I.
HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW Justice Lord Mansfield into the common law system and that it was not
1. Historical Background and Sources of Philippine Law on
Partnership
a. Notion of Partnership Is of Ancient Origins
Prof. Esteban B. Bautista wrote that as a business device, the partnership
was well known among the ancients and apparently occupied such an
important place in their social and economic life that they made provision
for it in their lawsamong the Babylonians from the time of Hammurabi,
among the Babylonian Jews as early as the fourth century, and among the
Romans almost from the time they laid the foundation of their
monumental legal system. (BAUTISTA, ESTEBAN B., TREATISE ON
PHILIPPINE PARTNERSHIP LAW, Rex Book Store, 1995 Ed., at p. 1,
hereinafter referred to as BAUTISTA; citing 12 ENCYCLOPEDIA OF
SOCIAL SCIENCE 3 [1948]). He also wrote that in medieval times, the
device 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
[1952] and 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 4 [1948])
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. Commercial partnerships of that time
were generally for single transactions or undertakings. (DE LEON,
HECTOR S., and DE LEON, HECTOR M., JR., COMMENTS AND CASES ON
PARTNERSHIP, AGENCY AND TRUST, Rex Book Store, Inc., Manila,
Philippines, 2005 ed. , at p. 2, hereinafter referred to as DE LEONS).
They also write that Following the Babylonian 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)
b. Civil and Common Law Bases of Partnership Laws
The De Leons trace the origins of the modern-day partnership through the
English commercials courts which eventually was integrated by then Chief
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)
They write that eventually in the United States, in 1914 the Uniform
Partnerships Act was endorsed by the National 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 workings of the English Act. (DE LEONS,
at p. 5)
Bautista suggested that the modern world provisions on partnership of
every legal system providing for and regulating this type of business
organization are based upon the Roman law, of course with several
important modifications; . . . and that civil law countries or jurisdiction
regard the partnership as a legal entity, while the common law ones
generally do not. (BAUTISTA, at p. 1, citing 17 ENCYCLOPEDIA
BRITANNICA 420 [1969]). The De Leons observe that In fine, modern
partnership law may be said to contain combination of principles and
concepts developed from three sources: the Roman Law, the law [on]
merchant and equity, and the common law courts. (DE LEONS, at p. 5)
c. Particular Bases of Philippine Law on Partnerships
Before the promulgation of the New Civil Code, the Philippine partnership
laws formerly distinguished between civil partnership and commercial
partnerships. Civil partnerships were governed in Title VIII of Book IV of
the old Civil Code of 1889 (Articles 1665 to 1708); while commercial or
mercantile partnership were governed by Title I of Book II of the Code of
Commerce (Articles 116 to 238). According to Bautista, both sets of laws
had their origin in the Roman Law. (BAUTISTA, 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. (BAUTISTA, at p. 2). In particular, Article 45 of the New
Civil Code expressly provides that Partnerships and associations for
private interest or purpose are governed by the provisions of this Code
concerning partnerships.
While the bulk of the present provisions in the Civil Code were taken from
the old Civil Code provisions, the Code Commission reported that some
provisions were taken from the Code of Commerce, and other rules were
adopted from the Uniform Partnership Act and the Uniform Limited
Partnership Act of the United States. Bautista assessed that [o]n the
whole, it may be 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
States Uniform Partnership Act and Uniform Limited Partnership Act. be molded into a framework that provides a stability from the set of rules
(BAUTISTA, at p. 2)
d. The Significance of Knowing the Historical Background of
Philippine 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 business can be drawn from two
characteristics.
Firstly, that society considers it important enough to provide a legal
framework by which entrepreneurs, merchants and businessmen may
draw upon a set of rules to govern the medium by which to pursue a
venture, without having to enter into costly and time-consuming
negotiations and contract drafting. The essential characteristics of
partnership as governed by law (under modern settings, they would be:
juridical personality, mutual agency, delectus personae and unlimited
liability of 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 contract of partnership.
Secondly, that the partnership relationship being essentially contractual in
nature, assures would-be partners of the expedience of contractual
stipulation, to be able to tailor-fit their relationships in a way that would
best address their individual needs and their working relationships with
their co-partners, as well as the demands of the business enterprise they
have decided to embark upon.
Partnership Law therefore provides a stable platform by which individuals
may provide an active means to pursue jointly a business enterprise.
The other significant reason coming from the historical background of our
Philippine Law on Partnerships is that it draws it 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 from the Uniform Partnership Act of the United States. Properly
appreciated, that means that the Philippine Law on Partnerships can truly
and principles that are laid out in the provisions of the New Civil Code, and
yet be dynamic and progressive in characteristic to allow
Filipino businessmen and the legal profession to be able to evolve them
effectively through application in the business world of innovative changes
and advances, confirmed and made precedential in decisions of our
courts resolving the acceptability of such cutting-edge innovations.
2. Old Branches of Partnership Law
a. Distinguishing Between Civil and Commercial Partnerships
Before the New Civil Code, resolution of partnership issues depended on
whether it covered a civil partnership for which the provisions of the old
Civil Code were made to apply, or commercial partnership, and therefore
covered by the Code of Commerce. There was even a third type of
partnerships, the industrial partnerships, which may have the
characteristics of commercial or civil partnerships, according to whether
they have been established in accordance with the requirements of the
Code of Commerce or without regard to the latter. (Prautch, etc. v.
Hernandez, 1 Phil. 705, 709-710 [1903]).
The essence of a commercial partnership was that it was undertaken by
merchants, and essentially possessed of the 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 following are merchants: 1. Those who, having legal capacity to
engage in commerce, habitually devote themselves thereto. . .
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 the facts showed that the
1. Said common fund was not something they found already in existence.
It was not a property inherited by them pro indiviso. They created it
purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
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 strongly indicative of a pattern or
common design that was not limited to the conservation and preservation
of the aforementioned common fund or even of the property acquired . . .
In other words, one cannot but perceive a character of habituality peculiar
tobusiness transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties 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
utilization thereof. (Ibid, at p. 145).
Prior to the New Civil Code, the significant distinctions between civil
partnerships from commercial partnerships were as follows:
(a) Registration was essential for the coming into existence of
commercial partnerships and their acquisition of juridical personalities
(Arts. 118-119, Code of Commerce; Hung-Man-Yoc v. Kieng-Chiong Seng,
6 Phil. 498 [1906]); whereas, it was the perfection of a contract of
partnership which under the old Civil Code brought about the separate
juridical personality of a civil partnership;
(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 [1928]); while civil
partners were primarily but only jointly (pro-rata) liable for partnership
debts (Co-Pitco v. Yulo, 8 Phil. 544 [1907]); 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.
At the onset of Philippine jurisprudential development, it was recognized
in Prautch v. Hernandez, 1 Phil. 705 (1903), that a 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.
In a commercial partnership, both the partnership and the separate
partners thereof may be joined in one action, but the private property of
the partners could be taken in payment of the partnership debts only after
the common property of the partnership had been exhausted. (La
Compaia Maritima v. Muoz, 9 Phil. 326 [1907]).
The commercial partnership under the Code of Commerce tended to be a
more solemn affair, and when it failed to register its articles of partnership
in the mercantile registry, it did not become a juridical person nor did it
have any personality distinct from the personality of the individuals who
composed it (Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498
[1906]; Bourns v. Carman, 7 Phil. 117 [1906]; Ang Seng Quen v. Te
Chico, 7 Phil. 541 [1907]); and therefore could not also maintain an action
in its name Prautch, etc. v. Hernandez, 1 Phil. 705 [1903]).
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 has it acquired any juridical personality in the acts and
contracted executed and made by it, (Ibid, at pp. 500-501) and what was
applied was Article 119 of the Code of Commerce which made liable for the
debts incurred by such partnership de facto 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
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.
In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the civil
partnership was engaged in the laundry business and 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.
Nonetheless, the registration requirements under the Code of Commerce
were never interpreted to undermine the obligatory force of contracts
entered into in the name of the commercial partners. Thus, it was held
in Prautch, etc. v. Jones, 8 Phil. 1 (1907), and affirmed in Ang Seng Quen
v. Te Chico, 12 Phil. 547 (1909), that while an unregistered commercial
partnership 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 deny their right to
do so.
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), that under the Code
of Commerce, where the partners liability for a partnership debt was only
secondary or subsidiary, their right of excussion was deemed already
satisfied where at the time the judgment was executed against the
partnership they were unable to show that there were still partnership
assets, or when a writ of execution against the partnership had been
returned not fully satisfied.
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
If that section includes commercial partnerships then such a partnership
can be organized under it selecting from the Code of Commerce such of its
provisions as are favorable to the partners and rejecting such as are not,
and even including in its articles of agreement the right to do things which
by that Code are expressly prohibited. Such a construction would allow a
commercial partnership to use or dispense with the Code of Commerce as
best suited its own ends. (Ibid, at pp. 707-708)
. . . Is a commercial partnership distinguished from a civil one by the
object to which it is devoted or by the machinery with 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 certain well-defined ways. The provisions of this Code
were well known when the Civil Code was adopted. The author of that
Code when writing article 1667, having in mind the provisions of the Code
of Commerce, did not say that a partnership may be organized in any
form, which would have repealed the said provisions of the Code of
Commerce, but did say instead that a civil partnership may be organized
in any form.
Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2
(1904), what the Supreme Court held critical was proper application of
Article 1670 of the old Civil Code which provided that civil partnerships, on
account of the objects to which they are devoted, may adopt all the forms
recognized by the Commercial Code, and thereby held that
It will be seen from this provision that whether or not partnerships shall
adopt the forms provided for by the Civil or Commercial 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 Code) do not conflict with the provisions of the
Civil Code. In this provision the legislature expressly indicates that there
may exist two classes of commercial associations, depending not upon the
business in which they are engaged but upon the particular form adopted
in their organization. . . We are inclined to the belief that the respective
codes, Civil and Commercial, have adopted a complete system for the
organization, control, continuance, liabilities, dissolutions, and juristic
personalities of 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)

b. Significance of Knowing the Historical Distinctions Between Civil

and Commercial Partnerships

What may be considered as a good development in our present Law on

Partnerships is the removal of the distinctions between civil and
commercial partnerships, and which are now governed by a common set of
laws, i.e., the relevant provisions of the New Civil Code. The main
drawback of such a development is that even commercial partnerships
(and admittedly there may not be quite a number operating due to the
availability of the corporate medium), would find themselves governed by
non-commercial doctrines, such as the non-central role of the institution of
registration. And in fact, many issues have arisen under our current Law
on Partnerships arising from having adopted in the New Civil Code
provisions from the Code of Commerce on registration requirements.

In addition, the civil-coding of some of the provisions of the Code of

Commerce which were copied into the New Civil Code, should provide a
better understanding of the legal consequences of current provisions of the
Philippine Law on Partnerships, and a better constructions of the effects
they have on the commercial field, by providing a comparison with the old
jurisprudential rulings for commercial partnerships under the provisions of
the Code of Commerce.
II. 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:
(a) As a contractual relationship between and among the partners;
(b) As a means or medium of doing business, through the structure of
separate juridical personality, or as the basis of creating multi-leveled
contractual relations among various parties; and
(c) As a business enterprise, or a business venture, or what is termed in
other disciplines as a going concern.
Knowing the three levels at which the Law on Partnerships treats the
partnership arrangement is important in determining the 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.
1. Illustrative Interplay of the Tri-Level Existence of the
Partnership
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 SCRA 75 (1993).
In that decision, the facts indicated that a limited partnership was duly
registered with the firm name of Jade Mountain 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 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 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 attorneys fees, against Jade Mountain under the
new partnership. The new 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 dissolved due to
the withdrawal of the leading partners.
The basic contention of Mr. Yu was the principle that a partnership has a
juridical personality separate and distinct from that of 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 changes in the latters membership.
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:
Two (2) main issues are thus posed for our consideration in the case at
bar:
(1) whether the partnership which had hired petitioner Yu as Assistant
General Manager had been extinguished and replaced by a new
partnership composed of Willy Co and Emmanuel Zapanta; and
(2) if indeed a new partnership had come into existence, whether
petitioner Yu could nonetheless assert his rights under his 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 membership of the
partnership was the dissolution of the old partnership which had hired
petitioner in 1984 and the emergence of a new firm composed of Willy Co
and Emmanuel Zapanta in 1987. (Ibid, at p. 80.)
The Court held that the applicable rule would be Article 1828 of the Civil
Code which defines dissolution of a partnership [as] the change in the
relation of the partners caused by any partner ceasing to be associated in
the carrying on as distinguished from the winding up of the business.
Nonetheless, the determination of the right of Mr. Yu to recover from the
new partnership which constituted its own separate juridical personality
was based on the fact that it continued the old business enterprise of the
dissolved partnership, thus:
In the ordinary course of events, the legal personality of the expiring
partnership persists for the limited purpose of winding up 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 partnership was simply
continued by the new partners, without the old partnership undergoing the
procedures relating to dissolution and winding up of its business affairs. In
other words, the new partnership simply took over the business enterprise
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 re-assembling the said assets or most
of them and opening a new business enterprise. There were, no doubt,
powerful tax considerations which underlay such an informal approach to
business on the part of the retiring and the incoming partners. It is not,
however, necessary to inquire into such matters.
What is important for present purposes is that, under the above described
situation, not only the retiring partners (Rhodora Bendal, et al.) but also
the new partnership itself which continued the business of the old,
dissolved, one, are liable for the debts of the preceding partnership.
In Singson, et al. v. Isabela Saw Mill, et al., the Court held that under
facts very similar to those in the case at bar, a withdrawing partner
remains liable to a third party creditor of the old partnership. The liability
of the new partnership, upon the other hand, in the set of circumstances
obtaining in the case at bar, is established in Article 1840 of the Civil
Code. . .(Ibid, at pp. 81-82)
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 enterprise), and recognized that the business
enterprise transfer doctrine is governed in details under Article 1840 of the
Civil Code.
Yu also recognized one of the principles in business enterprise transfers,
that the new owners of the business enterprise do have a right to choose
who would be employed in their newly acquired business, and they cannot
be compelled to maintain the employment contracts of the managers and
employees existing with the transferor, thus:
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 assistant general
manager to run the affairs of the business enterprise taken over. An
assistant general manager belongs to the most senior ranks of
management and a new partnership is entitled to appoint a top manager
of its own choice and confidence. The non-retention of Benjamin Yu as
Assistant General Manager did not therefore constitute unlawful
termination, 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 himself, who personally
ran the business of Jade Mountain. Benjamin Yus old position as Assistant
General Manager thus became superfluous or redundant. 11 It follows that
petitioner Benjamin Yu is entitled to separation pay at the rate of one
months pay for each year of service that he had rendered to the old
partnership, a fraction of at least six (6) months being considered as a
whole year. (Ibid, at p. 83-84.)
Another illustrative case is the decision in United States v. Clarin, 17 Phil.
84 (1910), where a partner filed estafa charges against his co-partners for
the latters failure to deliver to him his half of the profits from the
partnership venture. In denying the applicability of the charges of estafa
the Court held
The P172 having been received by the partnership, the business
commenced and profits accrued, the action that lies with the partner who
furnished the capital for the recovery of his money is not a criminal action
for estafa, but a civil one arising from the partnership contract for a
liquidation of the partnership and a levy on its assets if there should be
any. x x x [Estafa] . . . does not include money received for a partnership;
otherwise the result would be that, if the partnership, instead of obtaining
profits, suffered losses, as it could not be held liable civilly for the share of
the capitalist partner who reserved the ownership 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 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 [1952]).
The ruling in Clarin should be distinguished from that in People v. de la
Cruz, (G.R. No. 21732 [1957], 03 September 1924, cited in People v.
Campos, (CA) 54 O.G. 681 [1957]) where the industrial partner was held
liable for estafa for appropriating money that has been given to him by the
capitalist partner for a particular transaction. The doctrine was reiterated
in Liwanag v. Court of Appeals, 281 SCRA 255 (1997), Thus, even
assuming that a contract of partnership was indeed entered into by and
between the parties, we have ruled that when money or property have
been received by a partner for a specific purpose (such as that obtaining in
the instant case) and he later misappropriated it, such partner is guilty of
estafa.
Perhaps the interplay of the various levels of existence of the partnership
arrangement is best exemplified by the decision of 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 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 industrial partner,
which agreement was not duly registered with the SEC, and the
partnership operated under the original registered firm name. Shortly
thereafter, the original partners bought out the interest, share and
participation of the industrial partner in the firm, and the partnership was
continued without the benefit of any written agreement or reconstitution of
their written articles of co-partnership.
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 and compliance with his
obligation to perform the duties of logging superintendent as provided
expressly in the registered articles of co-partnership. When Rojas
responded that he would not be able to comply with his promised
contribution and will not work as logging superintendent for the
partnership, Maglana gave notice of the dissolution of the partnership. In
the suit that ensued between the partners, one of the issues that had to
be resolved by the Court was the nature of the partnership and the legal
relationship of Rojas and Maglana after the retirement of the industrial
partner from the second partnership.
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
. . . [I]t 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 unmistakable called an Additional Agreement . . . Except for
the fact that they took in one industrial partner, gave him an equal share
in the profits and fixed the term of the second partnership to thirty (30)
years, everything else was the same. Thus, they adopted the same name,
. . . they pursued the same purposes and the capital contributions of Rojas
and Maglana as stipulated in both partnership call for the same amounts.
Just as important is the fact that all subsequent 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
Co-Partnership . . . which was never registered . . . Otherwise stated, even
during the existence of the second partnership, all business transactions
were carried out under the duly registered articles. (Ibid, at pp. 117-118)
The Court then proceeded to hold that
On the other hand, there is no dispute that the second partnership was
dissolved by common consent. Said dissolution did not affect the first
partnership which continued to exist as shown by the subsequent acts of
the original partners carrying one with the original partnership business
and confirming the obligations constituted under the original articles of
partnership. The conclusion of the Court was thus: Under the
circumstances, the relationship of Rojas and Maglana after the withdrawal
of [the 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)
Rojas therefore affirms two important aspects in Partnership Law:Firstly,
that registration of the contract of partnership with the SEC has the legal
effect of binding the partners (and perhaps even third parties dealing with
the partnership), as to the contractual obligations, the rights and duties of
the partners, and which has effective force even as the partnership
undergoes changes within its constitution by the acceptance into and
withdrawal of partners into the venture. Secondly, the underlying business
enterprise, the manner of its operation, has much legal influence of
determining the contractual intents of the partners in the determination of
inter-partnership rights and obligations.
III. PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP
_____
Art. 1767. By the contract of partnership two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a partnership for the
exercise of a profession. (1665a)
Art. 1770. A partnership must have a lawfu object or
purpose, and must be established for the common benefit or
interest of the partners.
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)
_____
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.
The fact that a partnership is first and foremost a contractual relationship,
means that it is subject to the rules, principles and 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 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 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 as it provides that A
partnership must have a lawful object or purpose.
The primary doctrine that first and foremost the partnership must find its
nexus in a contractual relationship is exemplified in 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 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 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 partnership enterprise, it is necessary that there must
having been a meeting of minds to constitute a contract of partnership.
1. Characteristics of the Partnership Contract
a. Nominate and Principal
The contract of partnership is a nominate contract, not only because it has
been given a specific name under the New Civil Code, but it is a principal
contract and can exists on its own upon the essential elements coming
together at perfection; and 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 Partnerships
and associations for private interest or purpose are governed by the
provisions of this Code concerning partnerships.
To illustrate the nominate and principal nature of the contract of
partnership, Fernandez v. Dela Rosa, 1 Phil. 671 (1903), held that
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 partnership relation results, and the law
itself fixes the incidents of this relation if the parties fail to do so. In
resolving the motion for reconsideration on in original decision, the Court
even held that It is of no importance that the parties have failed to reach
an agreement with respect to the minor details of contract. These details
pertain to the accidental and not to the essential part of the
contract. (Ibid, at p. 680. Also Fue Leung v. IAC, 169 SCRA 746 [1989]).
b. Consensual
A contract of partnership is essentially consensual, it is perfected upon
meeting of the minds of the parties of the subject matter to undertake a
business venture, and the consideration, which is the obligation to
contribute of money, property or service to a common fund. Whether the
business enterprise is actually constituted or set-up, or whether or not the
contributions have been made into the partnership coffers, do not detract
from the coming into existence of a valid partnership contract. And failure
to comply with the undertaking to deliver the promised contribution does
not make a contract of 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 agreement was not
necessary in order to give efficacy to the verbal contract of partnership as
a civil contract, the contributions of the partners not having been in the
form of immovables or rights in immovables. (Ibid, at p. 677). This
feature of consensuality of a contract of partnership is now embodied in
Article 1772 which provides that A partnership may be constituted in any
form except where immovable property or real rights are contributed
thereto, in which case a public instrument shall be necessary.
Although Articles 1772 and 1773 provide for public instrument and
registration when the capital contribution is more than 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.
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:
There is no doubt that the parties hereto formed a partnership when they
bound themselves to contribute money to a common fund with the
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 [policy that a dealership
can only be granted to one person] of SHELL and the understanding of the
parties of having only one dealer of the SHELL products. (Ibid, 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).
In contrast, in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), the parties
executed a partnership agreement, to conduct and carry on the business
of operating a theatre for the exhibition of motion and talking pictures;
nonetheless, the Court held that the real intention of the parties was to
effect a sub-lease of the property and the partnership agreement was
resorted to in order to avoid the provision in the main lease agreement
prohibiting a sublease of the premises. The Court took into consideration
the following actuations of the supposed Yulo partner to show that there
as never a real agreement to form a partnership, thus:
In the first place, plaintiff did not furnish the supposed P20,000 capital. In
the second place, she did not furnish any help or intervention in the
management of the theatre. In the third place, it does not appear that she
has ever demanded from defendant any accounting of the expenses and
earnings of the business. Were she really a partner, her first concern
should have been to find out how the business was progressing, whether
the expenses were legitimate, whether the earnings were correct, etc. She
was absolutely silent with respect to any of the acts that a partner should
have done; all that she did was to receive her share of P3,000 a month,
which can not be interpreted in any manner than a payment for the use of
the premises which she had leased from the owners. 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. 117.)
Yulo demonstrates the principle that a contract of partnership is
consensual in nature and is constituted by the real meeting of the minds;
such that even when formal articles of partnership are drawn-up between
the parties, when it fact the evidence shows that they never intended to
enter into a partnership, the article of partnership cannot create a
partnership when in fact there has never been a meeting of minds to
constitute one.
In contrast, we view the decision in Woodhouse v. Halili, 93 Phil. 526
(1953), as a little dubious when it distinguishes between the obligation to
enter into a contract of partnership, from that of executing the certificate
of partnership itself. In Woodhouse, the plaintiff and the defendant had
come to an agreement to enter into a partnership business to bottle and
distribute an 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 venture was
eventually set-up, the defendant had refused to finalize the articles of
partnership when he learned during the negotiations in the United States
that plaintiff did not have for himself the bottling franchise he promised he
had secured. The plaintiff brought action to have the articles of partnership
executed and to receive his 30% share in the earnings. Prescinding 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 individuals 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 with the intention of dividing the profits, as
was the case between the parties in Woodhouse, a contract of partnership
arises, and the incidents thereof governed by Partnership Law, even in the
absence of a formal certificate or articles of co-partnership.
Only recently, Tocao v. Court of Appeals, 342 SCRA 20 (2000),
summarized the prevailing doctrine on the nature of the contract of
partners, thus
To be considered a juridical personality, a partnership must fulfill these
requisites: (1) two or more persons bind themselves to contribute money,
property or industry to a common fund; and (2) intention on the part of
the partners to divide the profits among themselves. It may be constituted
in any form; a public instrument is necessary only where immovable
property or real 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 complied with the
requisites of a partnership. The fact that there appears to be no record in
the Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of the Civil
Code did not cause the nullification of the partnership. . . (Ibid, at pp. 30-
31.)
Tocao held that so long as the two essential elements of a partnership are
present, then the fact that the business was operated under the name of a
registered sole proprietorship was of no moment, especially when the
registration of the business name with the Bureau of Domestic Trade was
only for purpose of being able to secure such business name. (Ibid, at p.
36.)
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.
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 partners, but
primarily to pursue a business enterprise (i.e., creation of a common fund
with intent to share profits and losses). 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 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
. . . We have already stated in the opinion what are the essential
requisites of a contract of partnership . . . Considering as a 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 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 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.)
IV. ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP
______
Art. 1767. By the contract of partnership two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a partnership for the
exercise of a profession. (1665a).
Art. 1770. A partnership must have a lawful object or
purpose, and must be established for the common benefit or
interest of the partners.
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)
Art. 1784. A partnership begins from the moment of the
executio of the contract, unless it is otherwise stipulated. (1679).
_____
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 essential elements for a contract of partnership to
be valid would be as follows:
(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) SUBJECT MATTER: The creation of a common fund or more
specifically, to undertake a business venture with the intention of dividing
the profits among themselves, or in the case of a professional
partnership, to exercise together a common profession; and
(c) CONSIDERATION: The contribution of cash, property or service to
the business venture.
1. Element of CONSENT
______
Art. 1769. In determining whether a partnership exists,
these rules shall apply:
(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 co-possessors
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;
(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:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a
deceased partner;
 (d) As interest on a loan, though the amount of payment
vary with the profits of the business;
(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 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.
One does not become a partner, nor is a partnership constituted, but the
fact alone that they are associated together in situation where there is co-
ownership or profits earned therefrom. Thus, under Article 1769(2), 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. The essence of every partnership
arrangement is the consent of each of the partners to be associated in a
business venture.
b. Legal Capacity to Contract
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 husbands consent, but the latter may
object under certain conditions.
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.
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
(b) with joint interest in the profits and losses thereof.
The agreement to share profits and losses from the business venture is the
hallmark of a partnership arrangement. It is also the essence of the
equity position of the partners vis-a-vis the business enterprise, as
differentiated from partnership 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 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
derived.
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, 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 lions 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 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
Being a contract of partnership, each partner must share in the profits
and losses of the venture. That is the essence of a partnership. And even
with an assurance made by one of the partners that they would earn a
huge amount of profits, in the absence of fraud, the other partners cannot
claim a right to recover the highly speculative profits. It is a rare business
venture guaranteed to give 100% profits. (Ibid, at p. 95)
The Court also held that any stipulation on the payment of a high
commission to one of the partners must be understood have been based
on an anticipation of large profits being made from the venture; and since
the venture sustained losses, then there 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 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.
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 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 purchase
the lots and eventually to partition them among themselves to build their
residences; and that in fact they had no choice but to resell the same to
dissolve the co-ownership. Obillos found that the division of the profits was
merely incidental to 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.
In contrast, in Reyes v. Commissioner of Internal Revenue, 24 SCRA 198
(1968), the Court found that where father and son purchased a lot and
building and had it administered by an administrator, and divided equally
the net income, there was a partnership formed because profit was the
original intention for the common fund.
Likewise in Evangelista v. Collector of Internal Revenue, 102 Phil. 140
(1957), where three sisters bought four pieces of real property with every
intention to lease them out, and which they in fact leased to various
tenants and derived rentals therefrom, there was a partnership formed.
b. Receipt By a Person of a Share of the Net Profit
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;
(b) As wages of an employee;
(c) As rentals paid to a landlord;
(d) As annuity to a widow or representative of deceased partner;
and no separate bank accounts kept for that particular line of business.
The arrangement was deemed to be one of employment, with Bastida
contributing his services to manage the particular line of business of Menzi
& Co.
Tocao v. Court of Appeals, 342 SCRA 20 (2001), held that while it is true
that the receipt of a percentage of net profits constitutes only prima
facie evidence that the recipient is a partner 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 voice in the
management 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).

c. Meeting of Minds on the Establishing a Common Fund Is the

(e) As consideration of sale of goodwill or other property.
Essence of a Partnership Contract

Thus, in Pastor v. Gaspar, 2 Phil. 592 (1903), the Court held that there
All the foregoing examples indicate that what brings about a contract of
was no new partnership formed when a loan was obtained to purchase
partnership is essentially an agreement to constitute a common fund with
lorchas needed to expand the shipping business of an existing shipping
the intention of dividing the profits and losses; outside of these essential
partnership venture under the condition that the lender would receive part
elements, a contract of partnership cannot subsist.
of the profits of the business in lieu of interests.

The importance of consent, vis-a-vis the elements of common fund and

In Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906), where the terms of the
intention to divide the profits among themselves, is best illustrated inYulo
contract provided for the salary of the bookkeeper to be 5% of net profits
v. Yang Chiao Seng, 106 Phil. 111 (1959), where in fact the parties had
of the business, the same did not make the bookkeeper a partner in the
executed formal articles of partnership, and yet the Court found that the
business, since it was merely a measure of his salary as an employee of
real intention of the parties was really to constitute a relation of sublease
the company. To the same effect is the ruling inSardane v. Court of
between the parties over a commercial land where one party (the lessee)
Appeals, 167 SCRA 524 (1988).
was prohibited under her main contract of lease from subleasing the
property, and the other party (the sublessee) wanted to operate a threater
In Bastida v. Menzi & Co., 58 Phil. 188 (1933), the Court held that despite in said premises. The Court held
the agreement that Bastida was to receive 35% of the profit from the
business of mixing and distributing fertilizer registered in the name of
The most important issue raised in the appeal is that contained in the
Menzi & Co., there was never any contract of partnership constituted
fourth assignment of error, to the effect that the lower court erred in
between them based on the following key elements: (a) there was never
holding that the written contracts, Exhs. A, B, and C, between
any common fund created between the parties, since the entire business
plaintiff and defendant, are one of lease and not one of partnership. We
as well as the expenses and disbursements for operating it were entirely
have gone over the evidence and we fully agree with the conclusion of the
for the account of Menzi & Co.; (b) there was no provision in the
trial court that the agreement was a sublease, not a partnership. The
agreement for reimbursing Menzi & Co. in case there should be no profits
following are the requisites of partnership: (1) two or more persons who
at the end of the year; and (c) the fertilizer business was just one of the
bind themselves to contribute money, property, or industry to a common
many lines of business of Menzi & Co., and there were no separate books
fund; (2) intention on the part of the partners to divide the profits among
themselves. (Art. 1767, Civil Code.)
In the first place, plaintiff did not furnish the supposed P20,000 capital. In
the second place, she did not furnish any help or intervention in the
management of the theatre. In the third place, it does not appear that she
has ever demanded from defendant any accounting of the expenses and
earnings of the business. Were she really a partner, her first concern
should have been to find out how the business was progressing, whether
the expenses were legitimate, whether the earnings were correct, etc. She
was absolutely silent with respect to any of the acts that a partner should
have done; all that she did was to receive her share of P3,000 a month,
which can not be interpreted in any manner than a payment for the use of
the premises which she had leased from the owners. 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 pp. 116-117)
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
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 registered dealer of SHELL under the latters 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 respondent . . ., his sister, to examine and audit the
books of their common business (aming negosyo). . . . There is no doubt
that the parties hereto formed a partnership when they bound themselves
to contribute money to a common fund with the 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 of the parties of having only one dealer of the SHELL
products. (Ibid, at p. 837)
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.
Thus, in Evangelista v. Collector of Internal Revenue, 102 Phil. 140
(1957), three sisters borrowed a huge amount of money from their father,
and with their personal funds, purchased under several transactions real
estate properties, and subsequently 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 that they
have never formed a partnership, and that they merely constituted
themselves a co-owners of the properties bought pro indiviso, the Court
held
Pursuant to this article, the essential elements of a partnership are two,
namely: (a) an agreement to contribute money, 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:
1. Said common fund was not something they found already in existence.
It was not a property inherited by them pro indiviso. They created it
purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series
of transactions. . . . The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly
the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by
petitioners in February, 1943. In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for
purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties 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
utilization thereof.
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 and checks. Thus, the affairs relative to
said properties have been handled as if the same belonged to a
corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or,
to be exact, over fifteen (15) years, since the first property was acquired,
and over twelve (12) years, since Simeon Evangelista became the
manager.
6. Petitioners have not testified or introduced any evidence, either on their
purpose in creating the set up already adverted to, or on the causes for its
continued existence. They did not even try to offer an explanation
therefore. (Ibid, at pp. 144-146.)
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
participates in the gross receipts of a business enterprise or from a
property arrangement does not make him a partner because he is not
made to bear the burdens of ownership, i.e.,to be liable for expenses and
losses of the business enterprise.
The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA 74
(1972), is illustrative of this principle. In Ona, in the project partition
agreed upon by the heirs the agreed to keep the properties of the estate
together and to divide the profits in proportion to their stipulated interests
therein. In holding that there was thereupon constituted among the co-
heirs an unregistered partnership subject to corporate income tax under
the Tax Code, the Court held
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limited themselves to holding the properties inherited
by them. Indeed, it is admitted that during the material years herein
involved, some of the said properties 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.
d. Proof of the Existence of the Business Enterprise May Support
the Existence of a Partnership Even After Dissolution
There have been cases where the existence of the business enterprise
became the basis by which the courts would conclude that indeed a
contract of partnership had been entered into by the parties.
In Idos v. Court of Appeals,] 296 SCRA 194 (1998), in determining
whether the partnership enterprise continued to exist and has not been
terminated, the Court ruled that The best evidence of the existence of the
partnership, which was not yet terminated (though in the winding up
stage), were the unsold goods and uncollected receivables, which were
presented to the trial court. Since the partnership has not been
terminated, the petitioner and private complainant remained as co-
partners. (Ibid, at p. 206.)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), citing the ruling inIdos,
the Court held that the fact that the claiming party had been
unceremoniously booted out of the partnership . . . she still received her
overriding commission (Ibid, at p. 36) . . . The winding up of partnership
affairs has not yet been undertaken by the partnership. This is manifest in
petitioners claim for stocks that had been entrusted to private respondent
in the pursuit of the partnership business. (Ibid, at p. 38.)
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.
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 proprietorship on the business venture as to
show without doubt the existence of a partnership, thus:
Petitioners [Tocao and Belo] admit that private respondent [Anay] had the
expertise to engage in the business of distributorship of cookware. Private
respondent contributed such expertise to the partnership and hence, under
the law, she was the industrial or managing partner. It was through her
reputation with the West Bend Company that the partnership was able to
pen the business of distributorship of that companys cookware products;
it was through the same efforts that the business was propelled to
financial success. Petitioner Tocao herself admitted private respondent
[Anay] held the positions of marketing manager and vice-president for
sales . . . x x x. (Ibid, at p. 31; underscoring supplied)
By the set-up of the business, third persons were made to believe that a
partnership had indeed been forged between petitioners [Tacao and Belo]
and private respondent [Anay] . . .
On the other hand, petitioner Belos denial that he financed the
partnership rings hollow in the face of the established fact that he presided
over meeting regarding matters affecting the operation of the business.
Moreover, his having authorized in writing . . . that private respondent
should receive thirty-seven (37%) of the proceeds of her personal sales,
could not be interpreted otherwise than that he had a proprietary interest
in the business. His claim that he was merely a guarantor is belied by that
personal act of proprietorship in the business . . . (Ibid, at p.
32;underscoring supplied)
The business venture operated under Geminesse Enterprise did not result
in an employer-employee relationship between petitioners and private
respondent. While it is true that the receipt of a percentage of net profits
constitutes only prima facie 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 cookware
distributorship, including selection of people who would constitute the
administrative staff and the sales force. . . (Ibid, at pp. 33-
34; underscoring supplied)
The exercise of the prerogatives of a proprietor should be viewed as
merely collaborative evidence of the partnership relationship between the
parties in a business venture; in the end the existence of the contract of
partnership must be located in the actual meeting of minds to constitute a
common fund and to divide the profits thereof among themselves. The
reason why exercising the prerogatives of proprietorship or participating in
the management of the business enterprise cannot on their 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.
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.
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:
Article 1767 of the Civil Code states that in a contract of partnership two
or more persons bind themselves to contribute 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
contribute money, property or industry for the purpose of engaging inthe
supposed business. There is no proof that he was receiving a share in the
profits as a matter of course, curing the period when the trucking business
was under operation. Neither is there any proof that he had actively
participated in the management, administration and adoption of policies of
the business. (Ibid, at p. 308.)
In contrast, we should consider the decision in Heirs of Tan Eng Kee v.
Court of Appeals, 341 SCRA 740 (2000), where a partnership was insisted
to have been constituted yet no direct evidence of the contribution to a
common fund or sharing of profits had been adduced during trial. The
Court held
Besides, it is indeed odd, if not unnatural, that despite the forty years the
partnership was allegedly in existence, Tan Eng Kee never asked for an
accounting. The essence of a partnership is that the partners share in the
profits and losses. Each has the 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 than get
immediate returns, a deferment of sharing in the profits is perfectly
plausible. [Fue Lung v. IAC, 169 SCRA 764, 755 (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 to take ordinary care of his concerns. . . A
demand for periodic accounting is evidence of a partnership. (Ibid, at pp.
755-756, citing Estanislao, Jr. v. Court of Appeals, 160 SCRA 830, 837
[1988]).
f. When Subject Matter (the Business Venture) Is Unlawful or
Against Public Policy
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.
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. However, it decreed that the
partners had a right to recover their contributions, thus:
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 the disposal prescribed for said
profits, shows that in consequence of said exclusion, the general rules of
law must be followed, and hence, the partners must be reimbursed the
amount of their respective contributions. Any other solution would 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, COMMENTARIES ON THE SPANISH CIVIL
CODE, Vol. XI, pp. 262-264.)
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.
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 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) Article 1787, which makes a partner liable for interest and damages for
failing to contribute the sum of money he was bound to pay under
the articles of partnership;
(c) Article 1789, which prohibits an industrial partner from engaging in
business for himself, since he bound himself to contribute service to
the partnership;
(d) Article 1790, which presumes an obligation to contribute equal shares
among the partners when there is no stipulation as to manner and
amount of contribution; and
(e) Article 1830(4), which decrees the dissolution of a partnership when
the specific thing, which a partner had promised to contribute to the
partnership, perishes before the delivery.
City of Manila v. Cumbe, 13 Phil. 677 (1909), held that credit, such as a
promissory note or other evidence of obligation, or 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.
4. Other Essential Elements of Partnership
Although American jurisprudence would consider two other elements to be
essential for the contract of partnership to exist, namely:
(a) the purpose of a purpose must be to engage in some business
enterprise; and
(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
arrangement. (Art. 1810(3) provides that one of the property rights of a
partner is His right to participate in the management. 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 way the business of the partnership of which he is
a member binds 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 provides as follows:
The constitution of the association provided for the following purpose:
The object of this association shall be to perpetuate the spirit of patriotism
and fraternity those men who upheld the Stars and Stripes in the
Philippine Islands 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 [1979].)
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.
V. PARTNERSHIP AS A MENAS OF DOING BUSINESS, THROUGH THE
JURIDICAL ENTITY
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)
Art. 44. The following are juridical persons:
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)
1. Legal Bases of the Partnership Juridical Personality
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 governed by the
provisions of this Code concerning partnerships.
2. Underlying Business Ends of the Partnership Juridical Person
The importance of the grant of separate juridical personality to the
partnership is to make it an efficient means by which 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 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 person,
but precisely only as a means or medium by which individuals in society
may achieve certain ends, and often they are business or commercial
ends.
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 (the partners) and those who are
authorized to deal with said medium (the creditors, the clients and
customers). This philosophical understanding of the essence and purpose
of the partnership juridical person is best exemplified by the provisions
of Article 1775 of the Civil Code which denies juridical personality to
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. In other words, if an aggregation of individuals
is not meant to undertake a business or commercial venture that is
supposed to 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
separate juridical personality.
a. The Case for Secret Associations
Art. 1775. 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 shall be governed by the provisions
relating to co-ownership. (1669)
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 shall be govenred by the provisions
relating to co-ownership. (1669). Bautista discussed the rationale and
effects of Article 1775 as follows:
Not every contract intended to create a partnership produces a juridical
personality. The Code [Article 1775] withholds the attribute of juridical
personality to 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. And applies to such associations or
societies only the rules governing co-ownership. The phrase kept secret
among the members, according to Manresa, does not mean that the
articles are known to all the members but withheld from third persons. It
contemplates a situation where the articles, which 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.
This rule is intended to preserve the equality which must exist among the
partners and to prevent any of them from defrauding the partnership or
the other members. This being the case it does not prohibit secret
stipulations which are not designed to produce this result. It would not, for
instance, have the effect of rendering invalid a separate agreement
between two members of a partnership pursuant to which one guarantees
the other against loss of his capital contribution or assures him of profit.
Neither can the rule be invoked as against third persons by the partners
entering into the secret stipulations, in consonance with the general
principle that a party should not be allowed to take advantage of a nullity
which he himself has caused. (BAUTISTA, at pp. 58-59, citing 11 Manresa
289 to 291)
b. Jurisprudential Application of the Doctrine of Separate Juridical
Personality of the Partnership
In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the contention
that since the defendant sued was a partnership that summons must be
served upon each of the partners, the Court held
[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)
The decision in Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil.
916 (1923), demonstrates how the separate juridical personality accorded
to a partnership arrangement makes certain rules on insolvency work
differently as compared to 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 three creditors
for more than thirty days). The trial court denied the petition on the
ground that it was not proven, nor alleged, that the partners of the firm
were insolvent at the time the application was filed; and that as said
partners are personally and solidary liable for the consequences of the
transactions of the partnership, it cannot be adjudged insolvent so long as
the partners are not alleged and proven to be insolvent. In ruling that the
denial of the petition for insolvency was in error, the Court held
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 personality of a limited
partnership being different from that of its members, it must, on general
principle, answer for, and suffer, the consequence of its acts as such an
entity capable of being the subject of rights and obligations. If, as in the
instant case, the limited partnership of Campos Rueda & Co. failed to pay
its obligations with three creditors for a period of more than thirty days,
which failure constitutes, under our Insolvency Law, one of the acts of
bankruptcy upon which an adjudication of 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
adjudged insolvent in an involuntary insolvency proceeding unless all of its
members are insolvent, while others have maintained a contrary view. But
it must be borne in mind that under the American common law,
partnership have no juridical personality independent from that of its
members; and if now they have such personality for the purposes of the
insolvency law. (Ibid, at pp. 918-919.)
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 ground for the
dismissal of a pending suit against the partnership, as a partnership
possesses a personality distinct from any of the partners.
In Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366
(1988), the Court held that a partnership may sue and be sued in its name
or by its duly authorized representative, and when it has a designated
managing partner, he may execute all acts of administration including the
right to sue debtors of the partnership.
3. Application of the Doctrine of Piercing the Veil of Separate
Juridical Fiction
The doctrine of piercing the veil of corporate fiction finds relevance in
Corporate Law because it is the means by which to by-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.
In spite of the partnership being accorded also a separate juridical
partnership, the piercing doctrine has less application in Partnership Law
because the partners are unlimitedly liable (i.e., personally liable with their
separate properties) for partnership debts. And yet, the doctrine found
application to partnerships in Commissioner of Internal Revenue v. Suter,
27 SCRA 152 (1969), where the Court addressed the legal position of the
Tax Commissioner seeking to make the individual partners liable for
income tax for the income earned by the limited partnership, thus:
It being a basic tenet of the Spanish and Philippine law that the
partnership has a juridical personality of its own, distinct and separate
from that of its partners (unlike American and English law that does not
recognize such separate juridical personality). The bypassing of the
existence of the limited partnership as a taxpayer can only be done by
ignoring or disregarding clear statutory mandates and basic principles of
our law. The limited partnerships separate individuality makes it
impossible to equate its income with that of the component members. .
. (Ibid, at pp. 158-157.)
x x x.
. . . 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 the partners-spouses in their individual
capacities. The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a
disregard of their corporate personalities for tax purposes. This is not 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
appellees 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 or accountable for the consequences of
the acts or contracts done in the partnership name.
The piercing doctrine also found recognition, albeit by way of obiter,
inAguila, Jr. v. Court of Appeals, 319 SCRA 246 (1999), but only in the
limited area of determining standing in a suit brought against claims
pertaining to the partnership. In Aguila, Jr. the complaint was filed against
the partners and officers to enforce essentially a partnership obligation. In
ruling that the judgment rendered by the trial court (affirmed by the Court
of Appeals) against the individual defendants was void, the Court held
Under Art. 1768 of the Civil Code, a partnership has a juridical personality
separate and distinct from that of each of the partners. The partners
cannot be held liable for the obligations of the partnership unless it is
shown that the legal fiction of a different juridical personality is being used
for fraudulent, unfair, or illegal purposes. In this case, private respondent
has not shown that A.C. Aguila & Sons, Co., as a separate juridical entity,
is being used for fraudulent, unfair or illegal purposes. Moreover, the title
to the subject property is in the name of A.C. Aguila & Sons, Co. and the
Memorandum of Agreement was 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
registered in its name. A violation of this rule will result to dismissal of the
complaint. We cannot understand why both the Regional Trial Court and
the Court of Appeals sidestepped this issue when it was squarely raised
before them by petitioner. (At p. *)
4. Entitlement to Constitutional Rights and Guarantees
The more interesting topic under the juridical personality doctrine
pertaining to partnerships is whether they are entitled to the constitutional
rights of due process, equal protection, unreasonable searches and
seizures and the right against self-incrimination.
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
[1919]; Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 [1971]) the rights
against unreasonable searches and seizure; (Stonehill v. Diokno, 20 SCRA
383 [1967]) but not to the right against self-incrimination.
(Bataan Shipyard and Engineering Co., Inc.. v. PCGG, 150 SCRA 181
[1987]).
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:
The guarantees of the Fourteenth Amendment and so of the first
paragraph of the Philippine Bill of Rights, are universal in their application
to all persons within the territorial jurisdiction, without regard to any
differences of race, color, or nationality. The word person includes aliens .
. . Private corporations, likewise, are persons within the scope of the
guaranties in so far 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 against unreasonable searches and
seizures because A corporation is, after all, but an association of
individuals under an assumed name and with a distinct legal entity. In
organizing itself as a collective body it waives no constitutional immunities
appropriate for such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law,
and is protected, under the 14th Amendment, against unlawful
discrimination. (Ibid, at p. 837, quoting from Hale v. Henkel, 201 U.S. 43,
50 L.Ed. 652).
In fact, in the partnership setting there is closer identity between the
partners and the partnership in the sense that the partners not only own
the partnership and its affairs and they directly manage the affairs of the
partnership, but more so that the separate juridical personality is closely
identified with the personality of the partners under delectus
personae considerations.
On the other hand, the Courts 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 Shipyard from Wilson v. United States, (55 L.Ed. 771,
780) thus:
* * * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It receives certain 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
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 corporation, vested with special privileges, and
franchise may refuse to show its hand when charged with an abuse of such
privileges. . . (150 SCRA 181, 234-235, quoting from Wilson v. United
States, 55 Law Ed. 771, 780.)
Every corporation is a direct creature of the law and receives an individual
franchise from the State. But a partnership, although is deemed to be a
juridical person by grant of the State, becomes a juridical person through
a private contract of partnership between and among the partners, without
needing to register its existence with the State or any of its organs. More
importantly, the partnership person is a fiction of law given more for the
convenience of the partners, and thus can be dissolved by the will of the
partners or by the happening of an event that would constitute the
termination of the contractual relationship, whereas, no corporation can be
dissolved without the consent of the State, and only after due notice and
hearing. Likewise, the other features of the partnership, mainly mutual
agency, delectus personae and unlimited liability on the part of the
partners, that places a close identity between the persons of the partners
and that of the partnership. This is unlike in 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 self-incrimination, 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 Courts 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 into the personal and
business privacy of the stockholders, members or partners who compose
the juridical person. Perhaps 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 and
against unreasonable searches and seizures are all meant to curb the
abuse that the State and its representatives may employ upon the
citizenry, including the modes upon which they conduct their lives and
businesses. On the other hand, the constitutional protection against self-
incrimination is not meant to prevent an actual State abuse but to avoid
pressuring the individual from having to tell a lie. The main purpose of
the provision . . . is to prohibit compulsory oral examination of prisoners
before the trial, or upon trial, for the purpose of extorting unwilling
confessions or declarations implicating them in the commission of a
crime. (U.S. v. Tan Teng, 23 Phil. 145, 152 [1912]) A corporation owes
full allegiance and subject to the unrestricted jurisdiction of the courts of
the State under which it has been organized. (Tayag v. Benguet
Consolidated, Inc., 26 SCRA 242, 248 [1968]) Likewise, it has no soul that
can be damned by a lie.
VI. PARTNERSHIP AS A BUSINESS ENTERPRISE
Although not explicitly stated in the provisions of the Civil Code, the
partnership may constitute also a business enterprise or what is known
in the disciplines of Economics and Accounting, as a going concern
that is separately valued and 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 partnerships 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.
For example, the right of the partners to specific partnership property and
to share in the profits and losses, as well as the right to manage, are legal
matters that necessarily refer to the partnership business enterprise.
This understanding of the business enterprise of a partnership is applicable
even to a professional partnership. Our Supreme Court has defined the
term profession as a group of men pursuing a learned art as a common
calling in the spirit of public serviceno less a public service because it
may incidentally be a means of livelihood. (In the Matter of the Petition
for Authority to Continue Use of Firm Name Sycip, Salazar, et. al. Ozaeta,
Romulo, etc., 92 SCRA 1 (1979).)
The recognition of the inherent relationship between and among the
partners to be bound by the results of operations from the business
enterprise has been well-explained by the Court in Villareal v. Ramirez,
406 SCRA 145 (2003), thus:
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 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 appellate courts in fact recognized the
decrease of the partnership assets to almost nil, but the latter failed to
recognize the consequent corresponding decrease of the capital. (Ibid, at
p. 153.)
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 not amount to that much.
It is a long established doctrine that the law does not relieve parties from
the effects of unwise, foolish or disastrous contracts they have entered
into with all the required formalities and with full awareness of what they
were doing. Courts have no power to relieve them from obligations they
have voluntarily assumed, simply because their contracts turn out to be
disastrous deals or unwise investments. (Ibid, at p. 154.)
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 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.
VII. ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP
_____
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.
Two or more persons may also form a partnership for the exercise
of a profession.
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)
_____
1. Attributes of the Partnership
Every partnership existing under the Law on Partnerships of the Civil Code
is endowed with the following essential attributes:
(a) Informal/Consensual and Weak Juridical Personality;
(b) Mutual agency;
(c) Delectus personae;
(d) Partners Burdened with Unlimited Liability
(except for limited partners in a limited partnership).
An understanding of each of the partnership attributes provides a better
appreciation of the multifarious functions of the partnership in the
Philippine commercial setting.
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.
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 the separate juridical personality
arises as a mandatory consequence under the law from the perfection of a
contract of 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 partnerships 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, which under Article 1784
begins from the moment of the execution of the contract, unless it is
otherwise stipulated. So informal or casual is the attitude of the law on
the partnerships 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 by the
partners or such of them as habitually acted therein during the term,
without any settlement or liquidation of the partnership affairs.
What is the reason for the legal attitude of being rather informal on the
juridical personality of the partnership? It seems from 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 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 partnersor properly speaking, to clothe the business enterprise
with a juridical person by which it can better deal with the publicis meant
to add to the commercial efficiency of the partnership both as a medium of
association and as a medium of doing business.
The default rule of according by operation of law a juridical personality to a
partnership arrangement, makes it a cheaper medium of doing business.
Therefore, if the manner by which to achieve juridical personality be made
more rigorous and formal, then it makes the partnership medium a more
expensive proposition, and therefore unattractive especially for
businessmen and merchants who embark on modest ventures.
a. Exceptions to Informal or Consensual Nature of Juridical
Personality
The only time in the Civil Code when the contract of partnership (and
therefore likewise with the partnership juridical person) must assume a
solemn or formal character covers three expressed instances:
(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).
(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
(ii) 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 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 purpose of the
law in imposing solemn requirements for partnerships with capital
contributions of P3,000, if failure to comply therewith does not present any
dire legal consequences?
On the other hand, the law is clear that when what is contributed to the
partnership is immovable property, and there is failure to provide for an
inventory thereof to be attached to the public instrument to be registered
with the SEC, the resulting partnership is void. The exception when it
comes to real property contributions is the public policy contained in our
Civil Code and in other special laws, that considers real property as
constituting a cornerstone in our economic life, and that dealings 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.
The only other exception to the informal or consensual nature of the
partnership juridical personality would be the mandatory registration
requirements for the valid constitution of the limited partnership. Again,
this is in line with the principle that limited 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.
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 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;
(b) Express will of all the partners;
(c) Expulsion of any partner;
(d) Any event which makes the partnership business unlawful;
(e) Loss before delivery of the property promised to be contributed by the
partner;
(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
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 attributes of mutual agency and
delectus personae.
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.
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 usual way the business of the
partnership of which he is a member binds the partnership.
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 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)
The best way to define the concept of delectus personae is that the
contract of partnership creates the most personal 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 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:
Firstly, it is the embodiment of the principle of relativity or privity in
contracts: a partnership arrangement being primarily a contractual
relationship, then the privity that is created by its perfection is between
and among the partners thereto at the point of perfection; and that such
privity cannot be extended beyond the partners without the consent of all
the other parties to the contract of partnership.
To illustrate the point, although Article 1810 of the Civil Code recognizes
that interest in the partnership is a property right of 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 associate should be a manager.
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 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.
Secondly, that the relationship established in a contract of partnership is of
the most fiduciary character, or of the most confidential manner, that once
that thrust or confidence is lost, the contract is deemed breached or at
least at an end. This is 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 midstream By the express will of any
partner, who must act in good faith. Even the separate juridical
personality of the partnership enterprise cannot save the partnership from
being dissolved under the rule that the termination of the contract of
partnership terminates the separate juridical personality as well.
The features of mutual agency and delectus personae define the rights and
liabilities of the partners in a partnership 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.
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), Justice Vitug wrote
one of the best piece of doctrinal description the nature and
essence of the doctrine of delectus personae in every partnership, thus
The birth and life of a partnership at will is predicated on the mutual desire
and consent of the partners. The right to choose with whom a person
wishes to associate himself is the very foundation and essence of that
partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partners capability to
give it, and the 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 dissolution of the
partnership but that it can result in a liability for damages. (Ibid, at pp.
535-536)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held An
unjustified dissolution by a partner can subject him to 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)
6. Partners Subject to Unlimited Liability
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 therefore to enter into contracts, own and
possess properties, thus: 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 organizations.
The ordinary principle of relativity under the Law on Contracts that
Contracts take effect only between the parties, their assigns and heirs
(Article 1311, New Civil Code), should mean that that when a juridical
person enters into a contract and assumes an obligation by reason thereof,
its members or constituents, and its agents, do not ordinarily become
liable for the 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 partnership debts and obligations.
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 shall be void, except as among the
partners. Why does the law make partners personally liable for
partnership debts contracted as a separate juridical person, and would
such unlimited liability still apply without express provision of law?
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 VIII. PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS
essentially occupy the position of sole proprietors albeit associated with MEDIA
other sole proprietors; the basic rule is that sole proprietors are always
unlimitedly liable for business debts and obligations even as to their 1. Distinguished from Joint Venture
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
Bautista, although confirming that a joint venture is an association of two
liabilities arising from a business venture is because he controls the
or more persons to carry out a single business enterprise for profit . . .
business enterprise, and all profits go to him which he can devote into
[and] embodies several of the essential elements or characteristics of a
non-business matters, and thereby he must also absorb the losses from
partnership and bears such a close resemblance to it that the rights and
the business. Therefore if his business goes bankrupt, he cannot insist that
liabilities of joint adventures are largely governed by rules applied to
his business creditors are limited only to the business assets for the
partnership, (BAUTISTA, at pp. 41-42) nevertheless would distinguish a
satisfaction of their claims, and as all benefits and profits can be channeled
partnership and a joint venture in the following manner:
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
(a) a joint venture is ordinarily limited to a single transaction [and] not
would mean that the owner benefits fully on the profits, but lets his
intended to pursue a continuous business; whereas a
creditors absorb the losses from the business. It is a commercial law
partnership, though it may exist for a single transaction, usually
truism that it is the owner or equity holders of the business enterprise,
contemplates the undertaking of a general and continuous business of a
and not the creditors, who must stand ready to absorb the losses of the
particular kind which necessarily involves a series of transactions; (Ibid,
enterprise.
at p. 42.)

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 partnerships 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.
(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)
(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 mutual agents is a
conclusion that can only be drawn if we premise that a co-venture is not a
species of partnerships. Finally, that a partnership adopts no firm name
does not make it void as a contract or a partnership, so also with a joint
venture.
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:
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 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 BLACKS LAW DICTIONARY, Sixth ed., at p. 839.)
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 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.
2. Distinguished from Co-Ownership
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-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)
A joint account is governed under Article 239 of the Code of Commerce,
and still referred to as a corporate taxpayer under the National Internal
Revenue Code. But its use is a rarity in our jurisdiction because it does not
lend itself to commercial or business efficiency, as shown by the discussion
of its features in Bourns v. Carman, 7 Phil. 117 (1906), thus
. . . 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 way that there were other people beside
the one who ostensibly managed and conducted the business, is exactly
the accidental partnership of cuentas en participacion defined in Article
239 of the Code of Commerce.
Those who contract with the person under whose name the business of
such partnership of cuentas en participacion is conducted, shall have only
a right of action against such person and not against the other persons
interested, and the latter, on the other hand, shall have no right of action
against the third person who contracted with the manager unless such
manager formally transfers his right to them. (Art. 242 of the Code of
Commerce) . . . (at pp. 119-120).
4. Distinguished from Agency
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 partnership relationship among the partners makes them mutual
agents of one another, and thereby the control that a principal has over
his agent does not pertain between and among the partners. Likewise,
unlike in a pure agency relationship 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
partnership enterprise.
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 partner of his principal.
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 accounts kept for the business showed that
the amount was charged to him since the same was merely a method of
keeping an account of the business, so that the parties would know how
much money had been invested and what the condition thereof was at any
particular time. (Ibid, at p. 166)
5. Distinguished from the Business Trust
As compared to a partnership, a business trust is constituted by deed of
trust which is easier and less expensive to constitute for it is not bounded
by any legal requirements like the registration requirements for
partnerships where the real property or more than P3,000 worth of
property is contributed to the partnership.
The creation of a business trust does not give rise to a separate juridical
personality, and is mainly governed by contractual doctrines and the
common law principles on trust. There is no element of mutual agency or
co-ownership in a business trust relationship, and in fact the trust
relationship is centered upon the splitting in the properties contributed
(the corpus) of the legal 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.
6. Distinguished from the Corporation
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 insolvency of any of its stockholders
or members. In a partnership, the withdrawal, death, incapacity or
insolvency of any partner would automatically bring about the dissolution
of the partnership. (Articles . 1828 and 1830, Civil Code.)
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)
Generally, every partner is an agent of the partnership, (Articles 1803(1),
1818, and 1819, Civil Code), and by his sole act, he 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 a partnership setting, although a partner has the power to sell or
dispose of his capital interest or proprietary interest, the buyer or
transferee does not assume transferors position as partner, but merely
has a right to demand for accounting or distribution of the profits
pertaining thereto. (Articles 1804 and 1813, Civil Code) In a corporate
setting, every stockholder has the right to transfer his shares in the
corporation, and the buyer or transferee assumes the role of stockholder
of said shares when the transfer has been duly registered in the corporate
books Section 63, Corporation Code. In other words, the position of being
partner is inherently not transferable, whereas, shares are freely
transferable in the corporate setting.
a. Does a Defective Incorporation Process Result into a
Partnership?
The clear distinctions between the corporation and partnership can best be
illustrated by discussing the issue of whether a defective incorporation
process that does not result into a corporate entity, would at least result
into a partnership.
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 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, it would still be a
partnership, even if the parties had intended a corporation but did not
materialize because of certain registration deficiencies.
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 following grounds:
Firstly, both corporate and partnership relationships are fundamentally
contractual relationship created by the co-venturers 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 a part of their consent to the contractual relationship.
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 the process of incorporation and the
issuance of the certificate of incorporation by which the corporate entity
comes into being. There is therefore no doubt in the minds of
incorporators that they could effect a venture under a juridical being, and
thereby achieve both the advantages and suffer the burdens associated
with such corporate medium, by the mere meeting of minds.
Secondly, the important differences between the corporation and the
partnership cannot lead one to the conclusion that in the absence of the
first, the contracting parties would have gone along with the latter. Limited
liability, centralized management and easy transferability of the units of
ownership in a corporation are by themselves strong factors for parties
intention to be 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 agency among the
partners, and the delectus personae feature.
The essence of what constitutes the contractual relationship of partnership
under Article 1767 is the coming together or what 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 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.
Nonetheless, there indications of a contrary view to the above. Under
Section 21 of the Corporation Code, when parties act 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.
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 as this seems to be the moving spirit of the corporation
by estoppel doctrine.
This position of the author has been partially justified by the discussions of
in Pioneer Insurance & Surety Corp. v. Court of Appeals,175 SCRA 668
(1989), when it resolved the issue raised: What legal rules govern the
relationship among co-investors whose agreements was to do business
through the corporate vehicle but who failed to (Ibid, at p. 681).
Quoting from American jurisprudence, the Supreme Court in Pioneer
Insurance held that there has been the position that as among
themselves the rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter and the laws of
the state relating thereto and not by the rules governing partners (Quoting
from CORPUS JURIS SECUNDUM which cited Cannon v. Brush Electric Co.,
54 A. 121, 96 Md. 446, 94 Am. S.R. 584), nevertheless it has been held
that ordinarily persons who attempt, but fail, to form a corporation and
who carry on business under the corporate name occupy the position of
partners inter se (Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 615,
Ann. Cas. 1913 A. 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).
Notwithstanding the foregoing, the Court took the position that such
partnership relationship does not exist, for ordinarily persons cannot be
made to assume the relation of partners, as between themselves, when
their purpose is that no partnership shall exist . . . and it should be implied
only when necessary to do justice between the parties; thus, one who
takes no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with other
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 stockholders, who were also directors, will
not be implied in the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally contracted by the latter.
(Ibid, at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p. 464).
Nor will it make the investor to a would-be corporation liable for losses
sustained from its operations under a partnership inter se theory. (Ibid,
at p. 685). The key elements in resolving the issue seem to have been in
Pioneer Insurance those of intent and participation in business activities.
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:
(a) Parties who had intended to participate or actually participated in the
business affairs of the proposed corporation would be considered as
partners under ade facto partnership, and would be liable as such in an
action for settlement of partnership obligations;
- Whereas, -
(b) Parties who took no part except to subscribe to shares of stock in
a proposed corporation, do not become partners with other
subscribers who engaged in business under the name of the pretended
corporation, and are not liable for action for settlement of the alleged
partnership contribution.
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 is not afforded by law; and an investor in a
corporation, where under the principal ofcentralized management, there is
no intent to participate in the corporate operations, and for which limited
liability is afforded by law.
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 what was really the meeting of minds
among them was a partnership, for in essence they agreed to set up a
common fund (i.e., pursue a business venture), with clear indication to
divide the profits among themselves. This is exactly the situation covered
in the decision in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.,
317 SCRA 728 (1999), where the liabilities of the parties were adjudged
under the corporation by estoppel doctrine. (See more detailed discussions
in Chapter 5).
In Lim Tong Lim, the Court found that three co-venturers agreed to
engage in a fishing business, which they started by buying boats worth
P3.35 million, financed by a loan . . . In their Compromise Agreement,
they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among themselves
the excess or loss. . . These boats, the purchase and the repair of which
were financed with borrowed money, fell under the term common fund
under Article 1767. The contribution to such fund need not be cash or
fixed assets; it could be an intangible like credit or 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 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 was there any attempt to incorporate such
entity. Consequently, both the unlimited liability principle under
Partnership Law and 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.
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 a partner does not participate at all in the
affairs of the partnership. On the other hand, under the corporation by
estoppel doctrine now embodied in Section 21 of the Corporation Code, it
is only the active or managing officers who assume the 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 consequently, passive stockholders are not
deemed to be personally liable for debts incurred on behalf of the
ostensible corporation.
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 debts incurred in pursuing the
business venture. Instead of holding that the primary doctrine to apply
would be the rules of unlimited liability since there was duly constituted a
valid partnership, the Court instead humored the argument and went on to
also apply the corporation by estoppel doctrine with a jurisprudential twist
when it held
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 barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case,
all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of. (Ibid, at p. 743)
The result is that by mixing principles in Partnership Law and Corporate
Law in Lim Tong Lim, the corporation by estoppel 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 back and benefited from the venture.
6. Cooperative
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)
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 [2005]).
Unlike ordinary corporations, cooperatives are governed by principles of
democratic control where the members in primary cooperatives shall have
equal voting rights on a one-member-one-vote principle (Articles. 4(2),
R.A. 6938); where the Board of Directors manages the affairs of the
cooperative, but it is the general assembly of full membership that
exercises all the 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.
Unlike a partnership which should be organized for profit, and a non-stock
corporation which can be organized for any eleemosynary purpose and no
part of the net income is to be distributed to the officers and members
thereof, the primary objective of every cooperative is self-help: to provide
goods and services to its members and thus enable them to attain
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 affairs of the cooperative for eleemosynary
or charitable purposes. (Article 7, R.A. 6938)
The Law on Cooperatives declares it a policy of the State to foster the
creation and growth of cooperatives as a practical 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 [2000]).
IX. CLASSES OF PARTNERSHIP AND PARTNER
_______________
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 partnership
(1677)
Art. 1781. Articles of universal partnership, entered into without
specification of its nature, only constitute a universal partnership
of profits. (1676)
Movable or immovable property which each of the partners may
posses at the time of the celebration of the contract shall continue
to pertain exclusively to each, only the usufruct passing to the
partnership. (1675)
Art. 1780. A universal partnership of profits comprises all that the
partners may acquire by their industry or work during the
existence of the partnership.
A stipulation for the common enjoyment of any other profits may
also be made; but the property which the partners may acquire
subsequently by inheritance, legacy, or donation cannot be
included in such stipulation, except the fruits thereof (1674a)
Art. 1779. In a universal partnership of all present property, 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 acquire
therewith.
Art. 1778. A partnership of all present property is that in which the
partners contribute all the property which actually 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)
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.
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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.
1. As to Object: Universal Partnership versusParticular Partnership
When it comes to the object or purpose, or the nature of the business
enterprise to be pursued, under Article 1776, a partnership is either
auniversal partnership or a particular partnership.
A universal partnership is one where the contract of partnership
encompasses expressly or impliedly either all the present properties of the
partners or just covering all of the profits. (Article 1777, Civil Code)
In a universal partnership of all present property is one where the
partners contribute all the property which actually belongs to them to a
common fund, with the intention of dividing the same among themselves,
as well as all the profits they may acquire 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 acquire therewith. (Article 1779, Civil Code). The Civil Code further
clarifies that A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may acquire
subsequently by inheritance, legacy, or donation cannot be included in
such stipulations, except the fruits thereof. (Article 1779, Civil Code).
In a universal partnership of profits all that the partners may acquire by
their industry or work during the existence of the partnership, as well as
the usufruct of all [m]ovable or immovable property which each of the
partner may possess at the time of the celebration of the contract of
partnership, shall all pertain to the partnership. (Article 1780, Civil Code).
The default rule under Article 1781 of the Civil Code is that when the
Articles of universal partnership [are] entered into 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 to apply?
Under Article 1782, Persons who are prohibited from giving each other
any donation or advantage cannot enter into universal partnership.
On the other hand, Article 1783 of the Civil Code defines a particular
partnership [to be one that] has for its object determinate things, their use
or fruits, or a specific undertaking, or the exercise of a profession or
vocation There is no doubt then that every professional partnership and
joint venture arrangement would constitute particular partnerships.
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 spouses can validly enter into a particular partnership
between each other, when actually their property relations are governed
already by a legal property regime?
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 the limited partner, and a year later
the two get married.
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 his own
name, but later released it and had his own property mortgaged when it
was clear that the partner abroad did not change his mind about not
joining the venture. In any event, the San Juan estate project proved very
successful, and after the 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 for the loan obtained
by the local partner to finance his acquisition of the estate.
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 Juan estate project, thus
In the purely legal aspect of the case, the position of the appellant is, in
our opinion, untenable. . . . Of course, if an actual relation of partnership
had existed in the money used, the case might be different; and much
emphasis is laid in the appellants brief upon the relation of partnership
which, it is claimed, existed. But there was clearly no general relation of
partnership 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 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)
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 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.
Apart from the foregoing, the concept and medium of universal
partnership serves no reasonable commercial purpose, for 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.
The other important question that may be asked is By definition under
Article 1776 that there can be a valid partnership for the practice of a
profession, why would Article 1783, in defining a particular partnership,
include the exercise of a vocation which may not include one that seeks
to provide a livelihood for the so-called partners, such as religious or civic
vocation?
2. As to Duration:
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.
Both partnerships with fixed term or for a particular undertaking are
automatically dissolved upon the expiration of the stipulated term or the
achievement of the particular undertaking stipulated in the contract of
partnership; whereas, in a 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 undertaking is
continued after it has terminated without any express agreement,
partnership then become one at will and 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 will. The article also provides that A
continuation of the business by the partners or such of them as habitually
acted therein during the term, without any settlement or liquidation of the
partnership affairs, is prima facie evidence of a continuation of the
partnership.
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), the Court described
the characteristics of a partnership at will in the following manner, thus:
The birth and life of a partnership at will is predicated on the mutual desire
and consent of the partners. The right to choose with whom a person
wishes to associate himself is the very foundation and essence of that
partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partners capability to
give it, and the 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 dissolution of the
partnership but that it can result in a liability for damages. (Ibid, at pp.
535-536)
Nonetheless, by way of obiter, Ortega also described the ability of every
partner even in a partnership with fixed term or for a particular
undertaking, to be able to dissolve the partnership upon the application of
the principles of mutual agency and delectus personae, thus
In passing, neither would the presence of a period for its specific duration
or the statement of a particular purpose for its creation prevent the
dissolution of any partnership by an act or will of a partner. Among
partners, mutual agency arises and the 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)
Ortega also clarified that the designation of the purpose in the articles
does not prevent it from being a partnership at will, thus:
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 no need to provide for articles on
partnership at will as none would so exist. Apparently what the law
contemplates, is a specific undertaking or project which has a definite or
definable period of completion.
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court held that where
there has been duly registered articles of partnership, and subsequently
the original partners accept an industrial partner but do not register a new
partnership, and thereafter the industrial partner retires from the
business, and the original partners continue under the same set-up as the
original partnership, then although the second partnership was dissolved
with the withdrawal of the industrial partner, there resulted a reversion
back into the original partnership under the terms of the registered articles
of partnership. There is not constituted a new partnership at will.
3. As to Extent of Partners Liabilities
When it comes to the kinds of liabilities that the partners may be exposed
to for partnership debts and obligations, the Civil Code distinguishes
between a general partnership, where all the partners are unlimitedly
liable; and a limited partnership, where there is one or more general
partner who are unlimitedly liable, with one or more limited partners, who
are liable for partnership debts only to the extent of their stipulated
contributions under the articles of partnership.
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., 317 SCRA 728 (1999), Justice Vitug summarized the
nature of the liabilities of general partners, thus:
. . . The liability of general partners (in a general partnership as so
opposed to a limited partnership) is laid down in Article 1816 which posits
that all partners shall be liable pro rata beyond the partnership assets for
all the contracts which may have been entered into in its name, under its
signature, and by a person authorized to act for the partnership. This rule
is to be construed along with other provisions of the Civil Code which
postulate that the partners can be held soidarily liable with the partnership
specifically in these instances(1) where, by any wrongful act or omission
of any partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is
caused to any person, not 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 of a
third person and the money or property so received is misapplied by any
partner while it is in the custody of the partnershipconsistently with the
rules on the nature of civil liability in delicts and quasi-delicts. (Ibid, at pp.
746-747).
4. Other Kinds of Partners
Other than the general and limited partners that have been previously
discussed, there are two kinds of partners when it comes to the nature of
their contributions: capitalist partner and industrial partner.
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
[1973]).
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 case of an incoming partner,
his liability with respect to the partnership obligations which were incurred
prior to his admission into the partnership shall be satisfied only out of
partnership property, unless it is otherwise stipulated. (Articles 1826 and
1840, Civil Code).
Partnership Law also refers to the managing partner who has been given
the management of the partnership enterprise (Articles 1800 and 1801,
Civil Code); the liquidating partner, who takes charge of the liquidation
and winding-up of 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, 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 as so such relying creditors (Article 1815, Civil Code).
X. SPECIAL ISSUES OF WHO MAY QUALIFY TO BECOME PARTNERS
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).
From the placement of Article 1782 (coming after the two articles covering
the definition, nature and effects of universal partnerships, and
immediately before the article defining particular partnerships), it seems
pretty well implied that spouses, whatever the regime of property relations
prevails in their marriage, are disqualified from entering into any sort of
universal partnership; and consequently, spouses may validly become
partners to one another in a particular partnership, which would 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 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 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 petitioner,
Commissioner of Internal Revenue, is that the marriage of Suter and
Spirig and their subsequent acquisition of the interests of remaining
partner Carlson in the partnership dissolved the limited partnership, and if
they did not, the fiction of juridical personality of the partnership should be
disregarded for income tax purposes because the spouses have exclusive
ownership and control of the business. (27 SCRA 152, at p. 156).
The Court found no merit in the position of the Commissioner, and quoted
from the commentaries of Tolentino, thus:
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 prohibited from entering into universal
partnerships. (2 Echaverri, 196) It follows that the marriage of partners
necessarily brings about the dissolution of a pre-existing partnership (1
Guy de Montella 58). (Ibid, at p. 157, quoted from Tolentino,
Commentaries and Jurisprudence on Commercial Laws of the Philippines,
Vol. 1, 4th ed., at p. 58).
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] . . . was not a partnership that [the] spouses
were forbidden to enter under Article 1677 of the Civil Code of 1889 [now
Article 1782]. In essence, Suter holds that spouses are not disqualified
from becoming partners in a limited partnership, provided one of them (or
at least both of them) is a limited partner.
b. Spouses Are Not Qualified to Enter into Other Forms of
Partnership for Gain
It is the writers position that apart from a professional partnership,
spouses cannot enter into any form of partnership, be it universal or
particular, general or limited partnership, as a separate property
arrangement apart from the property regime prevailing in their marriage,
for the reasons discussed below.
Firstly, apart from a universal partnership, every form of partnership,
including a limited partnership, effectively makes partners donors to one
another of their contributions in the partnership. Although a partnership
would have a personality separate and distinct from each of the partners,
so that it can hold contributed property in its name, nonetheless, partners
are expressly granted by Partnership Law co-ownership interest in the
partnership property as to then have a direct co-ownership interest
therein. (Articles 1810 and 1811, Civil Code). Effectively, even in a limited
partnership, such as the Suter situation, the contribution of the limited
partner wife belonged to the partnership which would then be under the
control and management of the general partner husband. A partnership
arrangement between spouses would thereby be an indirect violation of
the provisions of Article 87 of the Family Code which provides that Every
donation or grant of gratuitous advantage, direct or indirect, between the
spouses during the marriage shall be void.
Although it can be argued that contributions to a partnership are not in the
nature of donations or gratuitous advantage, because a contract of absolute community of property during the marriage can be made except
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 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 .
Secondly, there is clear implication under the Family Code, that the
property regime that must govern spouses must be in accordance with the
provisions of said Code, and cannot be the subject of regular partnership
rules under the Partnership Law of the New Civil Code.
(1) Spouses Governed by the Absolute Community of Property
Regime
To begin with, the Family Code sets the absolute community of property
regime as the default rule for marriages, and consequently, it cannot exist
consistently with another set of rules governing partnerships for gains
under the Partnership Law of the Civil Code. Although Article 1782
provides that
Persons who are prohibited from giving each other any donation or
advantages cannot enter into a universal partnership, 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 govern, and which under Article 88 of the Family Code, shall
commence at the precise moment that the marriage is celebrated [and
that any] stipulation, express or implied, for the commencement of the
community regime at any other time shall be void.
The absolute community of property regime actually establishes a sort of
universal partnership between the spouses, in that it includes all
property owned by the spouses at the time of the celebration of the
marriage or acquired thereafter. (Article 91, Family Code). Can spouses
governed by the absolute community of property regime, vary the effects
between them on certain community property, by contributing them into a
particular partnership for gain? The answer ought to be in the negative,
and such partnership agreement would be void, since under Article 89 of
the Family Code No waiver of rights, interest, shares and effects of the
in case of judicial separation of property. In other words, Article 1782 in
Partnership Law is not the main rule on regulating property rights between
spouses, but merely suppletory to the primary rules set out by the Family
Code.
(2) Spouses Governed by the Conjugal Partnership of Gains
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 enter into a contract of particular
partnership for gain by contributing thereto either conjugal property, or
their separate properties? When it comes to conjugal property, the answer
ought to be in the negative, since the effect is that spouses would be
donating to one another, as discussed below, contrary to the provisions of
Article 87 of the Family Code. In addition, by entering into a contract of
particular partnership and thereby invoking the provisions of the
Partnership Law of the Civil Code on the conjugal property contributed,
would that not in effect be amending, or perhaps even contravening, the
provisions of the marriage settlements invoking the Family Code rules
covering conjugal partnership of gains? Article 108 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 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.
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.
(3) Spouses Governed by the Complete Separation of Property
Regime
May spouses governed by the complete separation of property regime
validly enter into a contract of particular partnership? The answer ought to
be in the negative, for the contribution of any of their separate properties
into the partnership for gain would amount to donation, and under Article
87 of the Family Code, which prohibits any form of donation or gratuitous
advantage between spouses during marriage, makes no distinction, much
less an exception, for spouses governed by the complete separation of
property regime.
c. Contract of Partnership May Offend Against the Provisions of the
Family Code
A contract of partnership between spouses entered into during marriage
would be void because it would contravene the rules under Articles 76 and
77 of the Family Code that prohibit any modification in the marriage
settlements after the celebration 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.
In essence, the Partnership Law under the New Civil Code, which should
be considered general provisions, cannot overcome the more specific
provisions on the Law on Marriages under the Family Code, which govern
specifically the property regime that should prevail between spouses. The
provisions of Partnership Law are geared towards providing for the a
contractual relationship that seeks to undertake a business venture;
whereas, the Family Code provisions governing the property regime
prevailing between spouses have considerations that transcend profit
motives, and seek to strengthen the institutions of marriage and the
family. Consequently, a contract of partnership between spouses should be
held void in that it seeks to overcome or undermine the mandatory
provisions of the Family Code.
There are several areas where there arises real conflict between doctrines
under Partnership Law and those under the Family Code.
(1) Issue on Control and Binding Effects of Acts of Partners
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[1] and 1818, Civil Code). On the other, the general rule
under the Family Code, when it comes to absolute community of 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 community or the conjugal property, done by one
without the consent of the other partner, would be void. (Guiang v. Court
of Appeals, 291 SCRA 372 [1998]; Cirelos v. Hernandez, 490 SCRA 625
[2006]; Bautista v. Silva, 502 SCRA 334 [2006]). Take the case of
allowing the spouses to enter into a particular partnership, and they both
contribute community or conjugal properties thereto, would the rules
under Partnership Law therefore allow one spouse, without the consent of
the other spouse, to dispose of such property pursuant to partnership
affairs?
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, business or industry and all fruits, natural,
industrial or civil, due or received during the marriage from his or her
separate property. Under a complete separation of property regime,
spouses separately manage and control their separate properties. Can
spouses who are governed by the regime of separation of property,
thereby partially overcome the governing provisions of the Family Code,
by being allowed to validly enter into a particular partnership agreement?
(2) Charges to Partnership Properties
We should look also into the areas of charges against the partnership
properties and the effects of dissolution. Under Partnership Law,
partnership properties would be chargeable against any claim or contract
entered into pursuant to partnership affairs. On the other hand, under
both the absolute community of property regime and the conjugal
partnership of gains, there are specific listings of what should first be
chargeable against the community property (Articles 94 and 95, Family
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).
When community, conjugal or separate property is allowed to be
contributed into the partnership for gain, the rules of first 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 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.
d. Professional Partnerships
May spouses by themselves, or together with other professionals, enter
validly into a contract of professional partnership, 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 not primarily bind actual community or conjugal properties, and
therefore thus not operate in violation of the property rules governing
marriage property regimes.
More importantly, professional partnership are not really pursued for
profit, but more for civic or vocational ends and therefore do not address
proprietary ends; but rather, the exercise of a profession, even in the
partnership medium, has more to do with the expression of ideals held by
an individual or towards achieving a fruitful life in the mundane world. This
fact is recognized even under the Family Code, where Article 73 provides
that Either spouse may exercise any legitimate profession, occupation,
business or activity without the consent of the other.
2. May Corporations Validly Qualify to Become Partners?
The prevailing rule in the United States is that
Unless it is expressly authorized by statute or charter, a corporation
cannot ordinarily enter into partnerships with other corporations or with
individuals, for, in entering into a partnership, the identity of the
corporation is lost or merged with that of another and the direction of the
affairs is placed in other hands than those provided by law of its creation. .
. A corporation can act only through its duly authorized officers and agents
and is not bound by the acts of anyone else, while in a partnership each
member binds the firm when acting within the scope of the partnership.
(FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520).
The doctrine is grounded on the theory that the stockholders of a
corporation are entitled, in the absence of any notice to the contrary in the
articles of incorporation, to assume that their directors will conduct the
corporate business without sharing that duty and responsibility with
others. (BAUTISTA, at p. 9).
a. Jurisprudential Rule
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 corporation may validly enter into a
joint venture agreement, where the nature of that venture is in line with
the business authorized by its charter. (Ibid, quoting from Wyoming-
Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletcher Cyc. of
Corp., Sec. 1082).
A joint venture is essentially a partnership arrangement, although of a
special type, since it pertains to a particular project or undertaking
(BAUTISTA, supra, at p. 50). In Torres v. Court of Appeals, 278 SCRA 793,
the Supreme Court held 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). AlthoughTuason does
not elaborate on why a corporation may become a co-venturer or partner
in a joint venture arrangement, it would seem that the policy behind the
prohibition on why a corporation cannot be made a partner do not apply in
a joint venture arrangement. Being for a particular project or undertaking,
when the Board of Directors of a corporation evaluate the risks and
responsibilities involved, they can more or less exercise their own business
judgment is determining the extent by which the corporation would be
involved in the project and the likely liabilities to be incurred. Unlike in an
ordinarily partnership arrangement which may expose the corporation to
any and various liabilities and risks which cannot be evaluated and
anticipated by the Board, the situation therefore in a joint venture
arrangement, allows the Board to fully bind the corporation to matters
essentially within the Boards 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 therein is not the
name or nomenclature given to the undertaking, but the very nature and
essence of the undertaking that limits it to a particular project which
allows the Board of Directors of the participating corporation to properly
evaluate all the consequences and likely liabilities to which the corporation
would be held liable for.
b. SEC Rules
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 not its duly appointed and authorized agents and
officers, which is inconsistent with the policy of the law that the
corporation shall manage its own affairs separately and exclusively. (SEC
Opinion, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 13
Am. Jr. Sec. 823 (1938); 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl.
1950, at p. 2520).
However, the SEC has on special occasions allowed exceptions to the
general rule when the following conditions are complied with:
(a) The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the corporation,
and the nature of the business venture to be undertaken by the
partnership is in line with the business authorized by the charter or articles
of incorporation of the corporation involved (SEC Opinion, 29 February
1980);
(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 partnership. (Ibid)
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 partners are general partners so that all corporate partners shall take
part in the management and thus be jointly and severally liable with the
other partners. (SEC Opinion, dated 23 February 1994, XXVII SEC
Quarterly Bulletin 18 (No. 3, Sept. 1994).
The rationale given by the SEC for the second condition was that if the
corporation is allowed to be a limited partner only, there is no assurance
that the corporate partner shall participate in management of the
partnership which may create a situation wherein the corporation may not
be bound by the acts of the partnership in the event that, as a limited
partner, the corporation chooses not to participate in the management.
(Ibid).
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:
1. Just as a corporate investor has the power to make passive investments
in other corporations by purchasing stock, a corporate investor should also
be allowed to make passive investments in partnerships as a limited
partner, who would then not be bound beyond the amount of its
investment by the acts of the other partners who are not its duly
appointed and 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 partner, will now be
protected from the unlimited liability of the other partners who are not
agents or officers of the corporation;
2. Section 42 of the Corporation Code which permits a corporation to
invest its funds in another corporation or business, does not require that
the investing corporation be involved in the management of the investee
corporation with a view to protect its investment therein. By entering into
a contract of limited partnership, a corporation would continue to manage
its own 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 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
3. The SEC policy that a corporation cannot enter into a limited
partnership, is an offshoot of the outdated view in the U.S., 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 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
corporations 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)
XI. PARTNERSHIP FORMAL & REGISTRATION REQUIREMENTS
_____
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)
_____
Since the contract of partnership is essentially consensual in character,
there is generally no form required, much less a need 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
immovable property or real rights are contributed thereto, in which case a
public instrument shall be necessary. The other 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
Securities and Exchange Commission.
Public documents and other forms of registration are features of
commercial law system, for indeed the public must deal on the basis of
systems, infrastructures and institutions that are manifest and made
known to them, and in line with the characteristic of uniformity of
commercial transactions. But as will be shown hereunder, the forms and
registration requirement 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 1772 of the Civil
Code provides that Failure to comply with the [formal] requirements [of
public instrument and SEC registration] shall not affect the liability of the
partnership and the members thereof to third persons.
1. When Capital Contributions Total P3,000.00 or More
_____
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)
_____
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 twin
requirements may have no legal or commercial significance based on the
following grounds:
(a) The law does not declare the partnership void when the twin
requirements are not met, nor is non-compliance meted any adverse legal
consequence; and
(b) The law expressly provides that Failure to comply with
the requirements . . . shall not affect the liability of the partnership and
the members thereof to third persons.
In a situation where a partnership is constituted not having complied with
the twin requirements of Article 1772 is not declared void as among the
partners, and the claims of its creditors are unaffected, why should any
partner worry about non-compliance with the twin requirements of public
document and SEC registration?
In Angeles v. Secretary of Justice, 465 SCRA 106 (2005), the Supreme
Court held that the mere failure to register the contract of partnership
with the SEC does not invalidate a contract that has the essential
requisites of a partnership. The purpose of registration of the contract of
partnership is to give notice to third parties. Failure to register the contract
of partnership does not affect the liability of the partnership and of the
partners to third persons. Neither does such failure to register affect the
partnerships juridical personality. A partnership may exist even if the
partners do not use the words partner or partnership. (Ibid, at p. 115).
According to the Code Commission, the business purpose of the
requirements under Articles 1771 and 1772 is to prevent evasion of tax
liabilities by big partnership and to safeguard the public by enabling it to
determine more accurately the 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).
Under current tax rules, which essentially taxes the partnership separately
as corporate taxpayer, formal registration requirements with the BIR on
matters as getting a taxpayer identification number (TIN), to be registered
as withholding agent, 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-registration
with the SEC and other government agencies would be the likely scheme
to be followed. And yet if there are no deleterious consequences provided
by the Law on Partnerships in not complying the formalities under Article
1771, why would they be complied with?
In any event, since Articles 1771 and 1772 do not expressly declare that
failure to comply with the public document 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 a public instrument. (Dauden-Hernaez v. De los Angeles, 27
SCRA 1276 [1969]; Fule v. Court of Appeals, 286 SCRA 698
[1998]; Dalion v. Court of Appeals, 182 SCRA 872 [1990]).
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.
In that case, Maglana and Rojas executed their Articles of Co-Partnership,
calling their company the Eastcoast Development Enterprises (EDE), with
the purpose to apply or secure timber and/or minor forests products
licenses and concessions over 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
divided share and share alike.
When the venture was not getting off the ground, they invited
Pahamatong as industrial partner, and they executed a Supplemental
Articles of Co-partnership adopting the original name of the company, but
this time providing for a period of 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 from
the arrangement and his equity was bought back by Maglana and Rojas,
who then proceeded to operate the firm under the same original name,
and with the verbal agreements that the profits would be distributed 80%-
20% in favor of Maglana.
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 (Maglanas) withdrawal from the partnership arrangement in EDE,
and for Rojas to account fully for the amounts withdrawn from the
partnership treasury, which when totaled up would necessitated for Rojas
to pay the promised contributions under the original articles of co-
partnership.
The case reached the Supreme Court on the issues of the nature of the
partnership that existed between Maglana and Rojas after the withdrawal
of the industrial partner; on whether it became a partnership at will as
provided under the original articles of partnership as to have justified
Maglanas termination thereof when the second articles of partnership
provided for a period 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 partnership, or on the
verbal agreement of 80%-20% in favor of Magalana.
The Court placed much weight on the original articles of incorporation
executed by Maglana and Rojas, which was duly registered with the SEC,
and held that when the second articles of co-partnership was executed
(but not registered), there was 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
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 called an Additional Agreement . .
. Except for the fact that they took in one industrial partner; gave him an
equal share in the profits and fixed the term of the second partnership to
thirty (30) years, everything else was the same.
Thus, they adopted the same name, EASTCOAST DEVELOPMENT
ENTERPRISES, they pursued the same purposes and 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 licensee. To all intents and purposes therefore,
the First Articles of Partnership were only amended, in the form of
Supplementary Articles of Co-Partnership . . . which was never registered
. . . . Otherwise stated, even during the existence of 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 obligations accrued in the name of the second
partnership except in favor of Pahamotang which was fully paid by the
duly 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 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
same and duly registered also with the SEC.
2. When Immovable Property Contributed
_____
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. 1773. 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. (1668a)
_____
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
Agad v. Mabato, 23 SCRA 1223 (1968), reminds us that it is not the
purpose clause of the articles of partnership or the 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 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.
The ruling would also support the position that just because the
partnership venture owns or operates immovables does not mean it comes
into the operation of Article 1773, as when such immovables were not
contributed by the partners but were purchased during the operations of
the partnership business.
c. Rationale Behind the Formal Requirements under Article 1773
It is when immovable property is contributed into the capital of the
partnership that the twin requirements of public document and SEC
registration come into play together with the requirement of an inventory
to be prepared, because under Article 1773 it is provided 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.
Does the declaration of nullity of the partnership under Article 1773 for
failure to comply with the formalities therein refer to the intra-partnership
relations of the partners among themselves and the partnership, or to the
extra-partnership relationship with the creditors, or to both? The decision
in Torres v. Court of Appeals, 320 SCRA 428 (1999), should be instructive
in answering these issues.
In Torres, a Joint Venture Agreement was executed among the co-
venturers covering the terms for the development of a 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. No articles of partnership was registered with the SEC, much
less was the requisite inventory mandated under Article 1773 of the Civil
Code executed and attached to the public document. In ruling against the
contention of the capitalist partners that the partnership was void, the
Court held
. . . First, Article 1773 was intended primarily to protect third persons.
Thus, the eminent Arturo M. Tolentino states that under the aforecited
provision which is a complement of Article 1771, the execution of a public
instrument would be useless if there is no inventory of the property
contributed, because without its designation and description in the
Registry of Property, and their contribution cannot prejudice third persons.
This will result in fraud to those who contract with the partnership in the
belief [in] the efficacy of the guaranty in which the immovables may
consist. Thus, the contract is declared void by law when such inventory is
made. The case at bar does not involve third parties who may be
prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis
for their claim that respondent should pay them 60 percent of the value of
the property. They cannot in one breath deny the contract and in another
recognize it, depending on what momentarily suits their purpose. Parties
cannot adopt inconsistent positions in regard to a contract and courts not
tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from
considering the Joint Venture Agreement an ordinary contract from which
the parties rights and obligations to each other may be inferred and
enforced. (Ibid, at p. 438).
It is clear from Torres that the formalities mandated under Article 1773
are meant for the protection of the partnership creditors, and that the
declaration that the partnership is void does not affect the intra-
partnership relationship between and among the partners and between the
partners and the partnership itself. Thus, Torres held that the alleged
nullity of the partnership will 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, there are
dire consequences that befall the partners and the partnership for failing
to comply with the formalities mandated under Article 1773 of the Civil
Code.
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 void, could be beneficial or
protective of the rights of partnership creditors, for the following reasons:
Firstly, the declaration of nullity of the partnership cannot be ascribed to
the extra-partnership relationship between the partners and partnership
on one hand, and the partnership creditors on the other hand, for to do
so would adversely affect the contractual rights and standing of the
creditors vis-a-vis the partners on their unlimited liability rule and the
partnership, which must be deemed to exist to protect the integrity of the
contracts entered in its name.
Secondly, declaring the partnership void means that all contributed and
earned assets of the partnership pertain to the partners directly as co-
owners, since no contract of partnership exist between them (it is void and
inexistent), and no partnership person has arisen with a juridical
personality separate and distinct from each of the partners. Not only does
this scenario affect the integrity of the contracts entered into directly with
the partnership, but it also means that the contributed and earned
partnership assets pertain directly to the persons of the partners and
priority as to them pertains to their separate creditors and not to the
partnership creditors.
Neither of the afore-described scenarios seem to promote the interests or
protect the rights of partnership creditors.
The Torres ruling has therefore removed any force or teeth on the dealing with the business enterprise. Yet, the Supreme Court did not at all
declaration of nullity of the partnership under Article 1773: it cannot hurt
but must protect the partnership creditors, and yet it has no bearing or
application to the partners and the partnership in their intra-partnership
relationship.
The authors position, as a result of resolving this issue in class
discussions, is that contrary to the Torres ruling, the formalities under
Article 1773 should be understood as to create adverse consequences for
the partners who refuse to comply with the requirements vis-a-vis their
relationship with partnership creditors. When the partners fail to comply
with the formalities under 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.
Consequently, when partners do not comply with the formalities under
Article 1773, the partnership is void in the sense that the partners were
deemed to be acting for themselves when they entered into partnership
contracts and transactions; and that, similar to the principle in Agency Law
that makes the agent primarily liable for contracts entered into in behalf of
an inexistent principal, then partners can be held directly liable by
partnership creditors for all contracts entered into, and all obligations
assumed, in the name of a partnership which is declared void.
The landscape has become more complicated with the recent ruling
inLitonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005), where presented in
evidence was a typewritten note (referred to as Annex A-1)whereby the
elder brother purportedly 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 business and
other real estate properties. The typewritten note was not signed by the
elder brother, who denied its authenticity during trial.
The main issue resolved in Litonjua was whether a contract of partnership
or joint venture arrangement existed between the siblings, a purely intra-
partnership issue that essentially did not involve the rights of third parties
allude to its decisions in Torres or in Angeles, where it held that the
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 between the siblings, or that
the same is void, the Court, after quoting Article 1771 to 1773, held
in Litonjua that
Annex A-1, on its face, contains typewritten entries, personal in
tone, but is unsigned and undated. As an unsigned document, there can
be no quibbling that Annex A-1 does not meet the public instrumentation
requirements exacted under 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 Exchange
Commission (SEC), as called for under the Article 1172 of the Code. And
inasmuch as the inventory requirement under the succeeding Article 1773
goes into the matter of validity when immovable property is contributed to
the partnership, the next logical point of inquiry turns on the nature of
petitioners contribution, if any, to the supposed partnership. (at p. 585;
italics supplied)
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 meeting of the minds involves the
formation of a partnership (i.e., the typewritten note doubtless referring
to a partnership involving more than P3,000.00 in money or property)
then the requirement that it contract be cast in a public instrument and
registered with the SEC were deemed to be essential to sustain a claim
that a contract of partnership exist between the parties, otherwise the
purported contract is deemed to beunenforceable.
The doctrine that failure to comply with the public instrument and SEC-
registration requirements under Article 1772 of the Civil Code renders the
contract of partnership as unenforceable can be deduced from the
following portion of the Litonjua decision which relied on provision of the
Statute of Frauds, thus:
It is at once apparent that what respondent Eduardo imposed upon himself
under the above passage, if he indeed wrote 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 non-
compliance therewith. By force of the statute of frauds, an agreement that
by its terms is not to be performed within a year from the making thereof
shall be unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribed by the party charged.
Corollarily, no action can be proved unless the requirement exacted by the
statute of frauds is complied with. (at p. 590)
Unfortunately, the Court failed to consider the fact that even under the
Statute of Frauds, the unenforceability of covered 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 enterprise, etc.), would make mitigate against the deleterious
effect of non-compliance with the public instrument and SEC-registration
requirement under Article 1771 and 1772 of the Civil Code.
In any event, what rendered the purported contract of partnership void
in Litonjua was that since the note indicated that there would be
contributed real property to the partnership, then there was failure to
comply with the requirements laid down in Article 1773 of the Civil Code,
for the rendering of the proper inventory and attaching it to the public
instrument registered with the SEC, thus:
Lest it be overlooked, the contract-validating inventory requirement under
Article 1773 of the Civil Code applies as long [as] 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 consideration is that real property was contributed, in which
case an inventory of the contributed property duly signed by the parties
should be attached to the public instrument, else there is legally no
partnership to speak of. (at p. 586).
Litonjua therefore gives the dire consequences faced by partners who do
not comply with the formal requirements mandated under Articles 1771 to
1773 of the Civil Code. It would have been better ifLitonjua had expressly
set aside its rulings in Torres and Angeles, so that its doctrine would have
been the clear guide to legal practitioners. For the author, it must be
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 comply with the requirements under
Article 1773 of the Civil Code, applicable only to situations where the
claimant that a 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 to
contribute money, property or industry to a common fund with the
intention of dividing the profits between or among themselves. (at pp.
590-591; italics supplied).
Perhaps the afore-quoted passage is the best way to appreciate the
decision in Litonjua, that in the end no contract of partnership arose
between the Litonjua sibling even on the basis of the arrangement
purported, since it lacked the essential element of contributing to a
common fund. Thus, the rulings on the failure to comply with the
provisions of Article 1771 to 1773 of the Civil Code ought to be considered
as obiter dictum.
c. Historical Background of Article 1773
Ruling under the provisions of the Code of Commerce and the old Civil
Code which prescribed formalities for the formation of a partnership where
real property is contributed, the Court held in Borja v. Addison, 44 Phil.
895 (1922), that knowledge of the 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)
Consequently, third parties without knowledge of the existence of the
partnership who deal with the property still registered in the name of one
of the partners have a right to expect full effectivity of such transaction on
the property, in spite of the protestation of the other partners and perhaps
even the partnership creditors.
d. Registration Requirements under Article 1773 Should Be
Considered in Connection with the Priority Rules Set for Claims of
Partnership Creditors and the Separate Debtors of the Partners
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.
The proper registration of real property contributed into the partnership
would have much to do with the priority rules set under the Law on
Partnerships between claims of partnership creditors and those of the
separate creditors of the each of the 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, saving the rights of lien or
secured creditors.
Again, under Article 1839(9), Where a partner has become insolvent or
his estate is insolvent, the claims against his separate property shall rank
in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution. (n)
Since Torres specifically held that the rules of inventory, public instrument
and SEC registration under Articles 1772 and 1773 of the Civil Code are
meant to protect partnership creditors, and as to them the partnership
contract is void, if it is necessary to protect their interests, what happens
then to real property contributions that have not complied with the
statutory formalities, would first priority towards them pertain to the
separate creditors of the contributing partner?
3. The Partnership Name
Article 1815 of the Civil Code provides that
________
Art. 1815. Every partnership shall operate under a firm name,
which may or may not include the name of one or more of the
partners.
Those who, not being members of the partnership, include their
names in the firm name, shall be subject to the liability of a
partner. (n)
________
The language of Article 1815 of the Civil Code shows unmistakably that its
not an obligation of the partners to include their 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.
Article 1815 is the first article under the section which reads Obligations
of the Partners with Regard to Third Persons, which indicates clearly the
essence of having a firm name: that since a partnership is given a
separate juridical personality which 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.
a. Historical Basis of Article 1815
Although the codal provision indicates that it is a new [(n)] provision in
the Civil Code, according to Tolentino, Article 1815 was taken from Article
126 of the Code of Commerce (TOLENTINO, at p. 353). Yet the principle
on partnership name under Article 126 was quite different, for it actually
required that the partnership name should be registered containing all the
names of the partners. (Article 126, Code of Commerce).
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 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
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 executed by the parties, and the only question was whether or
not they complied with the agreement. It essence Jo Chung 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).
The earlier decision in Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498
(1906), held that failure to register a commercial partnership would mean
that there is no partnership constituted and that the rule applicable to
protect parties who have dealt in good faith with the enterprise was the
application of Article 120 of the Code of Commerce, that the right of action
would be against the person in charge of the management of the
association.
Jo Chung Cang refused to apply the ruling in Hung-Man-Yoc because there
was actual registration of the partnership, and consequently decreed that
a general partnership had been constituted as to make the partners
thereof solidarily liable for partnership debt in the event the partnership
itself becomes insolvent. Although failure to comply with the mandatory
registration provisions of the Code of Commerce did not affect the cause of
action of creditors to enforce their contracts 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 requirements
under the law? No categorical ruling was made on this issue in Jo Chung
Cang although it did quote a ruling from the Supreme Court of Michigan on
the common law rule:
As this acts involves purely business transactions, and affects only money
interests, we think it should be construed as 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 [1912]; 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 Compaia
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 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).
xxx.
Where a shareholder of an association is called upon to respond to a
liability as such, and where a party has contracted with a corporation and
is sued upon the contract, neither is permitted to deny the existence or
the legal validity of such corporation. To hold otherwise would be contrary
to the plainest principles of reason and good faith. Parties must take the
consequences of the position they assume. (Ibid, at p. 13).
The question in the Jo Chung Cang, PNB and Compania Agricola rulings
was that if the provisions of Article 126 of the Code of Commerce were
mandatory in the sense that they were addressed to the partners and
partnership more for the protection of partnership creditors, and non-
compliance therewith could not prejudice creditors, then what would be
their usefulness if no adverse consequence visits the partners and the
partnership whenever they are not complied with?
There is no doubt that there were serious difficulties with enforcing the
mandatory provisions on registration and firm name for commercial
partnerships under the Code of Commerce. The present rule under Article
1815 of the Civil Code which essentially allows the partners and the
partnership to adopt any firm name they fancy is a more market-friendly
rule since:
(a) one who opts to have his name included in the firm name runs to risk
of being made liable for partnership debts;
(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
(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.
a. Intra-Partnership Relationship
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. 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
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,
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 partnership.
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 Securities and Exchange Commission. Not only does
Article 1772 declare the clearly non-lethal consequence of failure to
comply with the public instrument and SEC registration requirements:
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, but the Court 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 through a public
instrument and registration with the SEC.
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.
b. Dealings with Third Parties
There are basically two areas that are important to consider when it comes
to partnership dealings with third parties:
(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:
(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.
(b) Under Article 1818, 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 way the business of the partnership . . . binds the
partnership, unless the partner so acting has in fact no authority to act for
the partnership in the particular manner, and the person with whom he is
dealing with has knowledge of the fact that he has no such authority;
(c) Under Article 1834, partnership creditors who extend credit to the
partnership even after there has been dissolution can can claim payment
thereof against all the partners, when such creditors have no
knowledge or notice of the dissolution.
In fact, even when a partnership has been duly registered with the SEC,
the doctrine of the Supreme Court seems clear that third parties who deal
with the partnership are not bound by the terms of the registered articles
of partnership, and unless they 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.
Thus, Litton v. Hill & Ceron, 67 Phil. 509 (1939), laid down the rule that
Third persons . . . are 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 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).
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 an obligation that is 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 procedure does not require that
each time a third person contracts with one of the managing partners, he
should inquire as to the latters 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 husbands 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 firm
form part of the its stock-in-trade, and the sale thereof is in pursuance of
partnership purposes, hence within the ordinary powers of the partner.
(Ibid, at p. 969).
c. What Is the Value of the Statutory Requirements on Form and
Registration?
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 generally impose legal consequences on
the partners for non-compliance, then what is the usefulness of such
statutory provisions?
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:
If the law requires a document or other special form, as in the acts and
contracts enumerated in the following articles, the contracting parties may
compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action upon
the contract.
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.
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.
XII. RIGHTS & POWERS OF PARTNERS
Article 1810 of the Civil Code provides that the property rights of every
partner in the partnership set-up to be as follows:
(a) Right to Participate in the Management of the Partnership;
(b) Right in Specific Partnership Property; and
(c) Equity Interest in the Partnership.
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 business enterprise), and as an agent of
the partnership juridical person and of the other partners. The multi-level
positions assumed by partners under a partnership arrangement are
potentially wrought with conflict-of-interests situations. Consequently, two
important doctrinal approaches animate the Law on Partnerships as a
consequence of such multi-level positions of partners.
First is to characterize the contract of partnership and the contractual
relationships between and among the partners as of the 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 without their unanimous consent; and that every
partner is afforded the ability to withdraw from the contractual relationship
whenever he becomes uncomfortable with any or all of the other partners.
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 proprietary in nature. In other
words, the bundle of property rights of a partner is not indivisible, and in
fact the philosophy under Philippine Partnership Law is to consider them
divisible, and capable of being treated and transacted separately.
The foregoing doctrinal approaches shall animate the discussions
hereunder on the rights and obligations of partners in the partnership
arrangement.
1. Partners Right to Manage the Partnership
a. General Rule on Partnership Management
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 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 agents and whatever any one of them may do alone shall bind
the partnership. Article 1818 goes on to provide that 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 bind the partnership unless
authorized by the other partners.
Embodied clearly with the language of Article 1818 is the doctrine of
apparent authority which allows a third party dealing 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 presumption of apparent authority for every partner to act for
and thereby bind the partnership in all that is apparently for the 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 bind it in carrying on the partnership
transaction.
We should therefore consider the old ruling in Council of Red Men v.
Veterans Army, 7 Phil. 685 (1907), where the Court interpreted the
original provision of Article 1803 of the Civil Code (then Article 1695 of the
old Civil Code), that allowed one 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:
One partner, therefore, is empowered to contract in the name of the
partnership only when the articles of partnership make no provision for the
management of the partnership business. In the case at bar we think that
the articles of the Veteran Army of 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 fairly deduced from the contents of those articles. They
declare what the duties of the several officers are. In these various
provisions there is nothing said about the power of making contracts, and
that faculty is not expressly given to any officer. We think that it was,
therefore, reserved to the department as a whole; that is, that in any case
not covered expressly by the rules 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 the
power to make any contract relating to the society which that particular
officer saw fit to make, or that a contract when so made without
consultation with, or knowledge of the other members of the department
should bind it. We therefore, hold that no contract, such as the one in
question, is binding on the Veteran Army of the Philippines unless it was
authorized at a meeting of the department. No evidence was offered to
show that the department had never taken any such action. In fact, the
proof shows that the transaction in question was entirely between Apache
Tribe, No. 1, and the Lawton Post, and there is 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).
We are of the strong position that the doctrine in Council of Red
Men,rendered at a time when our legal jurisdiction was still deciding the
proper formulation of the doctrines in Philippine Partnership Law, no longer
applies.
Firstly, the prevailing doctrine now embodied in Articles 1803[1] and 1818
of the Civil Code is that every partner has the apparent authority to act for
and in behalf of the partnership in carrying on the ordinary or usual
business of the partnership.
Secondly, the ruling in Council of Red Men was based on the principal that
the special rules of management of partnership affairs provided for in the
articles of partnership is binding on the public, or at least on every person
dealing with the partnership. This is not the rule under Philippine
Partnership Law which characterizes the contract of partnership and the
arising of the partnership juridical person, as being merely consensual with
no specific formalities being required in general. Thus, even when the
articles of partnership has been formally executed and registered with the
SEC, the same is not 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, but does not
prejudice the rights of a third party who deals in good faith with the
partners without actual knowledge of the content of the articles of
partnership.
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 partnership business without knowledge of
such special arrangement, and who are not mandated to seek formal
authority and that in fact are deemed to have a right to expect, unless
otherwise indicated, that their dealings with the managing partner should
bind the partnership.
This situation is best exemplified in the decision in Litton v. Hill & Ceron,
67 Phil. 509 (1935), where an obligation in a sum of money was sought to
be recovered from the partnership Hill & Ceron in whose name it was
entered into by one of the managing partners, when in fact the articles of
partnership provided expressly that: Sixth. That the management of the
business affairs of the copartnership shall be entrusted to both copartners
who shall jointly administer the business affairs, transactions and activities
of the copartnership. In ruling that the act of just one of the managing
partners should properly make the partnership liable for the payment of
the debt, the Court held
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 that for one of the partners to bind
the partnership the consent of the other is necessary. Third persons, like
the plaintiff, are 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 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).
Litton held that there is a general presumption that each individual partner
is an authorized agent for the firm and that he has authority to bind the
firm in carrying on the partnership transaction, and that the presumption
is sufficient to permit third persons to hold the firm liable on transactions
entered into by one of the members of the firm acting apparently in its
behalf and within the scope of his authority. This was especially true under
the circumstances in Litton where the transaction which gave rise to the
partnership obligation was in the ordinary course of the partnerships
business.
Litton also supports the legal position that even with the registrations of
the article of partnership with the SEC, the same does not constitute a
public document that binds those who deal with the partnership enterprise.
In other words, even a registered 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
partnerships.
In Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941), the Court held that in
a transaction covering the purchase and delivery of merchandise within
the ordinary course of the partnership business effected by the industrial
partner without the consent of the 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
partnership, as against another provision of the articles by which the
industrial partner is authorized To make, sign, seal, 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.
In addition, Aznar applied the doctrine of apparent authority and the
estoppel doctrine when it held that The evidence also 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.
*).
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 procedure does not require that each time a third person
contracts with one of the managing partners, he should inquire as to the
latters authority to do so, or that he should first ascertain whether or not
the other partners had given their consent thereto. 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 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)
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 the following statutory
provisions:
(a) Article 1820, which provides that an admission or representation
made by any partner concerning partnership affairs within the scope of
his authority is evidence against the partnership;
(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 partnership (except in case of a fraud on
the partnership);
(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
(d) 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 notapparently 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:
(a) Assigning of partnership property in trust for creditors or on
the assignees promise to pay the debts of the partnership;
(b) Disposition of the goodwill of the business;
(c) Confession of a judgment;
(d) Entering into a compromise concerning a partnership claim or liability;
(e) Submitting a partnership claim or liability to arbitration; or
(f) Renouncing a partnership claim.
The foregoing cases are considered to be not merely acts of
administration, but rather acts of ownership which can only be effected by
the concurrence of all the partners who are collectively deemed to be the
owners of the partnership and its business enterprise.
One would consider therefore that when the transaction involves the sale,
transfer or encumbrance of the entire partnership business enterprise, it
would constitute an act of strict ownership or an act of alteration, which
cannot be considered as within the ordinary course of business that would
come within the apparent authority of one partner. And yet in the early
case of Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court held that the
sale of the partnerships business enterprise can be considered to be
within the power of the managing partner, thus:
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 without the real property it
originally had will not work its dissolution, since the firm was not organized
to exploit these precise lots but to engage in buying and selling real
estate, and in general real estate agency and brokerage business.
Incidentally, it is to be noted that the payment of the solidary obligation of
both the partnership and the late Tan Sin An, leaves open the question of
accounting and contribution between the co-debtors, that should be
ventilated separately. (Ibid, at p. 960).
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 (Vivantes 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 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. . .
(Ibid, at pp. 671-672).
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 enterprise or has the effect of preventing
the pursuit of the business enteprise.
c. Specific Modification on the Power of Management
It is a policy in Partnership Law for the partners to be allowed to expressly
contract around the default principle of mutual agency (i.e.,that the
partners are all managers of the partnership enterprise). Thus, under
Article 1800 of the Civil Code it is possible to appoint only one managing
partner in the articles of partnership, in which case the managing partner
may execute all acts of administration despite the opposition of his
partners, and his powers are irrevocable without just or lawful cause. 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.
Thus, the Supreme Court has held that: a manager of a partnership can
execute acts of administration without need of consent of the partners,
including the power to purchase goods in the ordinary course of business
(Smith, Bell & Co. v. Aznar, 40 O.G. 1882 [1941]); to hire employees
(Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 [1908]), as
well to dismiss employees (Martinez v. Cordoba & Conde, 5 Phil. 545
[1906]); to secure a loan to finish the construction of the boat of the
partnership (Agustia v. Mocencio, 9 Phil. 135 [1907]); to employ a
bookkeeper by his sole authority (Fortis v. Gutierrez Hermanos, 6 Phil. 100
[1906]); and to commence a suit in the name of the partnership against
partnership debtors (Tai Tong 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 [1929]) 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 others, the decision of the majority shall prevail;
and in case of a tie, the matter shall be decided by the partner owning the
controlling interest.
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 one of them cannot be alleged, unless there is
imminent danger of grave or irreparable injury to the partnership.
It should be emphasized though that the provisions of Articles 1800 to
1802 should be considered to be intramural rules that govern the
relationship between and among the partners, and the breach of which can
bring about a cause of action against 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.
d. Power of Alteration
The power of management of the partnership business, should be
distinguished from the power of ownership and control 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 to the partnership. But if the refusal of consent by the
other partners is manifestly prejudicial to the interest of the partnership,
the courts intervention may be sought.
e. Power Over Real Properties of the Partnership
Although Article 1774 of the Civil Code provides that immovable property
or an interest therein may be acquired in the partnership name, the
partnership title is not rendered void if the registration thereof is not in the
name of the partnership but in 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).
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:
(1) Where Title Is in the Partnership Name:
(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;
(ii) A partner who conveys the property but in his own name passes the
equitable interest of the partnership only when the partner so
conveying acted with authority; otherwise, no title at all to the immovable
property passes to the transferee.
The immediately preceding rule is consistent with the provision of Article
1774 which states that title to immovable property acquired in the
partnership name can be conveyed only in the partnership name.
(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):
(i) A conveyance executed by a partner in the name of the partnership or
in his own name only passes equitable interest of the partnership,
only when the partner conveying acted with authority;
(ii) A conveyance executed by a partner in the name of the partnership
or in his own name does not even pass anything (not even equitable
interest of the partnership) when the partner so conveying acted
without authority;
(3) Where Title Is in the Name of One or More But Not All the
Partners:
(i) When the records disclose partnership interests, the partners in
whose name the title stands may convey title to such property; and
the partnership may recover only when the partners so conveying acted
without authority, but not against a purchaser in good faith and for value;
(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 authority;
(4) Where Title Is in the Name of All of the Partners:
(i) Conveyance executed by all the partners (in whose ever name so
conveyed) passes all their rights in such property. In this case the will
of all the partners is the will of the partnership.
2. Partners Right to Specific Partnership Property
Although Article 1811 of the Civil Code defines or explains a partners
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:
(a) A partner . . . has an equal right with his partners to possess
specific partnership property for partnership purposes;
(b) A partners right in specific partnership property is not assignable
except in connection with the assignment of rights of all the partners
in the same property;
(c) A partners right in specific partnership property is not subject to
attachment or execution, except on a claim against the partnership; and
(d) A partners right in specific partnership property is not subject to
legal support.
Unlike the proprietary right of an ordinary co-owner to use the thing
owned in common, provided he does so in accordance 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 property is merely an extension of his right to
participate in the management of the partnership affairs, and bears no
proprietary title to himself personally apart from pursuing the partnership
affairs.
It may also be observed that the recognition by the Law on Partnerships of
the partners purported co-ownership interests in specific partnership
property would be in defiance of the grant of a separate juridical
personality to every partnership organized 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
prerogatives, equivalent to the recognition of the full-ownership by the
partners, as collective sole-proprietors so-to-speak, of the partnership
enterprise and its assets.
A better way of looking at the purported co-ownership rights of partners to
specific partnership property is to consider that the 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 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
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 to the amount of redemption. (at
p. 1271).
This is also the reason why paragraph numbered (2) of Article 1811 of the
Civil Code provides expressly that A partners right 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 partners right in partnership property is non-assignable
are as follows:
(a) it would effectively allow a third party (the assignee) to participate in
the affairs of the partnership, and would basically have a stranger become
a partner without the consent of all the other partners; and
(b) it would interfere with the rights of the other partners and the
partnership creditors to have all partnership properties applied directly to
the payment of partnership debts; and
(c) it would indirectly go against the principle that partners right in
specific partnership property cannot be attached or levied upon,
(BAUTISTA, at p. 162), as provided in paragraph (3) of Article 1811. In
line with the same rationale, paragraph numbered (4) of Article 1811 also
provides that a partners right in specific partnership property is also not
subject to support.
Bautista reminded us in his treatise that the whole of Article 1811 of the
Civil Code was taken from the Uniform Partnership Act which, based on
common law, adheres to the aggregate theory of partnership under
which, because it is not considered an entity or a legal person, a
partnership cannot hold title and hence partnership property is deemed
held or owned in common by the partners for the benefit of the
partnership, (BAUTISTA, at pp. 147-148) as opposed to the civil law
doctrine that affords the partnership a separate juridical personality,
3. Equity Rights of Partners
Article 1812 of the Civil Code defines a partners interest in the
partnership essentially as his equity interest, thus: his share of the
profits and surplus. A partners 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.
Profits represent the excess of receipts over expenses or the excess of
the value of returns over the value of advances (Citizens National Bank v.
Corl. 33 S.E.2d 613, 616 (1945); Fairchild v. Gray, 242 N.Y.S. 192
[1930]; Crawford v. Surety Insurance Co., 139 P. 481, 484 [1970]);
whereas; surplus has been defined as the excess of assets over
liabilities. (Tupper v. Kroc, 492 P. 2d 1275 [1972]; Anderson v. U.S., 131
F.Supp. 501 (1955); Balaban v. Bank of Nevada, 477 P.2d 860 [1970]).
Bautista wrote that The interest of the partner in the partnership has thus
been otherwise described as the net balance remaining to him; after all
partnership debts or claims against it have been paid and the equities and
accounts between such partner and his copartners have been adjusted.
(BAUTISTA, at p. 176, citing Claude v. Claude, 228 P.2d 776
[1951]; Preton v. State Industrial Accident Commission, 149 P.2d 275
[1944]; Swirsky v. Horwich, 47 N.E.2d 452 [1943]; Cunningham v.
Cunningham, 135 N.E. 21 [1922]).
a. Assignability of a Partners Equity Right
A partners equity interest in the partnership truly represents a proprietary
interest for his exclusive benefit as an owner of such intangible right.
Therefore, like any other property right, a partners equity is generally
transferable or assignable. Nonetheless under Article 1813 of the Civil
Code, the transfer or assignment of a partners equity does not make the
transferee or assignee step into the shoes of the partner in his personal
capacity as such in relation to the other partners, thus:
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 transactions, or to inspect the partnership books.
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 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 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.
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 transaction will not transfer his other rights as a
partner. The article also recognizes that just because a partner cashes in
on 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 partnership
contract nor does it trigger the dissolution of the partnership, which means
that with respect to his other right to management the partnership affairs
and act as agent of the other partners, these remain in tact.
So separate and divisible is a partners equity rights from his other rights
as a partner that even during the term of the partnership Article 1814 of
the Civil Code allow the personal judgment creditors of a partner to have
his equity right in a partnership to charge the interest of the debtor
partner with payment of the unsatisfied amount of such judgment debt
with 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 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.
Bautista wrote that Article 1814 was taken from the Uniform Partnership
Act, and patterned after the English Partnership Act of 1890, and it was
adopted formally to a decided purpose of providing a means by which the
separate creditors of a partner may seize upon his property rights without
having to disrupt the operations of the partnership enterprise or effectively
force the dissolution of the partnership. (BAUTISTA, at pp. 184-185).
Thus, Article 1814, which allows the attachment or execution of a partners
equity rights in a partnership is the remedy given to a partners separate
creditors in lieu of the express prohibition of seeking an attachment or levy
upon the partnership assets and properties themselves to cover the
partners right to specific partnership property.
Under Article 1827, the separate creditors of each partner may ask for the
attachment and public sale of the share of the partner in the partnership
assets, which must be upon dissolution and only after the partnership
creditors have been fully satisfied. To construe the provision of Article
1827 literally would mean that it would run counter to the provision under
Article 1811(3) which provides that A partners right in specific
partnership property is not subject to attachment or execution.
Under American jurisprudence, since an equity right in partnership is a
present, existing, and not a mere contingent, right, it 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 [1946]), or they may enter into an agreement
prohibiting such assignment altogether (Chaiken v. Employment Security
Commission, 274 A.2d 707 [1971]). 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 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 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
. . . 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 partners] 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
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 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.
Under Article 1767 of the Civil Code, the essence of a partnership
arrangement is the existence of a common fund or a 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 partners from any share in the profits or losses is void, but the
partnership arrangement remains subsisting.
Article 1797 of the Civil Code provides for the rules governing the
distribution of profits and losses in the partnership business, thus:
(a) Profits and losses shall be distributed in conformity with the
agreement between the partners;
(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 proportion;
(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.
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.
4. Other Rights of a Partner
a. Right to Inspect
Article 1805 of the Civil Code expressly provides that every partner shall at
any reasonable hour have access to and may inspect and copy the
partnership books which shall be kept at the principal place of business of
the partnership.
In Corporate Law, the right of a stockholder or member to inspect and
copy corporate records is considered to be a common law right, and a
right of such importance that its enforcement can be by an
actionmandamus. The right to inspect is critical to safeguarding all other
rights of stockholders or members in the corporation.
The same principles are applicable to a partners right to inspect and to
demand true and full information on partnership matters.
b. Right to Demand True and Full Information
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.
Consequently, in consonance with the fiduciary relationship existing
between and among partners, every partner has the obligations to render
true and full information to other partners of all things affecting the
partnership.
c. Right to Demand Accounting
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.
In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746 (1989), the
Court held that a partners 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 accounting is done.
On the other hand, iIn Hanlon v. Haussermann and Beam, 40 Phil. 796
(1920), the Court ruled that former partners in a joint 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 the enterprise, and that the other two partners pursued
the venture on their own account and only after the partnership
arrangement had terminated.
In Lim Tanhu v. Ramolete, 66 SCRA 425 (1975), the Court held that a
partners right to accounting for properties of the 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:
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).
d. Right to Dissolve the Partnership
The near-absolute legal power of any partnership in a partnership to
demand the dissolution of the partnership is in consonance with the
doctrine of delectus personae that establishes a fiduciary relationship
between and among the partners.
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 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.
5. Obligations of the Partnership
a. Obligations to the Partners
Partnership Law lays down specific provisions to govern the obligation of
the partnership to the partners arising from the management of
partnership affairs, thus:
(1) Amounts disbursed for and in Behalf of the Partnership
Article 1796 of the Civil Code provides that the partnership shall be
responsible to every partner for the amounts he may have disbursed on
behalf of the partnership and for the corresponding interest, from the time
the expenses are made;
(2) Contracts Entered into for and In Behalf of the Partnership
Article 1797 of the Civil Code provides that the partnership shall also
answer to each partner for the obligations such partner may have
contracted in good faith in the interest of the partnership business, and for
the risks and consequence of its management.
(3) Keeping of the Books
Under Article 1805 of the Civil Code, the partnership books shall be kept,
subject to any agreement between the partners, at the principal place of
business of the partnerships, and every partner shall at any reasonable
hour have access to and may inspect and copy any of them.
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
deals in good faith with the firm that he is a partner thereto.
Consequently, under said article, [t]hose who, not being members of the
partnership, include their names in the firm name, shall be subject to the
liability of a partner.
(2) Liability Arising from the Acts of the Agent
Since the corporate venture is accorded a separate juridical personality,
then the liability that it incurs with the public that it deals with can only
arise from the acts of the partnerships authorized agent or agents, which
by default rule would be every partner (Article 1818, Civil Code).
The liability that the partnership must bear from the acts of the partners
pursuant to partnership business applies only to a third person who deals
in good faith with the partnership; Thus, a third person who knows of the
lack of authority of the partner acting in a partnership transactions
generally cannot claim against the partnership, thus:
(a) When the partner so acting has in fact no authority to act for
the partnership in the particular matter, and the person with whom
he is dealing has knowledge of the fact that he has no such
authority (Article 1818, Civil Code); and
(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 bind
the partnership unless authorized by the other partners (Article 1818,
Civil Code); and
(c) No act of a partner in contravention of a restriction on authority
shall bind the partnership to persons having knowledge of the
restriction (Article 1818, Civil Code).
XIII. DUTIES & OBLIGATIONS OF PARTNERS
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 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 [2003]; NTC v. Court of
Appeals, 311 SCRA 508 [1999]; Commissioner of Internal Revenue v.
Court of Appeals, 301 SCRA 152 [1999]; Boman Environmental Dev. Corp.
v. Court of Appeals, 167 SCRA 540 [1988]). Consequently, capital
contributions and obligations to contribute capital (i.e., 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.
In Partnership Law, the rule is quite different in that Article 1786 of the
Civil Code provides that Every partner is a debtor of 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 and promised contribution as a trust fund for the
protection of the partnership creditors, who have the legal right to seek
satisfaction of their claims even against the separate properties of each of
the partners not contributed or promised to the partnership.
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 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 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 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;
(c) The remedies available to the partnership and the other partners with
respect to the failure or refusal to comply with contribution obligation
takes the normal remedies of interest and damages, including
compensatory damages constituting his shares of the profits (Uy v.
Puzon, 79 SCRA 598 [1977];Moran, Jr. v. Court of Appeals, 133 SCRA 88
[1986]);
(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 specific performance. (Sancho v.
Lizarraga, 55 Phil. 601 [1930]); and
(e) The property contributed by a partner becomes the property of the
partnership and cannot be disposed of without the consent of the other
partners. Lozana v. Depakakibo, 107 Phil. 728 [1960]).
a. When Promised Contribution Is a Sum of Money
Under Article 1788 of the Civil Code it is provided that A partner who has
undertaken to contribute a sum of money to the partnership venture [and
fails to do so,] becomes a debtor for the interest and damages from the
time he should have complied with his obligation.
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 by the partnership by reason
of the failure of the partner to pay in his contribution.
b. When Promised Contribution Is PropertyIn General
Whenever a partner has bound himself to contribute a specific or
determinate thing to the partnership, he thereby assumes the position of
being a seller of determinate property contributed into the partnership in
that he is liable for:
(a) A breach of the warranty against eviction;
(b) The fruits thereof from the time he obliged himself to deliver the
determinate thing, and without need of demand.
In addition, Article 1795 of the Civil Code establishes the rules on who
assumes [t]he risk of specific and determinate things . . . contributed to
the partnership, thus:
(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;
(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.
(c) In the absence of stipulation, the risk of things brought
and appraised in the inventory, shall also be borne by the partnership, and
in such case the claim shall be limited to the value at which they
were appraised.
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, at p. 91, citing Francisco,
Partnership at p. 150 [1958]) But in such case, under Article 1829(4),
[w]hen a specific thing which a partner had promised to contribute to the
partnership, perishes before the delivery, dissolves the partnership.
c. Contribution is Goods
Under Article 1787 of the Civil Code, When the capital or a part thereof
which a partner is bound to contribute consists of 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 for the account of the partnership.
The requirements of the provision are made to ensure that the capital
account of a partner is properly credited with the correct value of a
property contributed.
d. Contribution is Real Property
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 1771 of the Civil Code, which requires
in such case that the contract of partnership must be in a public
instrument, and which 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 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.
e. Contribution of Service or Industry; the Industrial Partner
There can be no doubt that once the contract of partnership is constituted,
the industrial partner is from then bound to devote 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 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 the partnership for which they do not also
obtain, as in the case of the industrial partner, a compensation therefor,
unless otherwise stipulated.
The American case of Marshs Appeal, (69 Pa. St. 30, quoted in Bautista,
at pp. 92-94) discusses the points as follows:
. . . 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 special agreement
to that effect, or such agreement can be implied from the course of
dealing between them. By the well-settled law of partnership, every
partner is bound to work to the extent of his ability for the benefit of the
whole, without regard 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. . .
. . . The plaintiffs are not seeking compensation for the services they
rendered the partnership. They are simply seeking to charge the defendant
with the loss occasioned the partnership by this refusal to render the
services which he agreed to perform. If the partnership has suffered loss
by his breach of the agreement, why should he not make good the loss,
and put the firm in the same condition it would have been if he had not
broken the agreement? . . . If, says Mr. Justice Story, the 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 sustained thereby, whether directly or through their
own liability to third persons. . . If this be the law, why should not the
defendant be answerable to the partnership for breach of the agreement
to perform the services stipulated?
It is clear therefore, that when an industrial partner has failed to render
the proper service he is obliged to render to the 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 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 may be just
and equitable under the circumstances.
The fiduciary duties of an industrial partner are discussed more in detail
hereunder.
f. Obligation for Additional Contribution
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 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 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.
g. Remedies When There is Default in Obligation to Contribute
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. Under the provisions of the old Civil
Code, the Court held in Sancho v. Lizarraga, 55 Phil. 601 (1931), that the
remedy of rescission of the contract of partnership which would mean the
return of the contribution of the complaining partner with interest and
damages proven, is not available because then Articles 1681 and 1682
[now Articles 1786 and 1788] provided for specific remedies to the
contract of partnership, thus:
Owing to the defendants failure to pay to the partnership the whole
amount which he bound himself to pay, he became indebted to it for the
remainder, with interest and any damages occasioned thereby, but the
plaintiff did not thereby acquire the 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 refer to the contract of partnership in particular. And it is a well
known principle that special provisions prevail over general provisions.
(Ibid, at pp. 603-604).
In Sancho the Court affirmed the decision of the lower court which
effectively denied the prayer for rescission, and instead 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 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.
It may be said that dissolution is a form of rescission unique to
partnerships (also for corporations, especially close corporations), which
only has a prospective effect of terminating the contractual relationship,
and thus not produce the 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.
The subsidiary and pro rata liability feature under the old Civil Code was
retained under the new Civil Code, which does not adopt the primary and
solidary liability feature for commercial partners under the Code of
Commerce.
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)
a. Duty to Account
Since the partners are mutual agents to one another and to the
partnership, then necessarily they are obliged by such fiduciary
relationship to render a full accounting on matters they undertake for the
partnership affairs, and are prohibited from obtaining secret benefits for
themselves therefrom. The duty is closely linked to the duty of loyalty.
Under Article 1806 of the Civil Code, partners shall render on demand true
and full information of all things affecting the partnerships to any partner
or the legal representative of any deceased partner or of any partner
under disability.
Under Article 1807 of the Civil Code , Every partner must account 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.
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 partners 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
partners 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
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 avoiding of entering into transactions or situations that
present a conflict-of-interests. The duty of loyalty in the partnership
setting arises necessarily as a consequence of the mutual agency
relationship existing between and among the partners.
In the event a partner takes any amount from the partnership funds for
himself, he becomes a debtor of the partnership, as well for the interests
and damages, which liability under Article 1789 of the Civil Code shall
begin from the time he converted the amount to his own use.
An aspect of a partners duty of loyalty arising from the fact that he acts
as an agent of the partnership is manifested in Article 1792 of the Civil
Code, which provides that when a partner authorized to manage collects a
demandable sum which was owed 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
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 partners 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)
d. Specific Fiduciary Duties of Industrial Partner
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 service to the partnership enterprise,
and when they do so they are not entitled to separate compensation
(unless otherwise stipulated), then in order to make the contribution of
service an industrial partner more meaningful and truly an obligation, it
must mean that is saddled with more burden or prohibitions. The coverage
of Article 1789 should mean also that:
(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.
(b) Even if the partnership is engaged in a particular form of business,
an industrial partner cannot devote his industry to another type
of undertaking for profit even when it is in a different line of business not
in competition with that of the partnership.
If an industrial partner breaches this duty, Article 1789 provides that the
capitalist partners may either:
(a) exclude him from the firm; or
(b) avail themselves of the benefits which the industrial partner may have
obtained in violation of such duty, with a right to damages in either case.
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 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:
It is an admitted fact that since before the execution of the amended
articles of partnership . . . the appellee Estrella Abad 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 performance of the duties of her public
office. This fact proves beyond peradventure that it was never
contemplated between 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.
The Court ruled as follows:
One cannot read appellees testimony just quoted without gaining the very
definite impression that, even as she was and still is 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. . .
xxx.
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 prestation. There is no pretense,
however, even on the part of appellants that appellee is engaged in any
business 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 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
company on June 7, 1955 as an industrial partner, why did it take
appellants so many years before excluding her from said 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 the net profits which the appellant partnership may
realize from June 7, 1955, until the mortgage loan of P30,000.00 obtained
from the Rehabilitation Finance Corporation shall have been fully paid. . .
The language of the decision in Evangelista & Co. leads to several
observations on the nature of the obligation of an industrial partner.
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.
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 devote to partnership affairs.
Finally, even when an industrial partner fails to live-up to the commitment
of service he obliged himself, the matter must be raised within a
reasonable period by the other partners as the basis for the remedies of
exclusion or forfeiture of benefits as provided in Article 1789; otherwise,
such grounds are deemed waived by reason by estoppel by laches.
e. Specific Fiduciary Duties of Capitalist Partners
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 shall personally bear all the losses.
3. Obligation of Subsequently Admitted Partners
Under Article 1826 of the Civil Code, a person admitted as a partner into
an existing partnership is liable for all the obligations of the partnership
arising before his admission as though he had been a partner when such
obligations were incurred, except that this liability shall be satisfied only
out of the partnership property, unless there is a stipulation to the
contrary.
This is the only aspect of limited liability in a general partnership setting.
4. Obligations of Non-Partners
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 not, thus:
(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 a partner;
(b) Under Article 1825, when a person by word or conduct,
represents himself, or consents to another representing him to anyone, as
a partner in an existing partnership or with one or more persons not actual
partners, he is liable to any 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;
(c) 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;
(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
(e) Under Article 1825, when all the members of
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.
XIV. DISSOLUTION, WINDING UP & TERMINATION
PARTNERSHIP
1. Introduction and Definition of Terms
An understanding under Partnership Law in the new Civil Code, of the
three terms, namely dissolution, winding-up and termination, would
help clarify the multi-faceted legal relationships that exist in the
partnership arrangement.
Article 1828 of the Civil Code, defines dissolution as the change in the
relation of the partners caused by any partner ceasing to be associated in
the carrying on as distinguished from the winding up of the business.
Dissolution is the term that pertains primarily to the contract of
partnership, the breaking of the vinculum juris, so to speak, between and
among the partners in the partnership arrangement. It is in Partnership
Law equivalent to the terms rescission and extinguishment of contract
of partnership under the general provisions of the Law on Contracts.
Article 1829 of the Civil Code implicitly distinguishes dissolution from
termination and winding-up when it provides that On dissolution the
partnership is not terminated, but continues until the winding up of the
partnership affairs is completed.
Termination therefore pertains essentially to the partnership as a
business enterprise, and defines the time when all matters pertaining to
the business enterprises, essentially the completion of pending contracts,
the payment of all obligations and the distribution, if any, of the net assets
of the partnership to the partners, have been completed. The Court has
defined termination of a partnership as the point in time after all the
partnership affairs have been wound up. (Idos v. Court of Appeals, 296
SCRA 194, 206 [1998], quoting fromParas, Civil Code of the Philippines,
Vol. V, 7th ed., p. 516)
the Winding-up of partnership affairs is therefore the process which is
commenced by the dissolution of the contract of partnership between and
among the partners, and is concluded upon the termination or complete
liquidation of the partnership business enterprise. The Court has defined
winding-up as the process of settling business affairs after dissolution,
OF (Idos v. Court of Appeals, 296 SCRA 194, 205 [1998],quoting from Paras,
Civil Code of the Philippines, Vol. V, 7th ed., p. 516), and it cites as
examples of the winding-up process, the following: the paying of previous
obligations; the collecting of assets previously demandable; even new
business if needed to wind up, as the contracting with a demolition
company for the demolition of the garage used in a used car partnership.
(Ibid.)
As will be seen from the discussions hereunder, dissolution which breaks
the contractual privity between and among the partners, does not
necessarily give rise to winding-up or termination of the partnership
business enterprise, as the dissolution of an existing partnership contract
may actually lead to the constitution of a new partnership contract. What
may therefore break the contractual relationship between and among the
partners, may not affect at all the underlying partnership business
enterprise, as when the remaining partners choose to continue the
partnership business.
2. Legal Effects of Dissolution
a. Effect on the Partnership Contract and Juridical Personality
In Corporate Law, dissolution is the termination of the juridical
personality of the corporation which was originally constituted to pursue
new business, and that in fact and in law, the corporate juridical
personality continues to exist for three years with only the capacity to
wind-down the corporate affairs. (Republic v. Tancinco, 394 SCRA 386
[2002]) The dissolution of a corporation affects directly the underlying
corporate business enterprise in that it ceases to pursue business as a
going concern, and any contract entered into as new business would be
considered void as having been entered into with a non-existing corporate
party. (Alhambra Cigar v. SEC, 24 SCRA 269 [1968]; Philippine National
Bank v. Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294
[1992]).
In stark contrast, the concept of dissolution in Partnership Law focuses in
the change of the contractual relationship between and among the
partners (the rescission of the partnership contract), as the termination of
their association in carrying the business venture as a going concern. The
contract of partnership remains but only in the concept as an association
to pursue liquidation process.
A direct effect of the dissolution of the partnership is provided in Article
1832 of the Civil Code, which extinguishes the right and power of the
partners to represent one another to pursue the partnership as a going
concern: Except so far as may be necessary to wind up partnership affairs
or to complete transactions begun but not then finished, terminates all
authority of any partner to act for the partnership. Dissolution of a
partnership does not therefore undermine existing contracts, nor modify or
extinguish the then existing obligations of the partnership and the
partners, and that the completion or performance of existing contracts and
the settlement of partnership obligations are in fact integral parts in the
winding-up process.
Since the juridical personality of a partnership is inextricably linked to the
underlying contract of partnership, it should mean that the dissolution of
the partnership would bring about the impairment of the partnership
juridical person in whose name the business is pursued remains hovering.
b. Effect on the Partnership Business Enterprise
Likewise, in a partnership setting the underlying partnership business
enterprise should cease to exist as as a going concern, but only if the
partners remaining do not wish to continue the partnership business,
whenever they are entitled under the law the option to so continue.
Dissolution therefore focuses mainly on the breaking-up of the contractual
relationship of the partners among one another, and when Article 1832
provides that Except so far as may be necessary to wind up partnership
affairs or to complete transactions begun but not then finished, dissolution
terminates all authority of any partner to act for the partnership, it means
that the force of the original contract of partnership between them as to
being mutual agents, as well as the enforceability of the doctrine
of delectus personae, are terminated, without prejudice to a new
partnership arrangement being constituted among the remaining partners.
c. Effects on Contracts Entered into With Third Parties
In Corporate Law, after dissolution all contracts entered into that pursue
new business for the corporate venture are void even as to persons who
deal with the corporation in good faith. The reason for this is that the
public policy behind the capacity of the corporate juridical personality pre-
empts the consideration of protecting the public that deal in good faith
with a purportedly validly existing corporation. Is this the same policy
when it comes to contracts on new business entered into for and in behalf
partnership after dissolution has occurred?
In covering the general legal effects of the dissolution of a partnership,
Bautista cited American decisions, showing that upon dissolution the
partnership continues to exist only for a limited purpose of winding it
affairs, and that no new business can be pursued. (BAUTISTA, at p. 319).
We feel that under the Partnership Law provisions of our Civil Code, which
expressly recognize that the non-defaulting partners can choose to
continue the business enterprise, the answer to the question raised should
be in the negative, because there is no over-arching public policy of State
supervision and control over the juridical personalities of partnerships.
Under Philippine Partnership Law, the partnership juridical personality is
merely an added feature to the partnership arrangement to improve the
efficiency of partnership transactions, and cannot overcome the more
important public policy considerations, such as the imperative need to
protect the contractual expectations of the public that deals in good faith
with the partnership venture.
We see the demonstration of this principle in Singson v. Isabela Sawmill,
88 SCRA 623 (1979), where the Court held
It is true that the dissolution of a partnership is caused by any partner
ceasing to be associated in the carrying on of the business. However, on
dissolution, the partnership is not terminated but continuous until the
winding up of the business.
The remaining partners did not terminate the business of the partnership
Isabela Sawmill. Instead of winding up the business of the partnership,
they continued the business still in the name of said partnership. It is
expressly stipulated in the memorandum-agreement that the remaining
partners had constituted themselves as the partnership entity, the Isabela
Sawmill.
There was no liquidation of the assets of the partnership. The remaining
partners . . . used the properties of said partnership.
xxx.
It does not appear that the withdrawal of [a partner] from the partnership
was published in the newspapers. . . the public in general had a right to
expect that whatever credit they extended to [the remaining partners]
doing the business in the name of the partnership Isabela Sawmill could
be enforced against the properties of said partnership. . . (Ibid, at p. 642)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held that the
fact that the managing partner excludes the industrial partner from
participation in the partnership business did not mean that the partnership
was extinguished automatically:
However, a mere falling out or misunderstanding between partners does
not convert the partnership into a sham organization. The partnership
exists until dissolved under the law. Since the partnership created by
petitioners and private respondent has no fixed term and is therefore a
partnership at will predicated on their mutual desire and consent, it may
be dissolved by the will of a partner. x x x In this case, petitioner Tocaos
unilateral exclusion of private respondent from the partnership effected
her own withdrawal from the partnership and considered herself as having
ceased to be associated with the partnership in the carrying on of the
business. Nevertheless, the partnership is not terminated thereby; it
continues until the winding up of the business. (Ibid, at pp. 37-38).
d. Effects on Determining Liability of Partners for Damages to One
Another
In Soncuya v. De Luna, 67 Phil. 646 (1939), that for purposes of
determining whether a partner is entitled to damages allegedly suffered by
reason of the supposed fraudulent managment of the partnership by the
managing partner, it is first necessary that a liquidation of the partnership
business must be made to the end that the profit and losses may be
known and the causes of the latter and the responsibility of the defnedant
as well as the damages which each partner may have suffered, may be
determined. (at p. 647; citing Po Yeng Cheo v. Lim Ka Yam, 44 Phil. 172
[1922]).
3. Causes of Dissolution
Partnership Law classifies the causes of dissolution of partnerships into the
following categories:
I. Causes Which Legally Dissolve Ipso Jure Without Need of Court
Decree:
(a) Dissolution Effected Without Violation of the Partnership Agreement
Termination of the term of the partnership
Termination of the specific undertaking for which the partnership was
constituted
 In a partnership at will, dissolution effected by the will of any partner
exercised in good faith
By mutual withdrawal by all the partners
Expulsion of a partner bona fide under powers granted in the
partnership agreement
(b) Dissolution Effected in Contravention of the Partnership Agreement,
Effected by the Will of Any Partner:
When the partnership term has not expired
When the particular undertaking for which the partnership has been
constituted has not yet terminated
At any time, in a partnership at will
(c) Dissolution Caused by Force Majeure or Outside the Will of the Partners
Loss of the specific thing promised to be contributed
Partnership business becoming unlawful
Death, insolvency or civil Interdiction of any partner
Insolvency of the partnership
II. Dissolution Caused by Court Decree:
(a) When a partner has been declared insane in any judicial proceeding
or is shown to be of unsound mind;
(b) When a partner becomes incapacitated in performing his part of
the partnership contract;
(c) When a partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the partnership business;
(d) When a partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that it is not reasonably practicable to
carry on the business in the partnership with him;
(e) When the partnership business can only be carried on at a loss;
(f) Other circumstances that render dissolution equitable;
(g) On the application of the purchaser of a partners interest in the
partnership:
o After termination of specified term of the partnership
o After termination of the particular undertaking for which the
partnership was constituted
o At any time, in a partnership at will
a. Understanding of the Causes of Partnership Dissolution in the
Light of the Partnership Being Primarily a Contractual Relationship
Notice that Articles 1830 and 1831 of the Civil Code clearly separate the
causes of partnership dissolution between those which may be effected
extrajudicially, and those which require a court decree in order to be
effective.
Partnership being primarily a contractual relationship between and among
the partners, the various modes of dissolution are akin to the general
principles covering the extinguishment of contracts.
When it comes to the first category of causes of partnership dissolution,
namely, those that are effected ipso jure or without need of any court
decree, perhaps a good way of understanding those causes of dissolution
dynamics for partnerships is to think of dissolution in relation to terms
very closely linked to principles of obligatory force and relativity
pertaining to contracts, namely, the remedy of rescission, the legal
concepts of breach of contract and the happening of resolutory
condition or term, as well as the other modes of extinguishment of
contracts.
Take the first two causes for dissolution, namely, the termination of the
term or the termination or fulfillment of the particular undertaking for
which the partnership has been constituted, which basically take the
character of either full performance or fulfillment of the resolutory
condition or term. Whether it be full performance or the happening of the
resolutory condition or term, a contract is deemed extinguishedipso jure,
and there need not be any particular act by which the legal effect comes
about. The same legal effect would be the act of any partner declaring the
termination of a partnership in a partnership at will.
When all the partners in a partnership comes to a unanimous agreement
to terminate the partnership, this is the same legal effect as in another
other contract which is extinguished by mutual withdrawal. Finally, when a
partner is expelled bona fide from the partnership pursuant to the
provisions granting such power in the contract of partnership, then this is
in accordance with exercising an extrajudicial right to rescind or cancel a
contract, which conforms to the spirit of, and is not in breach, of the
contractual commitment.
On the other hand, when a partner, without any legal or contractual basis,
seeks the dissolution of the partnership, the same would indeed constitute
a breach of contract for which he become personally liable for damages,
and for which he loses the right to wind-up its affairs, but nevertheless the
dissolution would take legal effect, in the same manner as in all contracts
that embody personal obligations to do (like agency), i.e., that they are
essentially revocable in spite of contractual stipulations to the contrary. In
this case, there is the application of the doctrine of delectus personae in
the partnership relationships.
As has been discussed previously, the principle of delectus personae,
which treat of the contractual relationship between and among the
partners of the most extreme personal nature (i.e., the principle of
relativity in Contract Law applied at it most extreme norm), would
override the principle of obligatory force of contractual provisions. Thus,
even when the contracting parties agree that their partnership
contract would be irrevocable for say ten years, under the principle
ofdelectus personae, any partner even without cause may seek to
terminate his relationship by withdrawing from the partnership and
thereby cause its dissolution; there is no legal remedy allowed to the other
partners to compel the withdrawing partner to remain with the partnership
arrangement within the remaining term of the partnership provided in its
articles of partnership. Nevertheless, the withdrawal from the partnership
before the expiration of the agreed term of existence would be in breach of
a contractual agreement, and would subject the withdrawing partnership
to liability for damages.
When it comes to dissolutions caused by force majeure or outside the will
of the partners, their importance lies in the spirit of Contract Law that says
that force majeure excuses a contracting party from his obligations, and
would not make him liable for damages for the occasion does not
constitute a breach of contract.
Finally, the causes of dissolution which require a court decree for their
effectivity, usually cover causes of action which either go into breach of
contract or radical change in the conditions or circumstances upon which
the contract was entered into (i.e., principal of rebus sic stantibus). In
either case, the intervention of the courts if required to establish the
factual basis of the breach of contract, or the radical change of the
circumstances binding the partners together into the contract of
partnership.
The termination of the partnership at will by the act of any partner or
when there is a mutual withdrawal by all the partners. Under either
characterization of (namely, contract partners) the legal basis upon which
dissolution would come into effect is when there is a breach of contract
or when there has been the happening of the resolutory condition or term,
which then effects a rescission or termination of the contract of
partnership. The concepts of rescission, breach of contract and
happening of the resolutory condition or term, as the effective criteria for
dissolution to come into play in a partnership setting, go into the
application of the doctrine of delectus personae in the partnership
relationships.
In essence, Philippine Partnership Law is careful to classify the various
causes of dissolution because of the varying legal consequences of
dissolution as an act of rescission or cancellation of the partnership
agreement.
b. Dissolution Effected with No Violation the Partnership Contract
Article 1830 of the Civil Code, in enumerating the causes for partnership
dissolution distinguishes first between causes without violation of the
agreement, and those causes that are In contravention of the
agreement. Those classified as causes without violation of the
agreement, are consistent with the agreed terms of the contract of
partnership, thus:
(a) Termination of the term or particular undertaking specified in
the partnership agreement;
(b) By the exercise in good faith by any partner of the power to withdraw
in a partnership at will (no definite term or particular undertaking
specified in the agreement);
(c) By the mutual withdrawal by all the partners from the partnership;
and
(d) By the bona fide expulsion of any partner in accordance with the
power provided for in the partnership agreement.
In any of the foregoing enumerated causes, there is no breach or
contravention of the partnership agreement, and the dissolution of the
partnership does not give rise to a liability for damages for breach of
contract. When it comes to the first three causes, there being no partner
at fault means that none of the partners would be disqualified from
participating in the winding-up of the affairs of the partnership. Whereas,
in the case of expulsion of a partner in accordance with the power
provided in the partnership agreement, since it can only be exercised bona
fide, it could only mean that the partner was expelled for cause and
consequently, he would be disqualified from participating in the winding-up
of the affairs of the partnership business, and electing to continue to
pursue the partnership business.
c. Dissolution Causes In Violation of the Partnership Contract
In contrast, although any partner is recognized with the power to withdraw
from the partnership at any time, it would be [i]n contravention of the
agreement between the partners, where the circumstances do not permit a
dissolution under the provisions of Article 1830. In that case, the partner
seeking the dissolution would be liable for damages, and he is without
right to continue to pursue the partnership business.
An example of the consequences of an expulsion of a partner effected in
bad faith is demonstrated in Tocao v. Court of Appeals, 342 SCRA 20
(2000), where in an oral partnership, the capitalist partner Tocao had
excluded the industrial partner Anay from entrance into any of the
business premises of the company or and severed any further dealings she
may have with the business venture. In ruling that the excluded partner
had a right to recover damages, to have a formal accounting of the
business, and to receive her shares in the net profits, the Court ruled:
Undoubtedly, the petitioner Tocao unilaterally excluded private respondent
[Anay] from the partnership to reap for herself and/or for petitioner Belo
financial gains resulting from private respondents efforts to make the
business venture a success . . . Her instruction . . . not to allow private
respondent to hold office in both the Makati and Cubao sales offices
concretely spoke of her perception that private respondent was no longer
necessary in the business operation, and resulted in a falling out between
the two. However, a mere falling out or misunderstanding between
partners does not convert the partnership into a sham organization. The
partnership exists until dissolved under the law. The partnership . . . has
no fixed term and is therefore a partnership at will predicated on their
mutual desire and consent, it may be dissolved by the will of a partner . . .
An unjustified dissolution by a partner can subject him to 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.
In this case, petitioner Tocaos unilateral exclusion of private respondent
from the partnership . . . effected her own withdrawal from the partnership
and considered herself as having ceased to be associated with the
partnership in the carrying on of the business. Nevertheless, the
partnership was not terminated thereby; it continued until the winding up
of the business. (Ibid, at pp. 36-38)
Essentially, the Court agreed with the decision of the trial court that a
partner who is excluded wrongfully from a partnership is an innocent
partner. Hence, the guilty partner must give him his due upon the
dissolution of the partnership as well as damages or share in the profits
realized from the appropriation of the partnership business and goodwill.
An innocent partner thus possesses pecuniary interest in every existing
contract that was incomplete and in the trade name of the co-partnership
and assets at the time he was wrongfully expelled. (Ibid, at p. 29)
d. Force Majeure and Other Similar Causes
A third general category for causes of dissolution are recognized by Article
1830 which occur by force majeure or events that are outside of the will of
the partners:
(a) Events which makes unlawful the partnership business;
(b) Loss of the specific thing promised to be contributed to the
partnership; and
(c) Death, insolvency or civil interdiction of any partner.
None of such causes of dissolution constitute a type of breach of the
partnership agreement.
An interesting issue would be if the loss of the specific thing promised to
be contributed to the partnership would cause the dissolution of the
partnership, then would the return back to a partner of his contribution be
deemed to have dissolved the partnership?
The decision in Fernandez v. Dela Rosa, 1 Phil. 671 (1902), covered the
issue of whether the receiving back by a partner of his contribution to the
partnership amount to withdrawal from the partnership to have effected a
dissolution thereof. The resolution of this issue was essential
in Fernandez because it determined whether the partner so receiving his
contribution had a right to participate in the profits of the venture earned
after he had allegedly withdrawn. Thus, the Court asked specifically
in Fernandez: Did the defendant waive his right to such interest as
remained to him in the partnership property by receiving the money? Did
he by so doing waive his right to an accounting of the profits already
realized, if any, and a participation in them in proportion to the amount he
had originally contributed to the common fund? Was the partnership
dissolved by the will or withdrawal of one of the partners under article
1705 of the Civil Code? (Ibid, at pp. 677-678) The Court held
. . . We think these questions must be answered in the negative.
There was no intention on the part of the plaintiff in accepting the money
to relinquish his rights as a partner, nor is there any evidence that by
anything that he said or by anything that he omitted to say he gave the
defendant any ground whatever to believe that he intended to relinquish
them. On the contrary he notified the defendant that he waived none of
his rights in the partnership. Nor was the acceptance of the money an act
which was in itself inconsistent with the continuance of the partnership
relation, as would have been the case had the plaintiff withdrawn his
entire interest in the partnership. There is, therefore, nothing upon which
a waiver, either express or implied, can be predicated. The defendant
might have himself terminated the partnership relation at any time, if he
had chosen to do so, by recognizing the plaintiffs right in the partnership
property and in the profits. Having failed to do this he can not be
permitted to force a dissolution upon his copartner upon terms which the
latter is unwilling to accept. We see nothing in the case which can give the
transaction in question any other aspect than that of the withdrawal by
one partner with the consent of the other of a portion of the common
capital. (Ibid, at p. 678)
e. Causes Equivalent to Rescission or Declaration That the Central
Basis Upon Which the Contract of Partnership Has Been
Constituted Is Lost
The fourth general category covers the grounds whereby a partner may
seek court order for the dissolution of the partners under Article 1831 of
the Civil Code, thus:
(a) When a partner has been declared insane in any judicial proceeding
or is shown to be of unsound mind;
(b) When a partner becomes in any other way incapable of performing
his part of the partnership contract;
(c) When a partner has been guilty of conduct as tends
to affect prejudicially the carrying on of the business;
(d) When a partner willfully or persistently commits a breach of
the partnership agreement, or otherwise so conducts himself in
matters relating to the partnership business that is not reasonably
practicable to carry on the business in partnership with him;
(e) When the business of the partnership can only be carried on at a loss;
(f) Other circumstances that render dissolution equitable.
In addition, Article 1831 of the Civil Code recognizes the standing of the
assignee of a partners interest to seek judicial dissolution of the
partnership when:
(a) Termination of the period upon which the partnership is expressly
constituted;
(b) Termination of the particular undertaking upon which the partnership
is expressly constituted; or
(c) At any time, in a partnership at will.
The foregoing grounds enumerated in Article 1831 for which a court order
of dissolution may be sought need to be considered carefully, for each
represent a public policy which understands that the business purpose of a
partnership which cannot be placed in a relatively clear vision at the time
the contract of partnership is entered into. The article recognizes the
inherent risk that business undertakings are exposed to, many of which
cannot be anticipated at the time the partnership agreement is entered
into. Therefore, a mechanism is set (i.e., an appropriate court proceeding
for dissolution) by which the parties may ask a tribunal to determine that
the circumstances has rendered the rationale of the partnership agreement
inutile. Likewise, each of the grounds provided under Article 1831 would
constitute substantial breach of the obligations assumed by the partners,
as the basis by which an action for rescission may be pursued;
consequently, the factual basis upon which the substantial breach may
arise must be determined to exist by the courts, and cannot be left to the
sole determination of any of the partners.
One would think that when a partner has been judicially declared insane, it
would thereby ipso jure cause the dissolution of the partnership, as in the
case of death, insolvency or civil interdiction of a partner. And yet under
Article 1831, it would require a formal petition in court to have the
partnership dissolved. The legal implication is that the partnership remains
unaffected by the judicial declaration of insanity of a partner, and the
discretion is given to the other partners to seek its dissolution. Judicial
declaration of insanity, like civil interdiction, would render the partner
without legal capacity to contract, and yet the former does not result in
automatic dissolution of the partnership. Perhaps it is because, judicial
declaration of insanity does not proceed from a criminal conviction as in
the case of civil interdiction, and that the law recognizes that the insane
partner still has an estate that has a right to benefit from the properties
and rights to which a partner is entitled to, and the other partners are
given the option to remain in partnership with him to allow his estate to
continue to benefit from the partnership business. After all, a partner who
turns out to be insane, may be a better partner to remain with, rather
than another partner who turns out to be a boor. This is the same
rationale under the second group for judicial dissolution: when a partner
becomes in any other way incapable of performing his part of the
partnership contract.
The last four grounds to seek judicial dissolution (when a partner has been
guilty of conduct as tends to affect prejudicially the carrying on of the
business; when a partner willfully or persistently commits a breach of the
partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that is not reasonably practicable to
carry on the business in partnership with him; when the business of the
partnership can only be carried on at a loss; and other circumstances that
render a dissolution equitable), look at the primary rationale for the
partnership agreement: to operate a business venture for the benefit of all
the partners. When there are circumstances prevailing in the partnership
that endanger or undermine the viability of the partnership enterprise, any
of the partners is given standing to seek for court determination of the
existence of such situation and decree the dissolution of the partnership.
For example, in Rojas v. Maglana, 192 SCRA 110 (1990), the Court held
that when a partner engages in a separate business enterprise that is
competitive with that of the partnership and even withdraws equipment
contributed into the partnership enterprise, the other partners withdrawal
from the partnership becomes thereby justified and for which the latter
cannot be held liable for damages. In such an instance, a partner has
violated his duty of loyalty, which under the principle of delectus
personae should allow the other partners to break any further ties with
him.
4. Effects of Dissolution Among the Partners Inter Se
We will now discuss the legal consequences, and the rights and obligations
that would govern the relationship of the partners under the various
causes of partnership dissolution.
a. When Dissolution Is Caused in Any Way, Except in
Contravention of the Partnership Agreement
Under Article 1837 of the Civil Code, unless otherwise agreed, each
partner, as against his co-partners and all persons claiming through them
in respect of their interests in the partnership, may have the partnership
property applied to discharge its liability, and the surplus applied to pay in
cash the net amount owing to the respective partners. In other words,
when there has been no breach of the partnership agreement upon the
dissolution of a partnership, every partner has a right to insist upon the
winding-down of partnership affairs.
When dissolution of the partnership is caused other than by a breach of
the contract of partnership, the remaining partners have no option to
continue the partnership business enterprise when the withdrawing
partner insists on winding-up the partnership affairs. Consequently, the
only way by which the remaining partners can hope to continue the
partnership business is to come into a settlement of the liquidation of the
withdrawing partners equity interests in the partnership. The tendency
therefore is that the withdrawing partner may receive a premium or a
higher price than the actual liquidation value of his share in the net assets
of the partnership in exchange for his not agreeing not to demand the
formal winding-up and termination of the partnership business.
b. When Dissolution Is Caused by the Bona Fide Expulsion of
a Partner
Under Article 1837 of the Civil Code, when dissolution is caused by
thebona fide expulsion of a partner pursuant to the terms of the
partnership agreement, and if the expelled partner is discharged from all
partnership liabilities, either by payment or by express agreement to
that effect between himself, the creditor and the remaining partners (as
provided under the second paragraph of Article 1835 of the Civil Code),
then such expelled partner shall receive in cash only the net amount due
him from the partnership.
In other words, the expelled partner is without power or authority to insist
upon the formal winding-up and liquidation of the partnership business
enterprise; and that the choice whether to continue with the business
enterprise or to formally wind-up and terminate the partnership is with the
remaining partners.
c. When Dissolution Is Caused in Contravention of the Partnership
Agreement
In the event the dissolution of the partnership is in contravention of the
partnership agreement, there exists legally a formal breach of contract,
and the rights and/or liabilities of the partners shall be as follows:
(1) Each partner who has not caused the dissolution wrongfully shall have
the right:
(i) to participate in the net assets of the partnership after discharge of all
partnership liabilities;
(ii) to damages for breach of the agreement, as against each partner who
caused the dissolution wrongfully;
(2) The partners who have not caused the dissolution wrongfully, may, if
they so desire:
(i) continue the business in the same name either by themselves or jointly
with others, during the rest of the agreed term for the partnership;
(ii) and for that purpose may possess the partnership property, provided
they secure the payment by bond approved by the court, or pay to any
partner who has caused the dissolution wrongfully, the value of his
interest in the partnership at the dissolution, less any damages for breach
of the agreement and in like manner indemnify him against all present
or future partnership liabilities;
(3) A partner who has caused the dissolution wrongfully shall only have:
(i) If the business is not continued, all the rights of a partner for share in
the net assets of the partnership after payment of all its liabilities, subject
to liability for damages incurred due to such wrongful dissolution;
(ii) If the business is continued, the right as against his co-partners
and all claiming through them in respect of their interests in
the partnership, to have the value of his interest in the partnership,
less any damage caused to his co-partners by the dissolution, ascertained
and paid to him in cash, or the payment secured by a bond approved by
the court, and to be release from all existing liabilities of the partnership;
But in ascertaining the value of the partners interest the value of
the goodwill of the business shall not be considered.
d. When Dissolution Is Caused by the Rescission of the Partnership
Agreement Because of Fraud or Misrepresentation (i.e., By Judicial
Decree)
Under Article 1838 of the Civil Code, without prejudice to any other right,
the party entitled to rescind or seek the dissolution of the partnership shall
be entitled:
(1) To a lien on, or right of retention of, the surplus of the partnership
property after satisfying the partnership liabilities to third persons, for any
sum of money paid by him for the purchase of an interest in the
partnership and for any capital or advances contributed by him;
(2) To stand, after all liabilities to third persons have been satisfied, in
the place of the creditors of the partnership for any payment made by
him in respect of the partnership liabilities; and
(3) To be indemnified by the person guilty of the fraud or making the
representation against all debts and liabilities of the partnership.
5. Effects of Dissolution on Partnership Liabilities Existing or
Accrued at the That Time
Discussions on dissolution of the partnership must center around the
fourth attribute of partnership of unlimited liability, i.e., that a partner
shall be liable jointly with the other partners, for partnership debts which
cannot be settled from the partnership assets. In fact, it is the point of
dissolution, that application of the attribute of unlimited liability because
most critical.
a. General Rule on Existing Partnership Liabilities
Under Article 1835 of the Civil Code, the general rule is that the dissolution
of the partnership does not of itself discharge the existing liability of any of
the partners.
When it comes to a deceased partner, it provides that The individual
property of a deceased partner shall be liable for all obligations of the
partnership incurred while he was a partner, but subject to the prior
payment of his separate debts.
b. Discharge of a Partner from Existing Partnership Liabilities
Article 1835 provides that the only manner by which a partner may be
discharged from any existing liability upon dissolution of the partnership, is
by an agreement to that effect between himself, the partnership creditor
and the person or partnership continuing the business.
Such an agreement may be inferred from the course of dealing between
the creditor having knowledge of the dissolution and the person or
partnership continuing the business.
6. Effects of Dissolution on Partnership Liabilities
Contracted or Incurred After Dissolution
The rules when it comes to liabilities contracted or incurred on behalf of
the partnership after dissolution has come in should be divided into the
following categories:
(a) Those that were incurred pursuant to winding-up proceedings;
(b) Those that were incurred in the nature of new business in spite of
the fact that the partnership is in winding-up process; and
(c) Those that were incurred when the partnership enterprise has
been continued and no winding-up process have been pursued.
a. Liabilities Incurred Pursuant to Winding-up Proceedings
Article 1832 of the Civil Code clearly implies that even with the dissolution
of the partnership, the partners not at fault have full authority to act for
the partnership in all matters that may be necessary to wind up
partnership afffairs or to complete transactions begun but not then
finished.
Therefore, despite the dissolution of the partnership, it is clear under
Article 1829 that the partnership is not terminated on dissolution, and that
the partnership continues to exist until the winding up of the partnership
affairs is completed. During winding-up stage, every partner authorized to
wind-up partnership affairs has full authority to enter into any contract or
transaction that is consistent with the winding-up of partnership affairs,
and such contracts and transactions shall be valid and binding upon the
partnership and those of the partners.
Whether considered from the inter-partnership relationship, or viewed in
relationship with third parties, all contracts and transactions entered into
after dissolution of the partnership, which are in pursuit of the winding-up
of partnership affairs, are valid and binding. Thus, Article 1834 provides
that After dissolution, a partner can bind the partnership x x x (1) By any
transaction appropriate for winding up partnership affairs or completing
transactions unfinished at dissolution.
(i) Where Partnership Not Bound Even for Winding-Up Liabilities
Under Article 1834, even when the liability incurred in behalf of the
partnership is incurred for winding-up purpose, nevertheless [t]he
partnership is in no case bound by any act of a partner after dissolution x
x x (3) Where the partner has no authority to wind up partnership affairs;
except by a transaction with one who
(a) Had extended credit to the partnership prior to dissolution and had
no knowledge or notice of the acting partners want of authority; or
(b) Had not extended credit to the partnership prior to dissolution,
and, having no knowledge or notice of his want of authority, the fact of
his want of authority has not been advertised in the a newspaper of
general circulation in the place (or in each place if more than one) at which
the partnership business was regularly carried on.
b. Liabilities Incurred Constituting New Business During the
Winding-Up Process
Article 1832 of the Civil Code is also clear that after dissolution, and
winding-up stage has been reached, and there is no intention to continue
the partnership enterprise, then it terminates all authority of any partner
to act for and in behalf of the partnership and/or the other partners
involving new business or that which is not in pursuit of the winding-up
of partnership affairs.
The general rule applicable in Partnership Law would then be equivalent to
the Agency Law principal that would come into play is that equivalent to
an agent who acts without or outside the scope of his authority, which
renders the contract entered into unenforceable against the principal, but
valid against the agent in his personal capacity. From the inter-partnership
relationship, every contract entered into or every liability incurred in the
name of the partnership as new business, is done without lawful
authority, and is non-binding on the partnership and the other partners. As
and between the partners, the liability incurred by the acting partner shall
then be for his sole account.
But the foregoing general rule applies only when the acting partner acts
with knowledge of the fact of dissolution of the partnership; for a partner
acting for and in behalf of the partnership after dissolution, but acting in
good faith, binds the partnership. Therefore, in determining whether the
acting partner acted in good faith or not, distinguishes among the causes
of dissolution.
(1) When Dissolution Is By the Act, Insolvency or Death of a
Partner
Under Article 1833 of the Civil Code, where the dissolution is caused by
the act, death or insolvency of a partner, the acting partner who acts
without knowledge of the act, death or insolvency of another partner (i.e.,
without knowledge that dissolution has come about), will legally bind the
partners to any liability created for the partnership as if the partnership
had not been dissolved. On the other hand, only the acting partner shall
be liable for the liability entered into in behalf of the partnership, when he
knew at that time of the fact of dissolution of the partnership.
(2) When Dissolution Is NOT By the Act, Insolvency or Death of a
Partner
Under Articles 1832 and 1833 of the Civil Code, when the dissolution of
the partnership is other than by the act, insolvency or death of a
partner, then knowledge of the fact of dissolution is presume to have
reached every partner and therefore, as between and among them, a
partner who incurs a liability in the name of the partnership, is deemed to
be acting without authority or in bad faith, and only such acting partner
shall be liable for the liability incurred.
(3) As To Third Party Creditors
Whatever may have been the cause of the dissolution of the partnership,
third parties who in good faith (i.e., unaware of the dissolution of the
partnership) enter into any contract or transaction with the partnership
through any of the partners, are protected in their contractual
expectations that the contract is valid and binding against the partnership.
The central principal in Partnership Law is that any third party who enters
into a contract with the purported partnership in good faith, shall have the
validity and enforceability of such contract protected.
Thus, Article 1834 of the Civil Code provides that After dissolution, a
partner can bind the partnership x x x (2) By any transaction which would
bind the partnership if dissolution had not taken place, provided the other
party to the transaction:
(a) Had extended credit to the partnership prior to dissolution and had no
knowledge or notice of the dissolution; or
(b) Though head not so extended credit, had nevertheless known of the
partnership prior to dissolution, and, having no knowledge or notice of
dissolution, the fact of dissolution had not been advertised in a newspaper
of general circulation in the place (or in each place if more than one) at
which the partnership business was regularly carried on.
Notice how the law treats differently third parties who have previously
extended credit to the partnership prior to dissolution, and those who have
only known of the partnership before dissolution: in the former it
is only actual knowledge or notice of the dissolution that would place him
in bad faith; whereas, in the latter mere notice of dissolution published in
the newspapers would transform him into a third party acting in bad faith.
When it comes to the effects of dissolution, especially on the power of
any partner to bind the partnership and other partners in new business
contracts and transactions, jurisprudence has ruled that unless otherwise
published or made known personally, third parties dealing with a
partnership in good faith have a right to expect that the partnership
relation exist and that the partners are authorized to pursue partnership
business as a going concern.
Thus, in Singson v. Isabela, 88 SCRA 623 (1979), the Court held since it
did not appear that the withdrawal of a partner from the partnership was
published in the newspapers, then the public in general had a right to
expect that whatever, credit they extended to [the remaining partners]
doing the business in the [original] name of the partnership Isabela
Sawmill could be enforced against the properties of said partnership,
(Ibid, at p. 642) as well as against the properties of the withdrawing
partner.
(i) Particular Rule of Limited Liability
Although a partner may be bound personally to the liabilities incurred with
third parties who act in good faith, nonetheless, Article 1834 makes it
clear that such liability is limited liability, that is that The liability of a
partner x x x shall be satisfied out of partnership assets alone when such
partner had been prior to dissolution:
(a) Unknown as a partner to the person with whom the contract is
made; and
(b) So far unknown and inactive in partnership affairs that the
business reputation of the partnership could not be said to have been in
any degree due to his connection with it.
(ii) When Creditors Not Deemed to Be In Good Faith
It should be noted that Article 1834 provides that even when third parties
enter into a new business contract or transaction with the partnership
without actual knowledge or notice of the fact of its dissolution,
nonetheless, they will not be considered to be third parties acting in good
faith, and that [t]he partnership is in no case bound by any act of a
partner after dissolution, in the following cases:
(a) Where the partnership is dissolved because it is unlawful to carry liability, the partners right to the benefit of excussion, and the priority
on the business, unless the act is appropriate for winding up partnership rules among conflicting claims, the Law on Partnership under Article 1839
affairs; or of the Civil Code lays down the following tenets, subject to any agreement
to the contrary:
(b) Where the partner has become insolvent.
(a) What Constitutes Partnership Property?
(iii) Particular Rule on Partner by Estoppel
The assets of the partnership which shall be applied to pay
Notwithstanding any of the foregoing rules, Article 1834 provides that the partnership liabilities are:
liability of any person who after dissolution represents himself or consents
to another representing him as a partner in a partnership engaged in (i) The partnership property,
carrying on business, shall be the same as that provided under Article
1825 on partnership by estoppel. (ii) The contributions of the partners necessary for the payment of all
the liabilities of the partnership.

7. Winding-Up of Partnership Affairs (b) What Are the Priority Rules Against Partnership Property?

a. Who Has Authority to Wind-up? The liabilities of the partnership shall rank in order of payment as follows:

Under Article 1836 of the Civil Code, the person or persons who have the (i) Those owing to creditors other than partners;
power and authority to wind up the partnership affairs as a consequence of
its formal dissolution, is determined by the following rules:
(ii) Those owning to partners other than for capital and profits;

(a) If there is an agreement on this matter, it is the partner or partners

(iii) Those owning to partners in respect of capital; and
so provided to have such authority, shall wind-up partnership affairs;

(iv) Those owing to partners in respect of profits.

(b) In the absence of any such agreement:

(1) Enforcing Contributions from Partners to Cover Partnership

(i) The partners who have not wrongfully dissolved the partnership or
Debts
the legal representative of the last surviving partner, not insolvent, has
the right to wind up the partnership affairs;
Article 1839 specifically provides that the partners shall contribute as
provided by Article 1797, the amount necessary to satisfy the liabilities,
(ii) However, any partner or his legal representative
and that the individual property of a deceased partner shall be liable for
or assignee, upon cause shown, may obtain winding-up by the courts.
such contribution.

b. Rules and Procedures for Winding-up and Liquidation of

It also provides that an assignee for the benefit of the creditors or any
Partnership Affairs
person duly appointed by the court shall have the right to enforce the
contribution specified.
Since winding-up and liquidation of the partnership affairs must apply the
rules and principles relating to the partnership doctrine of unlimited
In addition, any partner or his legal representative shall have the right to
enforce the contributions to the extent of the amount which he has paid in
excess of his share of the liability.
(2) Priority Rules Between Partners Creditors and Partnership
Creditors
Under Article 1829(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, saving the right of lien of
secured creditors.
(3) Priority Rules When Partner Is Insolvent
Where a partner has become insolvent or his estate is insolvent, the claims
against his separate property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owning to partnership creditors;
(c) Those owing to partners by way of contribution.
(4) Partner May Demand Share in Net Assets Only After
Liquidation and Settlement of Claims of Partnership Creditors
In Villareal v. Ramirez, 406 SCRA 145 (2003), the Court ruled that A
share in a partnership can be returned only after the completion of the
latters dissolution, liquidation and winding up of the business. But even
upon dissolution of the partnership, a partner has no right to demand from
the other partners for them to be personally liable for the return of his
contribution, especially when the partnership operations have been at a
loss, thus:
We hold that respondents have no right to demand from petitioners the
return of their equity share. Except as managers of the partnership,
petitioners did not personally hold its equity or assets. The partnership
has a juridical personality separate and distinct from that of each of the
partners. Since the capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the equity of the retiring
partners.
x x x.
Since it is the partnership, as a separate and distinct entity, that must
refund the shares of the partners, the amount to be refunded is
necessarily limited to its total resources. In other words, it can only pay
out what it has in its coffers, which consists of all its assets. However,
before the partners can be paid their shares, the creditors of the
partnership must first be compensated. After all the creditors have been
paid, whatever is left of the partnership assets becomes available for the
payment of the partners shares. (Ibid, at pp. 151-152)
The Villareal ruling reiterates the decision in Magdusa v. Albaran, 5 SCRA
511 (1962). It should be noted that in Magdusa the Supreme Court did not
accept the theory of the Court of Appeals that partners have a personal
cause of action against the managing partner for the latter to return their
capital on the basis that Plaintiffs action was based on the allegation,
substantiated in evidence, that Gregorion Magdusa, having taken delivery
of their shares, failed and refused and still fails and refuses to pay them
their claims. The liability, therefore, is personal to Gregorio Magdusa, and
the judgment should be against his sole interest, not against the
partnerships. (Ibid, at p. 513) This shows that even when the cause for
dissolution is fraud, the action to recover must still be by way of
dissolution and liquidation of the partnership affairs, and cannot be in the
form of a personal action against the allegedly defaulting partner.
Note must be taken of the decision in Martinez v. Ong Pong Co., 14 Phil.
726 (1910), where two persons received from a capitalist partner the
latters contribution for the establishment of a business with clear
agreement on the sharing of profits and losses from such venture. When
the managing partners refused to render an accounting of the operations
of the venture although they admitted there were small profits made, the
trial court rendered judgment directing the managing partners to return
the investment of the capitalist partner. The Court, in affirming the return
of contribution, rather than directing the dissolution and liquidation of the
partnership and determining the share of the partners in the net assets,
held
Inasmuch as in this case nothing appears other than the failure to fulfill an
obligation on the part of a partner who acted as agent in receiving money
for a given purpose, for which he has rendered no accounting, such agent
is responsible only for the losses which, by a violation of the provisions of
the law, he incurred. This being an obligation to pay in cash, there are no
other losses than the legal interest, which interest is not due except from
the time of the judicial demand, or, in the present case from the filing of
the complaint. . . We do not consider that article 1688 is applicable in this
case, in so far as it proves that the partnership is liable to every partner
for the amounts he may have disbursed on account of the same and for
the proper interests, for the reason that no other money that the
contributed as capital is involved. (Ibid, at p. 729)
We believe that the decision in Martinez is wrong, for a contemporaneously
held in Villareal, a partner cannot seek recovery of his contribution, much
less share in the net assets of the partnership, unless it be part of the
dissolution and liquidation of the partnership, whereby the claims of
partnership creditors have priority payment rights.
And yet the Supreme Court in Uy v. Puzon, 79 SCRA 598 (1977), also
ordered the primary partner to reimburse his co-partner the latters
investment and unrealized profits. In Uy, the Court found that the primary
partner in a construction venture did not comply with his obligation to
devote the project for the benefit of the partnership:
Had the appellant not been remiss in his obligations as partner and as
prime contractor of the construction projects in question as he was bound
to perform pursuant to the partnership and sub-contract agreements . . . it
is reasonable to expect that the partnership would have earned much
more than the P334,255.61. . . The award, therefore, made by the trial
court of the amount of P200,000.00, as compensatory damages, is not
speculative, but based on reasonable estimate. (Ibid, at p. 615).
8. Continuance of Partnership Business Instead of Winding-Up
Article 1840 recognizes that a partnership may be dissolved, but the
underlying partnership business enterprise would not be wound-up, and in
fact may be continued as a going concern.
a. Who May Continue Partnership Business and Obligations
Assumed?
Article 1837 of the Civil Code recognizes the right of the partners who
have not caused the dissolution wrongfully, if they so desire, to continue
the business in the same name either by themselves or jointly with others
during the agreed term for the partnership.
If such right to continue the partnership business is so exercised, then
such exercising partners must secure the payment by bond approved by
the court, or pay to any partner who has caused the dissolution
wrongfully, the value of his interest in the partnership at the point of
dissolution, less any damages recoverable from said defaulting partner, as
well as indemnify him against all present or future partnership liabilities.
b. Disposition of Liabilities When Partnership Business Continued
Article 1840 provides that if the dissolved partnership is not wounded-up
and instead the partners so qualified have chosen to continue the
partnership enterprise as a going concern, then the creditors of the
dissolved partnership shall also be creditors of the person or partnership
continuing the business:
(a) When any new partner is admitted into an existing partnership, or
when any partner retires and assign (or the representative of the
deceased partner assigns) his rights in partnership property to two or
more of the partners and one or more third persons, if the business is
continued without liquidation of the partnership affairs;
(b) When all but one partner retires and assigns (or the representative of
a deceased partner assigns) their rights in partnership property to
the remaining partner, who continues the business without liquidation
of partnership affairs, either alone or with others;
(c) When any partner retires or dies and the business of the
dissolved partnership is continued, with the consent of the retired
partners or the representative of the deceased partner, without any
assignment of his right in partnership property;
(d) When all the partners or their representatives assigns their rights
in partnership property to one or more third persons who promise to
pay the debts and who continue the business of the dissolved partnership;
(e) When any partner wrongfully causes a dissolution and
the remaining partners continue the business, either alone or with others,
and without liquidation of the partnership affairs;
(f) When a partner is expelled and the remaining partners continue
the business either alone or with others without liquidation of the
partnership affairs.
Article 1840 of the Civil Code provides also that the liability of a third
person becoming a partner in the partnership continuing the business, to
the creditors of the dissolved partnership shall be satisfied out of the
partnership property only, unless there is a stipulation to the contrary.
This is a form of limited liability on the part of a new partner coming into
an existing partnership.
The article likewise provides that when the business of a partnership after
dissolution is continued under any conditions set forth therein, the
creditors of the dissolved partnership, as against the separate creditors of
the retiring or deceased partner or the representative of the deceased
partner, have a prior right to any claim of the retired partner or the
representative of the deceased partner against the person or partnership
continuing the business, on account of the retired or deceased partners
interest in the dissolved partnership or on account of any consideration
promised for such interest or for his right in partnership property. Nothing
in the article shall be held to modify any right of creditors to set aside any
assignment on the ground of fraud.
Finally, the article provides that the use by the person or partnership
continuing the business of the partnership name, or the name of a
deceased partner as part thereof, shall not of itself make the individual
property of the deceased partner liable for any debts contracted by such
person or partnership.
The foregoing rules of liabilities must always be construed in consonance
with the primary doctrine of protecting creditors who deal in good faith
with the partnership business and who cannot be expected to be aware of
the inner workings of the partnership and the intramural dealings of the
partners. Thus, in Singson v. Isabela Sawmill, 88 SCRA 623 (1979), where
the partnership executed a chattel mortgage over its properties in favor of
a withdrawing partner, and the withdrawal was not published to bind the
partnership creditors, the Court ruled 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, did not relieve
such withdrawing partner from her liability to the partnership creditors.
Even if the withdrawing partner acted in good faith, it could not overcome
the position of partnership creditors who also acted in good faith, without
knowledge of her withdrawal from the partnership. Thus, the Court
affirmed the standing of the partnership creditors to seek the annulment of
the chattel mortgage for having been entered into adverse to their
interests.
e. Disposition of Liabilities When Dissolution Is Caused by the
Retirement or Death of a Partner
Under Article 1841 of the Civil Code, when any partner retires or dies, and
the business is continued under any of the conditions set forth in Article
1840, or in Article 1837(2), without any settlement of accounts as
between him or his estate and the person or partnership continuing the
business, unless otherwise agreed, then the following rules shall apply:
(a) The partner or his legal representative as against such person or
partnership may have the value of his interest at the date of
dissolution ascertained; and
(b) The partner or his legal representative shall receive as an
ordinary creditor an amount equal to the value of his interest in
the dissolved partnership, with option:
(i) to receive interest; or
(ii) in lieu of interest, the profits attributable to the use of his right in the
property of the dissolved partnership.
Nonetheless, the article expressly provides that the creditors of the
dissolved partnership as against the separate creditors, or the
representative of the retired or deceased partner, shall have priority on
any claim arising under said article, as provided by Article 1840, third
paragraph.
9. Partners Right to Demand an Accounting
Under Articled 1842 of the Civil Code, in the absence of any agreement to
the contrary, the right to receive an accounting of his interest shall accrue
to any partner, or his legal representative, as against the winding-up
partners, or the surviving partners, or the person or partnership continuing
the business, at the date of dissolution.
In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746 (1989), the
Court held that the right to accounting does not prescribe during the life of
the partnership, and that prescription begins to run only upon the
dissolution of the partnership and final accounting is done, under the
rationale that:
. . . As stated by the respondent, a partner shares not only in profits but
also in the losses of the firm. If excellent relations exist among the
partners at the start of business and all the partners are more interested
in seeing the firm grow rather than get immediate returns, a deferment of
sharing in the profits is perfectly plausible. It would be incorrect to state
that if a partner does not assert his rights anytime within ten years from
the start of operations, such rights are irretrievably lost. The private
respondents cause of action is premised upon the failure of the petitioner
to give him the agreed profits in the operation of Sun Wah Panciteria. In
effect the private respondent was asking for an accounting of his interests
in the partnership. (Ibid, at p. 754).
XV. LIMITED PARTNERSHIPS
1. Nature, Formation and Registration
According to Tolentino, the provisions of the Civil Code on limited
partnerships were taken from the Uniform Limited Partnership Act of the
United States of America. (See annotations in TOLENTINO, CIVIL CODE OF
THE PHILIPPINES, Vol V, pp. 382 to 395 [1992 ed.]; See alsoReport of the
Code Commission, p. 149). In essence, therefore, American decisions
relating to explaining the effects of the provisions of the Uniform Limited
Partnership Act should be taken as quite instructive in considering the
provisions of the new Civil Code on limited partnerships.
The De Leons give a more descriptive historical background of the limited
partnership as an outgrowth of the Roman Law, which provided that one
or more persons might turn over property to a slave and avoid personal
liability by trading through him. (De Leons, p. 295). They describe how
the institution of limited partnership grew up in the civil law, rules
governing this form of business, substituting, of course, for the slaves,
free persons who become general partners with unlimited liability, and it
development into the United States, thus
Louisiana, which uses the civil instead of the common law, recognized this
form of organization. In 1822, the principal rules on limited partnership
which grew up in the civil law were codified and enacted into a statute by
the State of New York. New Yorks lead has been followed by most
common law jurisdictions though England did not fall into line until 1907.
(Charles W. Gertenberg, Organization and Control, [1919], 3 Modern
Business, p. 50). (Ibid)
Bautista quoted from the New York decision in Ames v. Downing, 1 Brad.
(N.Y. Surr. Cit.) 321, (BAUTISTA acknowledges that the American decision
is reproduced in CRANE AND MCGRUDER, CASES ON PARTNERSHIP, 674-
675.) to describe the origin and development of limited partnerships, thus
The system of limited partnership, which was introduced by statute into
this state, and subsequently very generally adopted in many other states
of the Union, was borrowed from the French Code. (3 Kent. 36; Code de
Commerce, 12, 23, 24.) Under the name of la societe en commandite, it
has existed in France from most authentic commercial records, and in the
early mercantile regulations of Maseilles and Montpelier. In the vulgar
latinity of the middle ages it was styled commanda, and in
Italy accomenda. In the states of Pisa and Florence, it is recognized so far
back as the year 1166; also in the ordinance of Louise-le Hutin, of 1315;
the statutes of Marseilles, 1253; of Geneva, of 1588. In the middle ages it
was one of the most frequent combinations of trade, and was the basis of
the active and widely extended commerce of the opulent maritime cities of
Italy. It contributed largely to the support of the great and prosperous
trade carried on along the shores of the Mediterranean, was known in
Laguedoc, Provence, and Lombardy, entered into most of the industrial
occupations and pursuits of the age, and even traveled under the
protection of the arms of the Crusaders to the city of Jerusalem. At a
period when capital was in the hands of nobles and clergy, who, from pride
of caste, or cannonical regulations, could not engage directly in trade, it
afforded the means of secretly embarking in commercial enterprises, and
reaping the profits of such lucrative pursuits, without personal risk; and
thus the vast wealth, which otherwise could have lain dormant in the
coffers of the rich, became the foundation, by means of this ingenious
idea, of the great commerce which made princes of the merchants,
elevated to the trading class, and brought the Commons into position as
an influential estate in the Commonwealth. Independent of the interest
naturally attaching to the history of a mercantile contract, of such ancient
origin, but so recently introduced where the general partnership, known to
the common law has hitherto existed alone, I have been led to refer to the
facts just stated, for the purpose of showing that the special partnership
is, in fact, no novelty, but an institution of considerable antiquity, well
known, understood and regulated. Ducange defines it to be: Societas
mercatorem qua uni sociorum tota negotiationis cura commendatur, certis
conditionibus. It was always considered a proper partnership, societas,
with certain reserves and restrictions; and in the ordinance of Louis XIV.,
of 1793, it is ranked as a regular partnership. In the Code of Commerce it
is classed in the same manner. I may add, as an important fact, for the
explanation of the distinction to which I shall shortly advert, that the
French Code permits a special partnership, of which the capital may be
divided into shares, or stock, transmissible from hand to hand. In such a
case, the death of the special partner does not dissolve the firm, the
creation of transmissible shares being a proof that the association is
formed respectu negotii, and not respectu peronsarum; but even in such a
partnership the death of the general partner effects a dissolution, unless it
is expressly stipulated otherwise. But, says M. Troplong, in would be
wrong to extend the rule that a partnership, of which the capital is divided
into transmissible shares, is not dissolved by the death of a stockholder, to
a special partnership, the capital of which is not so divided. The statute of
New York recognizes only the latter kind of partnership, the names of the
parties being required to be registered, and any change in the name
working a dissolution, and turning the firm into a general partnership.
Such a partnership has always been held to be dissolved by the death of
the special partner. *** The partnership remains under the dominion of
the common law. It has created between the special and general partner a
tie, which is not subjected to the caprice of unforseen changes; it has
produced mutual relations of confidence, which the general partner cannot
be forced to extend to strangers. (BAUTISTA, at pp. 399-400)
It should be recognized that prior to the New Civil Code provisions on
limited partnerships, such institution was covered by the Spanish Code of
Commerce. In Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142
(1923), our Supreme Court recognized that there existed provisions in the
Code of Commerce governing limited partners: To establish a limited
partnership there must be, at least one general partner and the name of at
least one of the general partners must appear in the firm name. (Code of
Commerce, Arts. 122(2), 146, 148). (Ibid, at pp. 150-151)
What seems clear from all the foregoing is that the institution of limited
partnership had its origin from civil law, was adopted into the American
common law system, from whence it found its current adoption into the
Philippine legal system through the provisions of the new Civil Code of the
Philippines. Likewise, limited partnerships originated and grew primarily
from commercial partnership practices. Its origin in antiquity may be
basis to say that under modern setting, the limited partnership may be an
inadequate medium of doing business, for its main features and objectives
could be achieved by the modern corporation, especially the close
corporation vehicle.
a. Essence of the Medium of Limited Partnership
Article 1843 of the Civil Code defines a limited partnership as one formed
by two or more persons under the provisions of the following article,
having as members one or more general partner and one or more limited
partners. The limited partners as such shall not be bound by the
obligations of the partnership.
The American decision in Hoefer v. Hall, 411 P.2d 230 (1966), describes
the purpose and essence of the limited partnership under the terms of the
Uniform Limited Partnership Act, thus
x x x. A limited partnership is strictly a creature of statute, its object being
to enable persons not desiring to engage in a particular business, to invest
capital in it and to share in the profits which might be expected to result
from its use, without becoming liable as general partners for all
partnership debts. In other words, it is a form of partnership in which the
liability to third persons of one or more of its members is limited to a fixed
amount. . . (Citing Vol 2, ROWLEY ON PARTNERSHIP, 2d Ed., sec. 53.0,
pp. 549-552; Vol. 8, U.L.A., p. 2; Lanier v. Bowdoin, 282 N.Y. 32, 24 N.E.
2d 732; Ruzicka v. Rager, 305 N.Y. 191, 111 N.E. 2d 878, 39 A.L.R. 2d
288).
As a species of contract, a limited partnership may be characterized as a
formal or solemn contract, in that no limited partnership is formed unless
the formalities provided for under Article 1844 of the Civil Code are
complied with; and failure to so comply with the formalities only brings
about the creation of a general partnership. Having complied with the
formalities mandated by Partnership Law to form such a medium of doing
business, the distinguishing feature of a limited partnership is that it has
through the limited partners been able to institute a form of limited
liability, in that the limited partner as such shall not be bound by the
obligations of the partnership.
The language used in the last sentence of Article 1843 of the Civil Code
(The limited partners as such shall not be bound by the obligations of the
partnership.) carries more the doctrine of no liability for limited
partners, and perhaps more accurately reflects that in civil law, the debts
and obligations of the partnership pertain to it as a separate juridical
person, and that generally non-contracting parties, such as the limited
partners, are not bound by said contractual debts and obligations under
the principle of privity or relativity under general contract law. But
frankly, the use of the term limited liability for limited partners is more
appropriate since, as will be discussed hereunder, limited partners do
assume limited liability pertaining to their contributions and partnership
assets held them under Article 1858.
As will also be shown in the discussions hereunder, the limited liability
feature of the limited partnership is achieved by taking away from the
persons of the limited partners most of the key features of partnerships in
general, namely, mutual agency, delectus personae, and the right to
manage partnership affairs.
b. Requirements for the Formation of a Limited Partnership
Article 1844 lays down the rules by which two or more persons desiring to
form a limited partnership need to comply with, thus:
(1) Sign and swear to a Certificate of Limited Partnership, which
shall contain the following provisions describing or
designating the:
partnership name, adding thereto Limited;
character of the business;
principal place of business;
the term of existence;
name and residence of each of the partners, with clear designation of
who are the general and limited partners; and the right, if given, of
partners to admit additional limited partners;
contributions to the partnership; and the terms under which additional
contribution are to be made by the limited partners;
right, if given, of a limited partner to substitute an assignee as
contributor in his place;
time, if agreed upon, when the contributions of limited partners shall
be returned; and the right, if given, to demand and receive property
other than cash in return for such contribution;
share of the profits or the other compensation by way of income which
each limited partner shall receive by reason of his contribution; and the
right, if given, of one or more of the limited partners to priority over
other limited partners, as to contributions or as to compensation by
way of income and the nature of such priority;
right, if given, of the remaining general partner or partners to continue
the business on the death, retirement, civil interdiction, insanity or
insolvency of a general partner; and
(2) File such Certificate with the SEC
Hoefer v. Hall, 411 P.2d 230 (1966), explains the rationale in American
jurisdiction, on the formalities required of limited partnership under the
Uniform Limited Partnership Act, thus
x x x. The main purpose of the statutory regulation is to ensure the
limitation on the liability of limited partners. It naturally follows that in
order to obtain the privilege of limited liability, one must conform to the
statutory requirements. . . (Citing Gilman Pain & Varnish Co., v. Legum,
197 Md. 665, 80 A.2d 906; R.S. Oglesby Co. v. Lindsay, 112 Va. 767, 72
S.E. 672; Mud Control Laboratories v. Covey, 2 Utah 2d 85, 269 P. 2d
854; Bisno v. Hyde, 290 F.2d 560 [9th Cir. 1961]; 68 C.J.S. Partnership
Sec. 450, p. 1006; and 40 Am.Jur., Partnership, Sec. 506, p. 475)
Obviously, the purpose of the requirement that the certificate shall be
recorded is to acquaint third persons dealing with the partnership with the
essential features of the partnership arrangement. . . Under the
circumstances of this case, where neither the rights of third parties nor a
partners claim of limited liability is involved, we cannot se how the failure
to record the certificate could affect the existence of a limited partnership
insofar as the parties, inter se, are concerned . . .
The indicated provisions under Article 1846 which would provide for a right
if given, must yield to the legal conclusion that in effect the right alluded
to does not exist if not expressly provided for in the Certificate of Limited
Partnership or by another provision in the New Civil Code.
With respect to the contents, swearing and SEC-filing of the Certificate of
Limited Partnership, Article 1846 recognizes the doctrine of substantial
compliance: A limited partnership is formed if there has been substantial
compliance in good faith with the foregoing requirements. While there is
no doubt that the execution of a sworn Certificate of Limited Partnership
and its filing with the SEC are essential elements to establish a limited
partnership, the question that arises is that which of the enumerated
contents of the Certificate under Article 1844 are a must to reach the
level of substantial compliance?
Thus, under the Code of Commerce then in place, Jo Chung Cang v. Pacific
Commercial Co., 45 Phil. 142 (1923), held:
To establish a limited partnership there must be, at least one general
partner and the name of at least one of the general partners must appear
in the firm name. (Code of Commerce, arts. 122[2], 146, 148.) But
neither of these requirements have been fulfilled. The general rule is, that
those who seek to avail themselves of the protection of laws permitting
the creation of limited partnerships must show a substantially full
compliance with such laws. A limited partnership that has not complied
with the law of its creation is not considered a limited partnership at all,
but a general partnership in which all the members are liable. (Ibid, at pp.
150-151, citing MECHEM, ELEMENTS OF PARTNERSHIP, p. 412; GILMORE,
PARTNERSHIP, pp. 499, 595; 20 R. C. L., 1064)
It can thus be concluded, that the institution of who is or are the general
partners, and who is or are the limited partners, including the amount or
nature of their contributions, are essential contents of the Certificate of
Limited Partnership. In other words, limited partners cannot claim the
benefits of limited liability unless they find themselves expressly classified
as such in the duly filed and registered Certificate of Limited Partnership.
(Same ruling in Lowe v. Arizona Power & Light Co., 427 P.2d 366 [1967]).
Nonetheless, the formal requirements to establish a limited partnership
are relevant only insofar as establishing the limited liability rights against
third parties. Under American jurisprudence, particularly under the Hoefer
v. Hall decision, the issue as to substantial compliance has no relevance
in resolving issues inter se among the partners, and general partners are
bound by the contractual commitment under the partnership agreement to
hold the limited partners liable for partnership debts and obligations only
to the extent of their contributions. To the same effect is the ruling in Jo
Chung Cang v. Pacific Commercial Co., (45 Phil. 142 [1923]) under the
terms of the Code of Commerce which also required execution of public
document and formal registration of the certificate of limited partnership,
thus
The supreme court of Spain has repeatedly held that notwithstanding the
obligation of the members to register the articles of association in the
commercial registry, agreements containing all the essential requisites are
valid as between the contracting parties, whatever the form adopted, and
that, while the failure to register in the commercial registry necessarily
precludes the members from enforcing rights acquired by them against
third persons, such failure cannot prejudice the rights of third persons. . .
(Ibid, at p. 153).
The mandatory requirement of the filing of the certificate with the SEC
constitute the registration or notice that binds the public to the essential
nature of the partnership as one constituting a limited liability on the part
of the limited partners. This is consistent with the commercial law practice
that a diminution of rights or the limitation of remedies brought about by a
commercial medium shall come about only when there has be registration
that can bind the dealing public.
American jurisprudence requires that the filing of the Certificate of Limited
Partnership with the proper government agency (the SEC in our case),
must be done within a reasonable time. (Stowe v. Marrilees,44 P.2d
368; Solomont v. Polk Development Co., 54 Cal. Rptr. 22, 27 [1966]) In
our jurisdiction, the fact of non-filing of the certificate of limited
partnership does not bring about a limited partnership, and what is
deemed constituted is a general partnership.
c. False Statement in the SEC Certificate
Under Article 1847 of the Civil Code, if the Certificate contains a false
statement, one who suffers loss by reliance on such statement may hold
liable any party to the certificate who knew the statement to be false at
the time he signed the certificate or subsequently failed to cancel or
amend the certificate or to file a petition for such cancellation or
amendment.
The language covering liability under Article 1847 would indicate that a
limited partner who signs the Certificate knowing provisions therein to be
false, may thus become unlimitedly liable to a person who suffers loss by
reason of such false statement. But it does not create general unlimited
liability, because only third parties who relied upon such false statements,
and have suffered loss thereby, can hold the limited partner liable beyond
his contribution. Thus, in the American decision inGilman Paint & Varnish
Co. v. Legum, 80 A.2d 906, 29 A.L.R. 2d 286 (1951), it was held that
falsely indicating in the articles of limited partnership the contribution of
the limited partner at lower amount than what was actually contributed
cannot be a basis to hold such limited partner liable beyond his
contribution, since it would be inconceivable that a creditor could suffer
loss by relying on an investment stated in the certificate of partnership
which was smaller than the amount actually contributed; and that it is
when the actual contribution is less than amount stated in the certificate
that reliance upon it may cause loss to a creditor.
d. Name of Limited Partnership
Like in the ordinary partnership, the determination of the liabilities
assumed by partners and non-partners, is very much tied-up with the
name given to the partnership venture; in other words, the name which a
partnership employs to deal with the public may allow a member of the
dealing public basis upon which to enforce the personal liabilities against
the partners that arise from partnership dealings.
Under Article 1844, among the contents of the Certificate of Limited
Partnership should be The name of the partnership, adding thereto the
word Limited. In contrast, under Articles 122(2), 146 and 148 of the
Code of Commerce, as found by Jo Chung Cang v. Pacific Commercial
Co., (45 Phil. 142 [1923]) To establish a limited partnership, there must
be, at least, one general partner and the name of at least one of the
general partners must appear in the firm name. Today, it is not critical
under the terms of Article 1844 that the firm name should contain the
names of the general partners, or any of them, and what is imposed is to
add the word Limited. In fact, under Article 1815 (which is the first
article under the section denominated as Obligations of the Partners with
Regard to Third Persons), Every partner shall operate under a firm
name, which may or may not include the name of one or more of the
partners. This can only lead to the conclusion that under our present Law
on Partnerships, it is not required as an essential element to establish a
limited partnership, that the firm name should contain the names of the
general partners, or any of them.
One of the key elements under Partnership Law by which limited partners
are to be accorded their limited liability rights, is that they practically must
become invisible to the public when it comes to partnership dealings: they
are mere passive investors in the partnership business, and they do not
participate in its management nor are they agents of the partners and of
the partnership. And every indication that would lead the dealing public to
believe or presume that a limited partner participates in management or
control of the firm becomes a basis by which such limited partners shall,
insofar as the dealing public is concerned, be stripped of their limited
liability right.
Thus, under Article 1846, it is provided that the surname of a limited
partner shall not appear in the partnership name, unless it happens to be
the surname of a general partner or that prior to the time when the limited
partner became such, the business had been carried or under a name in
which such surname appeared. As a consequence of the breach of such
prohibition, [a] limited partner whose surname appears in a partnership
name . . . shall be liable as a general partner to partnership creditors who
extend credit to the partnership without actual knowledge that he is not a
general partner. Estoppel is therefore the legal basis upon which a limited
partner becomes liable to a creditor who acted on the belief that by the
inclusion of his surname, the partner was a general partner.
The problem with this rule of estoppel is that it would be difficult to
imagine how such a partnership creditor could claim good faith, since with
the filing the SEC of the Certificate of Limited Partnership indicating
therein a partner as a limited partner, would amount to constructive
knowledge of such fact binding on the whole world. Does Partnership Law
not intend that compliance with the mandatory requirements of execution,
swearing and SEC-filing of the Certificate of Limited Partnership shall
amount to registration on a public document binding on the whole world?
In any event, Article 1846 relies upon the principal of without actual
knowledge, to the exclusion of the principle of constructive knowledge.
It would seem therefore that the default rule in Philippine Partnership Law
is that articles of partnership and certificates of limited partnership, even
when formally registered with the SEC, do not constitute a form of
constructive notice to the public dealing with such partnerships, and there
is no obligation on the part of the dealing public to determine the legal
status of the partnership, and the intramural arrangements between and
among the partners, much less to determine the extent of the sharing and
division of powers among the partners.
What happens if the firm name adopted by limited partnership formally in
the Certificate of Limited Partnership does not contain the word Limited,
does it qualify to be a limited partnership? We believe this is only a formal
and not a substantial requirement, which cannot strip the limited partners
of their right to claim limited liability, for a member of the dealing public
cannot claim to have sustained loss by reason of the non-inclusion of the
word Limited in the firm name, since the Certificate clearly indicates who
are the limited partners. Again, the drawback of this position is that it
places the burden on the dealing public to know the contents of the
Certificate filed with the SEC.
What happens if the sworn Certificate on file with the SEC does not
provide at all for a firm name, would it break the limited liability rights of
the expressly designated limited partners therein. We believe that in such
a case, there is no substantial compliance with the requirements under
Article 1846. The firm name of every partnership is the very means by
which its existence as a juridical person, separate and distinct from its
members, and distinguishable from other firms and juridical persons,
constitutes the essence of the person of the partnership and thereby the
nexus upon which the obligatory force of its contracts and transactions are
fastened. The firm name of a partnership is the essence by which to
enforce its standing in its contractual relationship, and the legal basis upon
which its creditors can enforce its obligations and other contractual
commitments. As the firm name is critical to partnerships in general, then
it becomes more so in the case of a limited partnership, where the named
limited partners can fasten their limited liability within the four corners of
the partnership business enterpriser duly constituted within the person of
the created limited partnership. Without the firm name, it is nearly
impossible to determine where those four corners lie, and may be a basis
by which partnership creditors may be defrauded.
e. Contributions to the Limited Partnership
Article 1846 of the Civil Code expressly provides that the contributions of a
limited partner may be cash or other property, but not service.
Contribution of service by a limited partner is not allowed because to allow
otherwise would be to place a limited partner into the management of the
firm, and thereby constitute a breach of the fundamental reason for being
accorded limited liability privileges.
When the contribution of a limited partner is service or industry, then he
not only becomes unlimitedly liable, but really becomes a general partner.
The contribution of service by a limited partner should be distinguished
from being allowed under Article 1855 of the Civil Code to receive
compensation by way of income stipulated for in the certificate. This may
seem to be a contradictory feature under the Law on Partnership; for to
allow a limited partner to assume management or employment position in
the partnership business would lead a member of the dealing public to
assume that he is a regular partner. In other words, such employment
arrangements, although allowed under the law, may prove costly to a
limited partner. Actually compensation by way of income, should be
interpreted to mean that by the very position of being a limited partner,
and not because of any service or industry he will perform, he will be
accorded under the terms of the Certificate of Limited Partnership, periodic
payments whether or not the firm is making profits. Nevertheless, in
maintaining the preference of creditors to partnership assets, such
payments shall be considered as part of profit distribution.
The language of Article 1844(1)(f) which requires that the Certificate of
Limited Partnership should indicate The amount of cash and a description
of and the agreed value of the other property contributed by each limited
partner, has been taken to mean that it is imperative that the
contributions of limited partners must be given prior to or at the time of
the execution of the Certificate of Limited Partnership, and that the
indication of the obligation to give the contribution is not sufficient, and
would at least constitute a false statement in the Certificate which would
give rise to an obligation to pay the loss suffered by any person who relied
upon such statement as provided under Article 1847. (DE LEONS, at p.
308)
This position is not supported by the language of Article 1858 which makes
the limited partner liable to the partnership for the difference between his
contribution as having been made and [f]or any unpaid contribution
which he agreed in the certificate to make in the future at the time and on
the conditions stated in the certificate. The unmistakable language of
Article 1858 show that it is valid for the partners to agree under the terms
of the Certificate of Limited Partnership, for the limited partner or partners
to pay their contributions at some future time.
Does the failure of a limited partner to give his contribution to the limited
partnership at the time of the execution and registration of the Certificate
of Limited Partnership, when it is indicated therein that it has in fact been
given, make him assume the liability of a general partner? We do not think
so, for the penalty for such false statement is a special one provided under
Article 1847 which does not convert him into a general partner, but merely
makes him personally liable (beyond his promised contribution), and only
to a person who suffers loss by reliance on such false statement.
f. When Certificate Cancelled or Amended
(1) When Certificate Cancelled
Under Article 1864, the Certificate shall be cancelled when the partnership
is dissolved or all limited partners cease to be such. In these two cases,
the partnership has ceased to be a limited partnership, and may proceed
but only as a general partnership. In all other cases covered below, the
Certificate need only be amended.
Article 1865 of the Civil Code provides that the writing to cancel the
Certificate shall be signed by all members in order to be effective.
What happens in the two covered cases (dissolution and no more limited
partner remaining), if the Certificate of Limited Partnership is formally
cancelled? In the case of dissolution, usually caused by the
(2) When Certificate Amended
Under Article 1864, the Certificate must be amended when:
(a) There is a change in the name of the partnership or in the amount or
character of the contribution of any limited partner;
(b) A person is substituted as a limited partner;
(c) An additional limited partner is admitted;
(d) A person is admitted as a general partner;
(e) A general partner retires, dies, becomes insolvent or insane, or
is sentenced to civil interdiction and the business is continued;
(f) There is a change in the character of the business of the
partnership;
(g) There is a false or erroneous statement in the certificate;
(h) There is a change in the time as stated in the certificate for
the dissolution of the partnership or for the return of a contribution;
(i) A time is fixed for the dissolution of the partnership, or
(j) the return of a contribution, no time having been specified in the
certificate; or
(k) The members desire to make a change in any other statement in the
certificate in order that it shall accurately represent the agreement among
them.
Except for the return of contributions of limited partners, the foregoing
provisions must be interpreted to mean that if the certificate is not
amended to cover the instances enumerated, then such changes cannot be
given legal affect as between and among the partners and the public.
(3) Procedure to Amend Certificate
Article 1865 provides that the writing to amend a certificate shall:
(a) Conform to the requirements of Article 1844 as far as necessary to
set forth clearly the change in the certificate which it is desired to make;
and
(b) Be signed and sworn to by all members, and an amendment
substituting a limited partner or adding a limited or general partner
shall be signed also by the member to be substituted or added, and when
a limited partner is to be substituted, the amendment shall also be
signed by the assigning limited partner.
The article also provides that when a person desiring the cancellation or
amendment of a certificate may petition the courts to order such
cancellation or amendment whenever any person designated to execute
the writing refuses to do so.
A certificate is amended or cancelled when there is filed for record with the
SEC:
(a) A writing accomplished in accordance with the provisions for
cancellation or amendment of the certificate;
(b) A certified copy of the order of court ordering such cancellation or
amendment; and
(c) After the certificate is duly amended, the amended certificate shall
thereafter be for all purposes the certificate provided in the provisions
of the Law on Partnership.
2. The General and Limited Partners
a. The General Partners
(1) Who Is a General Partner in a Limited Partnership?
When a limited partnership is duly constituted, then every partner who
does not qualify as a limited partner by compliance with the formal
requirements mandated under Article 1844, is deemed to be a general
partner and subject to the unlimited liability for partnership obligations.
(2) Rights and Powers of General Partners in a Limited Partnership
Under Article 1850, a general partner shall have the rights and powers and
be subject to all the restrictions and liabilities of partner in a partnership
without limited partners, except that such general partner or all of the
general partners in a limited partnership have no power nor authority to
do any of the following acts, without the written consent or ratification of
the specific act by all the limited partners, thus:
(a) Do any act in contravention of the Certificate;
(b) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(c) Confess a judgment against the partnership;
(d) Possess partnership property, or assign their rights in
specific partnership property, for other than a partnership purpose;
(e) Admit a person as a general partner;
(f) Admit a person as a limited partner, unless the right so to do is given
in the certificate.
Article 1850 therefore enumerates six (6) instances when the acts of the
general partners on behalf of the partnership would not be valid without
the written consent of, or ratification in each transaction by, all the limited
partners. In other words, outside of the enumerated instances under
Article 1850, limited partners have no voice in partnership affairs.
Notice that the nature of the six (6) instances enumerated under Article
1850 would require unanimous written consent or ratification by all the
limited partners because they go into either of two matters:
(a) would contravene the contractual stipulations with the limited partners
(limited partners must be protected in their contractual rights);
(b) would affect the very commercial reason by which they agreed to
become passive investors: undermines the partnership business venture;
or
(c) would undermine the fiduciary duties of the general partners to
manage the partnership enterprise themselves for the limited partners.
Therefore, anything that affects the terms of the solemn contract, which
the Certificate of Limited Partnership is, would require limited partnership
approval because it would amount to a novation of contract, and easily the
following fall into that category: do any act in contravention of the
Certificate; admit a general partner, admit an additional limited partner.
The rest of the enumerated instances under Article 1850 affect
substantially the partnership business enterprise, and therefore would
require unanimous consent or ratification by the limited partners.
Three things must be noted carefully from the provisions of Article 1850.
Firstly, although Article 1850 provides that the written consent or
ratification of all the limited partners is required for the admission of a new
limited partner, unless the right to do so is given in the certificate, the
same cannot be interpreted to mean that when the right to do so is given
in the certificate, the admission of a new limited partner no longer requires
the consent of all the limited partners. For even when such right is
granted, the provisions of Article 1865 in laying down the procedure for
the amendment of the Certificate provides within its coverage the
admission of a limited partner, which requires the written consent of all
the partners. Otherwise, if the Certificate is not amended to include
formally the additional limited partner, he or she does not become a
limited partner, and would be exposed to the unlimited liability of a
general partner.
The real advantage granted by having a specific provision in the Certificate
allowing the admission or substitution of limited partners is that the same
can be done even against the wishes of the limited and general partners,
and if their signature to the amendment of the Certificate cannot be
obtained, then there is basis to go to court to obtain an order granting
such amendment of the Certificate.
Secondly, although the act of the general partners in relation to any of the
six instances covered by Article 1850 would be void without the written
consent or ratification of all the limited partners, the declaration refers to
intra-partnership issues, because insofar as third persons dealing in good
faith with the partnership, the lack of consent or ratification by the limited
partners, cannot be a basis by which they cannot treat their contracts with
the partnership as valid, binding and enforceable.
Thirdly, the enumeration of the instances under Article 1850 which would
require written consent or ratification of all the limited partnership to be
valid, is apart from the enumerated act of ownership or acts of strict
dominion under Article 1818 which cannot be effected by less than all
partners, which includes two of the instances enumerated in Article 1850,
thus
(a) Assign a partnership property in trust for creditors or on the
assignees promise to pay the debts of the partnership;
(b) Dispose of the goodwill of the business;
(c) Confess a judgment;
(d) Enter into a compromise concerning a partnership claim or liability;
(e) Submit a partnership claim or liability to arbitration; and
(f) Renounce a claim of the partnership.
Only two (2) instances are common to both Articles 1818 and 1850,
namely:
(a) Do any other act which would make it impossible to carry on the
ordinary business of a partnership; and
(b) Confess a judgment against the partnership.
Do we take it to mean that in a limited partnership, but expressly
enumerating the six (6) instances under Article 1850 of when the written
consent or ratification of all the limited partners is required, that all the
other instances granted under Article 1818 would only need the consent of
all the general partners and do not require the consent of the limited
partners, to be valid and binding? The difference in the matters pertaining
to Article 1818 is that without the requisite unanimous consent, the acts
done would be void, not only against the partnership and the other
partners who did not consent, but even as to third parties who dealt on
the other side of the transactions, because such acts or transactions are
not deemed to be in the ordinary course of partnership business, and third
parties have no right to expect that the same is within the power of any
one or more, but not all of the partners, to enter into.
(3) Duties and Obligations of General Partner
Article 1850 provides that A general partner shall . . . be subject to all the
restrictions and liabilities of a partnership without limited partners. Must
we therefore presume that every general partner in a partnership is
saddled with the same obligations, and has the same duties and fiduciary
obligations, to the limited partnership and to all the partners, whether
general or limited, as those prevailing in a non-limited partnership
arrangement?
Thus, a general partner who is a capitalist partner is saddled with the
same fiduciary duty of loyalty, in that he cannot engage in any business
that conflicts with that of the limited partnership. (Article 1789, Civil Code
of the Philippines) A general partner who is such as an industrial partner is
also saddled with the same fiduciary duty of loyalty, of being disqualified
from engaging in any business venture. (Article 1789, Civil Code of the
Philippines)
While there is no doubt that the general partners, individually and
collectively, owe fiduciary duties to the limited partners in a partnership
setting, is the legal basis of such fiduciary relationship that of principal and
agency? There seems to be little doubt that the limited partners do not
have any rights of management, and consequently do not act as agents to
one another, of the partnership itself, and of the general partners. On the
other hand, although the general partners are mutual agents to one
another, as well as being agents of the partnership, can we consider them
agents of the limited partners? The authors position on this matter is that
there can be no legal way by which the general partners can be treated as
agents of the limited partnership, for that legal relationship would violate
the rule under Article 1848 that limited partners cannot involve themselves
in the management of the partnership affairs, since the act of the agents
(the general partners) would be equivalent to the act of the principal (the
limited partners).
It is our proposition that the fiduciary relationship that arises between the
limited partners on one hand, and the general partner or partners on the
other hand, rather than being borne out by an agency relationship,
actually arises more from that of business trust: that the general partners
become in effect the trustee for the limited partners, who assume the role
of being beneficiaries to the corpus, which can be considered to be the
properties and the business enterprise of the partnership itself. Not only
does the trustee-beneficiary not only support the existence of a fiduciary
relationship between the general partners and the limited partners, but
validates the structure of management and limited liability existing in the
limited partnership setting: that as trustees, the management over the
corpus (the properties and business enterprise of the partnership) are
placed in the hands of the general partners, with an obligation to run the
partnership affairs to serve the beneficial interests of the limited partners
(to receive their share in the profits as stipulated under the Certificate of
Limited Partnership), and thereby make the limited partners, as mere
passive beneficiaries in a trust arrangement, thereby not personally liable
for the resulting debts and liabilities of the partnership venture.
The foregoing thesis explains the reason why, being merely a beneficiary
in the partnership trust, limited partners do not thereby owe any fiduciary
obligations to one another, must less to the general partners, and thereby
can engaged in a business that may even compete with that of the limited
partnerships business. Likewise, the thesis would explain why in areas
covered under Article 1818 which do not fall within the enumerations
under Article 1850, which are acts of ownership, it may be presumed that
in a limited partnership setting, the requirement that they may be done
validly only with the agreement of all the partners would only cover the
general partners since they are deemed to be endowed with the power to
do acts of ownership as trustees having naked title to the partnership
assets and business enterprise.
b. The Limited Partner
(1) Who is a Limited Partner?
Under Article 1844, no member of a partnership shall be considered a
limited partner, unless he is so designated in the Certificate of Limited
Partnership duly filed with the SEC, and under Article 1846, his surname
cannot be part of the firm name, and under Article 1845, he does not have
the right or option to contribute service to the partnership.
(2) Erroneous But in Good Faith Limited Partner
Under Article 1852, a person who has contributed to the capital of a
business conducted by a person or partnership erroneously believing that
he has become a limited partner in a limited partnership, does not by his
exercise of the rights of a limited partner:
(a) become a general partner with the person or in the partnership
carrying on the business; nor
(b) be bound by the obligations of such person or partnership;
provided that on ascertaining the mistake he promptly renounces his
interest in the profits of the business or other compensation by way of
income.
The situations contemplated under Article 1852 must cover a situation
when although there exist a partnership business, it is conducted not
within the medium of a limited partner. Therefore, if one becomes a
member of the partnership with the intention that he becomes a limited
partner, and sticks only to exercising the rights of a limited partner, he
does not incur liability of a general partner even as to the partnership
creditors, provided he undertakes the acts of good faith mandated by
law. It is only when he takes part in the control of the business (as
provided in Article 1848), that he then becomes liable as a general
partner, or when having realized the mistake in affiliating with the
partnership he does not renounce his interests in the partnership profits,
and severe his relationship with the partnership venture.
Why is it an essential feature of the acts of good faith of such limited
partner that he must renounce his interest in the profits of the business
or other compensation by way of income? The answer to this question lies
in the fact that the contract of limited partnership is considered to be a
solemn contract, and thereby void if the solemnities mandated by law
have not been complied. Therefore, in a situation where the party acts in
good faith believing himself to be a limited partner, when he learns that he
has not been duly instituted as such, then it can be considered to be a
situation where there is a void contract resulting, and if he is not to be
bound by the unlimited liability obligations of an ordinary partner in
general, then he must not also partake of any benefits or advantage
arising from the purported contractual relationship.
(3) When Limited and General Partner at the Same Time
Article 1853 provides that a person may be a general partner and a limited
partner in the same partnership at the same time, provided that this fact
shall be stated in the certificate of limited partnership. Why would a
general partner want to be a limited partner at the same time, and vice
versa? It pertains to availing of the rights of a limited partner with respect
to his contribution as such.
Under Article 1853, even when a limited partner is at the same time a
general partner, nonetheless in respect to his contribution, he shall have
the rights against the other members which he would have had if he were
not also a general partner. What would those rights be peculiar to him as
a limited partner, which are not available to him as a general partner?
Certainly it cannot be limited liability rights, for being a general partner
at the same time, he cannot have any claim for limited liability against
partnership debts and claims. The only viable rights of a limited partner
which are not undermined by the fact that he is also a general partner at
the same time, may pertain only to the priority right to the return of his
contributions, share in the profits as it pertains to him as a limited partner.
c. The Rights and Powers of the Limited Partner
The provisions of the Civil Code provide the following rights to every
limited partner in a duly constituted limited partnership:
(a) Right to limited liability (Arts. 1843 and 1848);
(b) Right to the return of his contribution (Art. 1851);
(c) Right to receive his share in the profits and compensation by way
of income (Art. 1851);
(d) Right to assign his equity interest (Art. 1851);
(e) Right to have the partnership books kept at the principal place
of business of the partnership, and at a reasonable hour to inspect
and copy any of them (Art. 1851[1]);
(f) Right to have on demand true and full information of all things
affecting the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable (Art. 1851[2]); and
(g) Right to have the dissolution and winding-up by decree of court
(Arts. 1851[3] and 1857).
Perhaps the best way to describe the rights of limited partners, the nature
and extent, even to those granted expressly by law, is the way Bautista
had summarized the ruling in the American case of Millard v. Newmark &
Co., 266 N.Y.S.2d 254 (1966), thus: In broad terms, it may be stated
that a limited partner has such rights and only such rights as the law and
his contract afford. (BAUTISTA, at p. 425)
(1) Right to Limited Liability
The essence of the doctrine of limited liability is that limited partners
who are entitled thereto shall not be bound by the obligations of the
partnership (Art. 1843) beyond what they contributed or legally bound to
contribute to the partnerships common fund.
The essence of the medium of limited partnership is to allow a group of
investors-the limited partners-to be able to participate in the profits and
losses of the partnership venture without having to be liable to partnership
creditors for the separate properties, or more properly speaking, beyond
the value of their contributions in the partnership venture. Thus, Article
1843, as it defines a limited partnership provides that [t]he limited
partners as such shall not be bound by the obligations of the partnership.
The grant of the limited liability status to limited partners comes at a price,
in that: (a) they cannot have their surnames form part of the partnership
name (Art. 1846); (b) they cannot participate in the control of the
partnership business (Art. 1848); and (c) therefore they are prohibited
from contributing service or industry into the partnership (Art. 1845). If a
limited partner violates any of these restrictions, he becomes unlimitedly
liable as in the case of general partners.
It should be noted that the feature of limited liability is poised primarily in
relationship to the creditors of the partnership venture in that they have a
right to expect that all partners are unlimited liable for partnership debts,
unless they are so indicated in the Certificate as being limited partners
who assume the role of mere passive investors; and that partnership
creditors have a right to expect that a partner who participates in
partnership affair is a general partner, and cannot claim the rights to
limited liability. Since it is a limitation on the cause of action that
partnership creditors would ordinarily have against the partners, then
matters relating to the application or non-application of the principle of
limited liability can be raised only by partnership creditors. It is a matter
that is not within the right of partners to raise.
The operative norm of this doctrine is best exemplified in two American
decisions: limited partners by definition of law and by the terms of the
certificate of limited partnership have no right to participate or interfere in
the affairs of the partnership business enterprise, and if they do
so,Donroy, Ltd. v. United States, 196 F.Supp. 54, 57 (1961), holds that
general partners can seek dissolution of the partnership (since the
actuations of the limited partners would tantanmount to a breach of the
contract of partnership); but although the partnership creditors can now
hold the limited partners who interefere in partnership affairs as unlimited
liable, nontheless, Weil v. Diversified Properties, 319 Supp. 778 (1970),
holds that the general partners cannot, on account of such intereference,
seek to enlarge the liability of the limited partners by having ghem
declared as general partners with obligations to account.
(2) Right to Return of Contributions
Article 1844(1)(h) provides that one of the provisions that should be found
in the Certificate of Limited Partnership is [t]he time, if agreed upon,
when the contribution of each limited partner is to be returned. Does that
mean that when there is no agreement or provision in the Certificate on
this matter, limited partners, like general partners, do not have a right to
demand return of contributions during the life of the partnership? The
answer is in the negative, since the nexus of a limited partners
relationship in the partnership arrangement is his contribution and the
profits that he is entitled by reason of such contribution, then the ability of
the limited partner, as really a mere passive investor, must commercially
be linked to his ability to be able to liquidate his investment within a
reasonable time that cannot be linked to the entire going concern life of
the partnership business venture.
Article 1856 provides that where there are several limited partners the
entire members may agree that one or more of the limited partners shall
have a priority over other limited partners as to the return of their
contributions, as to their compensation by way of income, or as to any
other matter, but that [i]f such an agreement is made it shall be stated in
the certificate of limited partnership, and in the absence of such a
statement all the limited partners shall stand upon equal footing.
It seems clear that priority in return of contributions or share in income to
the limited partners must not only be agreed upon by all the partners, but
must find itself expressed in the Certificate of Limited Partnership, either
as originally indicated or by way of amendment thereto. In the absence of
such provision in the Certificate, there is no priority between and among
the limited partners, and they shall be treated to be at equal footing.
Return of contributions of the limited partners, therefore, is not necessarily
associated with the dissolution of the partnership.
Under Article 1857, a limited partner shall not receive from a general
partner or out of partnership property any part of his contribution until:
(a) All liabilities of the partnership, except liabilities to general partners
and to limited partners on account of their contributions, have been paid,
or there remains property of the partnership sufficient to pay them;
(b) The consent of all members is had, unless the return of the
contribution may be rightfully demanded under the law;
(c) The certificate is cancelled or so amended as to set forth the
withdrawal or reduction.
On the other hand, when all liabilities to third party creditors have been
paid or there will remain enough assets to cover them, a limited partner
may rightfully demand the return of his contribution:
(a) On the dissolution of the partnership; or
(b) When the date specified in the certificate for its return has arrived; or
(c) After he has given six months notice in writing to all other members,
if no time is specified in the certificate, either for the return of
the contribution or for the dissolution of the partnership.
Article 1857 also provides that [i]n the absence of any statement in the
certificate to the contrary or the consent of all members, a limited partner,
irrespective of the nature of his contribution, has only the right to demand
and receive cash in return for his contributions.
When the partnership creditors preference is respected (either because
they will first be all paid, or assets would be provided for their settlement),
do limited partners have the right to demand for the return of their
contributions even when it is only in cash, even when no such right is
provided for in the Certificate of Limited Partnership or outside of
dissolution scenario? The answers seems to be in the affirmative because
of the separate ground for return provided under Article 1857 [a]fter he
has given six months notice in writing to all other members, if no time is
specified in the certificate, . . . for the return of the contribution, and this
may seem even when the demand for return does not obtain the
unanimous vote of the other partners.
It is true that one of the conditions for the valid return of a limited
partners contribution is that there has to be the proper amendment of the
Certificate of Limited Partnership, which under the specific provisions
governing the same can only be done with the written consent of all the
partners. Nonetheless, the ackwnowledgment of the right of limited
partners to have the return of their contribution upon compliance with the
6-month notice rule, would mean that in the event the other partners
oppose such a return and they refuse to sign on the amendment to the
Certificate of Limited Partnership, nonetheless, it would authorize the
withdrawing limited partner to seek court order for the proper amendment
thereof.
What needs to be emphasized is that the law recognized that limited
partners are mere passive investors in the partnership venture, and in the
end they must have a way of offing-out of the venture either by the ability
to assign their equity interests or to demand properly the return thereof.
(3) Right to Profit or Compensation by Way of Income
Under Article 1856, a limited partner may receive from the partner the
share of the profits or the compensation by way of income stipulated for in
the certificate, provided that after such payment, whether from the
partner property or property of a general partner, the partnership assets
are in excess of all liabilities of the partnership, except liabilities to limited
partners on account of their contributions and to general partners. Even in
a limited partnership, the law recognizes the priority standing of
partnership creditors to those of the limited and general partners in terms
of payment from the partnership property.
It must be understood that the meaning of compensation by way of
income, should not mean that the limited partner is entitlted to be
employed or to participate in the management of or in the operations of
the partnership, for which he can be paid compensation. For even when
a limited partner is hired as an employee of the firm, this may be treated
as participating in the partnership affairs as to make them unlimitedly
liable for partnership debts and obligations. The term compensation by
way of income, means any arrangement by which the distribution of
profits is termed compensation or salary done on a regular or periodic
basis as may be agreed upon in the Certificate of Limited Partnership, and
paid to the partner by reason of his simply being a partner, and not by
virtue of the services or industry he renders to the firm.
(4) Right to Assign Limited Partners Interest
Under Article 1859, a limited partners interest in the limited partnership is
assignable, and like in an ordinary partnership, the assignee steps into the
shoes of the assigning limited partner only when admitted by the other
members: A substituted limited partner is a person admitted to all the
rights of a limited partner who had died or has assigned his interest in a
partnership. The article also provides that An assignee shall have the
right to become a substituted limited partner if all the members consent
thereto or if the assignor, being thereunto empowered by the certificate,
gives the assignee that right. But in the end Article 1859 provides
expressly that there is a need to amend the certificate, thus: An assignee
becomes a substituted limited partner when the certificate is appropriately
amended.
Article 1859 provides that the substituted limited partner has all the rights
and powers, and is subject to all the restrictions and liabilities of his
assignor, except those liabilities which he was ignorant of at the time he
became a limited partner and which could not be ascertained from the
certificate.
The article also provides that the substitution of the assignee as a limited
partner does not release the assignor from liability to the partnership for
false statement in the certificate under Article 1847, and for his
contributions liabilities under Article 1858.
Finally, Article 1859 provides that an assignee who does not become a
substituted limited partner, has no right to require any information or
account of the partnership transactions or to inspect the partnership
books; he is only entitled to receive the share of the profits or other
compensation by way of income, or the return of his contributions, to
which his assignor would otherwise be entitled.
On the other hand, under Article 1849, after the formation of a limited
partnership, additional limited partners may be admitted only upon filing
an amendment to the original certificate in accordance with the procedure
of amendments provided under Article 1865. Since Article 1849 does not
provide a particular procedure or voting threshold by which additional
limited partners may be admitted into the partnership, then the
requirements would have to track the procedure mandated under Article
1865 on the amendment of the Certificate of Limited Partnership, which
provides that the amending certificate Be signed and sworn to by all
members, and an amendment substituting a limited partner or adding a
limited or general partner shall be signed also by the member to be
substituted or added, and when a limited partner is to be substituted, the
amendment shall also be signed by the assigning limited partner. If
existing limited partners are more of passive investors in the partnership
venture, why would their consent be essential in a decision by the general
partners to admit additional limited partners, whenever that power is not
expressly provided for in the Certificate of Limited Partnership?
The first reason is that the institution of any limited partner (whether
original or additional) requires a formal indication in the Certificate,
otherwise such partners are not deemed to be limited partners, and they
will be treated as general partners. Consequently, the admission of a new
limited partner is really equivalent to an amendment or novation of the
original or existing limited partnership agreement, which under the
principle of mutuality in Contract Law, cannot be done without the consent
of all contracting parties, including the limited partners. This point
emphasizes the legal truism that limited partners must be treated in two
levels of legal relationship in the partnership arrangement: as passive
investors in the partnership venture, and as parties to the contract of
limited partnership.
Secondly, the admission of a new limited partner into the partnership
venture must necessarily eat up on the proportional share of the existing
limited partners in the partnership profits, and therefore like the principle
governing pre-emptive rights of stockholders under Corporate Law, limited
partners must give their consent to the admission of a new limited partner
which would have the effect of diluting their proportional right to the
partnership profits.
Finally, the admission of a new limited partner into the partnership also
dilutes the proportional share that each of the existing limited partners are
to have in the distribution of the net assets of the partnership upon
dissolution and winding-up.
If the equity holdings of limited partners in the partnership are impersonal
in nature, because they do not entitle the limited partners to participate in
the management of the partnership affairs, much less to act as agents of
one another, the partnership or the general partners, then it becomes a
little difficult understanding why the substitution by a limited partner of
another person in his place cannot happen as a matter of commercial
right, without having to obtain the consent of all the other partners.
Perhaps the free-transferability of the equity units of limited partners
should be instituted as a better feature of the institution of limited
partners in our jurisdiction.
We can understand the rationale for the need to formally amend the
Certificate of Limited Partnership whenever a limited partner is substituted
by another person as compliance with the solemn nature of the limited
partners position vis-a-vis to formally bind the public to the fact that they
are only limitedly liable. However, the same solemnity and notice to the
public can be achieved simply by registering with the SEC the sale or
assignment by a limited partner of his equity to another person. Requiring
the formal amendment of the Certificate of Limited Partnership
unnecessary involves the participation of all the other partners (by their
written consent or ratification), which makes the process entirely
cumbersome and needlessly costly, when such consent can be presumed
to have been part of the original perfection of the contract of partnership
among the parties, and, more importantly, the process of sale and
substitution cannot amount to a diminution or prejudice of the rights of
any of the other partners, whether general or limited, since limited
partners, whoever they may be, practically have no right or power except
as it pertains to their proprietary interest in the partnership. In short, the
entire rationale of delectus personae is completely irrelevant to limited
partners among themselves, and even in their contractual relationship with
the general partners.
(5) Heirs of Deceased General Partner Succeed Generally as
Limited Partners
Although there is no direct statutory provision that governs this particular
situation, the position has been taken that when the heir of the general
partner succeeds to his equity in the limited partnership pursuant to an
express provision in the Certificate of Limited Partnership, the presumption
is that he succeeds only to his investments, and thereby becomes only a
limited partner, unless the succeeding heir expressly manifest that he is
succeeding as a general partner, (DE LEONS, at pp. 298 and 300-301)
because he would normally prefer to avoid any liability in excess of the
value of the estate inherited so as not to jeopardize his personal assets.
(DE LEONS, at p. 319) The decision in Goquiolay v. Sycip, 9 SCRA 663
(1963), seems to support such position, thus
Besides, as we pointed out in our main decision, the heir ordinarily (and
we did not say necessarily) becomes a limited partner for his own
protection, because he would normally prefer to avoid any liability in
excess of the value of the estate inherited so as not to jeopardize hid
personal assets. But this statutory limitation of responsibility being
designed to protect the heir, the latter may disregard it and instead elect
to become a collective or general partner, with all the rights and privileges
of one, and answering for the debts of the firm not only with the
inheritance but also with the heirs personal fortune. This choice pertains
exclusively to the heir, and does not require the assent of the surviving
partner. (Ibid)
We do not agree with such position.
The institution of limited partnership is solemn or formal under our
Partnership Law, and no person becomes a limited partner, whether by the
power of assignment provided under the Certificate, or by the power of
substitution, unless the Certificate is formally amended to so name the it is hard to see why when a general partner dies and is substituted by an
assignee or the substitute, as a limited partnership. heir; the ipso jure effect is for the substitute to be a limited partner.

Consequently, in a general partnership, when the articles of partnership (6) Limited Right as to Partnership Affairs
provide expressly that a deceased partner shall be substituted by his heirs,
the heirs do not become partners, unless formally accepted into the Article 1851 provides that a limited partner shall have the same rights as a
partnership arrangement under the doctrine of privity or relativity general partner only to:
applicable to partnerships as embodying contractual relationship. Only
when the succeeding heirs confirms that he takes more than just the (a) have the partnership books kept at the principal place of business;
equity rights of the deceased partner and actually steps into the shoes of and to inspect and copy them at reasonable hours;
the deceased partner thus he even become a partner, and in that case a
general partner. In order for him to come in as a limited partnership, there
(b) have on demand true and full information of all things affecting the
is a need to formally adopt a Certificate of Limited Partnership as provided
partnership, and a formal account of partnership affairs whenever
by Article 1844.
circumstances render it just and reasonable;

On the other hand, in a limited partnership scenario, where the Certificate

Under Article 1854, a limited partner may loan money to, and transact
of Limited Partnership provides for substitution of a general partner by his
other business with, the partnership without adverse consequences to his
heir in the event of death, it is hard to see how the automatic application
standing as a limited partner and his right to demand only limited liability
of such provision would thereby make the heir a partner at all, whether
exposure. When he is not also a general partner, a limited partner may
limited or general partner. Since partnership relationship is essentially
receive on account of resulting claims against the partnership with general
contractual in nature where consent is the essence to make one a partner,
creditors a pro rata share of the assets. Nonetheless, in all these cases, a
then an heir succeeds only to the equity rights of the deceased general
limited partner shall not:
partner and unless he formally consents to become a partner, then he
does not become one, whether general or limited partner. In addition, if
such consent is obtained, whether expressly or impliedly, from such heir, (a) receive or hold as collateral security any partnership property; or
in the absence of expressly choosing to become a limited partner, the
general rule should be that he becomes a general partner by his (b) receive from a general partner or the partnership any payment,
acceptance into the partnership. To become a limited partner, by conveyance, or release from liability, if at the time the assets of the
succeeding a general partner, requires not only indication that one partnership are not sufficient to discharge partnership liabilities to persons
chooses to join only as a limited partner, but actually requires compliance as general or limited partners.
with the formalities covering the amendment of the Certificate of Limited
Partnership, without which one becomes a general partner subject to The violation of any of the immediately foregoing prohibitions shall
unlimited liability. constitute fraud on the creditors of the partnership.

This position is bolstered by Article 1859 which provides that even when (7) Right to Dissolve the Limited Partnership
there is a specific provision in the Certificate allowing a limited partner to
substitute another person in his stead, such substitution does not become Under Article 1857, a limited partner may have the partnership dissolved
valid (i.e., the substituted partner does not become a limited partner), and its affairs wound up when:
unless there is a formal amendment to the Certificate. When such
solemnities are required when a limited partner is substituted in his stead, (a) he rightfully but unsuccessfully demands the return of his
contribution; or
(b) The other liabilities of the partnership have not been paid, or
the partnership property is insufficient for their payment, and the
limited partner would otherwise be entitled to the return of his
contributions.
c. Obligations of Limited Partners
(1) On Original Contributions to the Partnership
Aside from the prohibition against giving service as contribution to the
limited partnership (Art. 1845), a limited partner is liable to the
partnership for the difference between his contribution as having been
made and for any unpaid contribution which he agreed in the certificate to
make in the future at the time and on the conditions stated therein (Art.
1858).
(2) On Additional Contributions
Under Article 1844(1)(g), a limited partner may be obliged during the life
of the partnership to give additional contribution if such obligation is
provided for in the Certificate of Limited Partnership. The default rule
therefore is that in the absence of a provision in the Certificate, limited
partners cannot be compelled to give additional contribution to the
partnership.
Do the provisions of Article 1791, which obliges a partner to sell his
interest to the other partners in the event such selling partner refuses to
contribute additional share to the capital to save the partnership from the
imminent loss of its business? The authors position is that the provisions
of Article 1791 cannot apply to limited partners for their suppletory
application to limited partners would ran contrary the basic principle that
limited partners are assured, so long as their remain within their passive
role of investors, be made to assume greater risk or additional loss arising
from the operations of the partnership business, beyond what they have
contractually committed to contribute.
(3) On Returned Contributions
Article 1858 provides that [w]hen a contributor has rightfully received the
return in whole or in part of the capital of his contribution; he is
nevertheless liable to the partnership for any sum, not in excess of such
return with interest, necessary to discharge its liabilities to all creditors
who extended credit or whose claims arose before such return.
(4) Liable as Trustee of the Partnership
Under Article 1858, aside from the fact that a limited partner is liable to
the partnership for his unpaid contributions when it has become due under
the terms of the certificate, he would become liable as a trustee for the
partnership for:
(a) specific property stated in the certificate as contributed by him, which
was not been delivered or wrongfully returned to him;
(b) money or other property wrongfully paid or conveyed to him on
account of his contribution.
The foregoing liabilities of a limited partner can be waived or compromised
only by the consent of all members, and provided it shall not affect the
right of a creditor of the partnership who extended credit or whose claim
arose after the filing and before a cancellation or amendment of the
certificate, to enforce such liabilities.
d. Fiduciary Duties of Limited Partners
Are limited partners, being merely passive investors into the partnership
business enterprise, bound by any fiduciary obligations and duties to the
limited partnership and to the other partners? There is no doubt that
general partners owe fiduciary duties not only to one another under the
principle of mutual agency, and to the limited partners on the
consideration that general partners act as agents (i.e., trustees) for the
limited partners. On the other hand, by definition, limited partners do not,
and cannot participate in the management of the partnership affairs, and
therefore do not act as agents for one another, for the general partners,
nor for the limited partnership itself. Not assuming the position of agents
in the partnership arrangement, limited partners are not bound by
fiduciary obligations.
Therefore, it has been posited by writers, such as the De Leons, that while
a capitalist general partner cannot engage in competitive business with the
partnership business, a limited partner is not prohibited from engaging in
such competitive business, thus: In the absence of statutory restrictions,
a limited partnership may carry on any business which could be carried on
by a general partnership. (DE LEONS, at p. 301).
The SEC has ruled that limited partners that are foreign corporations are
not deemed to be doing business in the Philippines (SEC Opinion, 06
August 1998), which supports the position that limited partners are not
deemed to participate in management of the business enterprise, nor do
they constitute mutual agents to one another or are they deemed agents
representing the limited partnership.
e. General Lack Standing for Partnership Suits
Under Article 1866, a contributor, unless he is a general partner (which
means that contributor covers a limited partner), is not a proper party to
proceedings by or against a partnership, except where the object is to
enforce a limited partners right against or liability to the partnership.
3. Dissolution and Winding up of Limited Partnership
a. Causes of Dissolution
Under Article 1860, the retirement, death, insolvency, insanity or civil
interdiction of a general partner dissolves the partnership, but not that in
the case of a limited partner. But even in those cases the partnership is
not dissolved if the business is continued by the remaining general
partners:
(a) under a right so to do stated in the certificate; or
(b) with the consent of all members.
Under Article 1861, in case of death of a limited partner, his executor or
administrator shall have all the rights of a limited partner for the purpose
of settling his estate, and such power as the deceased had to constitute
his assignee a substituted limited partner. In turn, the estate of the
deceased limited partner shall be liable for all his liabilities as a limited
partner.
Under Article 1862, on due application by any creditor of a limited partner,
and without prejudice to other existing remedies, the courts may charge
the interest of the indebted limited partner with payment of the unsatisfied
amount of such claim, and may appoint a receiver, and make all other
orders, directions, and inquiries which the circumstances of the case may
require. Such interest may be redeemed with the separate property of any
general partner, but may not be redeemed with partnership property. Why
is this so?
It should also be noted that upon the declaration of insanity of the general
partner, it would constitute a cause for the dissolution of the limited
partnership. This is in contrast to the rule for non-limited partnerships,
particular under Article 1831 which provides that the insanity of a partner
becomes only a basis by which to go to court for a judicial declaration of
dissolution of the partnership. Why is the rule different when it comes to a
limited partnership?
b. Settling of Accounts
Under Article 1863, in settling accounts after dissolution, the liabilities of
the partnership shall be entitled to payment in the following order:
(a) Those to creditors, in the order of priority as provided by law,
except those to limited partners on account of their contributions, and
to general partners;
(b) Those to limited partners in respect to their share of the profits
and other compensation by way of income on their contributions;
(c) Those to limited partners in respect to the capital of their
contributions;
(d) Those to general partners other than for capital and profits;
(e) Those to general partners in respect to profits;
(f) Those to general partners in respect to capital.
Article 1863 specifically provides that [s]ubject to any statement in the
certificate or to subsequent agreement, limited partners share in the
partnership assets in respect to their claims for capital, and in respect to contributions, before [t]hose to limited partners in respect to the capital
their claims for profits or for compensation by way of income on their of their contributions.
contribution respectively, in proportion to the respective amounts of such
claims.

Note should be taken that the order of priority in the distribution of the
assets of the limited partnership in the event of dissolution and winding-up
provides priority to the claims of partners as to their share in the profits
and compensation by way of income, over their claims in respect to
capital. This actually is the reverse order in the general rules on
distribution of partnership assets upon dissolution under Article 1839(2),
which in its ranking of the liabilities of the partnership in order of payment,
give preference ranking to (c) Those owning to partners in respect of
capital, than to (d) Those owing to partners in respect of profits. Why
the difference in preference when it comes to dissolution of a limited
partnership?

The difference in liquidation priority among partners in a limited

partnership shows that the primary reason for the institution of a class of
limited partners is that of investment, rather than management, of the
partnership business enterprise. Whereas, the ability to participate in
profits is also a main focus in non-limited partnership set-up, nonetheless,
the partners come together as a group of contractually bound sole
proprietors, where the right to manage and participate in the affairs of
the partnership business enterprise is the main focus. In a limited
partnership scenario, in order to be entitled to the feature of limited
liability, the limited partners do not participate in the management of the
affairs of the business enterprise; they come in only as passive investors;
and therefore, the main nexus of the relationship between the general
partners on one hand, and the limited partners on the other hand, mainly
focuses on the profits that would be earned from the capital contribution of
the limited partners.

The return of capital itself is not the priority, for indeed under the limited
liability rule, the capital contribution is intended to be the main source of
claim of partnership creditors as against the limited partners. That is
perhaps the main reason why upon dissolution and winding-up of a limited
partnership, after having paid all claims of partnership creditors, the
priority for the remaining assets of the limited partnership would have to
go to [t]hose to limited partners in respect to their share of the profits
and other compensation by way of income on their