which set of laws should govern it; or whether a group of co-venturers can choose by the expediency of registration under the old Civil Code or under the Code of Commerce, of whether to organize a civil or a commercial partnership. In Prautch, et. v. Hernandez, 1 Phil. 705 (1903), it was held –
b. Significance of Knowing the Historical Distinctions Between Civil and Commercial Partnerships
If that section includes commercial partnerships then such a partnership can be organized under it selecting from the Code of
What may be considered as a good development in our present Law on Partnerships is the removal of the distinctions
Commerce such of its provisions as are favorable to the partners and rejecting such as are not, and even including in its
between civil and commercial partnerships, and which are now governed by a common set of laws, i.e., the relevant provisions
articles of agreement the right to do things which by that Code are expressly prohibited. Such a construction would allow a
of the New Civil Code. The main drawback of such a development is that even commercial partnerships (and admittedly there
commercial partnership to use or dispense with the Code of Commerce as best suited its own ends. (Ibid, at pp. 707-708)
may not be quite a number operating due to the availability of the corporate medium), would find themselves governed by noncommercial doctrines, such as the non-central role of the institution of registration. And in fact, many issues have arisen under
. . . Is a commercial partnership distinguished from a civil one by the object to which it is devoted or by the machinery with
our current Law on Partnerships arising from having adopted in the New Civil Code provisions from the Code of Commerce on
which it is organized? We think that the former distinction is the true one. The Code of Commerce of 1829 distinctly provided
that those partnership were mercantile which had for their object an operation of commerce. (Art. 264.). x x x . The Code of Commerce declares the manner in which commercial partnerships can be organized. Such organization can be effected only
In addition, the “civil-coding” of some of the provisions of the Code of Commerce which were copied into the New Civil Code,
in certain well-defined ways. The provisions of this Code were well known when the Civil Code was adopted. The author of
should provide a better understanding of the legal consequences of current provisions of the Philippine Law on Partnerships,
that Code when writing article 1667, having in mind the provisions of the Code of Commerce, did not say that a partnership
and a better constructions of the effects they have on the commercial field, by providing a comparison with the old
may be organized in any form, which would have repealed the said provisions of the Code of Commerce, but did say instead
jurisprudential rulings for commercial partnerships under the provisions of the Code of Commerce.
that a civil partnership may be organized in any form. —oOo—
5 In that decision, the facts indicated that a limited partnership was duly registered with the firm name of “Jade Mountain 2 – THREE LEVELS OF EXISTENCE OF PARTNERSHIPS
Products Company Limited” (“Jade Mountain”), with the partnership business consisting of exploiting a marble deposit found on land situated in Bulacan, but with the partnership having its main office in Makati, Metropolitan Manila. Benjamin Yu was for [Updated: 23 August 2010]
many years the Assistant General Manager of the partnership business, but only half of his contracted salary was paid under the agreement that the rest would be paid when the partnership is able to source more funding. Majority of the partners eventually sold their equity (about 82%) and the business to a new set of investors who retained the business enterprise under the original name of Jade Mountain, but moved the head office to Mandaluyong. When Benjamin Yu learned later of the new address he proceeded to Mandaluyong but was told that the new partnership did not wish to retain his services. He then
III. THREE LEVELS OF EXISTENCE OF PARTNERSHIPS The Law on Partnerships under the New Civil Code treats of the partnership in three “levels of existence,” namely:
sought to recover from the new partnership his salary claims which accrued with the original partnership. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing from November 1984 to October 1988, moral and exemplary damages and attorney’s fees, against Jade Mountain under the new partnership. The new
(a) As a contractual relationship between and among the partners;
partners contended that Mr. Yu was never hired as an employee by the present or new partnership. One of the issues raised was whether the new partnership could be held liable for the claims of Yu pertaining to the old partnership which had been
(b) As a means or medium of doing business, through the structure of separate juridical personality, or as the basis of creating
dissolved due to the withdrawal of the leading partners.
multi-leveled contractual relations among various parties; and The basic contention of Mr. Yu was the principle that a partnership has a juridical personality separate and distinct from that of (c) As a business enterprise, or a business venture, or what is termed in other disciplines as ”a going concern.”
each of its members, which subsisted notwithstanding changes in the identities of the partners. Consequently, the employment contract between Benjamin Yu and the partnership and the partnership Jade Mountain could not have been affected by
Knowing the three levels at which the Law on Partnerships treats the partnership arrangement is important in determining the
changes in the latter’s membership.
legal significance of the various provisions of the New Civil Code regulating partnerships, as well as a manner of appreciating the doctrinal value of such provisions.
The Court defined the inextricable link of the contract of partnership between the original partners and the juridical personality that arose from the nexus of that contract, and that when the contract was rescinded with the withdrawal of the majority of the partners, then the partnership was dissolved and its separate juridical personality ceased to exists to cover the new set of partners, thus:
1. Illustrative Interplay of the Tri-Level Existence of the Partnership Two (2) main issues are thus posed for our consideration in the case at bar: It would be important to illustrate the legal interplay between the three (3) levels of partnership existence, and the legal doctrines that result from such interplay. For this purpose we will use the decision of the Supreme Court in Yu v. NLRC, 224
(1) whether the partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and replaced
SCRA 75 (1993).
by a new partnership composed of Willy Co and Emmanuel Zapanta; and
6 (2) if indeed a new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights under his
enterprise), and recognized that the business enterprise transfer doctrine is governed in details under Article 1840 of the Civil
employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal effect of the changes in the
Yu also recognized one of the principles in business enterprise transfers, that the new owners of the business enterprise do
membership of the partnership was the dissolution of the old partnership which had hired petitioner in 1984 and the
have a right to choose who would be employed in their newly acquired business, and they cannot be compelled to maintain the
emergence of a new firm composed of Willy Co and Emmanuel Zapanta in 1987. (Ibid, at p. 80.)
employment contracts of the managers and employees existing with the transferor, thus:
The Court held that the applicable rule would be Article 1828 of the Civil Code which defines “dissolution of a partnership [as]
It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new general or
the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished
assistant general manager to run the affairs of the business enterprise taken over. An assistant general manager belongs to
from the winding up of the business.” Nonetheless, the determination of the right of Mr. Yu to recover from the new partnership
the most senior ranks of management and a new partnership is entitled to appoint a top manager of its own choice and
which constituted its own separate juridical personality was based on the fact that it continued the old business enterprise of
confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination,
the dissolved partnership, thus:
or termination without just or authorized cause. We think that the precise authorized cause for termination in the case at bar was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new owner
In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of winding up
himself, who personally ran the business of Jade Mountain. Benjamin Yu’s old position as Assistant General Manager thus
and closing of the affairs of the partnership. In the case at bar, it is important to underscore the fact that the business of the old
became superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one
partnership was simply continued by the new partners, without the old partnership undergoing the procedures relating to
month’s pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6) months being
dissolution and winding up of its business affairs. In other words, the new partnership simply took over the business enterprise
considered as a whole year. (Ibid, at p. 83-84.)
owned by the preceding partnership, and continued using the old name of Jade Mountain Products Company Limited, without winding up the business affairs of the old partnership, paying off its debts, liquidating and distributing its net assets, and then
Another illustrative case is the decision in United States v. Clarin, 17 Phil. 84 (1910), where a partner filed estafa charges
re-assembling the said assets or most of them and opening a new business enterprise. There were, no doubt, powerful tax
against his co-partners for the latter’s failure to deliver to him his half of the profits from the partnership venture. In denying the
considerations which underlay such an informal approach to business on the part of the retiring and the incoming partners. It is
applicability of the charges of estafa the Court held –
not, however, necessary to inquire into such matters. The P172 having been received by the partnership, the business commenced and profits accrued, the action that lies with the What is important for present purposes is that, under the above described situation, not only the retiring partners (Rhodora
partner who furnished the capital for the recovery of his money is not a criminal action for estafa, but a civil one arising from
Bendal, et al.) but also the new partnership itself which continued the business of the old, dissolved, one, are liable for the
the partnership contract for a liquidation of the partnership and a levy on its assets if there should be any. x x x [Estafa] . . .
debts of the preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al., the Court held that under facts very similar to
does not include money received for a partnership; otherwise the result would be that, if the partnership, instead of obtaining
those in the case at bar, a withdrawing partner remains liable to a third party creditor of the old partnership. The liability of the
profits, suffered losses, as it could not be held liable civilly for the share of the capitalist partner who reserved the ownership of
new partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established in Article 1840 of
the money brought in by him, it would have to answer to the charge of estafa, for which would be sufficient to argue that the
the Civil Code. . .(Ibid, at pp. 81-82)
partnership had received money under the obligation to return it. The complaint for estafa is dismissed without prejudice to the institution of a civil action. (Ibid, at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 ).
Yu therefore recognized the applicability of the successor liability arising from business enterprise transfer (i.e., that the creditors of the business enterprise have a right to recover payment of their claims against the transferee of the business
7 The ruling in Clarin should be distinguished from that in People v. de la Cruz, (G.R. No. 21732 , 03 September
. . . [I]t appears evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution of the
1924, cited in People v. Campos, (CA) 54 O.G. 681 ) where the industrial partner was held liable for estafa for
second one, which they unmistakable called an “Additional Agreement” . . . Except for the fact that they took in one industrial
appropriating money that has been given to him by the capitalist partner for a particular transaction. The doctrine was
partner, gave him an equal share in the profits and fixed the term of the second partnership to thirty (30) years, everything else
reiterated in Liwanag v. Court of Appeals, 281 SCRA 255 (1997), “Thus, even assuming that a contract of partnership was
was the same. Thus, they adopted the same name, . . . they pursued the same purposes and the capital contributions of Rojas
indeed entered into by and between the parties, we have ruled that when money or property have been received by a partner
and Maglana as stipulated in both partnership call for the same amounts. Just as important is the fact that all subsequent
for a specific purpose (such as that obtaining in the instant case) and he later misappropriated it, such partner is guilty of
renewal of Timber License No. 35-36 were secured in favor of the First Partnership, the original licensee. . . To all intents and
purpose therefore, the First Articles of Partnership were only amended, in the form of Supplementary Articles of CoPartnership . . . which was never registered . . . Otherwise stated, even during the existence of the second partnership, all
Perhaps the interplay of the various levels of existence of the partnership arrangement is best exemplified by the decision of
business transactions were carried out under the duly registered articles. (Ibid, at pp. 117-118)
the Supreme Court in Rojas v. Maglana, 192 SCRA 110 (1990). In that case, a partnership was constituted between Rojas and Maglana to operate timber forest products concession, and articles of co-partnership were duly executed and registered with
The Court then proceeded to hold that —
the SEC using the firm name “Eastcoast Development Enterprises”. Later, the partners took in an industrial partner, whereby they executed an “Additional Agreement” which essentially adopted the registered articles but covering the acceptance of an
On the other hand, there is no dispute that the second partnership was dissolved by common consent. Said dissolution did not
industrial partner, which agreement was not duly registered with the SEC, and the partnership operated under the original
affect the first partnership which continued to exist “as shown by the subsequent acts of the original partners carrying one with
registered firm name. Shortly thereafter, the original partners bought out the interest, share and participation of the industrial
the original partnership business and confirming the obligations constituted under the original articles of partnership. The
partner in the firm, and the partnership was continued without the benefit of any written agreement or reconstitution of their
conclusion of the Court was thus: “Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of [the
written articles of co-partnership.
industrial partner] can neither be considered as a de facto partnership, nor a partnership at will, for as stressed, there is an existing partnership, duly registered.” (Ibid, at p. 118)
When Rojas entered into a separate management contract with another logging enterprise and withdrew his equipment from the partnership, Maglana made a formal demand against Rojas for the payment of his promised contribution to the partnership
Rojas therefore affirms two important aspects in Partnership Law:Firstly, that registration of the contract of partnership with the
and compliance with his obligation to perform the duties of logging superintendent as provided expressly in the registered
SEC has the legal effect of binding the partners (and perhaps even third parties dealing with the partnership), as to the
articles of co-partnership. When Rojas responded that he would not be able to comply with his promised contribution and will
contractual obligations, the rights and duties of the partners, and which has effective force even as the partnership undergoes
not work as logging superintendent for the partnership, Maglana gave notice of the dissolution of the partnership. In the suit
changes within its constitution by the acceptance into and withdrawal of partners into the venture. Secondly, the underlying
that ensued between the partners, one of the issues that had to be resolved by the Court was the nature of the partnership and
business enterprise, the manner of its operation, has much legal influence of determining the contractual intents of the
the legal relationship of Rojas and Maglana after the retirement of the industrial partner from the second partnership.
partners in the determination of inter-partnership rights and obligations.
On this issue, the trial court ruled that the second partnership superseded the first partnership, so that when the second
partnership was dissolved by the withdrawal of the industrial partner, there being no written contract of co-partnership when it was continued by the two original partners, there was no reconstitution of the original partnership, and consequently the partnership that was continued between Rojas and Maglana was a de facto partnership at will. In overruling the court a quo, the Court held –
8 The fact that a partnership is first and foremost a contractual relationship, means that it is subject to the rules, principles and 3 – PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP
doctrines pertaining to contracts in general, but modified in the sense that a partnership is at the same time a “medium of doing business” or a device for undertaking a venture. This means that the Law on Partnerships must balance between the [Updated: 23 August 2010]
principles governing the relationship of partners among themselves as contractual parties, and also their rights and obligations with respect to the business venture or undertaking that brought them together in the first place. In other words, parties to a partnership do not come together for the sake of coming together, but in order to achieve as a group, a business venture or undertaking. The various provisions of the Law on Partnerships embodied in the Civil Code address either separately or coordinately these “levels of existence” of a partnership: as contractual relationship, and as a means of doing business. An example showing the essence of a partnership as a contract is provided under Article 1771 which bears the doctrine of
III. PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP
“consensuality” governing contracts in general: “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 1770 also
embodies the principle that the provisions of law are deemed incorporated into every contract, even a contract of partnership Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property,
as it provides that “A partnership must have a lawful object or purpose.”
or industry to a common fund, with the intention of dividing the profits among themselves. The primary doctrine that first and foremost the partnership must find its nexus in a contractual relationship is exemplified in Two or more persons may also form a partnership for the exercise of a profession. (1665a)
the decision inLyons v. Rosentock, 56 Phil. 632 (1932). In that case, Lyons and Elser were already partners in particular real estate undertakings. Subsequently, Lyons became interested in purchasing for the venture the San Juan estate, and moved
Art. 1770. A partnership must have a lawfu object or purpose, and must be established for the common benefit or interest of the partners.
forward towards negotiating its acquisition and communicating to Elser in the United States to join him in the venture. Elser wrote back clearly indicating that he was not joining Lyons in the San Juan estate venture. The Court held that the fact that Lyons had used as security for the acquisition of the San Juan estate one of the partnership properties in anticipation that
Art. 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. (1667a)
Elser would accept the partnership arrangement, but which Elser definitive refused and the partnership property was substituted by Lyons separate property to secure the venture, did not make Lyons a partner in the San Juan estate venture, since there was never any meeting of minds to constitute such partnership. Lyons demonstrate that before there can be a
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise
partnership enterprise, it is necessary that there must having been a meeting of minds to constitute a contract of partnership.
stipulated. (1679) _____ 1. Characteristics of the Partnership Contract Article 1767 of the Civil Code defines a “contract of partnership” as one where “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,” and includes in its coverage the exercise of a profession pursued in partnership form.
a. Nominate and Principal
9 The contract of partnership is a nominate contract, not only because it has been given a specific name under the New Civil
constituted in any form except where immovable property or real rights are contributed thereto, in which case a public
Code, but it is a principal contract and can exists on its own upon the essential elements coming together at perfection; and
instrument shall be necessary.”
that once created there is a set of rules (Law on Partnerships of the New Civil Code) that govern such contract, and the parties to such contract cannot refuse generally to be governed by such provisions. Thus, Article 45 of the Civil Code provides that
Although Articles 1772 and 1773 provide for public instrument and registration when the capital contribution is more than
“Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning
P3,000.00, and that of an inventory attached to the public instrument whenever immovable property is contributed,
nonetheless jurisprudence even discount the nullity of the resulting contract of partnership, as will be discussed hereunder.
To illustrate the nominate and principal nature of the contract of partnership, Fernandez v. Dela Rosa, 1 Phil. 671 (1903), held
In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court held that when members of the family leased out a
parcel of land to SHELL Company, and used the advance rentals paid them to allow one of their members to capitalize the dealership with SHELL, then a partnership has been constituted among them:
The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these two elements the
There is no doubt that the parties hereto formed a partnership when they bound themselves to contribute money to a common
partnership relation results, and the law itself fixes the incidents of this relation if the parties fail to do so.” In resolving the
fund with the intention of dividing the profits among themselves. The sole dealership by the petitioner and the issuance of all
motion for reconsideration on in original decision, the Court even held that “It is of no importance that the parties have failed to
government permits and licenses in the name of petitioner was in compliance with the [policy that a dealership can only be
reach an agreement with respect to the minor details of contract. These details pertain to the accidental and not to the
granted to one person] of SHELL and the understanding of the parties of having only one dealer of the SHELL products. (Ibid,
essential part of the contract. (Ibid, at p. 680. Also Fue Leung v. IAC, 169 SCRA 746 ).
at p. 837.) In essence, Estanislao demonstrates that it is the true meeting of the minds of the parties (in this case, to pursue a common venture as a family group) that shall govern the rights and obligations of the contracting parties, and not the evidence of a
purported agreement (in this case the dealership agreement being registered only in the name of a brother).
A contract of partnership is essentially consensual, it is perfected upon meeting of the minds of the parties of the subject
In contrast, in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), the parties executed a “partnership agreement,” to conduct and
matter to undertake a business venture, and the consideration, which is the obligation to contribute of money, property or
carry on the business of operating a theatre for the exhibition of motion and talking pictures; nonetheless, the Court held that
service to a common fund. Whether the business enterprise is actually constituted or set-up, or whether or not the
the real intention of the parties was to effect a sub-lease of the property and the partnership agreement was resorted to in
contributions have been made into the partnership coffers, do not detract from the coming into existence of a valid partnership
order to avoid the provision in the main lease agreement prohibiting a sublease of the premises. The Court took into
contract. And failure to comply with the undertaking to deliver the promised contribution does not make a contract of
consideration the following actuations of the supposed Yulo partner to show that there as never a real agreement to form a
partnership void, but merely gives a ground for its dissolution.
Thus, in the early decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), the Court held that “The execution of a written
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish any help or
agreement was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the contributions
intervention in the management of the theatre. In the third place, it does not appear that she has ever demanded from
of the partners not having been in the form of immovables or rights in immovables.” (Ibid, at p. 677). This feature of
defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should
consensuality of a contract of partnership is now embodied in Article 1772 which provides that “A partnership may be
have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were
10 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
with the intention of dividing the profits, as was the case between the parties in Woodhouse, a contract of partnership arises,
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
and the incidents thereof governed by Partnership Law, even in the absence of a formal certificate or articles of co-partnership.
which she had leased from the owners. 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. (Ibid, at p.
Only recently, Tocao v. Court of Appeals, 342 SCRA 20 (2000), summarized the prevailing doctrine on the nature of the
contract of partners, thus —
Yulo demonstrates the principle that a contract of partnership is consensual in nature and is constituted by the real meeting of
To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more persons bind themselves to
the minds; such that even when formal articles of partnership are drawn-up between the parties, when it fact the evidence
contribute money, property or industry to a common fund; and (2) intention on the part of the partners to divide the profits
shows that they never intended to enter into a partnership, the article of partnership cannot create a partnership when in fact
among themselves. It may be constituted in any form; a public instrument is necessary only where immovable property or real
there has never been a meeting of minds to constitute one.
rights are contributed thereto. This implies that since a contract of partnership is consensual, an oral contract of partnership is as good as a written one. Where no immovable property or real rights are involved, what matters is that the parties have
In contrast, we view the decision in Woodhouse v. Halili, 93 Phil. 526 (1953), as a little dubious when it distinguishes between
complied with the requisites of a partnership. The fact that there appears to be no record in the Securities and Exchange
the obligation to enter into a contract of partnership, from that of executing the certificate of partnership itself. In Woodhouse,
Commission of a public instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Code did not
the plaintiff and the defendant had come to an agreement to enter into a partnership business to bottle and distribute an
cause the nullification of the partnership. . . (Ibid, at pp. 30-31.)
American brand softdrinks in the Philippines; and that defendant, who would primarily finance the business, agreed to grant plaintiff the right to receive 30% of the profits under his obligation to secure the bottling franchise for the venture. When the
Tocao held that so long as the two essential elements of a partnership are present, then the fact that the business was
venture was eventually set-up, the defendant had refused to finalize the articles of partnership when he learned during the
operated under the name of a registered sole proprietorship was of no moment, especially when the registration of the
negotiations in the United States that plaintiff did not have for himself the bottling franchise he promised he had secured. The
business name with the Bureau of Domestic Trade was only for purpose of being able to secure such business name. (Ibid,
plaintiff brought action to have the articles of partnership executed and to receive his 30% share in the earnings. Prescinding
at p. 36.)
from the language of the original agreement executed between the parties that the very language of the agreement that the parties intended that the execution of the agreement to form a partnership was to be carried out at a later date. They expressly agreed that they shall form a partnership,” (Ibid, at p. 539) the Court held – As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation to do, not to give. The law recognizes the individual’s freedom or liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what Spanish commentators call a very personal act (acto personalisimo), of which courts may not compel compliance, as it is considered an act of violence, to do so. (Ibid, at p. 539.) We disagree with the afore-quoted ruling of the Court in that it fails to appreciate the consensual nature of a contract of partnership, and that the moment the parties come to an agreement which basically embodies the formation of a common fund
c. Onerous and Bilateral The onerous and bilateral characteristics of the contract of partnership are demonstrated by the fact that the existence of a partnership requires an agreement for the creation of a common fund from the contributions of the partners, which may either be in money, property or industry. Under Article 1786, a partner becomes by its very constitution, “a debtor of the partnership for whatever he may have promised to contribute thereto.” All partners are bound to contribute to the common fund, or to the partnership, including even the industrial partner who is bound to contribute his service.
11 d. Preparatory and Progressive
A contract of partnership is not entered into for the sake of merely creating a contractual relationship between and among the
4 – ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP
partners, but primarily to pursue a business enterprise (i.e., creation of a common fund with intent to share profits and losses). [Updated: 12 October 2009]
Consequently, falling within the contractual meeting of the minds of the parties is that the inter-partnership relationship continues to evolve as the underlying business enterprise itself evolves and progresses. In other words, the contract of partnership is simply the base upon which other contracts and various other transactions are to be pursued with the public, and for which the partners shall continually adjust their working relationships. The operation of the underlying business enterprise also determines the nature and value of the equity of the partners. Thus, when the nexus of the contract of partnership (the common fund and intention to divide the profits and losses) have been constituted, other contractual relationships are expected to flow therefrom as a matter of course. An early illustration of the preparatory and progressive nature of the contract of partnership can be found in the decision
IV. ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP
in Fernandez v. De la Rosa, 1 Phil. 671 (1903), where once the elements of contribution to a common fund and understanding of sharing of profits had been clearly established between the parties, a contract of partnership arose and all the incidents arising therefrom automatically engendered even if the parties have not yet decided upon the details of their relationship, thus
— Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, . . . We have already stated in the opinion what are the essential requisites of a contract of partnership . . . Considering as a
or industry to a common fund, with the intention of dividing the profits among themselves.
whole the probatory facts which appears from the record, we have reached the conclusion that plaintiff and the defendant agreed to the essential parts of that contract, and did in fact constitute a partnership, with the funds of which were purchased
Two or more persons may also form a partnership for the exercise of a profession. (1665a).
the cascoes with which this litigation deals, although it is true that they did not take precaution to precisely establish and determine from the beginning the conditions with respect to the participation of each partner in the profits or losses of the partnership. The disagreements subsequently arising between them, when endeavoring to fix these conditions, should not and
Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners.
cannot produce the effect of destroying that which has been done, to the prejudice of one of the partners, nor could it divest his rights under the partnership which had accrued by the actual contribution of capital which followed the agreement to enter into a partnership, together with the transactions effected with partnership funds. The law has foreseen the possibility of the constitution of a partnership without an express stipulation by the partners upon those conditions, and has established rules which may serve as a basis for the distribution of profits and losses among the partners. . . We consider that the partnership entered into by the plaintiff and the defendant falls within the provision of this article. (Ibid, at pp. 680-681.)
When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime. (1666a) Art. 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. (1667a)
12 Art. 1784. A partnership begins from the moment of the executio of the contract, unless it is otherwise stipulated. (1679).
(1) Except as provided by Article 1825, pesons who are not partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or copossessors do or do not share any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;
The Law on Partnership under the New Civil Code begins with its definition under Article 1776 as “contract of partnership,” emphasizing that first and foremost the nexus of the legal relationship is contractual in nature. As in any other contract, the
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
essential elements for a contract of partnership to be valid would be as follows: (a) As a debt by installments or otherwise; (a) CONSENT: The meeting of minds between two or more persons to form a partnership (i.e., to pursue jointly a business enterprise, or to jointly exercise a profession);
(b) As wages of an employee or rent to a landlord;
(b) SUBJECT MATTER: The “creation of a common fund” or more specifically, to undertake a business venture with the
(c) As an annuity to a widow or representative of a deceased partner;
“intention of dividing the profits among themselves”, or in the case of a professional partnership, to exercise together a common profession; and
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(c) CONSIDERATION: The contribution of cash, property or service to the business venture.
(e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. (n) _____ a. Consent to Pursue a Business Jointly Is the Nexus of the Partnership Relationship The agreement of two or more persons to “bind themselves” to jointly pursue a business venture constitutes the very nexus by
1. Element of CONSENT ______ Art. 1769. In determining whether a partnership exists, these rules shall apply:
which the contract of partnership arises under Article 1767 of the Civil Code. Under Article 1769 of the Civil Code, “in determining whether a partnership exists,” the first and foremost rule is that “persons who are not partners as to each other are not partners as to third persons.” In other words, the general rules is that no person can find himself a partner in a partnership, even as to third parties, unless he previously consented to be in such contractual relationship.
13 One does not become a partner, nor is a partnership constituted, but the fact alone that they are associated together in
(b) with joint interest in the profits and losses thereof.
situation where there is co-ownership or profits earned therefrom. Thus, under Article 1769(2), “Co-ownership or copossession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits
The agreement to share profits and losses from the business venture is the hallmark of a partnership arrangement. It is also
made by the use of the property.” The essence of every partnership arrangement is the consent of each of the partners to be
the essence of the “equity” position of the partners vis-a-vis the business enterprise, as differentiated from partnership
associated in a business venture.
suppliers and creditors, and company employees, who bear no proprietary interest with the business enterprise they deal with. Article 1769 of the Civil Code, in providing for the rules “In determining whether a partnership exists,” states under paragraph (4) that “The receipt by a person of a share of the profits in the business is prima facie evidence that he is a partner in the
b. Legal Capacity to Contract
business.” In contrast, the same article provides, “The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are
Parties to a contract of partnership must have legal capacity to contract. Under Article 1782, persons who are prohibited from
giving each other any donation or advantage cannot enter into a universal partnership. Under Article 87 of the Family Code, a married woman may enter into a contract of partnership even without her husband’s consent, but the latter may object under
It is fairly implied under Article 1767, as it defines a contract of partnership, that the essence of the agreement among the
partners is to become equity-holders in a business enterprise, because their consent must be the creation of a common fund “with the intention of dividing the profits among themselves.” The essence of an equity holder is to take the profits from the business, and consequently, to absorb also the losses sustained thereby. Therefore, when a person is entitled to share in the “gross returns” of the business venture, he is not an equity holder, and if it is operated under the medium of a partnership,
c. Admission of New Partner into an Existing Partnership Since consent is the nexus of all partnership relationships, the principle is exemplified under Article 1804 of the Civil Code which provides even in an already existing partnership, that no person shall be admitted into a partnership, or become a party to the partnership arrangement without the consent of all the partners.
such person is not a partner in the venture. In Santos v. Reyes, 368 SCRA 261 (2001), the fact that in their “Articles of Agreement,” the parties agreed to divide the profits of a lending business “in a 70-15-15 manner, with the petitioner getting the lion’s share . . . proved the establishment of a partnership,” (Ibid, at p. 269.) even when the other parties to the agreement were given separate compensations as bookkeeper and creditor investigator. In Tocao v. Court of Appeals, 365 SCRA 463 (2001), the Court held that a creditor of a business enterprise cannot seek
2. SUBJECT MATTER: Pursuit of a Business Enterprise Essentially, the consent or meeting of the minds of the parties in a contract of partnership must be upon a particular type of “subject matter”, which essentially is the pursuit of a ”business enterprise”: (a) an agreement to contribute to a common fund; and
recovery of his claim against the partnership from a person who is without any right to participate in the profits and who cannot be deemed as a partner in the business enterprise, since the essence of partnership is that the partners share in the profits and losses. In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court held that –
14 “Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a
In contrast, in Reyes v. Commissioner of Internal Revenue, 24 SCRA 198 (1968), the Court found that where father and son
partnership. And even with an assurance made by one of the partners that they would earn a huge amount of profits, in the
purchased a lot and building and had it administered by an administrator, and divided equally the net income, there was a
absence of fraud, the other partners cannot claim a right to recover the highly speculative profits. It is a rare business venture
partnership formed because profit was the original intention for the common fund.
guaranteed to give 100% profits.” (Ibid, at p. 95) Likewise in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957), where three sisters bought four pieces of real The Court also held that any stipulation on the payment of a high commission to one of the partners must be understood have
property with every intention to lease them out, and which they in fact leased to various tenants and derived rentals therefrom,
been based on an anticipation of large profits being made from the venture; and since the venture sustained losses, then there
there was a partnership formed.
is no basis to demand for the payment of the commissions. Nonetheless, even when a person is entitled to share in the “profits” of the business venture, when the legal basis upon such right is based by some other contractual relationship not borne out of equity or proprietary interests, such as payment of the
b. Receipt By a Person of a Share of the Net Profit
principal and/or interest on a loan or a debt, wages of an employee, rents to a landlord, annuity to a widow or representative of a deceased partner, or as consideration for the sale of the goodwill of a business or other property by installments. In other words, the contractual agreement to share in the profits and losses of a business venture must always be based upon the assumption of equity interest in the business enterprise upon which the contract of partnership shall arise.
Under Article 1769(4), the receipt by a person of a share of the net profits of a business is prima facie evidence that he is a partner in the business. However, in the following cases, where there is legal and contractual basis for the receipt of the profits other than as equity holder, there is no partnership constituted, thus: (a) As installment payments of debt and/or interests thereof;
a. Co-ownership or Co-Possession Do Not Necessarily Constitute a Partnership In Navarro v. Court of Appeals, 222 SCRA 675 (1993), the Court held that mere co-ownership or co-possession of property does not necessarily constitute the co-owners or co-possessors partners, regardless of whether or not they share any profits derived from the use of the property, when no indication is shown that the parties had intended to enter into a partnership. In Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436 (1985), four brothers and sisters acquired lots with the
(b) As wages of an employee; (c) As rentals paid to a landlord; (d) As annuity to a widow or representative of deceased partner; (e) As consideration of sale of goodwill or other property.
original purpose to divide the lots among themselves for residential purposes; when later they found it not feasible to build their residences thereon because of the high cost of construction, they decided to resell the properties to dissolve the co-ownership. The Court ruled that no partnership was constituted among the siblings, since the original intention was merely to collectively
Thus, in Pastor v. Gaspar, 2 Phil. 592 (1903), the Court held that there was no new partnership formed when a loan was
purchase the lots and eventually to partition them among themselves to build their residences; and that in fact they had no
obtained to purchase lorchas needed to expand the shipping business of an existing shipping partnership venture under the
choice but to resell the same to dissolve the co-ownership. Obillos found that the division of the profits was merely incidental to
condition that the lender would receive part of the profits of the business in lieu of interests.
the dissolution of the co-ownership which was in the nature of things a temporary state; and that there could not have been any partnership, but merely a co-ownership, since there was utter lack of intent to form a partnership or joint venture.
15 In Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906), where the terms of the contract provided for the salary of the bookkeeper to
the parties over a commercial land where one party (the lessee) was prohibited under her main contract of lease from
be 5% of net profits of the business, the same did not make the bookkeeper a partner in the business, since it was merely a
subleasing the property, and the other party (the sublessee) wanted to operate a threater in said premises. The Court held –
measure of his salary as an employee of the company. To the same effect is the ruling inSardane v. Court of Appeals, 167 SCRA 524 (1988).
The most important issue raised in the appeal is that contained in the fourth assignment of error, to the effect that the lower court erred in holding that the written contracts, Exhs. “A”, “B”, and “C”, between plaintiff and defendant, are one of lease and
In Bastida v. Menzi & Co., 58 Phil. 188 (1933), the Court held that despite the agreement that Bastida was to receive 35% of
not one of partnership. We have gone over the evidence and we fully agree with the conclusion of the trial court that the
the profit from the business of mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any
agreement was a sublease, not a partnership. The following are the requisites of partnership: (1) two or more persons who
contract of partnership constituted between them based on the following key elements: (a) there was never any common fund
bind themselves to contribute money, property, or industry to a common fund; (2) intention on the part of the partners to divide
created between the parties, since the entire business as well as the expenses and disbursements for operating it were
the profits among themselves. (Art. 1767, Civil Code.)
entirely for the account of Menzi & Co.; (b) there was no provision in the agreement for reimbursing Menzi & Co. in case there should be no profits at the end of the year; and (c) the fertilizer business was just one of the many lines of business of Menzi &
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish any help or
Co., and there were no separate books and no separate bank accounts kept for that particular line of business. The
intervention in the management of the theatre. In the third place, it does not appear that she has ever demanded from
arrangement was deemed to be one of employment, with Bastida contributing his services to manage the particular line of
defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should
business of Menzi & Co.
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
Tocao v. Court of Appeals, 342 SCRA 20 (2001), held that “while it is true that the receipt of a percentage of net profits
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
constitutes only prima facie evidence that the recipient is a partner in the business, the evidence in the case at bar controverts
which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of
an employer-employee relationship between the parties. In the first place, private respondent had a voice in the management
June 17, 1945 (Exh. “A”), which shows that both parties considered this offer as the real contract between them.” ( Ibid, at pp.
of the affairs of the cookware distributorship, including selection of people who would constitute the administrative staff and the
sales force.” (Ibid, at pp. 33-34). In the more contemporary decision in Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court affirmed the decision of the trial court “Ordering the defendant to execute a public instrument embodying all the provisions of the partnership agreement entered into between plaintiffs and defendant as provided for in Article 1771, Civil Code of the c. Meeting of Minds on the Establishing a Common Fund Is the Essence of a Partnership Contract
Philippines.” In that case, the siblings in a family leased out to SHELL a family commercial lot for the establishment of a gasoline station, and they invested the advanced rentals they received from SHELL to allow one their brother to be the
All the foregoing examples indicate that what brings about a contract of partnership is essentially an agreement to constitute a common fund with the intention of dividing the profits and losses; outside of these essential elements, a contract of partnership cannot subsist. The importance of consent, vis-a-vis the elements of common fund and intention to divide the profits among themselves, is best illustrated inYulo v. Yang Chiao Seng, 106 Phil. 111 (1959), where in fact the parties had executed formal articles of partnership, and yet the Court found that the real intention of the parties was really to constitute a relation of sublease between
registered dealer of SHELL under the latter’s policy of “one station, one dealer,” and that in fact the registered dealer had accounted for the operations to the other members of the family. When later on he stopped accounting for the operations, and refused to acknowledge the existence of a partnership over the gasoline station, the Court held – Moreover other evidence in the record shows that there was in fact such partnership agreement between the parties. . . Petitioner submitted to private respondents periodic accounting of the business. . . gave a written authority to private
16 respondent . . ., his sister, to examine and audit the books of their “common business” (aming negosyo). . . . There is no doubt
common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a
that the parties hereto formed a partnership when they bound themselves to contribute money to a common fund with the
character of habituality peculiar to business transactions engaged in for purposes of gain.
intention of dividing the profits among themselves. The sole dealership by the petitioner and the issuance of all government permits and licenses in the name of petitioner was in compliance with the afore-stated policy of SHELL and the understanding
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties
of the parties of having only one dealer of the SHELL products. (Ibid, at p. 837)
were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the
The other important aspect is determining whether a partnership has been constituted among several persons, is that under
our tax laws, a partnership is treated like a corporate taxpayer and liable separately for income tax for its operations apart from the individual income tax liabilities of each of the partners.
4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes
Thus, in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957), three sisters borrowed a huge amount of money
and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or
from their father, and with their personal funds, purchased under several transactions real estate properties, and subsequently
business enterprise operated for profit.
appointed their brother as manager thereof who leased them out to various lessees. Eventually, the Collector of Internal Revenue assessed them for the payment of corporate income tax they have been operating the real estate venture. In arguing
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first
that they have never formed a partnership, and that they merely constituted themselves a co-owners of the properties
property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager.
bought pro indiviso, the Court held – 6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money,
or on the causes for its continued existence. They did not even try to offer an explanation therefore. (Ibid, at pp. 144-146.)
property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because:
In other words, the essence of the contract of partnership is that the partners “contract or bind themselves under a contractual arrangement” to be joint owners and managers of a business enterprise, which is highlighted by the right to receive the net profits and share the losses therein. Article 1770 of the Civil Code provides that for a partnership contract to be valid it “must be established for the common benefit or interest of the partners,” which clearly indicates the equity or proprietorship position of the partners. Consequently, if there is no clear meeting of the minds to form a partnership venture, the fact that a person
1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso.
participates in the “gross receipts” of a business enterprise or from a property arrangement does not make him a partner
They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common
because he is not made to bear the burdens of ownership, i.e.,to be liable for expenses and losses of the business enterprise.
fund. The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA 74 (1972), is illustrative of this principle. In Ona, in the 2. They invested the same, not merely in one transaction, but in a series of transactions. . . . The number of lots (24) acquired
project partition agreed upon by the heirs the agreed to keep the properties of the estate together and to divide the profits in
and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly
proportion to their stipulated interests therein. In holding that there was thereupon constituted among the co-heirs an
indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned
unregistered partnership subject to corporate income tax under the Tax Code, the Court held –
17 It is thus incontrovertible that petitioners did not, contrary to their contention, merely limited themselves to holding the
The winding up of partnership affairs has not yet been undertaken by the partnership. This is manifest in petitioners’ claim for
properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties
stocks that had been entrusted to private respondent in the pursuit of the partnership business.” (Ibid, at p. 38.)
were sold at considerable profit and that with said profit, petitioners engaged, thru Lorenzo T. Ona, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. . . the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Ona as a common fund in undertaking several transactions or in business, with the intent ion of deriving profits to be shared by them proportionally, such act was tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership. (Ibid, at p. 81.) Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939), where fifteen people contributed money to buy a sweepstakes ticket with the intention to divide the prize which they may win, and in fact the ticket won third prize, the Court ruled that they had formed a partnership which was subject to tax as a corporate taxpayer. Likewise, inGallemet v. Tabilaran, 20 Phil. 241 (1911), the Court held that when land is purchased with equal funds to be contributed by the parties, and it was the clear intention to divide the property between the two of them after acquisition, there could not have been formed a partnership.
e. Doctrine of “Attributes of Proprietorship” as a Means to Prove or Disprove the Existence of a Partnership There are a number of decisions that use the hazy doctrine of “attributes of proprietorship” as one of the indications of the existence of a contract of partnership or a partnership venture. We take the decision in Tocao v. Court of Appeals, 342 SCRA 20 (2000), where the main issue was whether there existed a contract of partnership between three parties, namely Tocao, Bello and Anay, in the face of the assertions of both Tocao and Bello that there was no partnership agreement entered into considering that: (a) there was no written agreement embodying the alleged partnership agreement, and that in fact the business was registered with the government authorities as a single proprietorship in the style of “Geminesse Enteprise” in the name of Tocao; (b) Bello asserts that he never gave any contribution to the venture, but merely guaranteed its credit standing; and (c) Anay never contributed anything to the business, and she was receiving overriding commission and participation in profits directly as a result of her handling the marketing of the products, and not as a partner to the venture.
d. Proof of the Existence of the Business Enterprise May Support the Existence of a Partnership Even After Dissolution
In brushing aside the assertions of no contract of partnership, the Court, apart from holding that a contract of partnership need not be in writing to be valid and enforceable, held that all three parties had by the evidence adduced exercised rights of
There have been cases where the existence of the business enterprise became the basis by which the courts would conclude
proprietorship on the business venture as to show without doubt the existence of a partnership, thus:
that indeed a contract of partnership had been entered into by the parties. Petitioners [Tocao and Belo] admit that private respondent [Anay] had the expertise to engage in the business of In Idos v. Court of Appeals,] 296 SCRA 194 (1998), in determining whether the partnership enterprise continued to exist and
distributorship of cookware. Private respondent contributed such expertise to the partnership and hence, under the law, she
has not been terminated, the Court ruled that “The best evidence of the existence of the partnership, which was not yet
was the industrial or managing partner. It was through her reputation with the West Bend Company that the partnership was
terminated (though in the winding up stage), were the unsold goods and uncollected receivables, which were presented to the
able to pen the business of distributorship of that company’s cookware products; it was through the same efforts that the
trial court. Since the partnership has not been terminated, the petitioner and private complainant remained as co-partners.”
business was propelled to financial success. Petitioner Tocao herself admitted private respondent [Anay] held the positions of
(Ibid, at p. 206.)
marketing manager and vice-president for sales . . . x x x. (Ibid, at p. 31; underscoring supplied)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), citing the ruling inIdos, the Court held that the fact that the claiming party
By the set-up of the business, third persons were made to believe that a partnership had indeed been forged between
“had been unceremoniously booted out of the partnership . . . she still received her overriding commission (Ibid, at p. 36) . . .
petitioners [Tacao and Belo] and private respondent [Anay] . . .
18 On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the face of the established fact that
contribute money, property or industry for the purpose of engaging inthe supposed business. There is no proof that he was
he presided over meeting regarding matters affecting the operation of the business. Moreover, his having authorized in
receiving a share in the profits as a matter of course, curing the period when the trucking business was under operation.
writing . . . that private respondent should receive thirty-seven (37%) of the proceeds of her personal sales, could not be
Neither is there any proof that he had actively participated in the management, administration and adoption of policies of the
interpreted otherwise than that he had a proprietary interest in the business. His claim that he was merely a guarantor is belied
business. (Ibid, at p. 308.)
by that personal act of proprietorship in the business . . . (Ibid, at p. 32;underscoring supplied) In contrast, we should consider the decision in Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), where a The business venture operated under Geminesse Enterprise did not result in an employer-employee relationship between
partnership was insisted to have been constituted yet no direct evidence of the contribution to a common fund or sharing of
petitioners and private respondent. While it is true that the receipt of a percentage of net profits constitutes only prima facie
profits had been adduced during trial. The Court held –
evidence that the recipient is a partners in the business, the evidence in the case at bar controverts an employer-employee relationship between the parties. In the first place, private respondent had a void in the management of the affairs of the
Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng Kee
cookware distributorship, including selection of people who would constitute the administrative staff and the sales force. . .
never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses. Each has the
(Ibid, at pp. 33-34; underscoring supplied)
right to demand an accounting as long as the partnership exists. We have allowed a scenario wherein “[i] excellent relations exists among the partners at the start of the business and all the partners are more interested in seeing the firm grow rather
The exercise of the prerogatives of a proprietor should be viewed as merely collaborative evidence of the partnership
than get immediate returns, a deferment of sharing in the profits is perfectly plausible.” [Fue Lung v. IAC, 169 SCRA 764, 755
relationship between the parties in a business venture; in the end the existence of the contract of partnership must be located
(1989)]. But in the situation in the case at bar, the deferment, if any, had gone too long to be plausible. A person is presumed
in the actual meeting of minds to constitute a common fund and to divide the profits thereof among themselves. The reason
to take ordinary care of his concerns. . . A demand for periodic accounting is evidence of a partnership. (Ibid, at pp. 755-
why exercising the prerogatives of proprietorship or participating in the management of the business enterprise cannot on their
756, citing Estanislao, Jr. v. Court of Appeals, 160 SCRA 830, 837 ).
own be weighty evidence to prove the existence of a partnership agreement is because, it is logical for a business enterprise, whether it is operated as a partnership or a single proprietorship, to actually appoint a manager or other agents, authorized to exercise acts of management, without being owners or partners of the business venture. f. When Subject Matter (the Business Venture) Is Unlawful or Against Public Policy In any event, the application of the suppletory doctrine of “attributes of proprietorship” in jurisprudence is a recognition that a partnership arrangement is in essence a contractual aggregation of sole proprietors, who come together to form a common venture, each acting very much a proprietor of the business venture, while at the same time as agents to one another.
When the subject matter of a contract of partnership is unlawful, Article 1770 of the Civil Code provides that the contract is void; and being void the purported partners have no right to participate in any profits that may have been earned by the partnership enterprise. Thus, the article provides that “the profits shall be confiscated in favor of the State.”
The recent decision in Sy v. Court of Appeals, 398 SCRA 301 (2003), succinctly summarizes the badges that would normally accompany a partnership relationship, thus:
In Arbes v. Polistico, 53 Phil. 489 (1929), a partnership organized to engage in illegal gambling was declared void by judicial order, and pursuant to the provisions of Article 1770, all the profits earned were deemed confiscated in favor of the state.
Article 1767 of the Civil Code states that in a contract of partnership two or more persons bind themselves to contribute
However, it decreed that the partners had a right to recover their contributions, thus:
money, property or industry to a common fund, with the intention of diving the profits among themselves. Not one of these circumstances is present in this case [which sought to make the truck driver of the company of many years to be characterized as an industrial partner]. No written agreement exists to prove the partnership between the parties. Private respondent did not
Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to be returned to the partners, because it only deals with the disposition of the profits; but the fact that said contributions are not included in
19 the disposal prescribed for said profits, shows that in consequence of said exclusion, the general rules of law must be
(e) Article 1830(4), which decrees the dissolution of a partnership when the specific thing, which a partner had promised to
followed, and hence, the partners must be reimbursed the amount of their respective contributions. Any other solution would
contribute to the partnership, perishes before the delivery.
be immoral, and the law will not consent to the latter remaining in the possession of the manager or administrator who has refused to return them, by denying to the partners the action to demand them. (Ibid, at p. 495, quoting from MANRESA,
City of Manila v. Cumbe, 13 Phil. 677 (1909), held that “credit”, such as a promissory note or other evidence of obligation, or
COMMENTARIES ON THE SPANISH CIVIL CODE, Vol. XI, pp. 262-264.)
even a mere goodwill, may be validly contributed into the partnership. In other words, if service is a valid contribution to the common fund, then more so when it comes to intangible things, rights and chooses in action.
In Deluao v. Casteel, 26 SCRA 475 (1968), the Court held that a contract of partnership that sought to divide between the two partners-applicants the fishpond in contravention of the prohibitory provisions of law was deemed dissolved when the Government did finally issue a fishpond permit to one of the partners. 4. Other Essential Elements of Partnership Although American jurisprudence would consider two other elements to be essential for the contract of partnership to exist, 3. CAUSE or CONSIDERATION: Promised Contributions
In a contract of partnership, it is held that the cause or consideration for each partner is the undertaking of the other or others
(a) the purpose of a purpose must be to engage in some business enterprise; and
to contribute money, property or industry to a common fund (i.e., to the business venture). Being essentially a consensual is characteristic, a contract of partnership is perfected by the agreement by the partners to make such contribution (i.e., by the assumption of the obligation to contribute or to render service). The essence of the element of cause or consideration in every contract of partnership is emphasized in: (a) Article 1786, which declares every partner to be a debtor of the partnership for whatever he may have promised to contribute;
(b) the element of joint control (BAUTISTA, at p. 4); the same are also present in Philippine Partnership Law. As discussed above, the subject matter of every contract of partnership must be the agreement to jointly pursue a business enterprise. Thus, in Fernandez v. De la Rosa, 1 Phil. 671 (1903), it was held that “a joint interest in the profits” would constitute one of the “essential points upon which the minds of the parties must meet in a contract of partnership.” ( Ibid, at pp. 675-676) The element of “joint control” is embodied in the provisions of law that provides for mutual agency in a partnership
(b) Article 1787, which makes a partner liable for interest and damages for failing to contribute the sum of money he was
arrangement. (Art. 1810(3) provides that one of the property rights of a partner is “His right to participate in the management.”
bound to pay under the articles of partnership;
Art. 1818 of the Civil Code provides that “Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual
(c) Article 1789, which prohibits an industrial partner from engaging in business for himself, since he bound himself
way the business of the partnership of which he is a member binds the partnership.”
to contribute service to the partnership; In Council of Red Men v. Veterans Army, 7 Phil. 685 (1907), Article 3 of the constitution of the Veteran Army of the Philippines (d) Article 1790, which presumes an obligation to contribute equal shares among the partners when there is no stipulation as
provides as follows: “The constitution of the association provided for the following purpose: ‘The object of this association shall
to manner and amount of contribution; and
be to perpetuate the spirit of patriotism and fraternity those men who upheld the Stars and Stripes in the Philippine Islands
20 during the Spanish war and the Philippine insurrection, and to promote the welfare of its members in every just and honorable way; to assist the sick and afflicted and to bury the dead, to maintain among its members in time of peace the same union and harmony with which they served their country in times of war and insurrection.’” (Ibid, at p. 686.) The Court had raised the point that: “It seems to be the opinion of the commentators that where the society is not constituted for the purpose of gain, it does not fall within this article of the Civil Code. Such an organization is fully covered by the Law of Associations of 1887, but that law was never extended to the Philippine Islands.” (Ibid, at p. 687.) Nonetheless,Council of Red Men applied the then old Civil Code rule on civil partnership. The only form of partnership where “business consideration” or the “gaining of profits” is not the primary consideration for the common fund would be the authorized professional partnerships; but even in such cases the Court has considered that a profession is pursued as part of the livelihood undertaking of the partners. (In the Matter of the Petition for Authority to Continue Use of Firm Name “Sycip, Salazar, et.al. Ozaeta, Romulo, etc.,” 92 SCRA 1 .) The element of “joint control” is actually specified as the property rights of a partner under Article 1810 “to participate in the management”, as well as the confirmation of the attribute of “mutual agency” under Article 1818 confirming that “Every partner is an agent of the partnership for the purposes of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership.” —oOo—
21 5 – PARTNERSHIP AS A MEANS OF DOING BUSINESS, THROUGH THE JURIDICAL PERSON 1. Legal Bases of the Partnership Juridical Personality [Updated: 23 August 2010] Immediately after defining partnership as a contract under Article 1767 of the Civil Code, the Law on Partnerships provides under Article 1768 that the “partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the [registration] requirements of Article 1772.” Article 44 of the Civil Code expressly recognizes “partnerships” as being “juridical persons,” and provides that “partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each . . . partner or member.” Under Article 45 of the Civil Code, it is provided that “Partnerships and associations for private interests or purpose are V. PARTNERSHIP AS A MENAS OF DOING BUSINESS, THROUGH THE JURIDICAL ENTITY
governed by the provisions of this Code concerning partnerships.”
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1712, first paragraph. (n) 2. Underlying Business Ends of the Partnership Juridical Person Art. 44. The following are juridical persons: The importance of the grant of separate juridical personality to the partnership is to make it an efficient means by which x x x. (3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. (35a) Art. 45. x x x . Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. Art. 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. (38a) Art. 1774. Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. (n)
several persons can collectively pursue business. Thus, under Article 46 of the Civil Code it is provided that “Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization.” In the Law on Partnerships, the business purpose of the partnership juridical person is best exemplified by Article 1774 of the Civil Code which provides that “Any immovable property or an interest therein may be acquired in the partnership name,” to avoid the cumbersome need of having all the names of the partners listed in the title to the property. Consequently, the article provides that title to real property acquired in the partnership name may be conveyed only in the partnership name. Although a partnership is treated as a “person” before the law, such juridical personality does not occupy the same level as the “person” of an individual. The “person” of an individual is considered sacrosanct under modern societal doctrine; the State and civil society are organized towards protecting that person and engendering its safety and well-being. On the other hand, the
22 “person” of a partnership is a legislative grant by the State or a fiction created by the law, not for the benefit of the juridical
the rules governing co-ownership. The phrase “kept secret among the members,” according to Manresa, does not mean that
person, but precisely only as a means or medium by which individuals in society may achieve certain ends, and often they are
the articles are known to all the members but withheld from third persons. It contemplates a situation where the articles, which
business or commercial ends.
allow any one of the members to contract in his own name with third persons, are known to some members only and kept secret from the rest. In other words, the secrecy is not directed to third persons but to some of the partners.
That a partnership is really a creature of the law as a means by which society may pursue certain business or commercial ends means therefore that it is regulated under the Law on Partnerships for the benefit of those who employ it as their medium
This rule is intended to preserve the equality which must exist among the partners and to prevent any of them from defrauding
(the partners) and those who are authorized to deal with said medium (the creditors, the clients and customers). This
the partnership or the other members. This being the case it does not prohibit secret stipulations which are not designed to
philosophical understanding of the essence and purpose of the partnership “juridical person” is best exemplified by the
produce this result. It would not, for instance, have the effect of rendering invalid a separate agreement between two members
provisions of Article 1775 of the Civil Code which denies juridical personality to “Associations and societies, whose articles are
of a partnership pursuant to which one guarantees the other against loss of his capital contribution or assures him of profit.
kept secret among the members, and wherein any one of the members may contract in his own name with third persons.” In
Neither can the rule be invoked as against third persons by the partners entering into the secret stipulations, in consonance
other words, if an aggregation of individuals is not meant to undertake a business or commercial venture that is supposed to
with the general principle that a party should not be allowed to take advantage of a nullity which he himself has caused.”
deal with the public at large, then it is not intended to be a medium of doing business, and there is not purpose of granting it a
(BAUTISTA, at pp. 58-59, citing 11 Manresa 289 to 291)
separate juridical personality.
b. Jurisprudential Application of the Doctrine of Separate Juridical Personality of the Partnership a. The Case for “Secret Associations” In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the contention that since the defendant sued was a partnership that Art. 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one
summons must be served upon each of the partners, the Court held –
of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership. (1669)
[I]t has been the universal practice in the Philippine Islands since American occupation, and was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as legal or juridical entities and to permit them to sue and be sued in the name of the company, the summons being served solely on the managing agent or other official of the company by the section of the Code of Civil Procedure.” (Ibid, at p. 448)
Under Article 1775 of the New Civil Code, “Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and
The decision in Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1923), demonstrates how the separate juridical
shall be govenred by the provisions relating to co-ownership. (1669). Bautista discussed the rationale and effects of Article
personality accorded to a partnership arrangement makes certain rules on insolvency work differently as compared to
1775 as follows:
American jurisprudence on the same matter. In Campos Rueda a petition for involuntary insolvency was filed by the creditors of the limited partnership for an act of insolvency provided under the Insolvency Act (i.e., having failed to its obligations with
Not every contract intended to create a partnership produces a juridical personality. The Code [Article 1775] withholds the
three creditors for more than thirty days). The trial court denied the petition on the ground that it was not proven, nor alleged,
attribute of juridical personality to “associations and societies whose articles are kept secret among the members, and wherein
that the partners of the firm were insolvent at the time the application was filed; and that as said partners are personally and
any one of the members may contract in his own name with third persons.” And applies to such associations or societies only
solidary liable for the consequences of the transactions of the partnership, it cannot be adjudged insolvent so long as the
23 partners are not alleged and proven to be insolvent. In ruling that the denial of the petition for insolvency was in error, the
The “doctrine of piercing the veil of corporate fiction” finds relevance in Corporate Law because it is the means by which to by-
Court held –
pass the effects of the doctrine of “limited liability,” and through piercing acting stockholders and/or officers may be held personally liable for corporate debts.
Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This being so and the juridical
In spite of the partnership being accorded also a separate juridical partnership, the piercing doctrine has less application in
personality of a limited partnership being different from that of its members, it must, on general principle, answer for, and
Partnership Law because the partners are unlimitedly liable (i.e., personally liable with their separate properties) for
suffer, the consequence of its acts as such an entity capable of being the subject of rights and obligations. If, as in the instant
partnership debts. And yet, the doctrine found application to partnerships in Commissioner of Internal Revenue v. Suter, 27
case, the limited partnership of Campos Rueda & Co. failed to pay its obligations with three creditors for a period of more than
SCRA 152 (1969), where the Court addressed the legal position of the Tax Commissioner seeking to make the individual
thirty days, which failure constitutes, under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication of
partners liable for income tax for the income earned by the limited partnership, thus:
involuntary insolvency can be predicted, this partnership must suffer the consequences of such failure, and must be adjudged insolvent. We are not unmindful of the fact that some courts of the United States have held that a partnership may not be
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own, distinct and
adjudged insolvent in an involuntary insolvency proceeding unless all of its members are insolvent, while others have
separate from that of its partners (unlike American and English law that does not recognize such separate juridical
maintained a contrary view. But it must be borne in mind that under the American common law, partnership have no juridical
personality). The bypassing of the existence of the limited partnership as a taxpayer can only be done by ignoring or
personality independent from that of its members; and if now they have such personality for the purposes of the insolvency
disregarding clear statutory mandates and basic principles of our law. The limited partnership’s separate individuality makes it
law. (Ibid, at pp. 918-919.)
impossible to equate its income with that of the component members. . . (Ibid, at pp. 158-157.)
In Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947), the Court held that the death of either of the two partners is not a
x x x.
ground for the dismissal of a pending suit against the partnership, as a partnership possesses a personality distinct from any of the partners.
. . . In the cited cases, the corporations were already subject to tax when the fiction of their corporate personality was pierced; in the present case, to do so would exempt the limited partnership from income taxation but would throw the tax burden upon
In Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988), the Court held that a partnership may sue and
the partners-spouses in their individual capacities. The corporations, in the cases cited, merely served as business conduits or
be sued in its name or by its duly authorized representative, and when it has a designated managing partner, he may execute
alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. This is not
all acts of administration including the right to sue debtors of the partnership.
true in the present case. Here, the limited partnership is not a mere business conduit of the partner- spouses; it was organized for legitimate business purposes; it conducted its own dealings with its customers prior to appellee’s marriage; and had been filing its own income tax returns as such independent entity. . . . As far as the records show, the partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws. Regularity, not otherwise, is presumed. (at p. 159.) In other words, Suter holds that when the facts show that the juridical personality of the partnership is but a means to evade the law or a sham, then the courts will pierce the veil of its separate juridical personality to treat the partners as directly liable
3. Application of the Doctrine of Piercing the Veil of Separate Juridical Fiction
or accountable for the consequences of the acts or contracts done in the partnership name.
24 The piercing doctrine also found recognition, albeit by way of obiter, inAguila, Jr. v. Court of Appeals, 319 SCRA 246 (1999),
The guarantees of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights, are universal in
but only in the limited area of determining standing in a suit brought against claims pertaining to the partnership. In Aguila,
their application to all persons within the territorial jurisdiction, without regard to any differences of race, color, or nationality.
Jr. the complaint was filed against the partners and officers to enforce essentially a partnership obligation. In ruling that the
The word ‘person’ includes aliens . . . Private corporations, likewise, are ‘persons’ within the scope of the guaranties in so far
judgment rendered by the trial court (affirmed by the Court of Appeals) against the individual defendants was void, the Court
as their property is concerned. . . (Ibid, at p. 144) The Smith, Bell & Co. rationale has equal application to partnerships which
are accorded as separate persons under the Partnership Law. The better rationale applicable to partnership would be the ruling in Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971), where the Court held that a corporation is entitled to immunity
Under Art. 1768 of the Civil Code, a partnership ‘has a juridical personality separate and distinct from that of each of the
against unreasonable searches and seizures because “A corporation is, after all, but an association of individuals under an
partners.’ The partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a
assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities
different juridical personality is being used for fraudulent, unfair, or illegal purposes. In this case, private respondent has not
appropriate for such body. Its property cannot be taken without compensation. It can only be proceeded against by due
shown that A.C. Aguila & Sons, Co., as a separate juridical entity, is being used for fraudulent, unfair or illegal purposes.
process of law, and is protected, under the 14th Amendment, against unlawful discrimination.” (Ibid, at p. 837, quoting
Moreover, the title to the subject property is in the name of A.C. Aguila & Sons, Co. and the Memorandum of Agreement was
from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652).
executed between private respondent with the consent of her late husband, and A.C. Aguila & Sons, Co., represented by petitioner. Hence, it is the partnership, not its officers, or agents, which should be impleaded in any litigation involving property
In fact, in the partnership setting there is closer identity between the partners and the partnership in the sense that the partners
registered in its name. A violation of this rule will result to dismissal of the complaint. We cannot understand why both the
not only own the partnership and its affairs and they directly manage the affairs of the partnership, but more so that the
Regional Trial Court and the Court of Appeals sidestepped this issue when it was squarely raised before them by petitioner.
separate juridical personality is closely identified with the personality of the partners under delectus personae considerations.
(At p. *) On the other hand, the Court’s ruling on why corporations are not entitled to the rights against self-incrimination, has less vigor to the partnership setting. Consider the decision in Bataan Shipyard & Engineering Co., Inc. v. PCGG, 150 SCRA 181 (1987), where the Court held that the right against self-incrimination has no application to corporations, extensively quoted in Bataan 4. Entitlement to Constitutional Rights and Guarantees
Shipyard from Wilson v. United States, (55 L.Ed. 771, 780) thus:
The more interesting topic under the “juridical personality” doctrine pertaining to partnerships is whether they are entitled to the
* * * The corporation is a creature of the state. It is presumed to be incorporated for the benefit of the public. It receives certain
constitutional rights of due process, equal protection, unreasonable searches and seizures and the right against self-
special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its power are
limited by law. It can make no contract not authorized by its charter. Its right to act as a corporation are only preserved to it so long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts and find out
It is well established in Philippine Corporate Law, that corporations as “persons before the law” are entitled to the constitutional guarantee to due process and equal protection, (Smith, Bell & Co. v. Natividad, 40 Phil. 136 ; Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 ) the rights against unreasonable searches and seizure; (Stonehill v. Diokno, 20 SCRA 383 ) but not to the right against self-incrimination. (Bataan Shipyard and Engineering Co., Inc.. v. PCGG, 150 SCRA 181 ). In Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919), discusses the rationale why corporations would be entitled to constitutional guarantees accorded to individuals, thus:
whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporation to make use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employed, and whether they had been abused, and demand the production of the corporate books and papers for that purpose. The defense amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may plead the criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follow that a
25 corporation, vested with special privileges, and franchise may refuse to show its hand when charged with an abuse of such
into the personal and business privacy of the stockholders, members or partners who compose the juridical person. Perhaps
privileges. . . (150 SCRA 181, 234-235, quoting from Wilson v. United States, 55 Law Ed. 771, 780.)
that is the basis for the difference in stance by the Court between two sets of constitutional rights with respect to corporations, and also in the case of partnerships. Another view is that the constitutional guarantees of due process, equal protection clause
Every corporation is a direct creature of the law and receives an individual franchise from the State. But a partnership,
and against unreasonable searches and seizures are all meant to curb the abuse that the State and its representatives may
although is deemed to be a juridical person by grant of the State, becomes a juridical person through a private contract of
employ upon the citizenry, including the modes upon which they conduct their lives and businesses. On the other hand, the
partnership between and among the partners, without needing to register its existence with the State or any of its organs. More
constitutional protection against self-incrimination is not meant to prevent an actual State abuse but to avoid pressuring the
importantly, the partnership “person” is a fiction of law given more for the convenience of the partners, and thus can be
individual from having to tell a lie. “The main purpose of the provision . . . is to prohibit compulsory oral examination of
dissolved by the will of the partners or by the happening of an event that would constitute the termination of the contractual
prisoners before the trial, or upon trial, for the purpose of extorting unwilling confessions or declarations implicating them in the
relationship, whereas, no corporation can be dissolved without the consent of the State, and only after due notice and hearing.
commission of a crime.” (U.S. v. Tan Teng, 23 Phil. 145, 152 ) A corporation owes full allegiance and subject to the
Likewise, the other features of the partnership, mainly mutual agency, delectus personae and unlimited liability on the part of
unrestricted jurisdiction of the courts of the State under which it has been organized. ( Tayag v. Benguet Consolidated, Inc., 26
the partners, that places a close identity between the persons of the partners and that of the partnership. This is unlike in
SCRA 242, 248 ) Likewise, it has no soul that can be damned by a lie.
corporate setting, where the stockholders do not own corporate properties, have no participation in management of corporate affairs, and enjoy personal immunity from the debts and liabilities of the corporation, and where basically the corporation “is its own person,” and acts through a professional group of managers and agents called the Board of Directors. While therefore it is understandable that a corporation, that has no heart, feels pain, and has no soul that can be damned, cannot be expected to be entitled to the constitutional right against self-incrimination, it is quite different in the case of the partnership, since its person is merely an extension of the group of partners, who having come together in business, and acting still for such business enterprise, could not be presumed to have waived their individual rights against self-incrimination. As the author has observed in his writing on Philippine Corporate Law, when it comes to the constitutional right against selfincrimination, the Court would rely upon old American doctrine which views the corporation as a mere creature of the law and with separate juridical personality apart from its stockholders or members. In the partnership setting, the difference in the Court’s stance may lie in the fact that the right against self-incrimination does not really result in physical intrusion into the premises of the partnership, because it would require only that the partnership, through its agents, produce records and books before the courts. The denial of the right against self-incrimination from corporations and partnerships does not really invite state authorities into the premises or physical privacy of the stockholders, members or partners who compose the juridical entity; but would deny acting individuals the right to abuse the medium of separate juridical personality as a means to do folly. On the other hand, to deny the due process rights or right against unreasonable searches and seizures to corporations and partnerships would actually be to invite state authorities to physically intrude into business premises, and therefore also intrude
26 The recognition of the inherent relationship between and among the partners to be bound by the results of operations from the 6 – PARTNERSHIP AS A BUSINESS ENTERPRISE
business enterprise has been well-explained by the Court in Villareal v. Ramirez, 406 SCRA 145 (2003), thus: [Updated: 23 August 2010]
First, it seems that the appellate court was under the misapprehension that the total capital contribution was equivalent to the gross assets to be distributed to the partners at the time of the dissolution of the partnership. We cannot sustain the underlying idea that the capital contribution at the beginning of the partnership remains intact, unimpaired and available for distribution or return to the partners. Such idea is speculative, conjectural and totally without factual or legal support. Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased by losses sustained. It does not remain static and unaffected by the changing fortunes of the business. In the present case, the financial
VI. PARTNERSHIP AS A BUSINESS ENTERPRISE
statements presented before the trial court showed that the business had made meager profits. However, notable therefrom is the omission of any provision for the depreciation of the furniture and the equipment. The amortization of the goodwill (initially valued at P500,000) is not reflected either. Properly taking these non-cash items into account will show that the partnership was actually sustaining substantial losses, which consequently decreased the capital of the partnership. Both the trial and the
Although not explicitly stated in the provisions of the Civil Code, the partnership may constitute also a “business enterprise” or
appellate courts in fact recognized the decrease of the partnership assets to almost nil, but the latter failed to recognize the
what is known in the disciplines of Economics and Accounting, as “a going concern” — that is separately valued and
consequent corresponding decrease of the capital. (Ibid, at p. 153.)
accounted for from the individual value of the assets and properties constituting it and from the medium or means by which it is operated (in the case of partnership, the juridical person created by express provision of law). Recognition of the existence and operation of the partnership’s business enterprise, as distinguished from the legal effects and consequences of the contract of partnership among the partners and the partnership juridical person, gives rise to legal relationships, rights and obligations, and doctrines, that can only be accounted for from that level.
x x x. Because of the above-mentioned transactions, the partnership capital was actually reduced. When petitioners and respondents ventured into business together, they should have prepared for the fact that their investment would either grow or shrink. In the present case, the investment of respondents substantially dwindled. The original amount of P250,000 which they had invested could no longer be returned to them, because one third of the partnership properties at the time of dissolution did
For example, the right of the partners to specific partnership property and to share in the profits and losses, as well as the right
not amount to that much.
to manage, are legal matters that necessarily refer to the partnership business enterprise. It is a long established doctrine that the law does not relieve parties from the effects of unwise, foolish or disastrous contracts This understanding of the business enterprise of a partnership is applicable even to a professional partnership. Our Supreme
they have entered into with all the required formalities and with full awareness of what they were doing. Courts have no power
Court has defined the term ”profession” as “a group of men pursuing a learned art as a common calling in the spirit of public
to relieve them from obligations they have voluntarily assumed, simply because their contracts turn out to be disastrous deals
service–no less a public service because it may incidentally be a means of livelihood.” ( In the Matter of the Petition for
or unwise investments. (Ibid, at p. 154.)
Authority to Continue Use of Firm Name Sycip, Salazar, et. al. Ozaeta, Romulo, etc., 92 SCRA 1 (1979).) In fact, it is only from the “partnership business enterprise” level that we can fully appreciate the concept that essentially the partners are “owners” of the business, or that they take the position of “equity” holders, as distinguished from creditors who
27 advance money to the partnership as “debt” holders. Thus, it is an essential element to the existence of the partnership under Article 1767 of the Civil Code, the obligation assumed by each partner “to contribute money, property or industry to a common fund”, which essentially represents the “business enterprise” to be pursued, to thereby assume the position of being “owners” or “equity holders,” and thereby to be entitled to the profits made from the pursuit of the business enterprise, and logically to assume the risks connected with it, including absorbing the losses sustained. This critical position of “equity holders” of partners is confirmed under Article 1770 Civil Code which requires that a partnership “must be established for the common benefit or interest of the partners,” which aptly describes their positions as owners of the partnership business enterprise. The importance of being aware that the partnership would eventually constitute a business enterprise is important in applying certain doctrines of succession of liability that apply peculiarly to business enterprise. Likewise, the rules on dissolution and liquidation clearly appreciate the difference between the contract relationship and juridical person constituting the partnership, from the underlying business enterprise that may remain operating even when the firs two levels are legally dissolved or extinguished. —oOo—
28 An understanding of each of the partnership attributes provides a better appreciation of the multifarious functions of the 7 – ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP
partnership in the Philippine commercial setting. [Updated: 12 October 2009]
2. Non-Solemn or Consensual Juridical Personality In contrast to the corporate juridical personality which can only arise and can only be terminated by complying with the formal processes and procedures approved by the State, the juridical personality accorded to every partnership under Article 1768 of
the Civil Code is best described to be “informal”, or better yet merely “consensual”, as distinguished from being “formal” or “solemn” characteristic.
Art. 1767. By the contract of partnership two or more persons binds themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves.
It is very well implied from the substance and sequence of Articles 1767 and 1768 of the Civil Code that the existence of a separate juridical personality for a partnership is conditioned on the perfection and validity of a contract of partnership; and that
Two or more persons may also form a partnership for the exercise of a profession.
the separate juridical personality arises as a mandatory consequence under the law from the perfection of a contract of
Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1712, first paragraph (n)
partnership. Consequently, as the contract of partnership is best described as a consensual contract, it follows necessarily that the constitution of a partnership juridical personality would also be consensual. The general rule under Article 1771 is that “a partnership may be constituted in any form.”
To illustrate, the partnership’s separate juridical personality arises in the privacy of the perfection of the contract of partnership: Article 1768 provides that the “partnership has a juridical personality separate and distinct from that of each of the partnership,”
1. Attributes of the Partnership
which under Article 1784 “begins from the moment of the execution of the contract, unless it is otherwise stipulated.” So Every partnership existing under the Law on Partnerships of the Civil Code is endowed with the following essential attributes:
informal or casual is the attitude of the law on the partnership’s juridical personality that under Article 1785, such juridical personality can be extended beyond the original fixed term or particular undertaking by the mere “continuation of the business
(a) Informal/Consensual and Weak Juridical Personality;
by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs.”
(b) Mutual agency; What is the reason for the legal attitude of being rather “informal” on the juridical personality of the partnership? It seems from (c) Delectus personae;
the provisions of the Law on Partnerships of the Civil Code that the “separate juridical personality” granted to the partnership contractual relationship between and among the partners, and the underlying partnership business enterprise, is not the
(except for limited partners in a limited partnership).
centerpiece of the Partnership Law, but merely an “add on” to allow the business venture to be run more efficiently by the owners thereof (the partners), and to make dealings by it with the public easier and pursued with more efficiency. After all, in common law traditions the partnership has survived and thrived in a setting that does not accord it a juridical personality. In other words, the civil law tradition of providing a partnership with a juridical personality separate and distinct from the partners
29 —or properly speaking, to clothe the business enterprise with a juridical person by which it can better deal with the public—is
purpose of the law in imposing solemn requirements for partnerships with capital contributions of P3,000, if failure to comply
meant to add to the commercial efficiency of the partnership both as a medium of association and as a medium of doing
therewith does not present any dire legal consequences?
business. On the other hand, the law is clear that when what is contributed to the partnership is immovable property, and there is failure The default rule of according by operation of law a juridical personality to a partnership arrangement, makes it a cheaper
to provide for an inventory thereof to be attached to the public instrument to be registered with the SEC, the resulting
medium of doing business. Therefore, if the manner by which to achieve juridical personality be made more rigorous and
partnership is “void.” The exception when it comes to real property contributions is the public policy contained in our Civil Code
formal, then it makes the partnership medium a more expensive proposition, and therefore unattractive especially for
and in other special laws, that considers real property as constituting a cornerstone in our economic life, and that dealings
businessmen and merchants who embark on modest ventures.
therewith must be formal and public, which would afford to the public a reliable means to determine the status of ownership and the existing liens of real property.
a. Exceptions to Informal or Consensual Nature of Juridical Personality The only other exception to the informal or consensual nature of the partnership juridical personality would be the mandatory The only time in the Civil Code when the contract of partnership (and therefore likewise with the partnership juridical person)
registration requirements for the valid constitution of the limited partnership. Again, this is in line with the principle that limited
must assume a “solemn” or “formal” character covers three expressed instances:
liability to the owners of a business enterprise is unusual, and if it is to exist to bind the public, it must be pursued and reflected in a formal manner.
(a) Under Article 1772, that every contract of partnership having a capital of P3,000 or more shall appear in a public instrument, which must be recorded with the Securities and Exchange Commission (SEC).
As shown in the decision in MacDonald v. National City Bank of New York, 99 Phil. 156 (1956), even under the Code of Commerce where registration was essential for the coming into existence of a commercial partnership, nonetheless in a proper
(b) Under Articles 1771 and 1773, where immovable property or real rights are contributed to the partnership: (i)
in which case a public instrument shall be necessary; and
the contract of partnership is void, if an inventory of said property is not made, signed by the parties and attached to the
public instrument; (c) Under Articles 1843 and 1844, which requires particular provisions describing limited partners in the articles of limited partnership, and which must be formally registered with the SEC. When the capital contributions not involving real property are in excess of P3,000, and there is failure to comply with the requirement for public instrument and recording with the SEC, Article 1772 does not expressly state what happens to the legal
case of estoppel, the courts treated such unregistered commercial partnership as a de factopartnership with a personality of its own in order to protect the rights of third persons. 3. Weak Juridical Personality On the other hand, the juridical personality of the partnership is “weak” because it can be put asunder without need of formal dissolution process, and by the will of any of the partners or all of them, or even by chance. To illustrate, under Article 1830 of the Civil Code, the partnership may be dissolved by: (a) Express will of any partner, either acting in good faith or even when not in good faith and in contravention of the agreement;
status of the contract of partnership. In fact, Article 1772 provides that “Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons.” What then is the
(b) Express will of all the partners;
30 (c) Expulsion of any partner;
Article 1818 of the Civil Code provides that “Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the
(d) Any event which makes the partnership business unlawful;
usual way the business of the partnership of which he is a member binds the partnership.”
(e) Loss before delivery of the property promised to be contributed by the partner;
The principle of mutual agency lies at the heart of the partnership arrangement because it defines the prerogative of every partner to participate in the management of the partnership business. It is one of the more important manifestation of the
(f) Death, insolvency, or civil interdiction of any partner; (g) By court decree, when a partner has been declared insane or incapacitated, or guilty of conduct prejudicial to the partnership business or in breach of the agreement, or when the partnership business can only be carried at a loss. The complaint has often been heard in business and legal fora that one of the disadvantages of the partnership medium is that it have a weak juridical personality. I believe that such an observation is misplaced and fails to appreciate the fact that it makes no sense for the Law on Partnerships to infuse a medium that it seeks to invite businessmen and the public to use and employ with a flaw or disadvantage. In other words, there is a purpose why the law infuses the partnership juridical personality with the characteristic of “weakness”. Understood properly the weakness of the partnership juridical personality is a clear advantage for the partnership as a medium of association and as a medium of doing business. What is the reason by the law endows the partnership juridical personality with such weakness? The separate juridical personality is employed only to allow the partners and the partnership venture to attain their objectives, and it is either brushed aside or set aside when it begins to obstruct such objectives. The value of the separate juridical personality of the partnership cannot override a value of greater importance in the Law of Partnerships best exemplified by the aphorism, that above all, the
position of the partners as “owners” or “equity holders” of the partnership business enterprise. It also brings into focus the reality that the partnership arrangement is of the most personal of nature, that the parties thereto are not only investors but exercise the prerogatives of ownership and control into the partnership business. Properly appreciated, a partnership is simply a conglomeration of two or more sole proprietorships, where the original sole proprietor continues to manage his business and also the business of the other proprietors in the association. Consequently, as a sole proprietor is liable with his other assets for the liabilities incurred by his business, then in the same manner, the partners will also be liable personally and for other non-contributed assets for the liabilities incurred by their combined business enterprises. 5. Delectus Personae Bautista refered to delectus personae as follows: “. . . For, in accordance with the principle of delectus personae (selection of persons), one selects his partners on the basis of their personal qualifications and qualities, such as solvency, ability, honesty, and trustworthiness, among others. It is for this reason that there is mutual representation among the partners so that the act of one is considered the act and responsibility of the others as well.” (BAUTISTA, at p. 95)
partnership is a contractual and personal relationship among the partners who associate together to be able to pursue a business venture collectively. In other words, everything is personal in a partnership set-up, and this is best exemplified by the
The best way to define the concept of delectus personae is that the contract of partnership creates the most personal
attributes of “mutual agency” and “delectus personae”.
relationship between and among the partners which when broken, also breaks the bond of the partnership. The doctrine emphasizes the personal-contractual relationship between and among the partners as being more important than the property
4. Mutual Agency The default rule under Article 1803(1) of the Civil Code is that each of the partners is an agent of the partnership and all of the other partners in the pursuit of partnership affairs, thus: “When the manner of management has not been agreed upon . . . All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership.”
rights and the business enterprise created in the partnership. Thus, Article 1770 of the Civil Code provides that “[a] partnership . . . must be established for the common benefit or interest of the partners.” The doctrine of delectus personae can be viewed in two ways:
31 Firstly, it is the embodiment of the principle of relativity or privity in contracts: a partnership arrangement being primarily a
The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose
contractual relationship, then the privity that is created by its perfection is between and among the partners thereto at the point
with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued
of perfection; and that such privity cannot be extended beyond the partners without the consent of all the other parties to the
existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner’s capability to give it, and the
contract of partnership.
absence of a cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the
To illustrate the point, although Article 1810 of the Civil Code recognizes that “interest in the partnership” is a property right of
dissolution of the partnership but that it can result in a liability for damages. (Ibid, at pp. 535-536)
a partner, nevertheless under Article 1804, although a partner may associate another person with him in his share, “the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held “An unjustified dissolution by a partner can subject him to
associate should be a manager.”
action for damages because by the mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although not necessarily the right to dissolve the partnership.” (Ibid, at p. 37)
The privity created by the contract of partnership is of the group of partners who consent, that the moment one partner is gone the privity is broken and the partnership contract is terminated. In other words, if five parties come together into a partnership
6. Partners Subject to Unlimited Liability
agreement, the privity retains its integrity among the five, and not just between two or three or four of the members. Thus, under Article 1830, the partnership is dissolved by the expulsion, death, insolvency, civil interdiction of any of the partners.
Both Articles 44 and 1768 of the Civil Code recognize that a partnership is granted with “a juridical personality, separate and distinct from that of each . . . . partner or member,” and that Article 46 recognizes the legal capacity of the partnership
Secondly, that the relationship established in a contract of partnership is of the most fiduciary character, or of the most
therefore to enter into contracts, own and possess properties, thus: “Juridical persons may acquire and possess property of all
confidential manner, that once that thrust or confidence is lost, the contract is deemed breached or at least at an end. This is
kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their
fortified by the fact that the partners are mutual agents to one another, and essentially the relationship between and among
them is of fiduciary character, and the character of every agency relation is that it is essentially revocable. Consequently, when the articles of partnership provide for a definite term of existence, under Article 1830, a partnership can be dissolved in
The ordinary principle of “relativity” under the Law on Contracts that “Contracts take effect only between the parties, their
midstream “By the express will of any partner, who must act in good faith.” Even the separate juridical personality of the
assigns and heirs” (Article 1311, New Civil Code), should mean that that when a juridical person enters into a contract and
partnership enterprise cannot save the partnership from being dissolved under the rule that the termination of the contract of
assumes an obligation by reason thereof, its members or constituents, and its agents, do not ordinarily become liable for the
partnership terminates the separate juridical personality as well.
obligations assumed by their principal. And yet, in defiance of the very essence of separate juridical personality of the partnership, the general rule is that every partner is liable personally for his other property not contributed to the partnership for
The features of mutual agency and delectus personae define the rights and liabilities of the partners in a partnership
partnership debts and obligations.
arrangement, and constitute the underlying reason why partners are personally liable for partnership debts beyond their contributions and to the extent of their separate properties.
Articles 1816 and 1817 of the Civil Code thus provide that “[a]ll partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted . . . [and that] [a]ny stipulation against [such] liability
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), Justice Vitug wrote one of the best piece of doctrinal description the
shall be void, except as among the partners.” Why does the law make partners personally liable for partnership debts
nature and essence of the doctrine of delectus personae in every partnership, thus –
contracted as a separate juridical person, and would such unlimited liability still apply without express provision of law?
32 Even without any express provision of law and despite the separate juridical personality of the partnership, unlimited liability would be the rule for partners in a partnership setting for the basic reason that partners essentially occupy the position of sole proprietors albeit associated with other sole proprietors; the basic rule is that sole proprietors are always unlimitedly liable for business debts and obligations even as to their properties not used nor devoted for the business enterprise. The reason why a sole proprietor is liable with his non-business assets for debts and liabilities arising from a business venture is because he controls the business enterprise, and all profits go to him which he can devote into non-business matters, and thereby he must also absorb the losses from the business. Therefore if his business goes bankrupt, he cannot insist that his business creditors are limited only to the business assets for the satisfaction of their claims, and as all benefits and profits can be channeled to his personal non-business affairs, then his non-business properties must also be held liable for the satisfaction of those claims; to rule otherwise would mean that the owner benefits fully on the profits, but lets his creditors absorb the losses from the business. It is a commercial law truism that it is the owner or equity holders of the business enterprise, and not the creditors, who must stand ready to absorb the losses of the enterprise. In a partnership setting, the partners are still collective owners of the business enterprise, as by the principle of mutual agency they all have the power of management of the partnership affairs, and all profits and gains are to their entire benefit and account. Thus, Article 1770 of the Civil Code provides that every “partnership must be established for the common benefit or interest of the partners,” and in turn Article 1799 provides that “[a]ny stipulation which excludes one or more partners from any share in the profits or losses is void.” Therefore, despite the separate juridical personality of the partnership enterprise, the partnership is still wholly owned, managed and controlled by the partners as collective sole proprietors of the business enterprise, and consequently, they must bear the full brunt of the reverses of the business. Since the partners benefit fully and personally from the partnership’s profitable operations, they must thereby stand liable personally for the debts and obligations contracted even in the partnership name. Otherwise (i.e., to provide for limited liability as to allow creditors recourse only to the partnership assets), would be tantamount to letting the partnership creditors take the risks and consequences of the losses of the partnership enterprise when they draw no advantage from its profits. —oOo—
33 mutual agents is a conclusion that can only be drawn if we premise that a co-venture is not a species of partnerships. Finally, 8 – PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA
that a partnership adopts no firm name does not make it void as a contract or a partnership, so also with a joint venture. [Updated: 12 October 2009]
In any event, the distinction between a joint venture as a business medium not falling within the ambit of Partnership Law, or as not constituting a species of partnerships, has really become mute since inKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), it was held:
1. Distinguished from “Joint Venture”
Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to
Bautista, although confirming that a joint venture “is an association of two or more persons to carry out a single business enterprise for profit . . . [and] embodies several of the essential elements or characteristics of a partnership and bears such a
direct and govern the policy in connection 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. (Ibid, citing BLACK’S LAW DICTIONARY, Sixth ed., at p. 839.)
close resemblance to it that the rights and liabilities of joint adventures are largely governed by rules applied to partnership,” (BAUTISTA, at pp. 41-42) nevertheless would distinguish a partnership and a joint venture in the following manner:
In Torres v. Court of Appeals, 320 SCRA 428 (1999), the Court took no exception to defining the terms, rights and obligations of the parties to a “Joint Venture Agreement” covering the development of a subdivision project under provisions of the Civil
(a) “a joint venture is ordinarily limited to a single transaction [and] not intended to pursue a continuous business;” whereas a partnership, “though it may exist for a single transaction, usually contemplates the undertaking of a general and continuous
Code governing partnerships. The Chapter on Joint Ventures provides for a more thorough discussion of the joint venture as a medium of doing business under Philippine setting.
business of a particular kind which necessarily involves a series of transactions;” (Ibid, at p. 42.) 2. Distinguished from Co-Ownership (b) in a joint venture, “the property used remains the undivided property of its contributor, whereas in a partnership the same, as a rule, becomes the property of the business entity and hence of all the partners;” (Ibid)
Although the Law on Partnerships recognizes that partners have co-ownership interest in the partnership properties (Article 1811, Civil Code), nonetheless a co-ownership constitutes merely a property relation whereby two or more persons own pro-
(c) In a joint venture, none of the co-venturers “can bind the joint adventure or his co-adventurers, while a partner, when acting in pursuance of the firm business, binds not only himself as a principal but, as their agent as well, also the partnership and his co-partners;” (Ibid) and (d) A “joint adventure has no firm name, while a partnership is required to operate under a firm name.” (Ibid) To the writer, the foregoing distinctions only affirms the fact that a joint venture is a species of the genus partnership as defined under Article 1767 of the Civil Code, since it contains the two essential elements of the creation of a common fund and undertaking to divide profits; that in fact it is a particular partnership for a specific undertaking fully recognized under Article 1783 covering “a specific undertaking,” and Article 1830 that recognizes the dissolution of a partnership “By the termination of the . . . particular undertaking specified in the agreement.” The position that in a joint venture the co-venturers do not become
indiviso a property, but the relationship does not seek the business or mercantile pursuit of the property relationship. In other words, a co-ownership situation comes about other than by a contractual intent to pursue a business venture in common, and consequently, no separate juridical personality arises from a purely co-ownership relationship. Without the contractual intent to pursue a business venture through a common fund, the fact that co-owners happen to share in the profits that may be produced by the property owned in common, there is still no partnership arrangement. Thus, Article 1769 of the Civil Code provides that “In determing whether a partnership exists . . . Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property.” 3. Distinguished from Joint Account (Sociedad de Cuentas en Participacion)
34 A joint account is governed under Article 239 of the Code of Commerce, and still referred to as a corporate taxpayer under the
an account of the business, so that the parties would know how much money had been invested and what the condition
National Internal Revenue Code. But its use is a rarity in our jurisdiction because it does not lend itself to commercial or
thereof was at any particular time.” (Ibid, at p. 166)
business efficiency, as shown by the discussion of its features in Bourns v. Carman, 7 Phil. 117 (1906), thus – 5. Distinguished from the Business Trust . . . A partnership constituted in such manner, the existence of which was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some
As compared to a partnership, a business trust is constituted by deed of trust which is easier and less expensive to constitute
way that there were other people beside the one who ostensibly managed and conducted the business, is exactly the
for it is not bounded by any legal requirements like the registration requirements for partnerships where the real property or
accidental partnership of cuentas en participacion defined in Article 239 of the Code of Commerce.
more than P3,000 worth of property is contributed to the partnership.
Those who contract with the person under whose name the business of such partnership of cuentas en participacion is
The creation of a business trust does not give rise to a separate juridical personality, and is mainly governed by contractual
conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on
doctrines and the common law principles on trust. There is no element of mutual agency or co-ownership in a business trust
the other hand, shall have no right of action against the third person who contracted with the manager unless such manager
relationship, and in fact the trust relationship is centered upon the splitting in the properties contributed (the corpus) of the legal
formally transfers his right to them. (Art. 242 of the Code of Commerce) . . . (at pp. 119-120).
or naked title in the trustee who then manages and control the properties, and beneficial or equitable title in the beneficiary and for whose benefit the trustee shall manage and control the properties of the corpus.
4. Distinguished from Agency 6. Distinguished from the Corporation In a pure agency agreement, the agent is merely a legal extension of the personality of the principal and thereby under the complete control of the principal.
The most important distinction between the corporation and the partnership are their legal capacities. With the right of succession, a corporation has a stronger legal personality, enabling it to continue despite the death, incapacity, withdrawal or
The partnership relationship among the partners makes them mutual agents of one another, and thereby the control that a
insolvency of any of its stockholders or members. In a partnership, the withdrawal, death, incapacity or insolvency of any
principal has over his agent does not pertain between and among the partners. Likewise, unlike in a pure agency relationship
partner would automatically bring about the dissolution of the partnership. (Articles . 1828 and 1830, Civil Code.)
where the agent who acts within the scope of his authority does not bind himself to the contract or transaction he enters into, in a partnership situation, the partner binds not only the other partners and the partnership, but also himself in the pursuit of the
Limited liability is a main feature in a corporate setting, whereas partners are liable personally for partnership debts not only to
what they have invested in the partnership but even as to their other properties. (Articles 1816, 1817, 1824, and 1839, Civil Code)
In Binglangawa v. Constantino, 109 Phil. 168 (1960), the Court held that just because a duly appointed agent has made personal advances for the expenses of the business venture that he had been designated to administer, does not make him a
Generally, every partner is an agent of the partnership, (Articles 1803(1), 1818, and 1819, Civil Code), and by his sole act, he
partner of his principal.
can bind the partnership (Articles 1822 and 1823, Civil Code), whereas in a corporation, only the Board of Directors or its duly authorized agents can bind the corporation.
In United States v. Muhn, 6 Phil. 164 (1906), it was held that the agent cannot escape the criminal liabilities of the crime of estafa for conversion of the funds given to him by his principal by claiming that he had become a partner when the books of
In a partnership setting, although a partner has the power to sell or dispose of his capital interest or proprietary interest, the
accounts kept for the business showed that the amount was charged to him since the same was “merely a method of keeping
buyer or transferee does not assume transferor’s position as partner, but merely has a right to demand for accounting or
35 distribution of the profits pertaining thereto. (Articles 1804 and 1813, Civil Code) In a corporate setting, every stockholder has
Secondly, the important differences between the corporation and the partnership cannot lead one to the conclusion that in the
the right to transfer his shares in the corporation, and the buyer or transferee assumes the role of stockholder of said shares
absence of the first, the contracting parties would have gone along with the latter. Limited liability, centralized management
when the transfer has been duly registered in the corporate books Section 63, Corporation Code. In other words, the position
and easy transferability of the units of ownership in a corporation are by themselves strong factors for parties’ intention to be
of being partner is inherently not transferable, whereas, shares are freely transferable in the corporate setting.
bound in the corporate relationship, and one cannot presume that if these features are not met that they would in the alternative wish to be covered by a partnership relationship, which has generally would involve unlimited liability, mutual
a. Does a Defective Incorporation Process Result into a Partnership?
agency among the partners, and the delectus personae feature.
The clear distinctions between the corporation and partnership can best be illustrated by discussing the issue of whether a
The essence of what constitutes the contractual relationship of partnership under Article 1767 is the coming “together” or what
defective incorporation process that does not result into a corporate entity, would at least result into a partnership.
is known in Partnership Law as “delectus personae” and not just the joint venture. The essence of partnership is the personal relationship, i.e., that each would-be partner goes into the venture precisely because he wants the other co-venturers, and no
It is a legal principle that when parties come together and all the elements of a particular contract are present, although the parties may have nominated it otherwise, the law will impose such contractual relationship upon them. In other words, the contract or relationship is what the law says it is, not how the parties wish to call it. Therefore, it may agreed when five or more
other person, to be with him in the venture. A venturer who seeks to enter into a corporate relationship perhaps does not even care about the personality of the other co-venturers, and fully aware that he himself and others have the ability to transfer their investments to outsiders.
persons come together to contribute money or property to a common venture or fund, with the intention of dividing the profits among themselves, the parties may wish to call it otherwise, however, under the definition of the Article 1767 of the Civil Code,
Nonetheless, there indications of a contrary view to the above. Under Section 21 of the Corporation Code, when parties act
it would still be a partnership, even if the parties had intended a corporation but did not materialize because of certain
and pretend to be a corporation, when in fact none exist, the law would impute to them a juridical personality to validate the
contract under the corporation by estoppel doctrine; however, it would treat the parties as partners since it expressly makes them liable as “general partners.”
If the parties have in fact pursued the incorporation process, by executing and filing with the SEC the articles of incorporation, then there should be no resulting partnership in the event that the incorporation process does not bear fruition, based on the
Under such contrary view, the main issue would be the priority between the personal creditors of the “partners” in a corporation
by estoppel doctrine, and the “corporate” creditors of the corporation by estoppel, as to the assets invested into the venture. The author would presume that it would have to be the corporate creditors that would have priority over the “corporate” assets
Firstly, both corporate and partnership relationships are fundamentally contractual relationship created by the co-venturers
as this seems to be the moving spirit of the corporation by estoppel doctrine.
who consent to come together under said relationships. If the parties had intended to create an association in the form of a corporation, a partnership cannot be created in its stead since such is not within their intent, and therefore does not constitute
This position of the author has been partially justified by the discussions of in Pioneer Insurance & Surety Corp. v. Court of
a part of their consent to the contractual relationship.
Appeals,175 SCRA 668 (1989), when it resolved the issue raised: “What legal rules govern the relationship among coinvestors whose agreements was to do business through the corporate vehicle but who failed to (Ibid, at p. 681).
More importantly, while partnership lies essentially within the norms of Contract Law, the corporation gets it essence from a particular State-grant of separate juridical personality. In other words, parties to a corporate venture are fully aware that it is
Quoting from American jurisprudence, the Supreme Court in Pioneer Insurance held that “there has been the position that as
the process of incorporation and the issuance of the certificate of incorporation by which the corporate entity comes into being.
among themselves the rights of the stockholders in a defectively incorporated association should be governed by the
There is therefore no doubt in the minds of incorporators that they could effect a venture under a juridical being, and thereby
supposed charter and the laws of the state relating thereto and not by the rules governing partners (Quoting from CORPUS
achieve both the advantages and suffer the burdens associated with such corporate medium, by the mere meeting of minds.
JURIS SECUNDUM which cited Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), nevertheless it has
36 been held that “ordinarily persons who attempt, but fail, to form a corporation and who carry on business under the corporate
is not afforded by law; and an investor in a corporation, where under the principal of centralized management, there is no intent
name occupy the position of partners inter se (Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913 A.
to participate in the corporate operations, and for which limited liability is afforded by law.
1065), and their rights as members of the company to the property acquired by the company will be recognized.” ( Ibid, citing Smith v. Schoodoc Pond Packing Co., 84 A, 268m 109 Me. 555; Whipple v. Parker, 29 Mich 369).
On the other hand, where the parties to a venture merely use a business name that pretends there is a corporation, when in fact they was no intention among the co-venturers to formally incorporate a juridical entity, then there can be no doubt that
Notwithstanding the foregoing, the Court took the position that such partnership relationship does not exist, “for ordinarily
what was really the meeting of minds among them was a partnership, for in essence they agreed to set up a common fund
persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership
(i.e., pursue a business venture), with clear indication to divide the profits among themselves. This is exactly the situation
shall exist . . . and it should be implied only when necessary to do justice between the parties; thus, one who takes no part
covered in the decision in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999), where the liabilities
except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other
of the parties were adjudged under the corporation by estoppel doctrine. (See more detailed discussions in Chapter 5).
subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contributions. . . A partnership relation between certain stockholders and other
In Lim Tong Lim, the Court found that three co-venturers agreed “to engage in a fishing business, which they started by buying
stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to
boats worth P3.35 million, financed by a loan . . . In their Compromise Agreement, they subsequently revealed their intention
contribute for payment of debts illegally contracted by the latter. (Ibid, at p.683, quoting from CORPUS JURIS SECUNDUM,
to pay the loan with the proceeds of the sale of the boats, and to divide equally among themselves the excess or loss. . .
Vol. 68, p. 464). Nor will it make the investor to a would-be corporation liable for losses sustained from its operations under a
These boats, the purchase and the repair of which were financed with borrowed money, fell under the term ‘common fund’
partnership inter se theory.” (Ibid, at p. 685). The key elements in resolving the issue seem to have been in Pioneer Insurance
under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or
those of intent and participation in business activities.
industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership.” (Ibid, at p. 739)
The doctrinal pronouncement in Pioneer Insurance can be summarized as follows: When parties come together intending to form a corporation, but no corporation is formed due to some legal cause, then:
The only complication in Lim Tong Lim was that the transaction upon which the personal liabilities of the co-venturers was being pursued, was entered into on behalf of “Ocean Quest Fishing Corporation,” although no such corporation existed nor
(a) Parties who had intended to participate or actually participated in the business affairs of the proposed corporation would
was there any attempt to incorporate such entity. Consequently, both the unlimited liability principle under Partnership Law and
be considered as partners under ade facto partnership, and would be liable as such in an action for settlement of partnership
the corporation by estoppel doctrine in Corporate Law were applied to determine the personal liability of each of the partners in
the business venture, which resulted in legal incongruency. - Whereas, -
In a partnership, as a legal consequence of the application of the doctrine of mutual agency, every partner shall be personally liable for partnership debts and liabilities, even when the underlying transaction was effected by another partner, or even when
(b) Parties who took no part except to subscribe to shares of stock in a proposed corporation, do not become partners with
a partner does not participate at all in the affairs of the partnership. On the other hand, under the corporation by estoppel
other subscribers who engaged in business under the name of the pretended corporation, and are not liable for action for
doctrine now embodied in Section 21 of the Corporation Code, it is only the active or managing officers who assume the
settlement of the alleged partnership contribution.
liability of a general partner, thus: “All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners, for all debts, liabilities and damages incurred or arising as a result thereof;” and that
The doctrinal pronouncements in Pioneer Insurance are consistent with the distinctions between an investor in partnership venture, where there is a clear intent to participate in the management of the partnership business and for which limited liability
37 consequently, passive stockholders are not deemed to be personally liable for debts incurred on behalf of the ostensible
The Tax Code defines a cooperative as an association conducted by the members thereof with the money collected from
among themselves and solely for their own protection and not for profit. (Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129 ).
This was in fact the defense raised by the petitioner in Lim Tong Lim, where he held that since he did not participate actively in the business venture, then under the principles of corporation by estoppel doctrine, he cannot be made personally liable for the
Unlike ordinary corporations, cooperatives are governed by principles of democratic control where the members in primary
debts incurred in pursuing the business venture. Instead of holding that the primary doctrine to apply would be the rules of
cooperatives shall have equal voting rights on a one-member-one-vote principle (Articles. 4(2), R.A. 6938); where the Board
unlimited liability since there was duly constituted a valid partnership, the Court instead humored the argument and went on to
of Directors manages the affairs of the cooperative, but it is the general assembly of full membership that exercises all the
also apply the corporation by estoppel doctrine with a jurisprudential twist when it held —
rights and performs all of the obligations of the cooperative (Articles 5(3) and 34, R.A. 6938); and are under the supervision and control of the Cooperative Development of Authority, and not the SEC.
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. . . . a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be
Unlike a partnership which should be organized for profit, and a non-stock corporation which can be organized for any
barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who
eleemosynary purpose and no part of the net income is to be distributed to the officers and members thereof, the primary
benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable
objective of every cooperative is self-help: “to provide goods and services to its members and thus enable them to attain
for contracts they impliedly assented to or took advantage of. (Ibid, at p. 743)
increased income and savings, investments, productivity, and purchasing power and promote among them equitable distribution of net surplus through maximum utilization of economies of scale, cost-sharing and risk-sharing without conducting
The result is that by mixing principles in Partnership Law and Corporate Law in Lim Tong Lim, the corporation by estoppel
the affairs of the cooperative for eleemosynary or charitable purposes.” (Article 7, R.A. 6938)
doctrine has grown out of the confines of Section 21 of the Corporation Code, as to make liable as general partners, not only those parties to acted for the ostensible corporation, but also all passive parties who knowing there is no such corporation sat
The Law on Cooperatives declares it a policy of the State to foster the creation and growth of cooperatives as a practical
back and benefited from the venture.
vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. (Article 2, R.A. 6938). In one case, the Court held that cooperatives are established to provide a strong social and
economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. ( Corpuz v. Grospe, 333 SCRA 425 ).
A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. (Article 3, Cooperative Development Authority Act [R.A. 6938]). A cooperative, like an ordinary corporation and a partnership, has a juridical personality separate and distinct from its members, and has limited liability feature. (Articles. 12 and 30, R.A. 6938)
38 Art. 1778. A partnership of all present property is that in which the partners contribute all the property which actually 9 – CLASSES OF PARTNERSHIPS AND PARTNERS
belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits which they may acquire therewith. (1673) [Updated 12 October 2009] Art. 1777. A universal partnership may refer to all the present property or to all the profits. (1672) As regards the liability of the partners, a partnership may be general or limited. (1671a)
_______________ Art. 1776. As to its object, a partnership is either universal or particular. Art. 1783. A particular partnership has for its object determinate things, their use or fruits, or specific undertaking, or the exercise of a profession or vocation. (1678)
Art. 1782. Persons who are prohibited from given each other any donation or advantage cannot enter into universal
In order to have a better understanding of the various legal relationships created within the partnership, and the consequent
rights and obligations arising from such varied relationships, it may be helpful to determine the classes of partnerships and partners defined under the New Civil Code.
Art. 1781. Articles of universal partnership, entered into without specification of its nature, only constitute a universal partnership of profits. (1676)
1. As to Object: Universal Partnership versusParticular Partnership
Movable or immovable property which each of the partners may posses at the time of the celebration of the contract
When it comes to the object or purpose, or the nature of the business enterprise to be pursued, under Article 1776, a
shall continue to pertain exclusively to each, only the usufruct passing to the partnership. (1675)
partnership is either auniversal partnership or a particular partnership.
Art. 1780. A universal partnership of profits comprises all that the partners may acquire by their industry or work
A universal partnership is one where the contract of partnership encompasses expressly or impliedly either all the present
during the existence of the partnership.
properties of the partners or just covering all of the profits. (Article 1777, Civil Code)
A stipulation for the common enjoyment of any other profits may also be made; but the property which the partners
In a universal partnership of all present property is one where “the partners contribute all the property which actually belongs to
may acquire subsequently by inheritance, legacy, or donation cannot be included in such stipulation, except the
them to a common fund, with the intention of dividing the same among themselves, as well as all the profits they may acquire
fruits thereof (1674a)
therewith.” (Article 1778, Civil Code). This means that “the property which belonged to each of the partners at the time of the constitution of the partnership, becomes the common property of all the partners, as well as all the profits which they may
Art. 1779. In a universal partnership of all present property, the property which belonged to each of the partners at the
acquire therewith.” (Article 1779, Civil Code). The Civil Code further clarifies that “A stipulation for the common enjoyment of
time of the constitution of the partnership, becomes the common property of all the partners, as well as all the profits
any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy, or
which they may acquire therewith.
donation cannot be included in such stipulations, except the fruits thereof.” (Article 1779, Civil Code).
39 In a universal partnership of profits “all that the partners may acquire by their industry or work during the existence of the
his own name, but later released it and had his own property mortgaged when it was clear that the partner abroad did not
partnership,” as well as the usufruct of all “[m]ovable or immovable property which each of the partner may possess at the time
change his mind about not joining the venture. In any event, the San Juan estate project proved very successful, and after the
of the celebration of the contract” of partnership, shall all pertain to the partnership. (Article 1780, Civil Code).
local partner died, the partner abroad sought to recover one-half of the profits of the venture on the ground that he was a partner therein, in spite of his previous refusal to be part of it, and mainly because partnership property was used as security
The default rule under Article 1781 of the Civil Code is that when the “Articles of universal partnership [are] entered into
for the loan obtained by the local partner to finance his acquisition of the estate.
without specification of its nature, [it will] only constitute a universal partnership of profits.” The real question that must be asked is when is a partnership agreement deemed to be even a “universal partnership” for the default rule under Article 1781
In resolving that the partner abroad was not entitled to any profits derived from the San Juan estate project, because he was
never a partner thereto, Lyons resolution revolved around the principle that the two partners never were part of a universal partnership, but that they were at best partners in particular partnerships for the previous projects entered into before the San
Under Article 1782, “Persons who are prohibited from giving each other any donation or advantage cannot enter into universal
Juan estate project, thus –
partnership.” In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. . . . Of course, if an actual On the other hand, Article 1783 of the Civil Code defines a “particular partnership [to be one that] has for its object determinate
relation of partnership had existed in the money used, the case might be different; and much emphasis is laid in the appellant’s
things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation” There is no doubt then that
brief upon the relation of partnership which, it is claimed, existed. But there was clearly no general relation of partnership
every professional partnership and joint venture arrangement would constitute particular partnerships.
between the parties; and the most that can be said is that Elser and Lyons had been coparticipants in various transactions in real estate. No objection can be made to the use of the word partnership as a term descriptive of the relation in those particular
What is the practical and legal importance of distinguishing between universal and particular partnerships? So far, statutorily the only critical usefulness of the distinction is that persons who are disqualified from donating to one another (like spouses under Article 187 of the Family Code), cannot enter into a universal partnership of any sort. Is it therefore fair to conclude that
transactions, but it must be remembered that it was in each case a particular partnership, under article 1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate, was not acting for any partnership composed into a proposition which would make Lyons a participant in this deal contrary to his express determination. (Ibid, at pp. 641-642)
spouses can validly enter into a particular partnership between each other, when actually their property relations are governed already by a legal property regime?
The other conclusion we can draw from Lyons is that a universal partnership is never presumed, not even from various transactions or ventures concluded between the partners. The default rule therefore should be that unless the parties so
In Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969), the Court held that the prohibition under now Article 1782 does not apply when the partners entered into a limited partnership, the man being the general partner and the woman being
stipulate in their articles of partnership that they are entering into a universal partnership, it would be presumed that they have existing between them merely a particular partnership.
the limited partner, and a year later the two get married. Apart from the foregoing, the concept and medium of universal partnership serves no reasonable commercial purpose, for On the more general question of what are the practical and legal significance of knowing the difference between universal and particular partnership, may best be exemplified in the decision in Lyons v. Rosentock, 56 Phil. 632 (1932). In that case, the two partners have been together in two previous real estate projects. While one partner was abroad, the other partner seized upon a potentially lucrative piece of property (the San Juan estate) and although he had tried his best to convince his partner abroad to commit to be part of the new venture, the latter declined. In any event, when the property was purchased by the local partner he had temporarily used a partnership property in the previous venture to secure the loan drawn by the local partner in
legally it can only come about when it is so expressly stipulated in contract of partnership, and practically, it is difficult to see how two or more persons not bounded by marriage, faith or vocation (which makes the partnership a particular one), would commit to one another all that they have and all the fruits of what they do, to one another.
40 The other important question that may be asked is “By definition under Article 1776 that there can be a valid partnership for
In passing, neither would the presence of a period for its specific duration or the statement of a particular purpose for its
the practice of a profession, why would Article 1783, in defining a particular partnership, include the ‘exercise of a vocation’
creation prevent the dissolution of any partnership by an act or will of a partner. Among partners, mutual agency arises and the
which may not include one that seeks to provide a livelihood for the so-called partners, such as religious or civic vocation?”
doctrine of delectus personae allows them to have the power, although not necessarily the right, to dissolve the partnership. An unjustified dissolution by the partner can subject him to a possible action for damages. (Ibid, at p. 536)
2. As to Duration: Ortega also clarified that the designation of the purpose in the articles does not prevent it from being a partnership at will, thus: When it comes to the partnership term or life, the law distinguishes between a partnership with fixed term, partnership for a particular undertaking, and partnership at will.
The “purpose” of the partnership is not the specific undertaking referred to in the law. Otherwise, all partnerships, which necessarily must have a purpose, would all be considered as partnerships for a definite undertaking. There would therefore be
Both partnerships with fixed term or for a particular undertaking are automatically dissolved upon the expiration of the
no need to provide for articles on partnership at will as none would so exist. Apparently what the law contemplates, is a
stipulated term or the achievement of the particular undertaking stipulated in the contract of partnership; whereas, in a
specific undertaking or “project” which has a definite or definable period of completion.
partnership at will, the partnership has an indefinite term and it would be dissolved only when an act or cause of dissolution happens or arises. Nonetheless, under Article 1785 of the Civil Code, when a partnership for a fix term or particular
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court held that where there has been duly registered articles of partnership,
undertaking is continued after it has terminated without any express agreement, partnership then become one at will and “the
and subsequently the original partners accept an industrial partner but do not register a new partnership, and thereafter the
rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at
industrial partner retires from the business, and the original partners continue under the same set-up as the original
will.” The article also provides that “A continuation of the business by the partners or such of them as habitually acted therein
partnership, then although the second partnership was dissolved with the withdrawal of the industrial partner, there resulted a
during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the
reversion back into the original partnership under the terms of the registered articles of partnership. There is not constituted a
new partnership at will.
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), the Court described the characteristics of a partnership at will in the
3. As to Extent of Partners’ Liabilities
following manner, thus: When it comes to the kinds of liabilities that the partners may be exposed to for partnership debts and obligations, the Civil The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose
Code distinguishes between a general partnership, where all the partners are unlimitedly liable; and a limited partnership,
with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued
where there is one or more general partner who are unlimitedly liable, with one or more limited partners, who are liable for
existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner’s capability to give it, and the
partnership debts only to the extent of their stipulated contributions under the articles of partnership.
absence of a cause for dissolution provided by law itself. Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999), Justice Vitug
dissolution of the partnership but that it can result in a liability for damages. (Ibid, at pp. 535-536)
summarized the nature of the liabilities of general partners, thus:
Nonetheless, by way of obiter, Ortega also described the ability of every partner even in a partnership with fixed term or for a
. . . The liability of general partners (in a general partnership as so opposed to a limited partnership) is laid down in Article
particular undertaking, to be able to dissolve the partnership upon the application of the principles of mutual agency
1816 which posits that all partners shall be liable pro rata beyond the partnership assets for all the contracts which may have
and delectus personae, thus –
been entered into in its name, under its signature, and by a person authorized to act for the partnership. This rule is to be
41 construed along with other provisions of the Civil Code which postulate that the partners can be held soidarily liable with the
case of an incoming partner, his liability with respect to the partnership obligations which were incurred prior to his admission
partnership specifically in these instances–(1) where, by any wrongful act or omission of any partner acting in the ordinary
into the partnership shall be satisfied only out of partnership property, unless it is otherwise stipulated. (Articles 1826 and
course of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any person, not
1840, Civil Code).
being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act; (2) where one partner acting within the scope of his apparent authority receives money or property
Partnership Law also refers to the managing partner who has been given the management of the partnership enterprise
of a third person and the money or property so received is misapplied by any partner while it is in the custody of the
(Articles 1800 and 1801, Civil Code); the liquidating partner, who takes charge of the liquidation and winding-up of
partnership–consistently with the rules on the nature of civil liability in delicts and quasi-delicts. (Ibid, at pp. 746-747).
partnership affairs (Article 1836, Civil Code); a retiring partner, who ceases to be part of the partnership which is continued after dissolution, as compared with the partners who remain with the venture as continuing partners (Articles 1837, 1839,
4. Other Kinds of Partners
1840 and 1841, Civil Code); and the partner by estoppel, who is not a formal partner in an existing partnership, but by his act he has led third-parties dealing with the partnership to believe he is a partner, and thereby becomes liable as a regular partner
Other than the general and limited partners that have been previously discussed, there are two kinds of partners when it
as so such relying creditors (Article 1815, Civil Code).
comes to the nature of their contributions: capitalist partner and industrial partner. —oOo— A capitalist partner contributes money and/or property to the partnership, while an industrial partner contributes only his industry or his service. The law does not specify the kind of industry that a partner may contribute into the partnership. (Evangelista & Co. v. Abad Santos, 51 SCRA 416 ). The importance of such distinction is essentially on the nature of the obligations and liabilities that they must assume: (a) The capitalist partner is liable for the losses sustained by the business and any stipulation to the contrary would be void (Articles 1791, 1797, and 1799, Civil Code); whereas, the industrial partner is not liable for losses of the partnership venture (Article 1797, Civil Code); (b) The capitalist partner may not engage on in business which are competing with that of the partnership business (Article 1808, Civil Code); whereas, the industrial partner cannot engage in any other business at all during his tenure as industrial partner (Article 1789, Civil Code); and (c) Whereas a capitalist partner is bound to make additional contributions to the partnership in case of an imminent loss of the business of the partnership, the industrial partner has no such obligation. (Article 1791, Civil Code) Partnership Law also distinguishes between the liabilities assumed by an original partner who is with the partnership at the time of its constitution, and subsequent or incoming partners, who come during the life of a pre-existing partnership. In the
42 partnership; and consequently, spouses may validly become partners to one another in a particular partnership, which would 10 – SPECIAL ISSUES OF WHO MAY QUALIFY TO BECOME PARTNERS
include a professional partnership, and both general and limited partnerships. The critical question must be asked:Can spouses just between themselves or with third parties validly enter into a contract of partnership for gain provided the resulting [Updated: 12 October 2009]
partnership is not a universal partnership? If one refers only to the provision of Article 1782, the answer would be in the affirmative. In Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969), which currently is the only decision to deal with the issue, the Supreme Court affirmed this particular view, relying only on the provisions of Article 1677 of the old Civil Code (now Article 1782), that since the prohibition
1. May Spouses Validly Enter into a Partnership Relation? a. Spouses Cannot Enter into a Universal Partnership The main statutory provision invoked when it comes to the issue of whether spouses can enter between themselves into a partnership agreement is Article 1782 of the Civil Code which provides that “Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership.” It has thus been opined that since under Article 133 of the Civil Code “Every donation between the spouses during the marriage shall be void,” then spouses are prohibited from entering into a universal partnership, but not necessarily a particular or limited partnership. Article 133 of the Civil Code has now been replaced by Article 87 of the Family Code, which reads: Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses, during the marriage should be void, except moderate gifts which the spouse may give each other on the occasion of any family rejoicing. The prohibition shall also apply to persons living together as husband and wife without a valid marriage. Bautista discussed the rationale of Article 1782 in this manner: The prohibition is founded on the theory that a contract of universal partnership is for all purposes a donation. Its purpose, therefore, is to prevent persons disqualified from making donations each other from doing indirectly what the law prohibits them from doing directly. (BAUTISTA, at p. 62).
for spouses covers expressly only universal partnerships, then they can validly be partners in a limited partnership, with the husband being the general partner and the wife being the limited partner. On this particular issue, Bautista limited his comment to the effect that the provisions of Article 1782 disqualifies “spouses, with respect to any contract of universal partnership made between them during the marriage,” and other than reporting the relevant portions of the decision in Suter, he did not comment on whether spouses can validly enter into other forms of partnership for gains. Tolentino does not comment on the provisions of Article 1782, although his discussion on the matter under his old work under the Code of Commerce was quoted in Suter. To the writer, it seems that in addressing the issue raised, it would be error to base the resolution only on of Article 1782 of the Civil Code. Certainly Article 1782 constitutes an important statutory provision to resolve that issue, but there are other statutory provisions more primordial in addressing the issue. Suter, which was decided under the terms of the old Civil Code and the Code of Commerce, is quite peculiar in its facts because the contract of partnership started out where there was no legal obstacle with the parties entering into a duly registered limited partnership: Suter as the general partner, with Spirig and Carlson, as limited partners. Eventually, Suter and Spirig were married, and bought out the interest of Carlson. Under the provisions of the Tax Code, the Commissioner of Internal Revenue then sought to recover income taxes individually against Suter for partnership income under the theory that the separate juridical personality of the partnership by which it was taxed separately as a corporate taxpayer, was extinguished with the marriage of Suter and Spirig, who ended up as the only partners in the venture. The Court held: “The theory of the
From the placement of Article 1782 (coming after the two articles covering the definition, nature and effects of universal
petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their subsequent acquisition of the
partnerships, and immediately before the article defining particular partnerships), it seems pretty well implied that spouses,
interests of remaining partner Carlson in the partnership dissolved the limited partnership, and if they did not, the fiction of
whatever the regime of property relations prevails in their marriage, are disqualified from entering into any sort of universal
43 juridical personality of the partnership should be disregarded for income tax purposes because the spouses have exclusive
Although it can be argued that contributions to a partnership are not in the nature of “donations” or “gratuitous advantage,”
ownership and control of the business.” (27 SCRA 152, at p. 156).
because a contract of partnership is essentially an onerous and commutative contract, whereby the contributions comes with a cost (e.g., becoming unlimitedly liable for partnership obligations), nevertheless, such contributions would then violate the
The Court found no merit in the position of the Commissioner, and quoted from the commentaries of Tolentino, thus:
provisions of Article 1490 of the Civil Code, which prohibits sales or any other form of onerous dispositions, between spouses not governed by the complete separation of property regime .
A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code, which applies in the absence of express provision in the Code of Commerce, persons prohibited from making donations to each other are
Secondly, there is clear implication under the Family Code, that the property regime that must govern spouses must be in
prohibited from entering into universal partnerships. (2 Echaverri, 196) It follows that the marriage of partners necessarily
accordance with the provisions of said Code, and cannot be the subject of regular partnership rules under the Partnership Law
brings about the dissolution of a pre-existing partnership (1 Guy de Montella 58). (Ibid, at p. 157, quoted from Tolentino,
of the New Civil Code.
Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th ed., at p. 58). (1) Spouses Governed by the Absolute Community of Property Regime Thus, the Court held that the partnership at issue “was not a universal partnership, but a particular one. . . since the contributions of the partners were fixed sums of money, . . . and neither one of them was an industrial partner. It follows that [it]
To begin with, the Family Code sets the absolute community of property regime as the default rule for marriages, and
. . . was not a partnership that [the] spouses were forbidden to enter under Article 1677 of the Civil Code of 1889 [now Article
consequently, it cannot exist consistently with another set of rules governing partnerships for gains under the Partnership Law
1782].” In essence, Suter holds that spouses are not disqualified from becoming partners in a limited partnership, provided one
of the Civil Code. Although Article 1782 provides that –
of them (or at least both of them) is a limited partner. Persons who are prohibited from giving each other any donation or advantages cannot enter into a universal partnership,” b. Spouses Are Not Qualified to Enter into Other Forms of Partnership for Gain
which beyond doubt should include spouses, yet under Article 75 of the Family Code, “In the absence of marriage settlements, or when the regime agreed upon is void, the system of absolute community of property as established in this Code shall
It is the writer’s position that apart from a professional partnership, spouses cannot enter into any form of partnership, be it
govern,” and which under Article 88 of the Family Code, “shall commence at the precise moment that the marriage is
universal or particular, general or limited partnership, as a separate property arrangement apart from the property regime
celebrated [and that any] stipulation, express or implied, for the commencement of the community regime at any other time
prevailing in their marriage, for the reasons discussed below.
shall be void.
Firstly, apart from a universal partnership, every form of partnership, including a limited partnership, effectively makes partners
The absolute community of property regime actually establishes a sort of “universal partnership” between the spouses, in that
“donors” to one another of their contributions in the partnership. Although a partnership would have a personality separate and
it includes “all property owned by the spouses at the time of the celebration of the marriage or acquired thereafter.” (Article 91,
distinct from each of the partners, so that it can hold contributed property in its name, nonetheless, partners are expressly
Family Code). Can spouses governed by the absolute community of property regime, vary the effects between them on
granted by Partnership Law co-ownership interest in the partnership property as to then have a direct co-ownership interest
certain community property, by contributing them into a particular partnership for gain? The answer ought to be in the negative,
therein. (Articles 1810 and 1811, Civil Code). Effectively, even in a limited partnership, such as the Suter situation, the
and such partnership agreement would be void, since under Article 89 of the Family Code “No waiver of rights, interest, shares
contribution of the limited partner wife belonged to the partnership which would then be under the control and management of
and effects of the absolute community of property during the marriage can be made except in case of judicial separation of
the general partner husband. A partnership arrangement between spouses would thereby be an indirect violation of the
property.” In other words, Article 1782 in Partnership Law is not the main rule on regulating property rights between spouses,
provisions of Article 87 of the Family Code which provides that “Every donation or grant of gratuitous advantage, direct or
but merely suppletory to the primary rules set out by the Family Code.
indirect, between the spouses during the marriage shall be void.”
44 (2) Spouses Governed by the Conjugal Partnership of Gains
of the marriage,” and which provide that “The marriage settlement and any modification thereof shall be in writing, signed by the parties and executed before the celebration of the marriage.”
Take then the cases of spouses governed by the conjugal partnership of gains, which under Article 105 of the Family Code, can come into play between spouses only when it has been so stipulated in the marriage settlements. May spouses therefore
In essence, the Partnership Law under the New Civil Code, which should be considered general provisions, cannot overcome
enter into a contract of particular partnership for gain by contributing thereto either conjugal property, or their separate
the more specific provisions on the Law on Marriages under the Family Code, which govern specifically the property regime
properties? When it comes to conjugal property, the answer ought to be in the negative, since the effect is that spouses would
that should prevail between spouses. The provisions of Partnership Law are geared towards providing for the a contractual
be donating to one another, as discussed below, contrary to the provisions of Article 87 of the Family Code. In addition, by
relationship that seeks to undertake a business venture; whereas, the Family Code provisions governing the property regime
entering into a contract of particular partnership and thereby invoking the provisions of the Partnership Law of the Civil Code
prevailing between spouses have considerations that transcend profit motives, and seek to strengthen the institutions of
on the conjugal property contributed, would that not in effect be amending, or perhaps even contravening, the provisions of the
marriage and the family. Consequently, a contract of partnership between spouses should be held void in that it seeks to
marriage settlements invoking the Family Code rules covering conjugal partnership of gains? Article 108 of the Family Code
overcome or undermine the mandatory provisions of the Family Code.
provides that “The conjugal partnership shall be governed by the rules on the contract of partnership in all that is not in conflict with what is expressly determined in this Chapter or by the spouses in their marriage settlements.” This shows the primacy of
There are several areas where there arises real conflict between doctrines under Partnership Law and those under the Family
the Family Code provisions on governing the conjugal partnership between the spouses, and any attempt to govern conjugal
properties under a contract of particular partnership would undermine such primacy and therefore void. (1) Issue on Control and Binding Effects of Acts of Partners For the same reasons, spouses governed by the conjugal partnership of gains cannot also validly enter into a contract of particular partnership for gain, even when they contribute thereto their separate properties, because that would in effect constitute donations to one another as discussed below, and would undermine the rules of the Family Code on how such separate properties should answer for the charges on family affairs.
We take the area of control and binding effect of the acts of partners against other partners and the partnership itself. Under Partnership Law, every partner is an agent of the partnership and for the other partners when it comes to transactions that pertain to partnership affairs; thus, the act of one partner binds the other partners and the partnership property (Articles 1803 and 1818, Civil Code). On the other, the general rule under the Family Code, when it comes to absolute community of
(3) Spouses Governed by the Complete Separation of Property Regime
property regime (Article 96, Family Code) and conjugal partnership of gains (Article 124, Family Code), is that both spouses are co-administrators of the conjugal properties; and any contract, especially an act of disposition or encumbrance of the
May spouses governed by the complete separation of property regime validly enter into a contract of particular partnership?
community or the conjugal property, done by one without the consent of the other partner, would be void. (Guiang v. Court of
The answer ought to be in the negative, for the contribution of any of their separate properties into the partnership for gain
Appeals, 291 SCRA 372 ; Cirelos v. Hernandez, 490 SCRA 625 ; Bautista v. Silva, 502 SCRA 334 ). Take
would amount to donation, and under Article 87 of the Family Code, which prohibits any form of donation or gratuitous
the case of allowing the spouses to enter into a particular partnership, and they both contribute community or conjugal
advantage between spouses during marriage, makes no distinction, much less an exception, for spouses governed by the
properties thereto, would the rules under Partnership Law therefore allow one spouse, without the consent of the other spouse,
complete separation of property regime.
to dispose of such property pursuant to partnership affairs?
c. Contract of Partnership May Offend Against the Provisions of the Family Code
Article 145, Family Code provides that “Each spouse shall own, dispose of, possess, administer and enjoy his or her own separate estate, without need of the consent of the other. To each spouse shall belong all earnings from his or her profession,
A contract of partnership between spouses entered into during marriage would be void because it would contravene the rules
business or industry and all fruits, natural, industrial or civil, due or received during the marriage from his or her separate
under Articles 76 and 77 of the Family Code that prohibit “any modification in the marriage settlements” after the “celebration
property.” Under a complete separation of property regime, spouses separately manage and control their separate
45 properties. Can spouses who are governed by the regime of separation of property, thereby partially overcome the governing
2. May Corporations Validly Qualify to Become Partners?
provisions of the Family Code, by being allowed to validly enter into a particular partnership agreement? The prevailing rule in the United States is that – (2) Charges to Partnership Properties “Unless it is expressly authorized by statute or charter, a corporation cannot ordinarily enter into partnerships with other We should look also into the areas of charges against the partnership properties and the effects of dissolution. Under
corporations or with individuals, for, in entering into a partnership, the identity of the corporation is lost or merged with that of
Partnership Law, partnership properties would be chargeable against any claim or contract entered into pursuant to
another and the direction of the affairs is placed in other hands than those provided by law of its creation. . . A corporation can
partnership affairs. On the other hand, under both the absolute community of property regime and the conjugal partnership of
act only through its duly authorized officers and agents and is not bound by the acts of anyone else, while in a partnership
gains, there are specific listings of what should first be chargeable against the community property (Articles 94 and 95, Family
each member binds the firm when acting within the scope of the partnership.” (FLETCHER CYC. CORPORATIONS (Perm.
Code), or the conjugal property (Articles 121 to 123, Family Code), like support and debts contracted for the benefit of the
marriage. Under a regime of separate property, both spouses shall bear the family expenses in proportion to their income, or, in case of insufficiency or default thereof, to the current market value of their separate properties (Article 146, Family Code).
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
When community, conjugal or separate property is allowed to be contributed into the partnership for gain, the rules of first
duty and responsibility with others. (BAUTISTA, at p. 9).
preference of partnership creditors to partnership property would undermine the claims of personal creditors of spouses, as well as the ability of marriage properties to properly provide for the family support and upkeep. In addition, contributions by
a. Jurisprudential Rule
spouses of marriage property into a partnership for gain would certainly allow a means by which spouses may defraud their marriage creditors, by making certain marriage properties subject to greater claims outside of marriage affairs.
Tuason v. Bolanos, 95 Phil. 106 (1954), recognized at that time in Philippine jurisdiction the doctrine in Anglo-American jurisprudence that “a corporation has no power to enter into a partnership.” (Ibid, at p. 109). Nevertheless, Tuason ruled that a
d. Professional Partnerships
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
May spouses by themselves, or together with other professionals, enter validly into a contract of professional partnership,
Corp., Sec. 1082).
which by definition of Article 1783 of the Civil Code is always a particular partnership? The answer seems to be in the affirmative. The reason is that a professional partnership essentially covering the contribution of service by the spouses, does
A joint venture is essentially a partnership arrangement, although of a special type, since it pertains to a particular project or
not primarily bind actual community or conjugal properties, and therefore thus not operate in violation of the property rules
undertaking (BAUTISTA, supra, at p. 50). In Torres v. Court of Appeals, 278 SCRA 793, the Supreme Court held
governing marriage property regimes.
unequivocally that a joint venture agreement for the development and sale of a subdivision project would constitute a partnership pursuant to the elements thereof under Article 1767 of the Civil Code that defines when a partnership exists).
More importantly, professional partnership are not really pursued for profit, but more for civic or vocational ends and therefore
AlthoughTuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement,
do not address proprietary ends; but rather, the exercise of a profession, even in the partnership medium, has more to do with
it would seem that the policy behind the prohibition on why a corporation cannot be made a partner do not apply in a joint
the expression of ideals held by an individual or towards achieving a fruitful life in the mundane world. This fact is recognized
venture arrangement. Being for a particular project or undertaking, when the Board of Directors of a corporation evaluate the
even under the Family Code, where Article 73 provides that “Either spouse may exercise any legitimate profession,
risks and responsibilities involved, they can more or less exercise their own business judgment is determining the extent by
occupation, business or activity without the consent of the other.
which the corporation would be involved in the project and the likely liabilities to be incurred. Unlike in an ordinarily partnership
46 arrangement which may expose the corporation to any and various liabilities and risks which cannot be evaluated and
partners are “general partners so that all corporate partners shall take part in the management and thus be jointly and
anticipated by the Board, the situation therefore in a joint venture arrangement, allows the Board to fully bind the corporation to
severally liable with the other partners.” (SEC Opinion, dated 23 February 1994, XXVII SEC Quarterly Bulletin 18 (No. 3, Sept.
matters essentially within the Board’s business appreciation and anticipation.
It is clear therefore that what makes a project or undertaking a “joint venture” to authorize a corporation to be a co-venturer
The rationale given by the SEC for the second condition was that if the corporation is allowed to be a limited partner only, there
therein is not the name or nomenclature given to the undertaking, but the very nature and essence of the undertaking that
is no assurance that the corporate partner shall participate in management of the partnership which may create a situation
limits it to a particular project which allows the Board of Directors of the participating corporation to properly evaluate all the
wherein the corporation may not be bound by the acts of the partnership in the event that, as a limited partner, the corporation
consequences and likely liabilities to which the corporation would be held liable for.
chooses not to participate in the management. (Ibid).
b. SEC Rules
However, in 1995, the SEC reversed such interpretation and practically dropped the second requirement, when it admitted the following reasoning for allowing a corporation to invest in a limited partnership, thus:
The SEC, in a number of opinions, has recognized the general rule that a corporation cannot enter into a contract of partnership with an individual or another corporation on the premise that it would be bound by the acts of the persons who are
1. Just as a corporate investor has the power to make passive investments in other corporations by purchasing stock, a
not its duly appointed and authorized agents and officers, which is inconsistent with the policy of the law that the corporation
corporate investor should also be allowed to make passive investments in partnerships as a limited partner, who would then
shall manage its own affairs separately and exclusively. (SEC Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278;
not be bound beyond the amount of its investment by the acts of the other partners who are not its duly appointed and
citing 13 Am. Jr. Sec. 823 (1938); 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl. 1950, at p. 2520).
authorized agents and officers. Hence, the very reason why as a general rule, a corporation cannot enter into a contract of partnership, as stated in the 1966 SEC opinion, would no longer be present, as the corporation, which is merely a limited
However, the SEC has on special occasions allowed exceptions to the general rule when the following conditions are complied
partner, will now be protected from the unlimited liability of the other partners who are not agents or officers of the corporation;
with: 2. Section 42 of the Corporation Code which permits a corporation to invest its funds in another corporation or business, does (a) The authority to enter into a partnership relation is expressly conferred by the charter or the articles of incorporation of the
not require that the investing corporation be involved in the management of the investee corporation with a view to protect its
corporation, and the nature of the business venture to be undertaken by the partnership is in line with the business authorized
investment therein. By entering into a contract of limited partnership, a corporation would continue to manage its own
by the charter or articles of incorporation of the corporation involved (SEC Opinion, 29 February 1980);
corporate affairs while validly abstaining from participation in the management of the entity in which it has invested. Accordingly, as there is generally no threat that a corporate limited partner would be solidarily liable with the partnership, there
(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
would be no reason for requiring a corporate partner to actually manage the partnership, if it makes the business decision no to do so and opts to become a limited partner; and
partnership. (Ibid) 3. The SEC policy that a corporation cannot enter into a limited partnership, is an offshoot of the outdated view in the U.S., The second condition set by the SEC would have the effect of allowing a corporation to enter as a general partner in general partnership, which would still have contravened the doctrine of making the corporation unlimitedly liable for the acts of the other partners who are not its authorized officers or agents. This interpretation of the second condition was confirmed by the SEC in 1994, to mean that a partnership of corporations should be organized as a “general partnership” wherein all the
that, as a general rule, corporations could not form a partnership; that corporations cannot become limited partners, is based on an assumption which is no longer current. Jurisprudence and common commercial practice in the U.S., indicate that corporations are not barred from acting as limited partners. Current American laws support the position that a corporation can enter into a contract of limited partnership. For example, the Revised Uniform Limited Partnership Act of 1976 (as amended in
47 1985), specifically confirms, that corporations may act as limited partners. Almost all states in the U.S. have adopted limited partnership laws which provide, in the same manner as the Revised Uniform Limited Partnership Act, that corporations may act as limited partners. This indicates that many other jurisdictions simply follow the broad language of the Revised Model Business Corporations Act which suggests that corporations may act as limited partners and in no event prohibits that activity. These statutes reaffirm what is indicated by the commercial practice in the U.S., that corporations can act as limited partners. The proliferation of statutes reversing the doctrine forbidding corporations to become partners is proof of the unsoundness of and dissatisfaction with such doctrine. (SEC Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8-9 (No. 1, June 1996). In that opinion, the SEC conceded on the points raised by confirming that “inasmuch as there is no existing Philippine law that expressly prohibits a corporation from becoming a limited partner in a partnership, the Commission is inclined to adopt your view on the matter,” (Ibid) provided that the power to enter into a partnership is provided for in the corporation’s charter. The SEC went on to say: “We agree with your statements that a reconsideration of the present policy of the Commission on the matter is timely in order to permit the Philippine commercial environment to maintain its pace in terms of legal infrastructure with similar developments in the international arena with a view to encouraging and facilitating greater domestic and foreign investments in Philippine business enterprise.” (Ibid) —oOo—
48 1. When Capital Contributions Total P3,000.00 or More 11 – PARTNERSHIP FORMAL AND REGISTRATION REQUIREMENTS _____ [Updated 14 October 2009] Art. 1772. Every contract of partnership having a capital of Three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission. _____
Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons (n)
Art. 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. (1667a)
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679)
Under modern day setting, most partnerships would be formed or constituted having contributed capital of more then P3,000.00, for it is doubtful whether two or more persons would come together in pursuit of business with a capital of less than _____
P3,000.00. This means that the twin requirements under Article 1772 of the Civil Code of having the contract of partnership in a public document and registered with the SEC apply almost universally to all modern-day partnerships. But even then, the
Since the contract of partnership is essentially consensual in character, there is generally no form required, much less a need
twin requirements may have no legal or commercial significance based on the following grounds:
for the actual delivery of the promised contributions, to perfect it, and thereby lead to the arising of a separate juridical personality. Article 1771 of the Civil Code provides that “A partnership may be constituted in any form, except where
(a) The law does not declare the partnership void when the twin requirements are not met, nor is non-compliance meted any
immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.” The other
adverse legal consequence; and
exception is provided in Article 1772 which provides that “Every contract of partnership having a capital of Three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the
(b) The law expressly provides that “Failure to comply with the requirements . . . shall not affect the liability of the
Securities and Exchange Commission.”
partnership and the members thereof to third persons.”
Public documents and other forms of registration are features of commercial law system, for indeed the public must deal on
In a situation where a partnership is constituted not having complied with the twin requirements of Article 1772 is not declared
the basis of systems, infrastructures and institutions that are manifest and made known to them, and in line with the
void as among the partners, and the claims of its creditors are unaffected, why should any partner worry about non-compliance
characteristic of uniformity of commercial transactions. But as will be shown hereunder, the forms and registration requirement
with the twin requirements of public document and SEC registration?
for partnerships under the Civil Code are meant more to regulate the relationship of the partners among themselves and with the partnership, but do not really bear into the rights of creditors who deal with the business enterprise. For indeed, Article
In Angeles v. Secretary of Justice, 465 SCRA 106 (2005), the Supreme Court held that the “mere failure to register the
1772 of the Civil Code provides that “Failure to comply with the [formal] requirements [of public instrument and SEC
contract of partnership with the SEC does not invalidate a contract that has the essential requisites of a partnership. The
registration] shall not affect the liability of the partnership and the members thereof to third persons.”
purpose of registration of the contract of partnership is to give notice to third parties. Failure to register the contract of
49 partnership does not affect the liability of the partnership and of the partners to third persons. Neither does such failure to
When the venture was not getting off the ground, they invited Pahamatong as industrial partner, and they executed a
register affect the partnership’s juridical personality. A partnership may exist even if the partners do not use the words ‘partner’
“Supplemental Articles of Co-partnership” adopting the original name of the company, but this time providing for a period of
or ‘partnership.’” (Ibid, at p. 115).
thirty (30) years for the life of the venture, and providing for equal distribution of profits among the three partners. The new articles were not registered with the SEC. Although the firm began to operate with profits, eventually Pahamatong withdrew
According to the Code Commission, the business purpose of the requirements under Articles 1771 and 1772 is to prevent
from the arrangement and his equity was bought back by Maglana and Rojas, who then proceeded to operate the firm under
evasion of tax liabilities by big partnership and to safeguard the public by enabling it to determine more accurately the
the same original name, and with the verbal agreements that the profits would be distributed 80%-20% in favor of Maglana.
membership and capital of partnerships before dealing with them. (Memorandum of Code Commission, Lawyers’ Journal, October 1955, p. 518, cited in Bautista, at pp. 71-72).
When Rojas abandoned the enterprise to set-up a competing venture in another logging concession, he withdrew some of his equipment contributed to EDE to be used in his new venture. Maglana notified Rojas of his (Maglana’s) withdrawal from the
Under current tax rules, which essentially taxes the partnership separately as corporate taxpayer, formal registration
partnership arrangement in EDE, and for Rojas to account fully for the amounts withdrawn from the partnership treasury, which
requirements with the BIR on matters as getting a taxpayer identification number (TIN), to be registered as withholding agent,
when totaled up would necessitated for Rojas to pay the promised contributions under the original articles of co-partnership.
etc., would require submission of the registered articles of partnership. But then if the motivation is to go below the government radar, and to operate within the underground economy as a means of avoiding tax and administrative burdens, then non-
The case reached the Supreme Court on the issues of the nature of the partnership that existed between Maglana and Rojas
registration with the SEC and other government agencies would be the likely scheme to be followed. And yet if there
after the withdrawal of the industrial partner; on whether it became a partnership at will as provided under the original articles
are no deleterious consequences provided by the Law on Partnerships in not complying the formalities under Article 1771, why
of partnership as to have justified Maglana’s termination thereof when the second articles of partnership provided for a period
would they be complied with?
of 30 years; and the basis of the distribution of profits and losses from the EDE venture, whether it would be the “share and share alike” under the first articles of partnership, on the basis of capital contributions based on the second articles of
In any event, since Articles 1771 and 1772 do not expressly declare that failure to comply with the public document
partnership, or on the verbal agreement of 80%-20% in favor of Magalana.
requirement render the contract of partnership void, then the general rule is that such failure does not render the contract void, but only affects the manner of its registration and affords to the parties affected the remedy of demanding that it be executed in
The Court placed much weight on the original articles of incorporation executed by Maglana and Rojas, which was duly
a public instrument. (Dauden-Hernaez v. De los Angeles, 27 SCRA 1276 ; Fule v. Court of Appeals, 286 SCRA 698
registered with the SEC, and held that when the second articles of co-partnership was executed (but not registered), there was
; Dalion v. Court of Appeals, 182 SCRA 872 ).
every intention to abide by the original partnership arrangement existing under the registered articles, since it covered the same venture and used the same firm name, thus —
It must be pointed out however, that the decision in Rojas v. Maglana, 192 SCRA 110 (1990), points to the “legal usefulness” of complying with the twin requirements mandated under Articles 1771 and 1772 of the Civil Code.
After a careful study of the records as against the conflicting claims of Rojas and Maglana, it appears evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution of the second one, which they unmistakably
In that case, Maglana and Rojas executed their Articles of Co-Partnership, calling their company the “Eastcoast Development
called an “Additional Agreement” . . . Except for the fact that they took in one industrial partner; gave him an equal share in
Enterprises (EDE),” with the purpose to “apply or secure timber and/or minor forests products licenses and concessions over
the profits and fixed the term of the second partnership to thirty (30) years, everything else was the same.
public and/or private forest lands and to operate, develop and promote such forests rights and concessions.” The articles were duly registered with the the SEC, indicating therein an indefinite period for the venture, and providing that the profits would be
Thus, they adopted the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same purposes and
divided “share and share alike.”
the capital contributions of Rojas and Maglana as stipulated in both partnerships call for the same amounts. Just as important is the fact that all subsequent renewals of Timber License No. 35-36 were secured in favor of the First Partnership, the original
50 licensee. To all intents and purposes therefore, the First Articles of Partnership were only amended, in the form of
Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are
Supplementary Articles of Co-Partnership . . . which was never registered . . . . Otherwise stated, even during the existence of
contributed thereto, in which case a public instrument shall be necessary. (1667a)
the second partnership, all business transactions were carried out under the duly registered articles. As found by the trial court, it is an admitted fact that even up to now, there are still subsisting obligations and contracts of the latter . . . . No rights and
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of
obligations accrued in the name of the second partnership except in favor of Pahamotang which was fully paid by the duly
said property is not made, signed by the parties, and attached to the public instrument. (1668a)
registered partnership. . . . (at pp. 117-118;underscoring supplied). _____ The Court declared the partnership to be one at will, under the terms of the registered articles of co-partnership, and ruled that the sharing scheme between Maglana and Rojas on the profits and loses of the venture would have to comply with that stipulated in the registered articles of co-partnership: “And in whatever way he may view the situation, the conclusion is inevitable that Rojas and Maglana shall be guided in the liquidation of the partnership by the provisions of its duly registered Articles of Co-Partnership; that is, all profits and losses of the partnership shall be divided “share and share alike” between the partners. (at p. 119) x x x Consequently, except as to the legal relationship of the partners after the withdrawal of Pahamatong which is unquestionably a continuation of the duly registered partnership and the sharing of profits and losses which should be on the basis of share and share alike as provided for in the duly registered Articles of Co-Partnership, no plausible reason could be found to disturb the findings and conclusions of the trial court.” (at p. 119; underscoring supplied). In Rojas, the Court refers to a partnership arrangement that is not covered by duly registered articles of co-partnership as a “de factopartnership;” the implication is that when a partnership has complied with the formalities and registration required under Articles 1771 and 1772, it would properly be termed as a “de jure partnership.” The lesson that can be drawn from Rojas is that compliance with the formal requirements mandated under the Law on Partnerships indeed has a very useful legal purpose: the duly registered articles of co-partnership shall serve to bind the partners as to their contractual intent, and
a. Importance of Immovable Property in the Partnership Scheme The importance that the law places upon immovable properties which constitute part of the assets of the partnership is not only shown by the formal requirements mandated under Article 1773 of the Civil Code, which requires the execution of the inventory covering such properties to be attached to the public instrument (i.e., the articles of incorporation) that should be registered with the SEC, but also by what seems to be a superfluous Article 1774 of the Civil Code which reiterates the obvious legal capacity of a partnership to own properties as a juridical person, where it provides that “Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name.” Then also, we have the long provisions of Article 1819 of the Civil Code, which detail all the scenarios under which real property owned by the partnership may be legally dealt with, under various circumstances where title is not registered in the name of the partnership. b. When Immovable Property Deemed Contributed
the default rules provided for under the Law on Partnerships in the Civil Code cannot apply to overcome the provisions of the articles of co-partnership that is duly registered with the SEC, except by another instrument that seeks to amend or modify the
Agad v. Mabato, 23 SCRA 1223 (1968), reminds us that it is not the purpose clause of the articles of partnership or the
same and duly registered also with the SEC.
designated business to be engaged in, that determine whether there should be deemed contributed immovable properties to the venture to trigger the application of Article 1773 of the Civil Code. The Court held in Agad that since the articles of partnership indicated that the partners were going to contribute cash into the venture, then the fact that the partnership was
2. When Immovable Property Contributed
expressly organized “to operate fishpond,” did not necessarily mean that either a fishpond or a real right to any fishpond was _____
contributed into the venture.
51 The ruling would also support the position that just because the partnership venture owns or operates immovables does not
what momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard to a contract and courts not
mean it comes into the operation of Article 1773, as when such immovables were not contributed by the partners but were
tolerate, much less approve, such practice.
purchased during the operations of the partnership business. In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement an ordinary c. Rationale Behind the Formal Requirements under Article 1773
contract from which the parties’ rights and obligations to each other may be inferred and enforced. (Ibid, at p. 438).
It is when immovable property is contributed into the capital of the partnership that the twin requirements of public document
It is clear from Torres that the formalities mandated under Article 1773 are meant for the protection of the partnership creditors,
and SEC registration come into play together with the requirement of an inventory to be prepared, because under Article 1773
and that the declaration that the “partnership is void” does not affect the intra-partnership relationship between and among the
it is provided that “A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said
partners and between the partners and the partnership itself. Thus, Torres held that the “alleged nullity of the partnership will
property is not made, signed by the parties, and attached to the public instrument.”
not prevent courts from considering the Joint Venture Agreement [or any contract of partnership] an ordinary contract from which the parties’ rights and obligations may be inferred and enforced.” Therefore, from the intra-partnership point of view,
Does the declaration of nullity of the partnership under Article 1773 for failure to comply with the formalities therein refer to the
there are dire consequences that befall the partners and the partnership for failing to comply with the formalities mandated
intra-partnership relations of the partners among themselves and the partnership, or to the extra-partnership relationship with
under Article 1773 of the Civil Code.
the creditors, or to both? The decision in Torres v. Court of Appeals, 320 SCRA 428 (1999), should be instructive in answering these issues.
If we follow therefore the Torres reasoning that the formalities mandated under Article 1773 are meant to protect partnership creditors, and every third person who deals with the partnership, I do not see how the imposition of the rule “partnership is
In Torres, a “Joint Venture Agreement” was executed among the co-venturers covering the terms for the development of a
void,” could be beneficial or protective of the rights of partnership creditors, for the following reasons:
subdivision project, the contributions of the co-venturers and the manner of distribution of the profits. Specifically, the agreement required from the capitalist partners to contribute the parcels of land upon which the project was to be developed.
Firstly, the declaration of nullity of the partnership cannot be ascribed to the extra-partnership relationship between the
No articles of partnership was registered with the SEC, much less was the requisite inventory mandated under Article 1773 of
partners and partnership on one hand, and the partnership creditors on the other hand, for to do so would adversely affect the
the Civil Code executed and attached to the public document. In ruling against the contention of the capitalist partners that the
contractual rights and standing of the creditors vis-a-vis the partners on their unlimited liability rule and the partnership, which
partnership was void, the Court held –
must be deemed to exist to protect the integrity of the contracts entered in its name.
. . . First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino states that under
Secondly, declaring the partnership void means that all contributed and earned assets of the partnership pertain to the
the aforecited provision which is a complement of Article 1771, “the execution of a public instrument would be useless if there
partners directly as co-owners, since no contract of partnership exist between them (it is void and inexistent), and no
is no inventory of the property contributed, because without its designation and description in the Registry of Property, and
partnership person has arisen with a juridical personality separate and distinct from each of the partners. Not only does this
their contribution cannot prejudice third persons. This will result in fraud to those who contract with the partnership in the belief
scenario affect the integrity of the contracts entered into directly with the partnership, but it also means that the contributed and
[in] the efficacy of the guaranty in which the immovables may consist. Thus, the contract is declared void by law when such
earned partnership assets pertain directly to the persons of the partners and priority as to them pertains to their separate
inventory is made. The case at bar does not involve third parties who may be prejudiced.
creditors and not to the partnership creditors.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent should pay them 60
Neither of the afore-described scenarios seem to promote the interests or protect the rights of partnership creditors.
percent of the value of the property. They cannot in one breath deny the contract and in another recognize it, depending on
52 The Torres ruling has therefore removed any “force” or “teeth” on the declaration of nullity of the partnership under Article
Annex “A-1,” on its face, contains typewritten entries, personal in tone, but is unsigned and undated. As an unsigned
1773: it cannot hurt but must protect the partnership creditors, and yet it has no bearing or application to the partners and the
document, there can be no quibbling that Annex “A-1” does not meet the public instrumentation requirements exacted under
partnership in their intra-partnership relationship.
Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to a partnership involving more than P3,000.00 in money or property, Annex “A-1” cannot be presented for notarization, let alone registered with the Securities and
The author’s position, as a result of resolving this issue in class discussions, is that contrary to the Torres ruling, the formalities
Exchange Commission (SEC), as called for under the Article 1172 of the Code. And inasmuch as the inventory requirement
under Article 1773 should be understood as to create adverse consequences for the partners who refuse to comply with the
under the succeeding Article 1773 goes into the matter of validity when immovable property is contributed to the partnership,
requirements vis-a-vis their relationship with partnership creditors. When the partners fail to comply with the formalities under
the next logical point of inquiry turns on the nature of petitioner’s contribution, if any, to the supposed partnership. (at p. 585;
Article 1773, it ought to mean that they cannot avail of any advantage that the partnership medium affords them. The primary
advantage that the partners have under ade jure partnership setting is that their personal liability to partnership creditors for assets that have not been contributed to the firm is only joint and subsidiary, since they have the benefit of excussion.
It is clear from the afore-quoted passage that Litonjua considers are binding and effective to purely intra-partnership issues the mandatory provisions of Article 1771 and 1773 of the Civil Code that requires that even when there is no issue that the
Consequently, when partners do not comply with the formalities under Article 1773, the “partnership is void” in the sense that
meeting of the minds involves the formation of a partnership (i.e., the typewritten note “doubtless referring to a partnership
the partners were deemed to be acting for themselves when they entered into partnership contracts and transactions; and that,
involving more than P3,000.00 in money or property”) then the requirement that it contract be cast in a public instrument and
similar to the principle in Agency Law that makes the agent primarily liable for contracts entered into in behalf of an inexistent
registered with the SEC were deemed to be essential to sustain a claim that a contract of partnership exist between the
principal, then partners can be held directly liable by partnership creditors for all contracts entered into, and all obligations
parties, otherwise the purported contract is deemed to beunenforceable.
assumed, in the name of a partnership which is declared void. The doctrine that failure to comply with the public instrument and SEC-registration requirements under Article 1772 of the Civil The landscape has become more complicated with the recent ruling inLitonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005),
Code renders the contract of partnership as unenforceable can be deduced from the following portion of the Litonjua decision
where presented in evidence was a typewritten note (referred to as Annex “A-1”)whereby the elder brother purportedly
which relied on provision of the Statute of Frauds, thus:
promised to the younger brother that “I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is greater,” of the business that the younger brother would help manage, consisting of theatre
It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if he indeed wrote
business and other real estate properties. The typewritten note was not signed by the elder brother, who denied its authenticity
Annex “A-1,” is a promise which is not to be performed within one year from “contract” execution on June 22, 1973.
Accordingly, the agreemend embodied in Annex “A-1” is covered by the Statute of Frauds and ergounenforceable for noncompliance therewith. By force of the statute of frauds, an agreement that by its terms is not to be performed within a year
The main issue resolved in Litonjua was whether a contract of partnership or joint venture arrangement existed between the
from the making thereof shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in
siblings, a purely intra-partnership issue that essentially did not involve the rights of third parties dealing with the business
writing and subscribed by the party charged. Corollarily, no action can be proved unless the requirement exacted by the
enterprise. Yet, the Supreme Court did not at all allude to its decisions in Torres or in Angeles, where it held that the
statute of frauds is complied with. (at p. 590)
provisions of Articles 1771 to 1773 of the Civil Code, as to the formal requirements for partnerships, applied only for the protection of third parties dealing with the partnership. In resolving that there was constituted no partnership or joint venture
Unfortunately, the Court failed to consider the fact that even under the Statute of Frauds, the “unenforceability” of covered
between the siblings, or that the same is void, the Court, after quoting Article 1771 to 1773, held in Litonjua that —
contracts is lifted the moment there is partial or full execution of the terms of the contract. Thus, in the future it can be anticipated that the rule of partial execution, (i.e., the actual contribution made to the partnership, the pursuit of the business
53 enterprise, etc.), would make mitigate against the deleterious effect of non-compliance with the public instrument and SEC-
to contribute money, property or industry to a common fund with the intention of dividing the profits between or among
registration requirement under Article 1771 and 1772 of the Civil Code.
themselves.” (at pp. 590-591; italics supplied).
In any event, what rendered the purported contract of partnership void in Litonjua was that since the note indicated that there
Perhaps the afore-quoted passage is the best way to appreciate the decision in Litonjua, that in the end no contract of
would be contributed real property to the partnership, then there was failure to comply with the requirements laid down in
partnership arose between the Litonjua sibling even on the basis of the arrangement purported, since it lacked the essential
Article 1773 of the Civil Code, for the rendering of the proper inventory and attaching it to the public instrument registered with
element of “contributing to a common fund.” Thus, the rulings on the failure to comply with the provisions of Article 1771 to
the SEC, thus:
1773 of the Civil Code ought to be considered as obiter dictum.
Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code applies as long [as]
c. Historical Background of Article 1773
real property or real rights are initially brought into the partnership. In short, it is really of no moment which of the partners, or, in this case, who between petitioner and his brother Eduardo, contributed immovables. In context, the more important
Ruling under the provisions of the Code of Commerce and the old Civil Code which prescribed formalities for the formation of a
consideration is that real property was contributed, in which case an inventory of the contributed property duly signed by the
partnership where real property is contributed, the Court held in Borja v. Addison, 44 Phil. 895 (1922), that “knowledge of the
parties should be attached to the public instrument, else there is legally no partnership to speak of. (at p. 586).
existence of the new partnership or community of property must, at least, be brought home to third persons dealing with the surviving husband in regard to community real property in order to bind them by the community agreement.” (at p. 907)
Litonjua therefore gives the “dire consequences” faced by partners who do not comply with the formal requirements mandated
Consequently, third parties without knowledge of the existence of the partnership who deal with the property still registered in
under Articles 1771 to 1773 of the Civil Code. It would have been better ifLitonjua had expressly set aside its rulings
the name of one of the partners have a right to expect full effectivity of such transaction on the property, in spite of the
in Torres and Angeles, so that its doctrine would have been the clear guide to legal practitioners. For the author, it must be
protestation of the other partners and perhaps even the partnership creditors.
stated that the rulings in Torres and Angeleswhich have their basis from jurisprudence under the old Civil Code and the Code of Commerce, will continue to prevail; and that the Litonjuadoctrine of rendering the contract of partnership void for failure to
d. Registration Requirements under Article 1773 Should Be Considered in Connection with the Priority Rules Set for
comply with the requirements under Article 1773 of the Civil Code, applicable only to situations where the claimant that a
Claims of Partnership Creditors and the Separate Debtors of the Partners
contract of partnership has been duly constituted relies only upon a note or instrument, and does not have other evidence to prove that indeed a contract of partnership has been constituted, such as his exercise with the tolerance of the other partners, of acts of ownership, demanding for an accounting, participation in the profit, etc. Indeed, in Litonjua the best evidence presented by the younger brother to prove a contract of partnership has been constituted was the unsigned typewritten note, and he failed to prove the essential elements of the contract of partnership, as observed by the Court, thus: Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family businesses supposedly promised by Eduardo to give in the near future. Any suggestion that the stated amount or the equity component of the promise was intended to go to a common fund would be to read something not written in Annex “A-1.” Thus, even this angle alone argues against the very idea of a partnership, the creation of which requires two or more contracting minds mutually agreeing
Failure to comply with the inventory and public documents requirements may, however, adversely affect the rights of the partners, the partnership and the partnership creditors, when it comes to the binding effect of transactions relating to real estate and other immovables where the controlling doctrine is that such transactions do not bind the public unless they are found in a public document, and duly registered. Thus, in Secuya v. Vda. de Selma, 326 SCRA 244 (2000), the Court held that while the sale of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons if it is not embodied in a public instrument and recorded in the Registry of Deeds. When it comes to contributions of real estate to a partnership, especially when it covers registered land, then the peremptory provisions of the Property Registration Decree (Pres. Decree No. 1459) will prevail as to who has a better claim, right or lien on the property, since “registration in good faith and for value,” is the operative rule under the Torrens system.
54 The proper registration of real property contributed into the partnership would have much to do with the priority rules set under
Those who, not being members of the partnership, include their names in the firm name, shall be subject to the
the Law on Partnerships between claims of partnership creditors and those of the separate creditors of the each of the
liability of a partner. (n)
partners. ________ Under Article 1839(8), “When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property,
The language of Article 1815 of the Civil Code shows unmistakably that its not an obligation of the partners to include their
saving the rights of lien or secured creditors.”
names in the partnership name; but that if an individual includes his name in the firm name, then he becomes bound to third parties who rely thereon to the same liabilities as the partners in the partnership.
Again, under Article 1839(9), “Where a partner has become insolvent or his estate is insolvent, the claims against his separate Article 1815 is the first article under the section which reads “Obligations of the Partners with Regard to Third Persons,” which
property shall rank in the following order:
indicates clearly the essence of having a firm name: that since a partnership is given a separate juridical personality which “(a) Those owing to separate creditors;
allows it to deal with legal capacity and enter into contracts with the public, then it must adopt a firm name by which it can be identified as the party to a contract.
“(b) Those owing to partnership creditors; a. Historical Basis of Article 1815 “(c) Those owing to partners by way of contribution. (n)” Although the codal provision indicates that it is a new [“(n)”] provision in the Civil Code, according to Tolentino, Article 1815 Since Torres specifically held that the rules of inventory, public instrument and SEC registration under Articles 1772 and 1773
was taken from Article 126 of the Code of Commerce (TOLENTINO, at p. 353). Yet the principle on partnership name under
of the Civil Code are meant to protect partnership creditors, and as to them the partnership contract is void, if it is necessary to
Article 126 was quite different, for it actually required that the partnership name should be registered containing all the names
protect their interests, what happens then to real property contributions that have not complied with the statutory formalities,
of the partners. (Article 126, Code of Commerce).
would first priority towards them pertain to the separate creditors of the contributing partner? In Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923), the Court held that the object of Article 126 in requiring a general partnership to transact business under the name of all its members, of several of them, or of one only, was to protect
3. The Partnership Name
the public from imposition and fraud; and that Article 126 was for the protection of the creditors rather than of the partners themselves. Jo Chung Cang held that the legal requirement as to firm name must be construed as rendering contracts made in
Article 1815 of the Civil Code provides that –
violation thereof unlawful and unenforceable only as between the partners and at the instance of the violating party, but not in ________
the sense of depriving innocent parties of their rights who may have dealt with the offenders in ignorance of the latter having violated the law; and that contracts entered into by commercial associations defectively organized are valid when voluntarily
Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more
executed by the parties, and the only question was whether or not they complied with the agreement. It essence Jo Chung
of the partners.
Cang ruled that partners cannot avoid the consequences of a partnership contract entered into by invoking in their defense the anomaly in the firm name which they themselves adopted. The ruling was reiterated in Philippine National Bank v. Lo, 50 Phil. 802 (1927).
55 The earlier decision in Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), held that failure to register a commercial
Where a shareholder of an association is called upon to respond to a liability as such, and where a party has contracted with a
partnership would mean that there is no partnership constituted and that the rule applicable to protect parties who have dealt in
corporation and is sued upon the contract, neither is permitted to deny the existence or the legal validity of such corporation.
good faith with the enterprise was the application of Article 120 of the Code of Commerce, that the right of action would be
To hold otherwise would be contrary to the plainest principles of reason and good faith. Parties must take the consequences of
against the person in charge of the management of the association.
the position they assume. (Ibid, at p. 13).
Jo Chung Cang refused to apply the ruling in Hung-Man-Yoc because there was actual registration of the partnership, and
The question in the Jo Chung Cang, PNB and Compania Agricola rulings was that if the provisions of Article 126 of the Code
consequently decreed that a general partnership had been constituted as to make the partners thereof solidarily liable for
of Commerce were mandatory in the sense that they were addressed to the partners and partnership more for the protection of
partnership debt in the event the partnership itself becomes insolvent. Although failure to comply with the mandatory
partnership creditors, and non-compliance therewith could not prejudice creditors, then what would be their usefulness if no
registration provisions of the Code of Commerce did not affect the cause of action of creditors to enforce their contracts
adverse consequence visits the partners and the partnership whenever they are not complied with?
against the partnership, did it mean then that as a consequence, if it were the partners and partnership seeking to enforce such contracts, they would be barred from doing so as a consequence of their failure to comply with the registration
There is no doubt that there were serious difficulties with enforcing the mandatory provisions on registration and firm name for
requirements under the law? No categorical ruling was made on this issue in Jo Chung Cang although it did quote a ruling
commercial partnerships under the Code of Commerce. The present rule under Article 1815 of the Civil Code which essentially
from the Supreme Court of Michigan on the common law rule:
allows the partners and the partnership to adopt any firm name they fancy is a more market-friendly rule since:
As this acts involves purely business transactions, and affects only money interests, we think it should be construed as
(a) one who opts to have his name included in the firm name runs to risk of being made liable for partnership debts;
rendering contracts made in violation of it unlawful and unenforceable at the instance of the offending party only, but not as designed to take away the rights of innocent parties who may have dealt with the offenders in ignorance of their having violated the statute. (Ibid, at pp. 154-155, citing Cashing v. Pliter 168 Mich 386; Ann. Cas. [1913-C], 67 ; underscoring supplied by author) To prevent such members of a commercial partnership from recovering on the contracts entered into on the ground that there was no valid registration or that it did not comply with the rule on firm name would constitute unjust enrichment. Eventually, the Court applied in Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the principles of corporation by estoppel doctrine (Section 21, Corporation Code), even as to unregistered partnerships, thus: Persons who assume to form a corporation or business association, and exercise corporate functions, and enter into business relations with third persons, are estopped from denying that they constitute a corporation. So also are the third persons who
(b) the articles of partnership, when registered provides anyway for the listing of the partners of the partnership enterprise; and (c) more importantly, the arising of the separate juridical personality of the partnership comes with the perfection of the contract of partnership, and not with registration thereof. 4. Registration Given Little Use in Partnership Law The essence of what constitutes a partnership contract is split into two levels in Philippine Partnership Law: (a) As between and among the partners, it is the point of perfection, when two or more parties have come to a meeting of minds to constitute a common fund and the distribution of profits and losses among themselves; and
deal with such a de facto association or corporation, recognizing it as such and thereby incurring liabilities, estopped, when an action is brought on such obligations, from denying the juristic personality of such corporations or associations. (Ibid, at p. 12).
(b) In relation to third parties who deal with a business enterprise, when a representation has been made that they are dealing with a partnership, or are dealing with a partner to a partnership enterprise.
56 a. Intra-Partnership Relationship
Failure to comply with the requirements under Article 1772 may also be basis for the SEC to refuse to give supportive aid to partners who have not registered their agreement with the SEC.
Within the intra-partnership relationship, the main doctrine that applies is that unless there is a meeting of minds as to the elements of common fund and distribution of profits, then there can be no contract of partnership between the parties involved.
b. Dealings with Third Parties
On the other hand, once there is such a meeting of minds, the partnership contract arises, and needs no particular form in order to be valid, binding and enforceable. Thus, Article 1784 provides that “A partnership begins from the moment of the
There are basically two areas that are important to consider when it comes to partnership dealings with third parties:
execution of the contract, unless it is otherwise stipulated.” The partnership agreement may be proved by competent evidence, whether written or oral, or from the acts and actuations of the parties. So strong is the “consensual” nature of the contract of partnership that the failure to comply with the formal requirement of inventory of immovable contributed, public instrument and registration with the SEC, brings no deleterious effect on the partnership itself, and between and among the partners. We shall illustrate this point. Under Article 1771 of the Civil Code, although it recognizes the general principal that “A partnership may be constituted in any form,” yet it provides expressly that “where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.” This is followed up in Article 1773 which provides that “A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument.” In spite of the clear injunction of the statutory provisions and the laying down of the consequences of failure to comply with the requisites forms of public document and inventory of the contributed immovable, the Court has always ruled that such requirements are meant for the protection of third parties who deal with the partnership,
(a) The validity and enforceability of contracts entered into with a purported partner of an existing partnership or with purported partnership that has not been legally constituted; and (b) The standing of partnership creditors to enforce partnership liability personally against the partners. The general principle in Partnership Law is that a member of the public who deals in good faith with a purported partner or purported partnership in the ordinary course of business of such partnership, has a right to expect that his contract can be enforced, and intra-partnership and technical issues pertaining to the partnership or on the distribution of power and authority between the partners cannot generally be raised against such third party to undermine the enforceability of his contractual dealings with the corporation. Various statutory provisions in the Partnership Law of the Civil Code, support this doctrine of reliance by third parties dealing in good faith with the purported partner or purported partnership, thus:
and consequently, when no third party interests are involved in a suit, neither the partnership nor any of the parties can invoke failure to comply with such requirements, to gain any advantage or so avoid the liability consequences of being a partner in a
(a) Under Article 1815, “Those who, not being members of the partnership, include their names in the firm name, shall
be subject to the liability of partner.”
In the same manner, under Article 1772 of the Civil Code, “Every contract of partnership having a capital of three thousand
pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the
every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual
Securities and Exchange Commission.” Not only does Article 1772 declare the clearly non-lethal consequence of failure to
way the business of the partnership . . . binds the partnership, unless the partner so acting has in fact no authority to act for the
comply with the public instrument and SEC registration requirements: “Failure to comply with the requirements of the
partnership in the particular manner, and the person with whom he is dealing with has knowledge of the fact that he has
preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons,” but the Court
no such authority;”
Under Article 1818, “Every partner is an agent of the partnership for the purpose of its business, and the act of
has consistently declared that the purpose of Article 1772 is merely to allow a partner in an oral partnership to have a cause of action to have the partnership constituted in a manner that allows its terms and conditions be made known to the public
Under Article 1834, partnership creditors who extend credit to the partnership even after there has been dissolution
through a public instrument and registration with the SEC.
can can claim payment thereof against all the partners, when such creditors have “no knowledge or notice of the dissolution.”
57 In fact, even when a partnership has been duly registered with the SEC, the doctrine of the Supreme Court seems clear that
firm form part of the its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary
third parties who deal with the partnership are not bound by the terms of the registered articles of partnership, and unless they
powers of the partner.” (Ibid, at p. 969).
have actual knowledge thereof, they have a right to rely upon what is the normal right and authority of every partner to generally bind the partnership and the other partners.
c. What Is the Value of the Statutory Requirements on Form and Registration?
Thus, Litton v. Hill & Ceron, 67 Phil. 509 (1939), laid down the rule that –
If non-compliance with the formal and registration requirements under Partnership Law of the Civil Code does not render the partnership void, nor does it undermine the enforceability of contracts entered into in the partnership name, and does not
Third persons . . . are not bound in entering into a contract with any of the two partners, to ascertain whether or not this partner
generally impose legal consequences on the partners for non-compliance, then what is the usefulness of such statutory
with whom the transaction is made has the consent of the other partner. The public need not make inquiries as to the
agreements had between the partners. Its knowledge is enough that it is contracting with the partnership which is represented by one of the managing partners. (Ibid, at p. 513).
The answer had been addressed early in our jurisdiction in Thunga Chui v. Que Bentec, 2 Phil. 561 (1903), which applied Article 1279 of the old Civil Code, now found as Article 1357 of the new Civil Code, which reads:
This ruling was reiterated in Goquiolay v. Sycip, 108 Phil. 947 (1960), which held that the statutory rule on how management power is distributed or exercised within the partnership, and the consequences of failure to comply with such statutory rule is
If the law requires a document or other special form, as in the acts and contracts enumerated in the following articles, the
“an obligation that is imposed by law on the partners among themselves, that does not necessarily affect the validity of the acts
contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be
of a partner, while acting within the scope of the ordinary course of business of the partnership, as regards third persons
exercised simultaneously with the action upon the contract.
without notice. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his co-partners. The regular course of business procedure does not require that each time a third person contracts with one of the managing partners, he should inquire as to the latter’s authority to do so, or that he should first ascertaining whether or not the other partners has given their consent thereto.” (Ibid, at p. 957). The reason why the general rule in Agency Law that one dealing with an agent must ascertain the extent of the power of the agent does not normally apply with the same effect in Partnership Law was also explained in Goquiolay in the following manner: “It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only to manage the property, and that it did not include the power to alienate . . . What this argument overlooks is that the widow was not a mere agent, because she had become a partner upon her husband’s death, as expressly provided by the articles of co-partnership.” (Ibid, at p. 965). Being therefore a partner, the general rule of Partnership Law, every partner had the power to dispose of partnership property even of its real estate, which is in the normal course of the partnership business of dealing with real property: “where the avowed purpose of the partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the
In Thunga Chui, the Court held – Article 1279 [now Article 1356] does not impose an obligation, but confers a privilege upon both contracting parties, and the fact that plaintiff has not made use of same does not bar his action. x x x . Article 1279 [now Article 1356], far from making the enforceability of the contract dependent upon any special extrinsic form, recognizes its enforceability by the mere act of granting to the contracting parties an adequate remedy whereby to compel the execution of a public writing, or any other special form, whenever such form is necessary in order that the contract may produce the effect which is desired, according to whatever may be its object. (Ibid, at pp. 563-564). Not only is the general rule under Partnership Law jurisprudence that partnership creditors do not have an obligation to verify the authority of a purported partner acting in the ordinary course of partnership business, nor to review the registration papers of the partnership, the rule is that any important changes in partnership relationship must be brought to the knowledge of the partnership creditors in order to be binding on the latter.
58 Thus, in Singson v. Isabela Sawmill, 88 SCRA 623 (1979), the Court held that the failure of a partner to have published her withdrawal from the partnership, and her agreeing to have the remaining partners proceed with running the partnership business instead of insisting on the liquidation of the partnership, will not relieve such withdrawing partner from her liability to the partnership creditors. The Court held that even if the withdrawing partner acted in good faith, this cannot overcome the position of partnership creditors who also acted in good faith, without knowledge of her withdrawal from the partnership. In particular, Singson ruled that when the partnership executes a chattel mortgage over its properties in favor of a withdrawing partner, and the withdrawal was not published to bind the partnership creditors, and in fact the partnership itself was not dissolved but allowed to be operated as a going concern by the remaining partners, the partnership creditors have standing to seek the annulment of the chattel mortgage for having been entered into adverse to their interests. —oOo—
59 The foregoing doctrinal approaches shall animate the discussions hereunder on the rights and obligations of partners in the 12 – RIGHTS AND POWERS OF PARTNERS
partnership arrangement. [Updated: 14 October 2009]
1. Partner’s Right to Manage the Partnership a. General Rule on Partnership Management
Article 1810 of the Civil Code provides that the property rights of every partner in the partnership set-up to be as follows:
Article 1818 of the Civil Code provides that “Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the
(a) Right to Participate in the Management of the Partnership;
usual way the business of the partnership of which he is a member binds the partnership.” This principle is supported by Article 1803 which provides “When the manner of management has not been agreed upon . . . All the partners shall be considered
(b) Right in Specific Partnership Property; and
agents and whatever any one of them may do alone shall bind the partnership.” Article 1818 goes on to provide that “An act of (c) Equity Interest in the Partnership.
a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not bind the partnership unless authorized by the other partners.”
The enumeration under Article 1810 of the “property rights” of a partner defines the three-fold role that every partner assumes under a contract of partnership: as an equity holder (investor), a manager of the business enterprise (a co-proprietor of the
Embodied clearly with the language of Article 1818 is the “doctrine of apparent authority” which allows a third party dealing
business enterprise), and as an agent of the partnership juridical person and of the other partners. The multi-level positions
with a juridical entity to rely upon the validity and enforceable of contracts entered into with an officer or representative who
has been by practice endowed with apparent authority to act for the juridical person. In every partnership, there is a
situations. Consequently, two important doctrinal approaches animate the Law on Partnerships as a consequence of such
presumption of apparent authority for every partner to act for and thereby bind the partnership in all that is “apparently for the
multi-level positions of partners.
carrying on of the business of the partnership in the usual way.” Thus, the Court held in Munasque v. Court of Appeals, 139
SCRA 533 (1985), that a presumption exists that each partner is an authorized agent for the firm and that he has authority to First is to characterize the contract of partnership and the contractual relationships between and among the partners as of the
bind it in carrying on the partnership transaction.
highest fiduciary and personal level (delectus personae), which therefore ensures that partners share the partnership bed only with parties with whom they contracted and there is no occasion in the future for a third party to be allowed to join the group
We should therefore consider the old ruling in Council of Red Men v. Veterans Army, 7 Phil. 685 (1907), where the Court
without their unanimous consent; and that every partner is afforded the ability to withdraw from the contractual relationship
interpreted the original provision of Article 1803 of the Civil Code (then Article 1695 of the old Civil Code), that allowed one
whenever he becomes uncomfortable with any or all of the other partners.
partner to act to bind the partnership, to apply only when there has been no provision at all in the articles of partnership on the exercise of power or management, thus:
Second is that each of the “property rights” of each of the partners, as enumerated under Article 1810, are treated separately, to ensure that those rights that pertain to agency and personal relations are not affected by dealings on those which are strictly
One partner, therefore, is empowered to contract in the name of the partnership only when the articles of partnership make no
proprietary in nature. In other words, the bundle of “property rights” of a partner is not indivisible, and in fact the philosophy
provision for the management of the partnership business. In the case at bar we think that the articles of the Veteran Army of
under Philippine Partnership Law is to consider them divisible, and capable of being treated and transacted separately.
the Philippines do so provide. It is true that an express disposition to that effect is not found therein, but we think one may be
60 fairly deduced from the contents of those articles. They declare what the duties of the several officers are. In these various
partnership business without knowledge of such special arrangement, and who are not mandated to seek formal authority and
provisions there is nothing said about the power of making contracts, and that faculty is not expressly given to any officer. We
that in fact are deemed to have a right to expect, unless otherwise indicated, that their dealings with the managing partner
think that it was, therefore, reserved to the department as a whole; that is, that in any case not covered expressly by the rules
should bind the partnership.
prescribing the duties of the officers, the department were present. It is hardly conceivable that the members who formed this organization should have had the intention of giving to any one of the sixteen or more persons who composed the department
This situation is best exemplified in the decision in Litton v. Hill & Ceron, 67 Phil. 509 (1935), where an obligation in a sum of
the power to make any contract relating to the society which that particular officer saw fit to make, or that a contract when so
money was sought to be recovered from the partnership Hill & Ceron in whose name it was entered into by one of the
made without consultation with, or knowledge of the other members of the department should bind it. We therefore, hold that
managing partners, when in fact the articles of partnership provided expressly that: “Sixth. That the management of the
no contract, such as the one in question, is binding on the Veteran Army of the Philippines unless it was authorized at a
business affairs of the copartnership shall be entrusted to both copartners who shall jointly administer the business affairs,
meeting of the department. No evidence was offered to show that the department had never taken any such action. In fact, the
transactions and activities of the copartnership.” In ruling that the act of just one of the managing partners should properly
proof shows that the transaction in question was entirely between Apache Tribe, No. 1, and the Lawton Post, and there is
make the partnership liable for the payment of the debt, the Court held –
nothing to show that any member of the department ever knew anything about it, or had anything to do with it. The liability of the Lawton Post is not presented in this appeal. (7 Phil. 685, at pp. 688-689).
It follows from the sixth paragraph of the articles partnership of Hill & Ceron above quoted that the management of the business of the partnership has been entrusted to both partners thereof, but we dissent from the view of the Court of Appeals
We are of the strong position that the doctrine in Council of Red Men,rendered at a time when our legal jurisdiction was still
that for one of the partners to bind the partnership the consent of the other is necessary. Third persons, like the plaintiff, are
deciding the proper formulation of the doctrines in Philippine Partnership Law, no longer applies.
not bound in entering into a contract with any of the two partners, to ascertain whether or not this partner with whom the transaction is made has the consent of the other partner. The public need not make inquiries as to the agreements had
Firstly, the prevailing doctrine now embodied in Articles 1803 and 1818 of the Civil Code is that every partner has the
between the partners. Its knowledge is enough that it is contracting with the partnership which is represented by one of the
apparent authority to act for and in behalf of the partnership in carrying on the ordinary or usual business of the partnership.
managing partners. (Ibid, at p. 513).
Secondly, the ruling in Council of Red Men was based on the principal that the special rules of management of partnership
Litton held that there is a general presumption that each individual partner is an authorized agent for the firm and that he has
affairs provided for in the articles of partnership is binding on the public, or at least on every person dealing with the
authority to bind the firm in carrying on the partnership transaction, and that the presumption is sufficient to permit third
partnership. This is not the rule under Philippine Partnership Law which characterizes the contract of partnership and the
persons to hold the firm liable on transactions entered into by one of the members of the firm acting apparently in its behalf
arising of the partnership juridical person, as being merely consensual with no specific formalities being required in general.
and within the scope of his authority. This was especially true under the circumstances in Litton where the transaction which
Thus, even when the articles of partnership has been formally executed and registered with the SEC, the same is not
gave rise to the partnership obligation was in the ordinary course of the partnership’s business.
considered to be a public document binding on the public. Therefore, notwithstanding what specific provisions may be found in the articles of partnership on the management of the partnership business, the same is binding inter se among the partners,
Litton also supports the legal position that even with the registrations of the article of partnership with the SEC, the same does
but does not prejudice the rights of a third party who deals in good faith with the partners without actual knowledge of the
not constitute a public document that binds those who deal with the partnership enterprise. In other words, even a registered
content of the articles of partnership.
articles of partnership constitutes first and foremost a intra-partnership document that is binding upon the partners, and a third party acting in good faith without actual knowledge of the contents thereof is not bound by the terms of the articles of
Although special management arrangements may be made among partners, and even when so formalized within the terms of the articles of partnership, generally such special arrangements do not bind or prejudice third parties who deal with the
61 In Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941), the Court held that in a transaction covering the purchase and delivery of
The right of a partner to manage the affairs of the partnership or to act as an agent of the partnership is expressly affirmed by
merchandise within the ordinary course of the partnership business effected by the industrial partner without the consent of the
the following statutory provisions:
capitalist partner, the provisions in the articles of partnership that the industrial partner “shall manage, operate and direct the affairs, businesses and activities of the partnership,” constitute sufficient authority to make such transaction binding against the
(a) Article 1820, which provides that an admission or representation made by any partner concerning partnership affairs
partnership, as against another provision of the articles by which the industrial partner is authorized “To make, sign, seal,
within the scope of his authority is evidence against the partnership;
execute and deliver contracts . . upon terms and conditions acceptable to him duly approved in writing by the capitalist partner,” which must cover only the execution of formal contracts in writing and not necessarily to routine transactions such as ordinary purchases and sale of merchandise.
(b) Article 1821, which provides that notice to any partner of any matter relating to partnership affairs, and the knowledge of partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner, operate as notice or knowledge of the
In addition, Aznar applied the “doctrine of apparent authority” and the “estoppel doctrine” when it held that “The evidence also
partnership (except in case of a fraud on the partnership);
shows that previous purchases made by [the industrial partner] in the name of the Aznar & Company from the same plaintiff were honored and paid for by the said firm, and we may well also assume that the goods herein in question which were delivered to defendant firm were made use of by the latter. It is, therefore, but just that the firm answer for their value.” (at p. *).
(c) Article 1822, which provides that any loss or injury caused to any third person or any penalty incurred by reason of any wrongful act or omission of a partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, shall make the partnership liable therefore; and
In Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court even took into consideration the provisions of Article 129 of the Code of Commerce to the effect that “If the management of the general partnership has not been limited by special agreement to any of the members, all shall have the power to take part in the direction and management of the common business, and the members present shall come to an agreement for all contracts or obligations which may concern the association.” It laid down the rule that is relevant under the current provisions of the Civil Code that defines the necessity of concurrence of partners’ vote on any partnership act or contract, thus: but this obligation is one imposed by law on the partners among themselves, that does not necessarily affect the validity of the acts of a partner, while acting within the scope of the ordinary course of business of the partnership, as regards third persons without notice. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his co- partners. The regular course of business
Article 1823, which provides that the partnership is bound to make good the loss caused by the misapplication by a
partner acting within the scope of his apparent authority of money or property belonging to, or received by the partnership from, a third person. In the cases of items (c) and (d) above-enumerated, Article 1824 of the Civil Code provides expressly that “All partners are liable solidary with the partnership for everything chargeable to the partnership.” b. Transactions Not in the Ordinary Course of Partnership Business Article 1818 of the Civil Code enumerates what are certainly not“apparently for the carrying on of the business of the partnership in the usual way,” and will not therefore be valid transactions unless done by or approved by all the partners, thus:
procedure does not require that each time a third person contracts with one of the managing partners, he should inquire as to the latter’s authority to do so, or that he should first ascertain whether or not the other partners had given their consent thereto.
(a) Assigning of partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership;
In fact, Article 130 of the same Code of Commerce provides that even if a new obligation was contracted against the express will of one of the managing partners, “it shall not be annulled for such reason, and it shall produce its effects without prejudice
(b) Disposition of the goodwill of the business;
to the responsibility of the member or members who contracted it, for the damages they may have caused to the common fund.” (Ibid, at p. 957)
(c) Confession of a judgment;
62 (d) Entering into a compromise concerning a partnership claim or liability;
partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm from part of its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary powers of the partner. . .
(e) Submitting a partnership claim or liability to arbitration; or
(Ibid, at pp. 671-672).
(f) Renouncing a partnership claim.
The foregoing discussions in Goquiolay certainly began to appreciate an act or transaction in the ordinary course of business, which basically may involve only a sale of assets, from an extraordinary act or contract, which either disposes of the business
The foregoing cases are considered to be not merely acts of administration, but rather acts of ownership which can only be
enterprise or has the effect of preventing the pursuit of the business enteprise.
effected by the concurrence of all the partners who are collectively deemed to be the “owners” of the partnership and its business enterprise.
c. Specific Modification on the Power of Management
One would consider therefore that when the transaction involves the sale, transfer or encumbrance of the entire partnership
It is a policy in Partnership Law for the partners to be allowed to expressly contract around the default principle of “mutual
business enterprise, it would constitute an act of strict ownership or an act of alteration, which cannot be considered as within
agency” (i.e.,that the partners are all managers of the partnership enterprise). Thus, under Article 1800 of the Civil Code it is
the ordinary course of business that would come within the apparent authority of one partner. And yet in the early case
possible to appoint only one managing partner in the articles of partnership, in which case the managing partner “may execute
of Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court held that the sale of the partnership’s business enterprise can be
all acts of administration despite the opposition of his partners,” and his powers are irrevocable without just or lawful cause.
considered to be within the power of the managing partner, thus:
The same rule would apply when a partner is designated as managing partner outside of the articles of incorporation, but in such case his designation as managing partner is essentially revocable.
Appellants also question the validity of the sale covering the entire firm realty, on the ground that it, in effect, threw the partnership into dissolution, which requires consent of all the partners. This view is untenable. That the partnership was left
Thus, the Supreme Court has held that: a manager of a partnership can execute acts of administration without need of consent
without the real property it originally had will not work its dissolution, since the firm was not organized to exploit these precise
of the partners, including the power to purchase goods in the ordinary course of business (Smith, Bell & Co. v. Aznar, 40 O.G.
lots but to engage in buying and selling real estate, and “in general real estate agency and brokerage business”. Incidentally, it
1882 ); to hire employees (Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 ), as well to dismiss
is to be noted that the payment of the solidary obligation of both the partnership and the late Tan Sin An, leaves open the
employees (Martinez v. Cordoba & Conde, 5 Phil. 545 ); to secure a loan to finish the construction of the boat of the
question of accounting and contribution between the co-debtors, that should be ventilated separately. (Ibid, at p. 960).
partnership (Agustia v. Mocencio, 9 Phil. 135 ); to employ a bookkeeper by his sole authority (Fortis v. Gutierrez Hermanos, 6 Phil. 100 ); and to commence a suit in the name of the partnership against partnership debtors (Tai Tong
Perhaps Goquiolay was decided at an earlier time in our jurisdiction when the concept and doctrines pertaining to “business enterprise transfers” were not yet developed, much less appreciated. On ruling on the motion for reconsideration, the resolution of Goquiolay v. Sycip, 9 SCRA 663 (1969), returned on this point and clarified the applicable doctrine as follows: It is next urged that the widow, even as a partner, had no authority to sell the real estate of the firm. This argument is lamentably superficial because it fails to differentiate between real estate acquired and held as stock-in-trade and real estate held merely as business site (Vivante’s “taller o banco social”) for the partnership. Where the partnership business is to deal in merchandise and goods, i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of a partner, because it is not in line with the normal business of the firm. But where the express and avowed purpose of the
Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988). Curiously though, the Court has also held that the managing partner has no power to purchase “barge, a truck and an adding machine” in the name of the partnership inasmuch as none of the properties were considered to be “supplies for partnership business.” (Teague v. Martin, 53 Phil. 504 ) The old ruling is contrary to the doctrine of apparent authority in the usual or normal pursuit of the business of the partnership embodied in Article 1818 of the Civil Code, especially when it comes to the adding machine. Under Article 1801 of the Civil Code, if two or more partners have bee entrusted with the management of the partnership affairs without specification of their respective duties, or without stipulation that one of them shall not act without the consent of all the others, each one may separately execute all acts of administration, but if any of them should oppose the acts of the
63 others, the decision of the majority shall prevail; and in case of a tie, the matter shall be decided by the partner owning the
(i) Any partner may convey title to such property by a conveyance executed in the partnership name; the partnership may
recover such property only when the partner so conveying has no such power to so convey, but not against a transferee in good faith and for value;
On the other hand, under Article 1802, if it has been stipulated that none of the managing partners shall act without the consent of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any
(ii) A partner who conveys the property but in his own name passes the equitable interest of the partnership only when the
one of them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership.
partner so conveying acted with authority; otherwise, no title at all to the immovable property passes to the transferee.
It should be emphasized though that the provisions of Articles 1800 to 1802 should be considered to be intramural rules that
The immediately preceding rule is consistent with the provision of Article 1774 which states that title to immovable property
govern the relationship between and among the partners, and the breach of which can bring about a cause of action against
acquired in the partnership name can be conveyed only in the partnership name.
the breaching partners. The rules provided therein do not bind nor apply to invalidate the contract and transactions had with third parties acting in good faith and under the doctrine of apparent authority provided under Article 1818.
(2) Where Title Is Not in Partnership Name (i.e., in the Name of One or More, or All the Partners, or a Third Person in Trust for the Partnership):
d. Power of Alteration (i) A conveyance executed by a partner in the name of the partnership or in his own name only passes equitable interest of The power of management of the partnership business, should be distinguished from the power of ownership and control
the partnership, only when the partner conveying acted with authority;
which is subject to a higher level of requirements. Under Article 1803(2) of the Civil Code, none of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful
(ii) A conveyance executed by a partner in the name of the partnership or in his own name does not even pass anything (not
to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership,
even equitable interest of the partnership) when the partner so conveying acted without authority;
the court’s intervention may be sought. (3) Where Title Is in the Name of One or More But Not All the Partners: e. Power Over Real Properties of the Partnership (i) When the records disclose partnership interests, the partners in whose name the title stands may convey title to such Although Article 1774 of the Civil Code provides that immovable property or an interest therein may be acquired in the
property; and the partnership may recover only when the partners so conveying acted without authority, but not against a
partnership name, the partnership title is not rendered void if the registration thereof is not in the name of the partnership but in
purchaser in good faith and for value;
one or more, or all, of the partners’ names (or for that matter in the name of a third-party who holds it in trust for the partnership).
(ii) When the records do not disclose the right of the partnership, the partners in whose name the title stands may convey title to such property, and the partnership may recover against any transferee when the partners so conveying acted without
Article 1819 of the Civil Code sets specific rules on how partners may bind real properties pertaining to the partnership,
depending on the manner by which such title was registered, thus: (4) Where Title Is in the Name of All of the Partners: (1) Where Title Is in the Partnership Name:
64 (i) Conveyance executed by all the partners (in whose ever name so conveyed) passes all their rights in such property. In this
A better way of looking at the purported co-ownership rights of partners to specific partnership property is to consider that the
case the will of all the partners is the will of the partnership.
law constitute the partners as trustees of the corporate properties, whereby they hold naked title to the partnership properties, with full power to manage and control the same for the benefit of the partnership venture, thus, “A partner . . . has equal right
2. Partner’s Right to Specific Partnership Property Although Article 1811 of the Civil Code defines or explains a partner’s “right in specific partnership property” to mean that “A partner is [merely a] co-owner with his partners of specific partnership property,” and the enumeration of the “incidents of this co-ownership” would show that what is being defined is merely an implementation of the principle of mutual agency, thus:
with his partners to possess specific partnership property for partnership purposes.” Thus, in Catlan v. Gatchalian, 105 Phil. 1270 (1959), it was held that when partnership real property had been mortgaged and foreclosed, the redemptio by any of the partners, even when using his separate funds, does not allow such redemption to be in his sole favor: “Under the general principle of law, a partners is an agent of the partnership (Art. 1818, new Civil Code). Furthermore, every partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a
(a) “A partner . . . has an equal right with his partners to possess specific partnership property for partnership purposes;”
partner (Article 1807, new Civil Code). Consequently, when Catalan redeemed the properties in question be became a trustee and held the same in trust for his copartner Gatchalian, subject of course to his right to demand from the latter his contribution
(b) “A partner’s right in specific partnership property is not assignable except in connection with the assignment of rights of all
to the amount of redemption.” (at p. 1271).
the partners in the same property;” This is also the reason why paragraph numbered (2) of Article 1811 of the Civil Code provides expressly that “A partner’s right (c) “A partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the
in specific partnership property is not assignable except in connection with the assignment of rights of all the partners in the
same property.” Bautista had written that the reasons why a partner’s right in partnership property is non-assignable are as follows:
(d) “A partner’s right in specific partnership property is not subject to legal support.” (a) it would effectively allow a third party (the assignee) to participate in the affairs of the partnership, and would basically have Unlike the proprietary right of an ordinary co-owner to “use the thing owned in common, provided he does so in accordance
a stranger become a partner without the consent of all the other partners; and
with the purpose for which it is intended and in such a way as not to injure the interest of the co-ownership or prevent the other co-owners from using it according to their rights” (Article 1486, Civil Code), the right of every partner in specific partnership
(b) it would interfere with the rights of the other partners and the partnership creditors to have all partnership properties applied
property is merely an extension of his right to participate in the management of the partnership affairs, and bears no
directly to the payment of partnership debts; and
proprietary title to himself personally apart from pursuing the partnership affairs. (c) it would indirectly go against the principle that partner’s right in specific partnership property cannot be attached or levied It may also be observed that the recognition by the Law on Partnerships of the partners’ purported co-ownership interests in
upon,” (BAUTISTA, at p. 162), as provided in paragraph (3) of Article 1811. In line with the same rationale, paragraph
specific partnership property would be in defiance of the grant of a separate juridical personality to every partnership organized
numbered (4) of Article 1811 also provides that a partner’s right in specific partnership property is also not subject to support.
under the Civil Code. Nonetheless, the purported co-ownership interest of partners is essentially for the furtherance of the partnership affairs, and emphasizes the fact that in the partnership setting equity ownership is merged with management
Bautista reminded us in his treatise that the whole of Article 1811 of the Civil Code was taken from the Uniform Partnership Act
prerogatives, equivalent to the recognition of the full-ownership by the partners, as collective sole-proprietors so-to-speak, of
which, based on common law, adheres to the “aggregate theory of partnership under which, because it is not considered an
the partnership enterprise and its assets.
entity or a legal person, a partnership cannot hold title and hence partnership property is deemed held or owned in common by
65 the partners for the benefit of the partnership,” (BAUTISTA, at pp. 147-148) as opposed to the civil law doctrine that affords
In other words, under Article 1813, the only thing that can be conveyed by a partner as an equity holder, is the sole right to
the partnership a separate juridical personality,
receive profits and surplus assets upon the dissolution of the partnership, thus: “i merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partners would otherwise be entitled.” The only instance under
3. Equity Rights of Partners
said provision that the transferee or assignee may avail himself of the usual remedies is “in case of fraud in the management of the partnership.
Article 1812 of the Civil Code defines a “partner’s interest in the partnership” essentially as his equity interest, thus: “his share of the profits and surplus.” A partner’s interest in the partnership defines his equity position as a co-proprietor of the partnership enterprise, which entitles him ipso facto to share in the profits and to share in the losses of the venture.
Unlike in Corporate Law where the rule on equity is that they are essentially transferable, in Partnership Law, equity interests of partners are not essentially transferable. This statement is not even accurate because if you look at the language of Article 1813 the proper rule would be, every partner shall have an absolute right to transfer or assign his equity interest, but such
“Profits” represent the excess of receipts over expenses or the excess of the value of returns over the value of advances
transaction will not transfer his other rights as a partner. The article also recognizes that just because a partner “cashes in” on
(Citizens National Bank v. Corl. 33 S.E.2d 613, 616 (1945); Fairchild v. Gray, 242 N.Y.S. 192 ; Crawford v. Surety
his equity rights in the partnership, which he has every right to do, the same does not mean that he ceases to be a party to the
Insurance Co., 139 P. 481, 484 ); whereas; “surplus” has been defined as the excess of assets over liabilities. (Tupper
partnership contract nor does it trigger the dissolution of the partnership, which means that with respect to his other right to
v. Kroc, 492 P. 2d 1275 ; Anderson v. U.S., 131 F.Supp. 501 (1955); Balaban v. Bank of Nevada, 477 P.2d 860 ).
management the partnership affairs and act as agent of the other partners, these remain in tact.
Bautista wrote that “The interest of the partner in the partnership has thus been otherwise described as the net balance
So separate and divisible is a partner’s equity rights from his other rights as a partner that even during the term of the
remaining to him; after all partnership debts or claims against it have been paid and the equities and accounts between such
partnership Article 1814 of the Civil Code allow the personal judgment creditors of a partner to have his equity right in a
partner and his copartners have been adjusted.” (BAUTISTA, at p. 176, citing Claude v. Claude, 228 P.2d 776 ; Preton
partnership to “charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with
v. State Industrial Accident Commission, 149 P.2d 275 ; Swirsky v. Horwich, 47 N.E.2d 452 ; Cunningham v.
interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or to fall due
Cunningham, 135 N.E. 21 ).
to him in respect of the partnership.” The article allows of the partners or the partnership itself to either to redeem or to purchase the equity executed “without thereby causing a dissolution” of the partnership.
a. Assignability of a Partner’s Equity Right Bautista wrote that Article 1814 was taken from the Uniform Partnership Act, and patterned after the English Partnership Act of A partner’s equity interest in the partnership truly represents a proprietary interest for his exclusive benefit as an owner of such
1890, and it was adopted formally to a decided purpose of providing a means by which the separate creditors of a partner may
intangible right. Therefore, like any other property right, a partner’s equity is generally transferable or assignable. Nonetheless
seize upon his property rights without having to disrupt the operations of the partnership enterprise or effectively force the
under Article 1813 of the Civil Code, the transfer or assignment of a partner’s equity does not make the transferee or assignee
dissolution of the partnership. (BAUTISTA, at pp. 184-185). Thus, Article 1814, which allows the attachment or execution of a
step into the shoes of the partner in his personal capacity as such in relation to the other partners, thus:
partner’s equity rights in a partnership is the remedy given to a partner’s separate creditors in lieu of the express prohibition of seeking an attachment or levy upon the partnership assets and properties themselves to cover the partner’s right to specific
A conveyance by a partner of his whole interest in the partnership does not of itself dissolve the partnership, or, as against the
other partners in the absence of agreement, entitle the assignee, during the continuance of the partnership, to interfere in the management or administration of the partnership business or affairs, or to require any information or account of partnership
Under Article 1827, the separate creditors of each partner may ask for the attachment and public sale of the share of the
transactions, or to inspect the partnership books.
partner in the partnership assets, which must be upon dissolution and only after the partnership creditors have been fully
66 satisfied. To construe the provision of Article 1827 literally would mean that it would run counter to the provision under Article
Under Article 1767 of the Civil Code, the essence of a partnership arrangement is the existence of a common fund or a
1811(3) which provides that “A partner’s right in specific partnership property is not subject to attachment or execution.”
business enterprise, and which under Article 1770 must be “established for the common benefit or interest of the partners;” and which is the reason why under Article 1799, a stipulation in the contract of partnership which excludes one or more of the
Under American jurisprudence, since an equity right in partnership is a present, existing, and not a mere contingent, right, it
partners from any share in the profits or losses is void, but the partnership arrangement remains subsisting.
can be assigned, nevertheless, the partners may agree that one of them cannot sell or assign his interest without the consent of the other or others(Pokrzywnicki v. Kozak, 47 A.2d 144 ), or they may enter into an agreement prohibiting such
Article 1797 of the Civil Code provides for the rules governing the distribution of profits and losses in the partnership business,
assignment altogether (Chaiken v. Employment Security Commission, 274 A.2d 707 ). Why is a right of refusal or right
of first refusal generally valid for partnership equity and not for shares of stock in a corporation? (a) Profits and losses shall be distributed in conformity with the agreement between the partners; A good illustration of the sheer divisibility between the property rights of a partner is shown in the decision in Goquiolay v. Sycip, 108 Phil. 947 (1960), where the particular provision on succession in the articles of partnership specifically provided as
(b) If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same
follows: “In the event of the death of any of the partners at any time before the expiration of said term, the copartnership shall
not be dissolved but will have to be continued and the deceased partner shall be represented by his heirs or assigns in said copartnership.” When the duly designated sole managing partner under the articles died and was succeeded by his widow, it was contended that under the terms of the articles she also succeeded to the sole management of the partnership. In ruling against such a conclusion, the Court held –
(c) In the absence of any such agreement, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, except that the industrial partner shall not be liable for the losses; as to the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances; and if he contributed also capital, the shall also receive a share in the profits in proportion to his capital.
. . . While, as we previously stated in our narration of facts, the Articles of Copartnership and the power of attorney . . . conferred upon the [the sole managing partner] the exclusive management of the business, such power, premised as it is upon trust and confidence, was a mere personal right that terminated upon [the sole managing partner’s] demise. The provision in the articles stating that “in the event of death of any one of the partners within the 10-year term of the partnership, the deceased partner shall be represented by his heirs”, could not have referred to the managerial right given to [the deceased husband]; more appropriately, it related to the succession in the proprietary interest of each partner. (Ibid, at pp. 954-955). b. Right to Participate in Profits; the Obligation to Participate in Losses
Article 1798 of the Civil Code provides that if the partners have entrusted to a third person the designation of profits and losses, such designation may be impugned only when it is manifestly inequitable; and in no case may a partnership who has begun to execute the decision of third person, or who has not impugned the same within three (3) months from the time he had knowledge thereof, complain of such decision. The article also provides that the designation of losses and profits cannot be entrusted to one of the partners. What happens when one or more of the partners are designated to distribute profits and losses? It would have to mean that the designation and the exercise thereof would both be void.
The rights of an equity holder are essentially linked to the operations of the business enterprise, and as he takes the risk connected with business down-turn, then to him would also accrue the profits of the enterprise. One who merely participates in
4. Other Rights of a Partner
the sharing of gross returns of an enterprise, as indicated in Article 1769(3) of the Civil Code does not necessarily mean that he is an equity holder, for he does not expose him to the expenses and losses of the business, in contrast to one who shares in the net profits, who under Article 1769(4) is prima facie evidence that he is a partner in the business, if such participation is not linked to some other clear contractual arrangement.
a. Right to Inspect
67 Article 1805 of the Civil Code expressly provides that every partner shall at any reasonable hour have access to and may
On the other hand, iIn Hanlon v. Haussermann and Beam, 40 Phil. 796 (1920), the Court ruled that former partners in a joint
inspect and copy the partnership books which shall be kept at the principal place of business of the partnership.
undertaking to rehabilitate a mining plant have no right to demand accounting for the profits of such undertaking when the partnership arrangement had been terminated with the failure of the claiming partners to raise the promised investments into
In Corporate Law, the right of a stockholder or member to inspect and copy corporate records is considered to be a common
the enterprise, and that the other two partners pursued the venture on their own account and only after the partnership
law right, and a right of such importance that its enforcement can be by an actionmandamus. The right to inspect is critical to
arrangement had terminated.
safeguarding all other rights of stockholders or members in the corporation. In Lim Tanhu v. Ramolete, 66 SCRA 425 (1975), the Court held that a partner’s right to accounting for properties of the The same principles are applicable to a partner’s right to inspect and to demand true and full information on partnership
partnership that are within the custody or control of the other partners shall apply only when there is proof that such properties,
registered in the individual names of the other partners, have been acquired from the use of partnership funds, thus:
b. Right to Demand True and Full Information
“Accordingly, the defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of [one of the partners] during the existence of the partnership.” (Ibid, at p. 477).
Article 1806 of the Civil Code provides that every partner or his legal representative may demand true and full information from other partners of all things affecting the partnership.
d. Right to Dissolve the Partnership
Consequently, in consonance with the fiduciary relationship existing between and among partners, every partner has the
The near-absolute legal power of any partnership in a partnership to demand the dissolution of the partnership is in
obligations to render true and full information to other partners of all things affecting the partnership.
consonance with the doctrine of delectus personae that establishes a fiduciary relationship between and among the partners.
c. Right to Demand Accounting
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court confirmed the right of a partner to “unilaterally dissolve the partnership,” by a notice of dissolution, which in effect is a notice of withdrawal from the partnership, thus: “Under Article 1830(2) of the Civil
Under Article 1807 of the Civil Code, every partner may demand from every other partner an accounting to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property. Under Article 1809 of the Civil Code, any partner shall have the right to a formal account as to partnership affairs, when he is wrongfully excluded from the partnership business or possession of its property, if the right exists under the terms of the partnership agreement, whenever circumstances render it just and reasonable.
Code, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the number of members is decreased, hence, the dissolution.” (Ibid, at pp. 118-119). The right of a partner to dissolve the partnership will be discussed in more details on the chapter on Dissolution, Winding-up and Termination.
In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746 (1989), the Court held that a partner’s right to accounting exists as long as the partnership exists, and that prescription begins to run only upon the dissolution of the partnership and final
5. Obligations of the Partnership
accounting is done. a. Obligations to the Partners
68 Partnership Law lays down specific provisions to govern the obligation of the partnership to the partners arising from the
deals in good faith with the firm that he is a partner thereto. Consequently, under said article, “[t]hose who, not being members
management of partnership affairs, thus:
of the partnership, include their names in the firm name, shall be subject to the liability of a partner.”
(1) Amounts disbursed for and in Behalf of the Partnership
(2) Liability Arising from the Acts of the Agent
Article 1796 of the Civil Code provides that the partnership shall be responsible to every partner for the amounts he may have
Since the corporate venture is accorded a separate juridical personality, then the liability that it incurs with the public that it
disbursed on behalf of the partnership and for the corresponding interest, from the time the expenses are made;
deals with can only arise from the acts of the partnership’s authorized agent or agents, which by default rule would be every partner (Article 1818, Civil Code).
(2) Contracts Entered into for and In Behalf of the Partnership The liability that the partnership must bear from the acts of the partners pursuant to partnership business applies only to a third Article 1797 of the Civil Code provides that the partnership shall also answer to each partner for the obligations such partner
person who deals in good faith with the partnership; Thus, a third person who knows of the lack of authority of the partner
may have contracted in good faith in the interest of the partnership business, and for the risks and consequence of its
acting in a partnership transactions generally cannot claim against the partnership, thus:
management. (a) When “the partner so acting has in fact no authority to act for the partnership in the particular matter, and the person with (3) Keeping of the Books
whom he is dealing has knowledge of the fact that he has no such authority” (Article 1818, Civil Code); and
Under Article 1805 of the Civil Code, the partnership books shall be kept, subject to any agreement between the partners, at
(b) “An act of a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not
the principal place of business of the partnerships, and every partner shall at any reasonable hour have access to and may
bind the partnership unless authorized by the other partners” (Article 1818, Civil Code); and
inspect and copy any of them. (c) “No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of b. Obligations to Third Persons Partnership Law, particularly under Article 1768, accords to the partnership venture a separate juridical personality, primarily to allow a more feasible and efficient manner by which to deal with the public and to organize the venture into a enterprise that provides for a clear delineation of liability and a hierarchy of claims against its assets. (1) Liability Arising from the Firm Name The name of a partnership venture becomes essential in its commercial dealings because it identifies the person of the partnership which is deemed to be party bound in each of the contracts entered into. Thus, under Article 1815 of the Civil Code, “Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.” The inclusion of the name of a person in the partnership name becomes a conclusive presumption to the public who
the restriction” (Article 1818, Civil Code). —oOo—
69 This is not to say that some of the elements of the trust fund doctrine do not apply to the partnership setting, for they do, such 13 – DUTIES AND OBLIGATIONS OF PARTNERS
as the rule that creditors have preference over partners against the partnership properties. Thus, Article 1826 of the Civil Code provides that “The creditors of the partnership shall be preferred to those of each partner as regards the partnership [Updated: 14 October 2009]
property.” Why is it then necessary for Partnership Law to declare expressly that a partner is a debtor of the partnership for whatever he may have promised to contribute thereto? The answer lies in the primary principle which Partnership Law seeks to promote, which is that the promise or obligation to contribute to the common fund is of the essence of the contract of partnership and
1. Obligation to Contribute to the Common Fund Since the agreement to contribute to a common fund is an essential element for a valid contract of partnership to arise, Philippine Partnership Law provides for clear statutory provisions governing such obligations. In Corporate Law, equity obligations (i.e., the obligation to pay subscriptions to capital stock) are not treated as debt obligations, and the receivables arising therefrom are not considered as forming part of the ordinary assets of the corporation. The rule takes it rationale from the “trust fund doctrine,” that the assets of the corporation corresponding to its capital stock are treated as a trust fund preserved for the protection of the claims of the corporate creditors who can, are under the
binds the partners to one another as the very privity of their relationship, and the breach of which would break the contractual bond (delectus personae). The point is best illustrated by the following doctrines: (a) Under Article 1788 of the Civil Code, when a partner fails to deliver his promised contribution to the partnership, he becomes liable for interests and damages from the time he should have complied with his obligation; (b) Under Article 1790 of the Civil Code, “Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership.” Under Article 1830(4), the partnership is automatically dissolved “When a specific thing, which a partner had promised to contribute to the partnership, perishes before the delivery;”
corporate “limited liability” rule, recover on their liabilities to the assets of the corporation and the investments and promised investments of the stockholders. (Ong Yong v. Tiu, 401 SCRA 1 ; NTC v. Court of Appeals, 311 SCRA 508
(c) The remedies available to the partnership and the other partners with respect to the failure or refusal to comply with
; Commissioner of Internal Revenue v. Court of Appeals, 301 SCRA 152 ; Boman Environmental Dev. Corp. v.
contribution obligation takes the normal remedies of interest and damages, including compensatory damages constituting his
Court of Appeals, 167 SCRA 540 ). Consequently, capital contributions and obligations to contribute capital (i.e.,
shares of the profits (Uy v. Puzon, 79 SCRA 598 ;Moran, Jr. v. Court of Appeals, 133 SCRA 88 );
subscription contracts and subscription receivables) cannot be treated like ordinary contracts and debts, and are not subject to rescission, set-off, or condonation, in order to ensure their collectibility for the benefit of the corporate creditors.
(d) When a partner fails to comply with his obligation to deliver what he promised to contribute to the partnership, and there is no desire to dissolve the partnership, the remedy that is available to the other partners cannot be rescission, but rather one for
In Partnership Law, the rule is quite different in that Article 1786 of the Civil Code provides that “Every partner is a debtor of
specific performance. (Sancho v. Lizarraga, 55 Phil. 601 ); and
the partnership for whatever he may have promised to contribute thereto.” The reason for this rule is that in Partnership Law, the prevailing doctrine is “unlimited liability” on the part of the partners, and there is no need to consider their capital accounts
(e) The property contributed by a partner becomes the property of the partnership and cannot be disposed of without the
and promised contribution as a “trust fund” for the protection of the partnership creditors, who have the legal right to seek
consent of the other partners. Lozana v. Depakakibo, 107 Phil. 728 ).
satisfaction of their claims even against the separate properties of each of the partners not contributed or promised to the partnership.
a. When Promised Contribution Is a Sum of Money
70 Under Article 1788 of the Civil Code it is provided that “A partner who has undertaken to contribute a sum of money to the
at p. 91, citing Francisco, Partnership at p. 150 ) But in such case, under Article 1829(4), “[w]hen a specific thing which a
partnership venture [and fails to do so,] becomes a debtor for the interest and damages from the time he should have complied
partner had promised to contribute to the partnership, perishes before the delivery,” dissolves the partnership.
with his obligation.” c. Contribution is Goods The article therefore allows the partners and the partnership to recover from the defaulting partner not only interest due (at the rate stipulated or in default thereof, the legal interest), but damages, including loss opportunity, shown to have been sustained
Under Article 1787 of the Civil Code, “When the capital or a part thereof which a partner is bound to contribute consists of
by the partnership by reason of the failure of the partner to pay in his contribution.
goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to the current prices, the subsequent changes thereof being
b. When Promised Contribution Is Property—In General
for the account of the partnership.”
Whenever a partner has bound himself to contribute a specific or determinate thing to the partnership, he thereby assumes the
The requirements of the provision are made to ensure that the capital account of a partner is properly credited with the correct
position of being a seller of determinate property contributed into the partnership in that he is liable for:
value of a property contributed.
(a) A breach of the warranty against eviction;
d. Contribution is Real Property
(b) The fruits thereof from the time he obliged himself to deliver the determinate thing, and without need of demand.
Under Article 1773 of the Civil Code, a contract of partnership would be void, whenever immovable property is contributed, if an inventory of said property is not made, signed by the parties, and attached to the public instrument mandated under Article
In addition, Article 1795 of the Civil Code establishes the rules on who assumes “[t]he risk of specific and determinate things . .
1771 of the Civil Code, which requires in such case that the contract of partnership must be in a public instrument, and which
. contributed to the partnership,” thus:
under Article 1772 of the Civil Code would have to be filed with the Securities and Exchange Commission (SEC) because it would almost always mean a capital of more than P3,000.00.
(a) “If they are not fungible, so that only their use and fruits may be for the common benefit, the risk shall be borne by the partner who owns them;
A more detailed discussion of the effects on the non-fulfillment with the requirements mandated by law can be found on the chapter on Formalities Required for Partnerships.
(b) “If the things contributed, (i) are fungible, or (ii) cannot be kept without deteriorating, or (iii) if they were contributed to be sold: the risk shall be borne by the partnership.
e. Contribution of Service or Industry; the Industrial Partner
(c) “In the absence of stipulation, the risk of things brought and appraised in the inventory, shall also be borne by the
There can be no doubt that once the contract of partnership is constituted, the industrial partner is from then bound to devote
partnership, and in such case the claim shall be limited to the value at which they were appraised.”
his time towards fulfilling the nature of the service he has contracted himself to contribute. The difficulty arises from the fact that the obligation essentially involves the personal obligation “to do”, and generally an industrial partner who does not
As to who bears the risk of loss of determinate things promised to be contributed but prior to actual delivery to the partnership, the prevailing view seems to be that it would be the partner who before actual delivery retains ownership thereof. (BAUTISTA,
contribute the services promised cannot be compelled to do so, otherwise specific performance on the matter would violate the public policy against involuntary servitude. The other difficulty that arises is that even non-industrial partners, being mutual agents with one another and generally empowered to jointly manage the partnership affairs, also contribute their services to
71 the partnership for which they do not also obtain, as in the case of the industrial partner, a compensation therefor, unless
Since the nexus of the obligation of a partner arises from the contract of partnership, there is generally no obligation for any
partner to contribute beyond what was originally stipulated in the articles of partnership, unless there is a stipulation providing for additional contributions. Even in the case where additional contribution to capital becomes necessary “in case of an
The American case of Marsh’s’ Appeal, (69 Pa. St. 30, quoted in Bautista, at pp. 92-94) discusses the points as follows:
imminent loss of the business of the partnership,” no partner can be compelled to give additional contribution, but the legal consequence under Article 1791, is that “any partner who refuses to contribute an additional share to the capital, except an
. . . The only question in this case is whether a partner who neglects and refuses, without reasonable cause, to perform the personal services which he has stipulated to render the partnership, is liable to account to the firm for the value of the services in the settlement of the partnership accounts. . . . It is undoubtedly true, as a general rule, that partners are not entitled to charge each other, or the firm of which they are members for their services in the copartnership business, unless there is a
industrial partner, to save the venture, shall be obliged to sell his interest to the other partners.” Even such a penalty cannot be applied according to Article 1791 “if there is an agreement to the contrary,” that is a stipulation in the contract of partnership that even in case of necessity to the save the venture, partners cannot be compelled to make additional contribution, in which case the forfeiture of their interest cannot even be enforced.
special agreement to that effect, or such agreement can be implied from the course of dealing between them. By the wellsettled law of partnership, every partner is bound to work to the extent of his ability for the benefit of the whole, without regard
g. Remedies When There is Default in Obligation to Contribute
to the services of his copartners, and without comparison of value; for services to the firm cannot, from their very nature, be estimated and equalized by compensation of differences. . .
Normally, the contract of partnership being one constituted of bilateral (multilateral) obligations, the remedy to the other partners when one of them fails to comply with his obligation to contribute, would either be specific performance or rescission.
. . . The plaintiffs are not seeking compensation for the services they rendered the partnership. They are simply seeking to
Under the provisions of the old Civil Code, the Court held in Sancho v. Lizarraga, 55 Phil. 601 (1931), that the remedy of
charge the defendant with the loss occasioned the partnership by this refusal to render the services which he agreed to
rescission of the contract of partnership which would mean the return of the contribution of the complaining partner with
perform. If the partnership has suffered loss by his breach of the agreement, why should he not make good the loss, and put
interest and damages proven, is not available because then Articles 1681 and 1682 [now Articles 1786 and 1788] provided for
the firm in the same condition it would have been if he had not broken the agreement? . . . If, says Mr. Justice Story, the
specific remedies to the contract of partnership, thus:
partnership suffers any loss from the gross negligence, unskillfulness, fraud, or wanton misconduct of any partner in the court of partnership business, he will ordinarily be responsible over to the other partners for all the losses and injuries, and damages
Owing to the defendant’s failure to pay to the partnership the whole amount which he bound himself to pay, he became
sustained thereby, whether directly or through their own liability to third persons. . . If this be the law, why should not the
indebted to it for the remainder, with interest and any damages occasioned thereby, but the plaintiff did not thereby acquire the
defendant be answerable to the partnership for breach of the agreement to perform the services stipulated?
right to demand rescission of the partnership contract according to article 1124 of the Code. This article cannot be applied to the case in question, because it refers to the resolution of obligations in general, whereas articles 1681 and 1682 specifically
It is clear therefore, that when an industrial partner has failed to render the proper service he is obliged to render to the
refer to the contract of partnership in particular. And it is a well known principle that special provisions prevail over general
business of the firm, he can be made liable for the damages sustained by the firm for such failure. In addition, the breach by an
provisions. (Ibid, at pp. 603-604).
industrial partner of his primary obligation to render service to the partnership would have repercussion on his share in the net profits of the company. Under Article 1797 of the Civil Code, “As for profits, the industrial partner shall receive such share as
In Sancho the Court affirmed the decision of the lower court which effectively denied the prayer for rescission, and instead
may be just and equitable under the circumstances.”
directed the dissolution of the partnership, the accounting and liquidation of its affairs. In other words, the remedy of rescission, which seeks to extinguish the contractual relationship and effect mutual restitution, is not allowed under the contract of
The fiduciary duties of an industrial partner are discussed more in detail hereunder.
partnership. The proper remedies would be to seek a collection of the promised contribution, with recovery of interests and damages as provided for in Articles 1786 and 1788, or ask for dissolution of the partnership under Article 1831.
f. Obligation for “Additional Contribution”
72 It may be said that dissolution is a form of rescission unique to partnerships (also for corporations, especially close
The subsidiary and pro rata liability feature under the old Civil Code was retained under the new Civil Code, which does not
corporations), which only has a prospective effect of terminating the contractual relationship, and thus not produce the
adopt the primary and solidary liability feature for commercial partners under the Code of Commerce.
retroactive effect of extinguishing the contract as though it never existed and providing for mutual restitution. This special type of remedies is indicative of the essential nature of the contract of partnership as (for lack of a better term) a preparatory orprogressive contract in that it is entered into to pursue a transaction or series of transactions (i.e., to operate a business enterprise) that changes the nature and content of the things that have been contributed thereto, such that it becomes nearly impossible to return the parties back to their original position. The ruling is also consistent with the rule that once a partner gives a contribution to the partnership, he loses direct ownership over said property which is now owned by the partnership as a separate juridical person, and that it is integrated into the partnership business enterprise, which upon application of the trust fund doctrine, means that it shall be the partnership creditors who shall first have priority over the partnership assets before any partner can be entitled to recover from the net assets. h. Personal Obligations for Partnership Debts; Doctrine of Unlimited Liability The “unlimited liability” feature in the partnership setting makes partners personally liable for partnership debts, notwithstanding the separate juridical entity of the partnership. However, such liabilities of partners are better covered in the chapter on Dissolution, Winding Up and Termination, because the triggering mechanism would in effect be only if the partnership becomes insolvent. But this is not to mean that the insolvency of the partnership necessarily would trigger its dissolution, for it may happen that the partners continue to pursue the business venture in the hope that there may still be a turn-around. Under Article 1816 of the Civil Code provides that ”All partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted, for the contracts which may be entered into in the name and for the account of the partnership.” Article 1817 provides that “Any stipulation against the liability laid down in [Article 1816] shall be void, except as among the partners.” Rightly stated, it is the exhaustion of partnership assets to answer for partnership liabilities that triggers the enforcement of the unlimited liability mechanism as against partners and their separate assets. And the pro-rata obligation of the partners does not mean that they become personally liable proportionately in relation to their contributions in the partnership, but actually means they are liable jointly.
2. Fiduciary Duties of Partners The fiduciary duties of the partners among one another and to the partnership subsists only while the partnership subsists; consequently the termination of the partnership relation (as distinguished from mere dissolution) also terminates the fiduciary obligations of the partners to one another and to the partnership. In Hanlon v. Haussermann, 40 Phil. 796 (1920), four contracting parties agreed to a joint enterprise to rehabilitate a mining plant, where the engagement of the three of them was limited to raising money within a stated period by subscribing to or selling shares of the mining company. One of the parties who had undertaken thus to raise money defaulted, and under the express resolutory conditions of the contract the two other parties were discharged. Subsequently, the two parties thus discharged, who were at the same time stockholders and officials of the mining company, procured a contract from the mining company by which they proceeded to restore the mining plant upon their own account. The other two members of the original enterprise sued to recover shares in the mining company and dividends declared upon such shares on the ground that they were earned pursuant to the joint enterprise to which they were entitled to receive their shares. In denying the claims, the Court held – After the termination of an agency, partnership, or joint adventure, each of the parties is free to act in his own interest, provided he has done nothing during the continuance of the relation to lay a foundation for an undue advantage to himself. To act as agent for another does not necessarily imply the creation of a permanent disability in the agent to act for himself in regard to the same subject-matter; and certainly no case has been called to our attention in which the equitable doctrine above referred to has been so applied as to prevent an owner of property from doing what he pleased with his own after such a contract [of partnership] between the parties to this lawsuit had lapsed. (Ibid, at p. 818) . Likewise, in Lim Tanhu v. Remolete, 66 SCRA 425 (1975), the Court held that former partners have no obligation to account on how they acquired properties in their names, when such acquisition were effected “long after the partnership had been automatically dissolved as a result of the death of Po Chuan [the primary managing partner]. Accordingly, defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of Po Chuan during the existence of the partnership.” (Ibid, at p. 476)
73 a. Duty to Account
Although the term is more properly associated to officers and directors of corporations, partners, being managers of the partnership, and agents to one another, owe both the partnership and one another the duly of loyalty, which includes the
Since the partners are mutual agents to one another and to the partnership, then necessarily they are obliged by such fiduciary
avoiding of entering into transactions or situations that present a conflict-of-interests. The duty of loyalty in the partnership
relationship to render a full accounting on matters they undertake for the partnership affairs, and are prohibited from obtaining
setting arises necessarily as a consequence of the mutual agency relationship existing between and among the partners.
secret benefits for themselves therefrom. The duty is closely linked to the duty of loyalty. In the event a partner takes any amount from the partnership funds for himself, he becomes a debtor of the partnership, as Under Article 1806 of the Civil Code, partners shall render on demand true and full information of all things affecting the
well for the interests and damages, which liability under Article 1789 of the Civil Code “shall begin from the time he converted
partnerships to any partner or the legal representative of any deceased partner or of any partner under disability.
the amount to his own use.”
Under Article 1807 of the Civil Code , “Every partner must account to the partnership for any benefit, and hold as trustee for it
An aspect of a partner’s duty of loyalty arising from the fact that he acts as an agent of the partnership is manifested in Article
any profits derived by him without the consent of the other partners from any transaction connected with the formation,
1792 of the Civil Code, which provides that when a partner authorized to manage collects a demandable sum which was owed
conduct, or liquidation of the partnership or from any use by him of its property.”
to him in his own name, but from a person who owned the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit
Aside from the remedy of recovering the profits derived by a partner from partnership affairs, the same may be a ground to seek judicial dissolution of the partnership under Article 1831 of the Civil Code. b. Duty of Diligence Article 1794 of the Civil Code covers a partner’s duty of diligence to the partnership affairs: Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitable lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have been realized. Under Article 1800 of the Civil Code, a duly designated managing partner who acts in bad faith, his particular exercise of power administration may effectively be opposed by the other partners. When he acts without just or lawful cause, then his power may be revoked, except of course when he has been appointed the managing partner under the terms of the articles of partnership. c. Duty of Loyalty
only; but should the partner have given it for the account of the partnership credit, the amount shall be fully applied for the account of the partnership. The article provides for an exception to its application: “The provisions of this article are understood to be without prejudice to the right granted to the debtor by Article 1252 [on right of debtor to stipulate the application of payment], but only if the personal credit of the partner should be more onerous to him.” Another aspect of a partner’s duty of loyalty is shown in Article 1793, which provides that a partner who has received in whole or in part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he received even though he may have given a receipt for his share only. In Catalan v. Gatchalian, 105 Phil. 1270 (1959), the Court ruled that when partnership real property had been mortgage and foreclosed, the redemption by any of the partners, even when using his separate funds, does not allow such redemption to be in his sole favor. The summary reported reads in part as follows: . . . Under the general principle of law, a partner is an agent of the partnership (Art. 1818, new Civil Code). Furthermore, every partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partner (Article 1807, new Civil Code). Consequently, when Catalan redeemed the properties in question he became a trustee and held the same in trust for his copartner Gatchalian, subject of course to his right to demand from the latter his contribution to the amount of redemption. (Ibid, at p. 1271)
74 d. Specific Fiduciary Duties of Industrial Partner
entitlement by which Judge Abad Santos had arranged for a loan financing for the company to be paid only after the loan has been fully paid; and that in fact being an incumbent judge she rendered to service to the company, thus:
Under Article 1789 of the Civil Code, an industrial partner is prohibited from engaging in business for himself, unless the partnership expressly permits him to do so. Since even capitalist partners are expected (although not obliged) to contribute
It is an admitted fact that since before the execution of the amended articles of partnership . . . the appellee Estrella Abad
service to the partnership enterprise, and when they do so they are not entitled to separate compensation (unless otherwise
Santos has been, and up to the present time still is, one of the judges of the City Court of Manila, devoting all her time to the
stipulated), then in order to make the contribution of service an industrial partner more meaningful and truly an obligation, it
performance of the duties of her public office. This fact proves beyond peradventure that it was never contemplated between
must mean that is saddled with more burden or prohibitions. The coverage of Article 1789 should mean also that:
the parties, for she could not lawfully contribute her full time and industry which is the obligation of an industrial partner pursuant to Art. 1789 of the Civil Code.
(a) Since his main contribution to the partnership is his industry, then an industrial partner owes to the venture and his fellow partners the obligation to devote his industry towards the partnership business.
The Court ruled as follows:
(b) Even if the partnership is engaged in a particular form of business, an industrial partner cannot devote his industry to
One cannot read appellee’s testimony just quoted without gaining the very definite impression that, even as she was and still is
another type of undertaking for profit even when it is in a different line of business not in competition with that of the
a Judge of the City Court of Manila, she has rendered services for appellants without which they would not have had the
wherewithal to operate the business for which appellant company was organized. . .
If an industrial partner breaches this duty, Article 1789 provides that the capitalist partners may either:
(a) exclude him from the firm; or
It is not disputed that the prohibition against an industrial partner engaging in business for himself seeks to prevent any conflict of interest between the industrial partner and the partnership, and to insure faithful compliance by said partner with his
(b) avail themselves of the benefits which the industrial partner may have obtained in violation of such duty, with a right to
prestation. There is no pretense, however, even on the part of appellants that appellee is engaged in any business
damages in either case.
antagonistic to that of appellant company, since being a Judge of one of the branches of the City Court of Manila can hardly be characterized as a business. That appellee has faithfully complied with her prestation with respect to appellants is clearly
It seems clear from jurisprudence that in order for an industrial to be held liable for breach of duty under Article 1789, he must have engaged during the term of the partnership into another business or an activity that is essentially for profit. In Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973), an article of co-partnership was executed between three capitalist partners on one hand, and Judge Abad Santos, as an industrial partner on the other hand, with the capitalist partners being entitled to 70% of the profits, while the industrial partner was entitled to 30% thereof. Several years into the partnership term, Judge Abad Santos sought to have an accounting of the partnership affairs and to be given her share of the profits of the company which had been distributed only among the capitalist partners. The capitalist partners sought to have the relationship declared as not a true partnership on the ground that the articles were drawn-up merely to cover the special arrangement
shown by the fact that it was only after the filing of the complaint in this case and the answer thereto that appellants exercised their right of exclusion under [Article 1789] . . . after around nine (9) years from June 7, 1955 . . . That subsequent to the filing of defendants’ answer to the complaint, the defendants reached an agreement whereby the herein plaintiff has been excluded from, and deprived of, her alleged share, interest or participation, as an alleged industrial partner, in the defendant partnership and/or in its net profits or income, on the ground that plaintiff has never contributed her industry to the partnership, and instead she has been and still is a judge of the City Court (formerly Municipal Court) of the City of Manila, devoting her time to the performance of her duties as such judge and enjoying the privileges and emoluments appertaining to the said office, aside from teaching in law school in Manila, without the express consent of the herein defendants’ (Record On Appeal, pp. 24-25). Having always known appellee as a City Judge even before she joined appellant
75 company on June 7, 1955 as an industrial partner, why did it take appellants so many years before excluding her from said
3. Obligation of Subsequently Admitted Partners
company as per aforequoted allegations? And ‘how can they reconcile such exclusion with their main theory that appellee has never been such a partner because ‘The real agreement evidenced by Exhibit ‘A’ was to grant the appellee a share of 30% of
Under Article 1826 of the Civil Code, a person admitted as a partner into an existing partnership is liable for all the obligations
the net profits which the appellant partnership may realize from June 7, 1955, until the mortgage loan of P30,000.00 obtained
of the partnership arising before his admission as though he had been a partner when such obligations were incurred, except
from the Rehabilitation Finance Corporation shall have been fully paid. . .
that this liability shall be satisfied only out of the partnership property, unless there is a stipulation to the contrary.
The language of the decision in Evangelista & Co. leads to several observations on the nature of the obligation of an industrial
This is the only aspect of “limited liability” in a general partnership setting.
partner. 4. Obligations of Non-Partners Firstly, unless otherwise stipulated, an industrial partner need not devote his entire working hours to the partnership affairs, and he is in fact not prohibited from engaging in other activities which must be non-business in character.
Under Partnership Law in the Civil Code, the only time when non-partners become liable for the partner debts and obligation is when there is estoppel, or when the public is made to believe that one person is a partner of the partnership when in fact he is
Secondly, it is possible that the personal circumstances that a would-be industrial partner as known to the capitalist partners at
the time they entered into the contract of partnership, would prevent the industrial partner from devoting full-time to the partnership affairs, would constitute an integral part of the manner and nature of what type of service or industry he should
(a) Under Article 1815, those who, not being members of the partnership, include their names in the firm name, shall
devote to partnership affairs.
be subject to the liability of a partner;
Finally, even when an industrial partner fails to live-up to the commitment of service he obliged himself, the matter must be
(b) Under Article 1825, when a person by word or conduct, represents himself, or consents to another representing him to
raised within a reasonable period by the other partners as the basis for the remedies of exclusion or forfeiture of benefits as
anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liable to any
provided in Article 1789; otherwise, such grounds are deemed waived by reason by estoppel by laches.
such persons to whom such representation has been made, who has, on the faith of such representation, given credit to the actual or apparent partnership;
e. Specific Fiduciary Duties of Capitalist Partners (c) Under Article 1808 of the Civil Code, “The capitalist partners cannot engage for their own account in any operation which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary.” If a capitalist partner breaches this duty of loyalty, then ”he shall bring to the common funds any profits accruing to him from his transactions, and
Under Article 1825, when such a person has made such representation or consent to its being made in a
public manner he is liable to such person, whether the representation has or has not been made or communicated to such person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to its being made;
shall personally bear all the losses.” (d) Under Article 1825, when a person has been thus represented to be a partner in an existing partnership, or with one or more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to the same extent and in the same manner as though he were a partner in fact; and
76 (e) Under Article 1825, when all the members of the existing partnership consent to the representation, a partnership act or obligation results; but in all other cases it is the joint act or obligation of the person acting and persons consenting to the representation. —oOo—