partnership villanueva

7/14/2019 Partnership Villanueva

http://slidepdf.com/reader/full/partnership-villanueva 1/76

PARTNERSHIP NOTES

By: Atty. Cesar Villanueva

1 – HISTORICAL BACKGROUND ON PHILIPPINE PARTNERSHIP LAW

I. HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW

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 laws—

among 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 event

integrated by then Chief Justice Lord Mansfield into the common law system and that it “was not until the latter yea

18th century that the law of partnership as we know it today began to assume both form and substance.” (DE LEONS

They write that eventually in the United States, in 1914 the Uniform Partnerships Act was endorsed by the

Conference of Commissioners on Uniform State Laws, which had many points of similarity with the English Partners

1890, and that “For this reason, the practical operation of the Uniform Partnership Act has a background of applicatio

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 regula

type of business organization are based upon the Roman law, of course with several important modifications;”

that ”civil law countries or jurisdiction regard the partnership as a legal entity, while the common law ones gen

not.” (BAUTISTA, at p. 1, citing 17 ENCYCLOPEDIA BRITANNICA 420 [1969]). The De Leons observe that “In fine

partnership law may be said to contain combination of principles and concepts developed from three sources: the Rom

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 pa

and commercial partnerships. Civil partnerships were governed in Title VIII of Book IV of the old Civil Code of 1889

1665 to 1708); while commercial or mercantile partnership were governed by Title I of Book II of the Code of Co

(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

386), which took effect on 30 August 1950, superseding the old Civil Code and repealed in toto the provisions of the

Commerce on partnerships, which “has resulted in the abolition of the distinction between civil and commercial partn

1



(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 UnitedStates’ ‘Uniform Partnership Act and Uniform Limited Partnership Act.’” (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 i

strength and its weakness from the fact that it is really an amalgam between two sets of legal traditions: the Civil Law

upon which most of the provisions of the New Civil Code had been drawn, and from the Common Law tradition, pa

from the Uniform Partnership Act of the United States. Properly appreciated, that means that the Philippin

Partnerships can truly be molded into a framework that provides a stability from the set of rules and principles that ar

in the provisions of the New Civil Code, and yet be dynamic and progressive in characteristic to allow Filipino busi

and the legal profession to be able to evolve them effectively through application in the business world of innovative

and advances, confirmed and made “precedential” in decisions of our courts resolving the acceptability of such cutt

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 w

provisions of the old Civil Code were made to apply, or commercial partnership, and therefore covered by the

Commerce. There was even a third type of partnerships, the industrial partnerships, which may have the characte

commercial or civil partnerships, according to whether they have been established in accordance with the requireme

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 possess

characteristic of “habitualness” (or more properly referred to as “ pursued as a going concern”) to be governed u

provisions of the Code of Commerce. Article 1 of the Code of Commerce provided that “For purposes of this C

following are merchants: 1. Those who, having legal capacity to engage in commerce, habitually devote th

thereto. . .”

To illustrate, Evangelista v. Commissioner of Internal Revenue, 102 Phil. 140 (1957), held that there would exists the

of common fund and intention to divide the profits among the members of the family who borrowed money as a gro

the facts showed that the

2



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 (190

commercial or mercantile partnership had for its object the pursuit of industry or commerce, and was then treat

merchant that must necessarily be governed by the Code of Commerce and had to comply with the registration requ

thereof to lawfully come into existence.

In a commercial partnership, both the partnership and the separate partners thereof may be joined in one action

private property of the partners could be taken in payment of the partnership debts only after the common proper

partnership had been exhausted. (La Compañia Maritima v. Muñoz, 9 Phil. 326 [1907]).

The commercial partnership under the Code of Commerce tended to be a more solemn affair, and when it failed to re

articles of partnership in the mercantile registry, it did not become a juridical person nor did it have any personality dis

the personality of the individuals who composed it (Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 [1906]; B

Carman, 7 Phil. 117 [1906]; Ang Seng Quen v. Te Chico, 7 Phil. 541 [1907]); and therefore could not also maintain an

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 requ

of the Code of Commerce for the execution of public document and registration in the mercantile registry (Art. 119,

Commerce) were not complied with, the Supreme Court held that the “alleged partnership never had any legal exist

has it acquired any juridical personality in the acts and contracted executed and made by it,” ( Ibid , at pp. 500-501)

was applied was Article 119 of the Code of Commerce which made liable for the debts incurred by such “partnership

the “persons in charge of the management of the association . . . together with persons not members of the associa

whom they may have transaction business in the name of the same.” (Ibid, at p. 500. ) Thus, the legal consequence o

comply with the registration requirements under the Code of Commerce was to make the acting partners perso

primarily liable for all partnership debts. The doctrine is similar to the agency doctrine that an agent who ente

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 bus

governed by the provisions of the Civil Code, it was held that the partnership existed as a separate juridical person e

no formal partnership agreement was entered into and registered, and thereby the obligations of the partners for pa

debts were held to be pro-rata.

3



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 wa

application of Article 1670 of the old Civil Code which provided that civil partnerships, on account of the objects to w

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 Co

Codes is left entirely to their discretion. And furthermore, that such civil partnerships shall only be governed by the fo

provisions of the Commercial Code when they expressly adopt them, and then only in so far as they (rules of the Co

Code) do not conflict with the provisions of the Civil Code. In this provision the legislature expressly indicates that th

exist two classes of commercial associations, depending not upon the business in which they are engaged but

particular form adopted in their organization. . . We are inclined to the belief that the respective codes, Civil and Com

have adopted a complete system for the organization, control, continuance, liabilities, dissolutions, and juristic person

associations organized under each. . . It is our opinion that associations organized under the different codes are gov

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 dis

between civil and commercial partnerships, and which are now governed by a common set of laws, i.e., the relevant p

of the New Civil Code. The main drawback of such a development is that even commercial partnerships (and admitte

may not be quite a number operating due to the availability of the corporate medium), would find themselves governe

commercial doctrines, such as the non-central role of the institution of registration. And in fact, many issues have aris

our current Law on Partnerships arising from having adopted in the New Civil Code provisions from the Code of Com

registration requirements.

In addition, the “civil-coding” of some of the provisions of the Code of Commerce which were copied into the New Ci

should provide a better understanding of the legal consequences of current provisions of the Philippine Law on Partn

and a better constructions of the effects they have on the commercial field, by providing a comparison with

jurisprudential rulings for commercial partnerships under the provisions of the Code of Commerce.

—oOo—

4



2 – THREE LEVELS OF EXISTENCE OF PARTNERSHIPS

[Updated: 23 August 2010]

III. THREE LEVELS OF EXISTENCE OF PARTNERSHIPS

The Law on Partnerships under the New Civil Code treats of the partnership in three “levels of existence,” namely:

(a) As acontractual relationship between and among the partners;

(b) As ameans 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 abusiness 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

Products Company Limited ” (“Jade Mountain”), with the partnership business consisting of exploiting a marble depo

on land situated in Bulacan, but with the partnership having its main office in Makati, Metropolitan Manila. Benjamin Y

many years the Assistant General Manager of the partnership business, but only half of his contracted salary was pa

the agreement that the rest would be paid when the partnership is able to source more funding. Majority of the

eventually sold their equity (about 82%) and the business to a new set of investors who retained the business enterpr

the original name of Jade Mountain, but moved the head office to Mandaluyong. When Benjamin Yu learned later ofaddress he proceeded to Mandaluyong but was told that the new partnership did not wish to retain his services.

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

1988, moral and exemplary damages and attorney’s fees, against Jade Mountain under the new partnership.

partners contended that Mr. Yu was never hired as an employee by the present or new partnership. One of the issue

was whether the new partnership could be held liable for the claims of Yu pertaining to the old partnership which h

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 fro

each of its members, which subsisted notwithstanding changes in the identities of the partners. Consequently, the em

contract between Benjamin Yu and the partnership and the partnership Jade Mountain could not have been affe

changes in the latter’s membership.

The Court defined the inextricable link of the contract of partnership between the original partners and the juridical pe

that arose from the nexus of that contract, and that when the contract was rescinded with the withdrawal of the majo

partners, then the partnership was dissolved and its separate juridical personality ceased to exists to cover the ne

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 r

by a new partnership composed of Willy Co and Emmanuel Zapanta; and

5



(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 t

Code.

Yu also recognized one of the principles in business enterprise transfers, that the new owners of the business ente

have a right to choose who would be employed in their newly acquired business, and they cannot be compelled to ma

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 g

assistant general manager to run the affairs of the business enterprise taken over. An assistant general manager b

the most senior ranks of management and a new partnership is entitled to appoint a top manager of its own cho

confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful ter

or termination without just or authorized cause. We think that the precise authorized cause for termination in the ca

was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal n

himself, who personally ran the business of Jade Mountain. Benjamin Yu’s old position as Assistant General Mana

became superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rat

month’s pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6) mont

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 char

against his co-partners for the latter’s failure to deliver to him his half of the profits from the partnership venture. In den

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

partner who furnished the capital for the recovery of his money is not a criminal action for estafa, but a civil one aris

the partnership contract for a liquidation of the partnership and a levy on its assets if there should be any. x x x [Est

does not include money received for a partnership; otherwise the result would be that, if the partnership, instead of o

profits, suffered losses, as it could not be held liable civilly for the share of the capitalist partner who reserved the own

the money brought in by him, it would have to answer to the charge of estafa, for which would be sufficient to argue

partnership had received money under the obligation to return it. The complaint for estafa is dismissed without prejud

institution of a civil action. (Ibid , at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 [1952]).

6



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 constitut

second one, which they unmistakable called an “Additional Agreement” . . . Except for the fact that they took in one i

partner, gave him an equal share in the profits and fixed the term of the second partnership to thirty (30) years, everyt

was the same. Thus, they adopted the same name, . . . they pursued the same purposes and the capital contributions

and Maglana as stipulated in both partnership call for the same amounts. Just as important is the fact that all sub

renewal of Timber License No. 35-36 were secured in favor of the First Partnership, the original licensee. . . To all in

purpose therefore, the First Articles of Partnership were only amended, in the form of Supplementary ArticlePartnership . . . which was never registered . . . Otherwise stated, even during the existence of the second partne

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 dissolutio

affect the first partnership which continued to exist “as shown by the subsequent acts of the original partners carrying

the original partnership business and confirming the obligations constituted under the original articles of partners

conclusion of the Court was thus: “Under the circumstances, the relationship of Rojas and Maglana after the withdraw

industrial partner] can neither be considered as a de facto partnership, nor a partnership at will, for as stressed, th

existing partnership, duly registered.” (Ibid , at p. 118)

Rojas therefore affirms two important aspects in Partnership Law:Firstly , that registration of the contract of partnershi

SEC has the legal effect of binding the partners (and perhaps even third parties dealing with the partnership), a

contractual obligations, the rights and duties of the partners, and which has effective force even as the partnership u

changes within its constitution by the acceptance into and withdrawal of partners into the venture. Secondly , the u

business enterprise, the manner of its operation, has much legal influence of determining the contractual inten

partners in the determination of inter-partnership rights and obligations.

—oOo—

7



3 – PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP


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, princ

doctrines pertaining to contracts in general, but modified in the sense that a partnership is at the same time a “m

doing business” or a device for undertaking a venture. This means that the Law on Partnerships must balance bet

principles governing the relationship of partners among themselves as contractual parties, and also their rights and o

with respect to the business venture or undertaking that brought them together in the first place. In other words, pa

partnership do not come together for the sake of coming together, but in order to achieve as a group, a business ve

undertaking. The various provisions of the Law on Partnerships embodied in the Civil Code address either sepacoordinately these “levels of existence” of a partnership: as contractual relationship, and as a means of doing busines

An example showing the essence of a partnership as a contract is provided under Article 1771 which bears the do

“consensuality” governing contracts in general: “A partnership may be constituted in any form, except where im

property or real rights are contributed thereto, in which case a public instrument shall be necessary.” Article 1

embodies the principle that the provisions of law are deemed incorporated into every contract, even a contract of pa

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 exem

the decision inLyons v. Rosentock , 56 Phil. 632 (1932). In that case, Lyons and Elser were already partners in partic

estate undertakings. Subsequently, Lyons became interested in purchasing for the venture the San Juan estate, an

forward towards negotiating its acquisition and communicating to Elser in the United States to join him in the ventu

wrote back clearly indicating that he was not joining Lyons in the San Juan estate venture. The Court held that the

Lyons had used as security for the acquisition of the San Juan estate one of the partnership properties in anticipa

Elser would accept the partnership arrangement, but which Elser definitive refused and the partnership prop

substituted by Lyons separate property to secure the venture, did not make Lyons a partner in the San Juan estate

since there was never any meeting of minds to constitute such partnership. Lyons demonstrate that before there

partnership enterprise, it is necessary that there must having been a meeting of minds to constitute a contract of partn

1. Characteristics of the Partnership Contract

a. Nominate and Principal

8



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

instrument shall be necessary.”

Although Articles 1772 and 1773 provide for public instrument and registration when the capital contribution is m

P3,000.00, and that of an inventory attached to the public instrument whenever immovable property is co

nonetheless jurisprudence even discount the nullity of the resulting contract of partnership, as will be discussed hereu

In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court held that when members of the family leas

parcel of land to SHELL Company, and used the advance rentals paid them to allow one of their members to capi

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

fund with the intention of dividing the profits among themselves. The sole dealership by the petitioner and the issua

government permits and licenses in the name of petitioner was in compliance with the [policy that a dealership can

granted to one person] of SHELL and the understanding of the parties of having only one dealer of the SHELL produ

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

venture as a family group) that shall govern the rights and obligations of the contracting parties, and not the evide

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 con

carry on the business of operating a theatre for the exhibition of motion and talking pictures; nonetheless, the Court

the real intention of the parties was to effect a sub-lease of the property and the partnership agreement was resor

order to avoid the provision in the main lease agreement prohibiting a sublease of the premises. The Court t

consideration the following actuations of the supposed Yulo partner to show that there as never a real agreement

partnership, thus:

In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish an

intervention in the management of the theatre. In the third place, it does not appear that she has ever demand

defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concer

have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnin

9



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 individual’s freedom or liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within

what Spanish commentators call a very personal act (acto personalisimo), of which courts may not compel compliance, as it is

considered an act of violence, to do so. (Ibid , at p. 539.)

We disagree with the afore-quoted ruling of the Court in that it fails to appreciate the consensual nature of a contract of

partnership, and that the moment the parties come to an agreement which basically embodies the formation of a common fund

with the intention of dividing the profits, as was the case between the parties in Woodhouse, a contract of partnersh

and the incidents thereof governed by Partnership Law, even in the absence of a formal certificate or articles of co-pa

Only recently, Tocao v. Court of Appeals, 342 SCRA 20 (2000), summarized the prevailing doctrine on the natu

contract of partners, thus —

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more persons bind them

contribute money, property or industry to a common fund; and (2) intention on the part of the partners to divide th

among themselves. It may be constituted in any form; a public instrument is necessary only where immovable prope

rights are contributed thereto. This implies that since a contract of partnership is consensual, an oral contract of partn

as good as a written one. Where no immovable property or real rights are involved, what matters is that the parti

complied with the requisites of a partnership. The fact that there appears to be no record in the Securities and Ex

Commission of a public instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Cod

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 busin

operated under the name of a registered sole proprietorship was of no moment, especially when the registratio

business name with the Bureau of Domestic Trade was only for purpose of being able to secure such business nam

at p. 36.)

c. Onerous and Bilateral

The onerous and bilateral characteristics of the contract of partnership are demonstrated by the fact that the existe

partnership requires an agreement for the creation of a common fund from the contributions of the partners, which m

be in money, property or industry. Under Article 1786, a partner becomes by its very constitution, “a debtor of the pa

for whatever he may have promised to contribute thereto.” All partners are bound to contribute to the common fund,

partnership, including even the industrial partner who is bound to contribute his service.

10



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.)

—oOo—

4 – ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP

[Updated: 12 Octo

IV. ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP

______

Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, pro

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

or interest of the partners.

When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor

State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments an

of a crime. (1666a)

Art. 1771. A partnership may be constituted in any form, except where immovable property or real right


11



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 partne

third persons;

(2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owner

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

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 p

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 ot

(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

which the contract of partnership arises under Article 1767 of the Civil Code. Under Article 1769 of the Civil

determining whether a partnership exists,” the first and foremost rule is that “persons who are not partners as to each

not partners as to third persons.” In other words, the general rules is that no person can find himself a partner in a pa

even as to third parties, unless he previously consented to be in such contractual relationship.

12



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 husband’s 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.

the essence of the “equity” position of the partners vis-a-vis the business enterprise, as differentiated from pa

suppliers and creditors, and company employees, who bear no proprietary interest with the business enterprise they d

Article 1769 of the Civil Code, in providing for the rules “In determining whether a partnership exists,” states under pa

(4) that “The receipt by a person of a share of the profits in the business is prima facie evidence that he is a part

business.” In contrast, the same article provides, “The sharing of gross returns does not of itself establish a pa

whether or not the persons sharing them have a joint or common right or interest in any property from which the re

derived.”

It is fairly implied under Article 1767, as it defines a contract of partnership, that the essence of the agreement am

partners is to become equity-holders in a business enterprise, because their consent must be the creation of a comm

“with the intention of dividing the profits among themselves.” The essence of an equity holder is to take the profits

business, and consequently, to absorb also the losses sustained thereby. Therefore, when a person is entitled to sha

“gross returns” of the business venture, he is not an equity holder, and if it is operated under the medium of a part

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 t

of a lending business “in a 70-15-15 manner, with the petitioner getting the lion’s share . . . proved the establishm

partnership,” (Ibid , at p. 269.) even when the other parties to the agreement were given separate compensa

bookkeeper and creditor investigator.

In Tocao v. Court of Appeals, 365 SCRA 463 (2001), the Court held that a creditor of a business enterprise can

recovery of his claim against the partnership from a person who is without any right to participate in the profits and wh

be deemed as a partner in the business enterprise, since the essence of partnership is that the partners share in th

and losses.

In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court held that –

13



“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 fathe

purchased a lot and building and had it administered by an administrator, and divided equally the net income, the

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 piec

property with every intention to lease them out, and which they in fact leased to various tenants and derived rentals t

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 th

partner in the business. However, in the following cases, where there is legal and contractual basis for the receipt of t

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;

(e) As consideration of sale of goodwill or other property.

Thus, in Pastor v. Gaspar , 2 Phil. 592 (1903), the Court held that there was no new partnership formed when a

obtained to purchase lorchas needed to expand the shipping business of an existing shipping partnership venture u

condition that the lender would receive part of the profits of the business in lieu of interests.

14



In Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906), where the terms of the contract provided for the salary of the bookkeeper to

be 5% of net profits of the business, the same did not make the bookkeeper a partner in the business, since it was merely a

measure of his salary as an employee of the company. To the same effect is the ruling in Sardane v. Court of Appeals , 167

SCRA 524 (1988).

In Bastida v. Menzi & Co ., 58 Phil. 188 (1933), the Court held that despite the agreement that Bastida was to receive 35% of

the profit from the business of mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any

contract of partnership constituted between them based on the following key elements: (a) there was never any common fund

created between the parties, since the entire business as well as the expenses and disbursements for operating it were

entirely for the account of Menzi & Co.; (b) there was no provision in the agreement for reimbursing Menzi & Co. in case there

should be no profits at the end of the year; and (c) the fertilizer business was just one of the many lines of business of Menzi &

Co., and there were no separate books 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 Essence of a Partnership Contract

All the foregoing examples indicate that what brings about a contract of partnership is essentially an agreement to constitute a

common fund with the intention of dividing the profits and losses; outside of these essential elements, a contract of partnership

cannot subsist.

The importance of consent, vis-a-vis the elements of common fund and intention to divide the profits among themselves, is

best illustrated inYulo v. Yang Chiao Seng, 106 Phil. 111 (1959), where in fact the parties had executed formal articles of

partnership, and yet the Court found that the real intention of the parties was really to constitute a relation of sublease between

the parties over a commercial land where one party (the lessee) was prohibited under her main contract of lea

subleasing the property, and the other party (t he sublessee) wanted to operate a threater in said premises. The Court

The most important issue raised in the appeal is that contained in the fourth assignment of error, to the effect that t

court erred in holding that the written contracts, Exhs. “A”, “B”, and “C”, between plaintiff and defendant, are one of le

not one of partnership. We have gone over the evidence and we fully agree with the conclusion of the trial cour

agreement was a sublease, not a partnership. The following are the requisites of partnership: (1) two or more pers

bind themselves to contribute money, property, or industry to a common fund; (2) intention on the part of the partners

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 an

intervention in the management of the theatre. In the third place, it does not appear that she has ever demand

defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concer

have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnin

correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did

receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the

which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of def

June 17, 1945 (Exh. “A”), which shows that both parties considered this offer as the real contract between them.” ( Ib

116-117)

In the more contemporary decision in Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court affir

decision of the trial court “Ordering the defendant to execute a public instrument embodying all the provision

partnership agreement entered into between plaintiffs and defendant as provided for in Article 1771, Civil Cod

Philippines.” In that case, the siblings in a family leased out to SHELL a family commercial lot for the establishm

gasoline station, and they invested the advanced rentals they received from SHELL to allow one their brother to

registered dealer of SHELL under the latter’s policy of “one station, one dealer,” and that in fact the registered de

accounted for the operations to the other members of the family. When later on he stopped accounting for the operat

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 p

Petitioner submitted to private respondents periodic accounting of the business. . . gave a written authority t

15



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 pe

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 p

were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 b

rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any chang

utilization thereof.

4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelista

power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and depo

and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corpo

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

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 adv

or on the causes for its continued existence. They did not even try to offer an explanation therefore. ( Ibid , at pp. 144-1

In other words, the essence of the contract of partnership is that the partners “contract or bind themselves under a co

arrangement” to be joint owners and managers of a business enterprise, which is highlighted by the right to receiv

profits and share the losses therein. Article 1770 of the Civil Code provides that for a partnership contract to be valid

be established for the common benefit or interest of the partners,” which clearly indicates the equity or proprietorship

of the partners. Consequently, if there is no clear meeting of the minds to form a partnership venture, the fact that a

participates in the “gross receipts” of a business enterprise or from a property arrangement does not make him a

because he is not made to bear the burdens of ownership, i.e.,to be liable for expenses and losses of the business en

The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA 74 (1972), is illustrative of this principle. In O

project partition agreed upon by the heirs the agreed to keep the properties of the estate together and to divide the

proportion to their stipulated interests therein. In holding that there was thereupon constituted among the co

unregistered partnership subject to corporate income tax under the Tax Code, the Court held –

16



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, in Gallemet 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 in Idos, 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’

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 indicatio

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

contract of partnership between three parties, namely Tocao, Bello and Anay, in the face of the assertions of both To

Bello that there was no partnership agreement entered into considering that: (a) there was no written agreement em

the alleged partnership agreement, and that in fact the business was registered with the government authorities as

proprietorship in the style of “Geminesse Enteprise” in the name of Tocao; (b) Bello asserts that he never g

contribution to the venture, but merely guaranteed its credit standing; and (c) Anay never contributed anything to the b

and she was receiving overriding commission and participation in profits directly as a result of her handling the mar

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 partners

not be in writing to be valid and enforceable, held that all three parties had by the evidence adduced exercised

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 bu

distributorship of cookware. Private respondent contributed such expertise to the partnership and hence, under the

was the industrial or managing partner. It was through her reputation with the West Bend Company that the partner

able to pen the business of distributorship of that company’s cookware products; it was through the same efforts

business was propelled to financial success. Petitioner Tocao herself admitted private respondent [Anay] held the po

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

petitioners [Tacao and Belo] and private respondent [Anay] . . .

17

http://www.blogger.com/post-create.g?blogID=6336731883560557810#_ftn6






On the other hand, petitioner Belo’s 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 tha

receiving a share in the profits as a matter of course, curing the period when the trucking business was under o

Neither is there any proof that he had actively participated in the management, administration and adoption of polic

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)

partnership was insisted to have been constituted yet no direct evidence of the contribution to a common fund or sh

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

never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses. Eac

right to demand an accounting as long as the partnership exists. We have allowed a scenario wherein “[i] excellent

exists among the partners at the start of the business and all the partners are more interested in seeing the firm gro

than get immediate returns, a deferment of sharing in the profits is perfectly plausible.” [Fue Lung v. IAC, 169 SCRA

(1989)]. But in the situation in the case at bar, the deferment, if any, had gone too long to be plausible. A person is p

to take ordinary care of his concerns. . . A demand for periodic accounting is evidence of a partnership. (Ibid , at

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 co

void; and being void the purported partners have no right to participate in any profits that may have been earned

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 b

order, and pursuant to the provisions of Article 1770, all the profits earned were deemed confiscated in favor of th

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

to the partners, because it only deals with the disposition of the profits; but the fact that said contributions are not inc

18














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 promis

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 oblig

even a mere goodwill, may be validly contributed into the partnership. In other words, if service is a valid contribut

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

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 b

enterprise. Thus, in Fernandez v. De la Rosa, 1 Phil. 671 (1903), it was held that “a joint interest in the profits” would

one of the “essential points upon which the minds of the parties must meet in a contract of partnership.” ( Ibid , at pp.

The element of “joint control” is embodied in the provisions of law that provides for mutual agency in a pa

arrangement. (Art. 1810(3) provides that one of the property rights of a partner is “His right to participate in the mana

Art. 1818 of the Civil Code provides that “Every partner is an agent of the partnership for the purpose of its business

act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in

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 P

provides as follows: “The constitution of the association provided for the following purpose: ‘The object of this associa

be to perpetuate the spirit of patriotism and fraternity those men who upheld the Stars and Stripes in the Philippine

19



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.”

—oOo—

20



5 – PARTNERSHIP AS A MEANS OF DOING BUSINESS, THROUGH THE JURIDICAL PERSON


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 bringcivil 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

under Article 1768 that the “partnership has a juridical personality separate and distinct from that of each of the partn

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 provi

“partnerships and associations for private interest or purpose to which the law grants a juridical personality, sepa

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 purp

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 b

several persons can collectively pursue business. Thus, under Article 46 of the Civil Code it is provided that “Juridica

may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in confo

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 17

Civil Code which provides that “Any immovable property or an interest therein may be acquired in the partnershi

to avoid the cumbersome need of having all the names of the partners listed in the title to the property. Consequ

article provides that title to real property acquired in the partnership name may be conveyed only in the partnership na

Although a partnership is treated as a “person” before the law, such juridical personality does not occupy the same lev

“person” of an individual. The “person” of an individual is considered sacrosanct under modern societal doctrine; the

civil society are organized towards protecting that person and engendering its safety and well-being. On the other h

21



“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 m

the articles are known to all the members but withheld from third persons. It contemplates a situation where the article

allow any one of the members to contract in his own name with third persons, are known to some members only a

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 d

the partnership or the other members. This being the case it does not prohibit secret stipulations which are not de

produce this result. It would not, for instance, have the effect of rendering invalid a separate agreement between two

of a partnership pursuant to which one guarantees the other against loss of his capital contribution or assures him

Neither can the rule be invoked as against third persons by the partners entering into the secret stipulations, in con

with the general principle that a party should not be allowed to take advantage of a nullity which he himself has

(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 partner

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

to treat companies of the class to which the plaintiff belongs as legal or juridical entities and to permit them to sue and

in the name of the company, the summons being served solely on the managing agent or other official of the compa

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 separat

personality accorded to a partnership arrangement makes certain rules on insolvency work differently as com

American jurisprudence on the same matter. In Campos Rueda a petition for involuntary insolvency was filed by the of the limited partnership for an act of insolvency provided under the Insolvency Act ( i.e., having failed to its obligat

three creditors for more than thirty days). The trial court denied the petition on the ground that it was not proven, nor

that the partners of the firm were insolvent at the time the application was filed; and that as said partners are perso

solidary liable for the consequences of the transactions of the partnership, it cannot be adjudged insolvent so lon

22



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 wh

pass the effects of the doctrine of “limited liability,” and through piercing acting stockholders and/or officers may

personally liable for corporate debts.

In spite of the partnership being accorded also a separate juridical partnership, the piercing doctrine has less appl

Partnership Law because the partners are unlimitedly liable (i.e., personally liable with their separate prope

partnership debts. And yet, the doctrine found application to partnerships in Commissioner of Internal Revenue v.

SCRA 152 (1969), where the Court addressed the legal position of the Tax Commissioner seeking to make the

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, dist

separate from that of its partners (unlike American and English law that does not recognize such separate

personality). The bypassing of the existence of the limited partnership as a taxpayer can only be done by ign

disregarding clear statutory mandates and basic principles of our law. The limited partnership’s separate individuality

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

in the present case, to do so would exempt the limited partnership from income taxation but would throw the tax burd

the partners-spouses in their individual capacities. The corporations, in the cases cited, merely served as business co

alter egos of the stockholders, a factor that justified a disregard of their corporate personalities for tax purposes. T

true in the present case. Here, the limited partnership is not a mere business conduit of the partner- spouses; it was o

for legitimate business purposes; it conducted its own dealings with its customers prior to appellee’s marriage; and h

filing its own income tax returns as such independent entity. . . . As far as the records show, the partners did not e

matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or design to

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

the law or a sham, then the courts will pierce the veil of its separate juridical personality to treat the partners as direc

or accountable for the consequences of the acts or contracts done in the partnership name.

23



The piercing doctrine also found recognition, albeit by way of obiter , in Aguila, 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 uni

their application to all persons within the territorial jurisdiction, without regard to any differences of race, color, or na

The word ‘person’ includes aliens . . . Private corporations, likewise, are ‘persons’ within the scope of the guaranties

as their property is concerned. . . (Ibid , at p. 144) The Smith, Bell & Co. rationale has equal application to partnersh

are accorded as separate persons under the Partnership Law. The better rationale applicable to partnership wou

ruling in Bache & Co. (Phil.), Inc. v. Ruiz , 37 SCRA 823 (1971), where the Court held that a corporation is entitled to

against unreasonable searches and seizures because “A corporation is, after all, but an association of individuals

assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional im

appropriate for such body. Its property cannot be taken without compensation. It can only be proceeded agains

process of law, and is protected, under the 14th Amendment, against unlawful discrimination.” ( Ibid , at p. 837

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

not only own the partnership and its affairs and they directly manage the affairs of the partnership, but more so

separate juridical personality is closely identified with the personality of the partners under delectus personae conside

On the other hand, the Court’s ruling on why corporations are not entitled to the rights against self-incrimination, has

to the partnership setting. Consider the decision in Bataan Shipyard & Engineering Co., Inc. v. PCGG, 150 SCRA 18

where the Court held that the right against self-incrimination has no application to corporations, extensively quoted

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 receive

special privileges and franchises, and holds them subject to the laws of the state and the limitations of its charter. Its p

limited by law. It can make no contract not authorized by its charter. Its right to act as a corporation are only preserve

long as it obeys the laws of its creation. There is a reserve right in the legislature to investigate its contracts and

whether it has exceeded its powers. It would be a strange anomaly to hold that a state, having chartered a corporatio

use of certain franchises, could not, in the exercise of sovereignty, inquire how these franchises had been employ

whether they had been abused, and demand the production of the corporate books and papers for that purpose. The

amounts to this, that an officer of the corporation which is charged with a criminal violation of the statute may p

criminality of such corporation as a refusal to produce its books. To state this proposition is to answer it. While an in

may lawfully refuse to answer incriminating questions unless protected by an immunity statute, it does not follo

24



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

Court’s stance may lie in the fact that the right against self-incrimination does not really result in physical intrusion into the

premises of the partnership, because it would require only that the partnership, through its agents, produce records and books

before the courts. The denial of the right against self-incrimination from corporations and partnerships does not really invite

state authorities into the premises or physical privacy of the stockholders, members or partners who compose the juridical

entity; but would deny acting individuals the right to abuse the medium of separate juridical personality as a means to do folly.

On the other hand, to deny the due process rights or right against unreasonable searches and seizures to corporations and

partnerships would actually be to invite state authorities to physically intrude into business premises, and therefore also intrude

into the personal and business privacy of the stockholders, members or partners who compose the juridical person

that is the basis for the difference in stance by the Court between two sets of constitutional rights with respect to corp

and also in the case of partnerships. Another view is that the constitutional guarantees of due process, equal protectio

and against unreasonable searches and seizures are all meant to curb the abuse that the State and its representat

employ upon the citizenry, including the modes upon which they conduct their lives and businesses. On the other h

constitutional protection against self-incrimination is not meant to prevent an actual State abuse but to avoid press

individual from having to tell a lie. “The main purpose of the provision . . . is to prohibit compulsory oral exami

prisoners before the trial, or upon trial, for the purpose of extorting unwilling confessions or declarations implicating th

commission of a crime.” (U.S. v. Tan Teng, 23 Phil. 145, 152 [1912]) A corporation owes full allegiance and subje

unrestricted jurisdiction of the courts of the State under which it has been organized. ( Tayag v. Benguet Consolidated

SCRA 242, 248 [1968]) Likewise, it has no soul that can be damned by a lie.

—oOo—

25



6 – PARTNERSHIP AS A BUSINESS ENTERPRISE


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 partnership’s business enterprise, as distinguished from the legal effects and

consequences of the contract of partnership among the partners and the partnership juridical person, gives rise to legal

relationships, rights and obligations, and doctrines, that can only be accounted for from that level.

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

service–no 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

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 equivale

gross assets to be distributed to the partners at the time of the dissolution of the partnership. We cannot sustain the u

idea that the capital contribution at the beginning of the partnership remains intact, unimpaired and available for distr

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 b

sustained. It does not remain static and unaffected by the changing fortunes of the business. In the present case, the

statements presented before the trial court showed that the business had made meager profits. However, notable the

the omission of any provision for the depreciation of the furniture and the equipment. The amortization of the goodwi

valued at P500,000) is not reflected either. Properly taking these non-cash items into account will show that the pa

was actually sustaining substantial losses, which consequently decreased the capital of the partnership. Both the tria

appellate courts in fact recognized the decrease of the partnership assets to almost nil, but the latter failed to reco

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 petitio

respondents ventured into business together, they should have prepared for the fact that their investment would eithe

shrink. In the present case, the investment of respondents substantially dwindled. The original amount of P250,000 w

had invested could no longer be returned to them, because one third of the partnership properties at the time of disso

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

they have entered into with all the required formalities and with full awareness of what they were doing. Courts have

to relieve them from obligations they have voluntarily assumed, simply because their contracts turn out to be disastro

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 essen

partners are “owners” of the business, or that they take the position of “equity” holders, as distinguished from cred

26



advance money to the partnership as “debt” holders. Thus, it is an essential element to the existence of the partnership under

Article 1767 of the Civil Code, the obligation assumed by each partner “to contribute money, property or industry to a common

fund”, which essentially represents the “business enterprise” to be pursued, to thereby assume the position of being “owners”

or “equity holders,” and thereby to be entitled to the profits made from the pursuit of the business enterprise, and logically to

assume the risks connected with it, including absorbing the losses sustained. This critical position of “equity holders” of

partners is confirmed under Article 1770 Civil Code which requires that a partnership “must be established for the common

benefit or interest of the partners,” which aptly describes their positions as owners of the partnership business enterprise.

The importance of being aware that the partnership would eventually constitute a business enterprise is important in applying

certain doctrines of succession of liability that apply peculiarly to business enterprise. Likewise, the rules on dissolution and

liquidation clearly appreciate the difference between the contract relationship and juridical person constituting the partnership,

from the underlying business enterprise that may remain operating even when the firs two levels are legally dissolved or

extinguished.

—oOo—

27

28



7 – ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP

[Updated: 12 October 2009]

_____

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 function

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 t

processes and procedures approved by the State, the juridical personality accorded to every partnership under Articl

the Civil Code is best described to be “informal”, or better yet merely “consensual”, as distinguished from being “fo

“solemn” characteristic.

It is very well implied from the substance and sequence of Articles 1767 and 1768 of the Civil Code that the existe

separate juridical personality for a partnership is conditioned on the perfection and validity of a contract of partnership

the separate juridical personality arises as a mandatory consequence under the law from the perfection of a co

partnership. Consequently, as the contract of partnership is best described as a consensual contract, it follows necess

the constitution of a partnership juridical personality would also be consensual. The general rule under Article 1771 i

partnership may be constituted in any form.”

To illustrate, the partnership’s separate juridical personality arises in the privacy of the perfection of the contract of paArticle 1768 provides that the “partnership has a juridical personality separate and distinct from that of each of the par

which under Article 1784 “begins from the moment of the execution of the contract, unless it is otherwise stipula

informal or casual is the attitude of the law on the partnership’s juridical personality that under Article 1785, such

personality can be extended beyond the original fixed term or particular undertaking by the mere “continuation of the

by the partners or such of them as habitually acted therein during the term, without any settlement or liquidati

partnership affairs.”

What is the reason for the legal attitude of being rather “informal” on the juridical personality of the partnership? It se

the provisions of the Law on Partnerships of the Civil Code that the “separate juridical personality” granted to the par

contractual relationship between and among the partners, and the underlying partnership business enterprise, icenterpiece of the Partnership Law, but merely an “add on” to allow the business venture to be run more efficient

owners thereof (the partners), and to make dealings by it with the public easier and pursued with more efficiency. Aft

common law traditions the partnership has survived and thrived in a setting that does not accord it a juridical person

other words, the civil law tradition of providing a partnership with a juridical personality separate and distinct from the

28

29



—or properly speaking, to clothe the business enterprise with a juridical person by which it can better deal with the public—is

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 t

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

to provide for an inventory thereof to be attached to the public instrument to be registered with the SEC, the r

partnership is “void.” The exception when it comes to real property contributions is the public policy contained in our C

and in other special laws, that considers real property as constituting a cornerstone in our economic life, and that

therewith must be formal and public, which would afford to the public a reliable means to determine the status of ow

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 ma

registration requirements for the valid constitution of the limited partnership. Again, this is in line with the principle tha

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

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

Commerce where registration was essential for the coming into existence of a commercial partnership, nonetheless in

case of estoppel, the courts treated such unregistered commercial partnership as a de factopartnership with a person

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 o

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 contraventi

agreement;

(b) Express will of all the partners;

29

30



(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 busin

the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying o

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

partner to participate in the management of the partnership business. It is one of the more important manifestati

position of the partners as “owners” or “equity holders” of the partnership business enterprise. It also brings into f

reality that the partnership arrangement is of the most personal of nature, that the parties thereto are not only inve

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 orig

proprietor continues to manage his business and also the business of the other proprietors in the association. Cons

as a sole proprietor is liable with his other assets for the liabilities incurred by his business, then in the same man

partners will also be liable personally and for other non-contributed assets for the liabilities incurred by their c

business enterprises.

5. Delectus Personae

Bautista refered to delectus personae as follows: “. . . For, in accordance with the principle of delectus personae (sel

persons), one selects his partners on the basis of their personal qualifications and qualities, such as solvency, ability

and trustworthiness, among others. It is for this reason that there is mutual representation among the partners so tha

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

relationship between and among the partners which when broken, also breaks the bond of the partnership. The

emphasizes the personal-contractual relationship between and among the partners as being more important than the

rights and the business enterprise created in the partnership. Thus, Article 1770 of the Civil Code provides that “[a] pa

. . . must be established for the common benefit or interest of the partners.”

The doctrine of delectus personae can be viewed in two ways:

30

31



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

with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its c

existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner’s capability to give it

absence of a cause for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,

dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can pre

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 subje

action for damages because by the mutual agency that arises in a partnership, the doctrine of delectus personae a

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, sep

distinct from that of each . . . . partner or member,” and that Article 46 recognizes the legal capacity of the pa

therefore to enter into contracts, own and possess properties, thus: “Juridical persons may acquire and possess prop

kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations

organizations.”

The ordinary principle of “relativity” under the Law on Contracts that “Contracts take effect only between the part

assigns and heirs” (Article 1311, New Civil Code), should mean that that when a juridical person enters into a con

assumes an obligation by reason thereof, its members or constituents, and its agents, do not ordinarily become liabl

obligations assumed by their principal. And yet, in defiance of the very essence of separate juridical personal

partnership, the general rule is that every partner is liable personally for his other property not contributed to the partne

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

all their property and after all the partnership assets have been exhausted . . . [and that] [a]ny stipulation against [suchshall be void, except as among the partners.” Why does the law make partners personally liable for partners

contracted as a separate juridical person, and would such unlimited liability still apply without express provision of law

31

32



Even without any express provision of law and despite the separate juridical personality of the partnership, unlimited liability

would be the rule for partners in a partnership setting for the basic reason that partners essentially occupy the position of sole

proprietors albeit associated with other sole proprietors; the basic rule is that sole proprietors are always unlimitedly liable for

business debts and obligations even as to their properties not used nor devoted for the business enterprise. The reason why a

sole proprietor is liable with his non-business assets for debts and liabilities arising from a business venture is because he

controls the business enterprise, and all profits go to him which he can devote into non-business matters, and thereby he must

also absorb the losses from the business. Therefore if his business goes bankrupt, he cannot insist that his business creditors

are limited only to the business assets for the satisfaction of their claims, and as all benefits and profits can be channeled to

his personal non-business affairs, then his non-business properties must also be held liable for the satisfaction of those claims;

to rule otherwise would mean that the owner benefits fully on the profits, but lets his creditors absorb the losses from the

business. It is a commercial law truism that it is the owner or equity holders of the business enterprise, and not the creditors,

who must stand ready to absorb the losses of the enterprise.

In a partnership setting, the partners are still collective owners of the business enterprise, as by the principle of mutual agency

they all have the power of management of the partnership affairs, and all profits and gains are to their entire benefit and

account. Thus, Article 1770 of the Civil Code provides that every “partnership must be established for the common benefit or

interest of the partners,” and in turn Article 1799 provides that “[a]ny stipulation which excludes one or more partners from any

share in the profits or losses is void.” Therefore, despite the separate juridical personality of the partnership enterprise, the

partnership is still wholly owned, managed and controlled by the partners as collective sole proprietors of the business

enterprise, and consequently, they must bear the full brunt of the reverses of the business. Since the partners benefit fully and

personally from the partnership’s profitable operations, they must thereby stand liable personally for the debts and obligations

contracted even in the partnership name. Otherwise (i.e., to provide for limited liability as to allow creditors recourse only to the

partnership assets), would be tantamount to letting the partnership creditors take the risks and consequences of the losses of

the partnership enterprise when they draw no advantage from its profits.

—oOo—

32

33



8 – PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA


1. Distinguished from “Joint Venture”

Bautista, although confirming that a joint venture “is an association of two or more persons to carry out a single business

enterprise for profit . . . [and] embodies several of the essential elements or characteristics of a partnership and bears such a

close resemblance to it that the rights and liabilities of joint adventures are largely governed by rules applied to partnership,”

(BAUTISTA, at pp. 41-42) nevertheless would distinguish a partnership and a joint venture in the following manner:

(a) “a joint venture is ordinarily limited to a single transaction [and] not intended to pursue a continuous business;” whereas a

partnership, “though it may exist for a single transaction, usually contemplates the undertaking of a general and continuous

business of a particular kind which necessarily involves a series of transactions;” ( Ibid , at p. 42.)

(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

that a partnership adopts no firm name does not make it void as a contract or a partnership, so also with a joint ventur

In any event, the distinction between a joint venture as a business medium not falling within the ambit of Partnership

as not constituting a species of partnerships, has really become mute since in Kilosbayan, Inc. v. Guingona, Jr ., 2

110, 143 (1994), it was held:

Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise; geall contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a rig

direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in pr

losses. The acts of working together in a joint project. ( Ibid , citing BLACK’S 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 o

of the parties to a “Joint Venture Agreement” covering the development of a subdivision project under provisions of

Code governing partnerships. The Chapter on Joint Ventures provides for a more thorough discussion of the joint ven

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 propertie

1811, Civil Code), nonetheless a co-ownership constitutes merely a property relation whereby two or more persons o

indiviso a property, but the relationship does not seek the business or mercantile pursuit of the property relationship

words, a co-ownership situation comes about other than by a contractual intent to pursue a business venture in com

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

in the profits that may be produced by the property owned in common, there is still no partnership arrangement. Thu

1769 of the Civil Code provides that “In determing whether a partnership exists . . . Co-ownership or co-possession do

itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the u

property.”

3. Distinguished from Joint Account (Sociedad de Cuentas en Participacion)

34



A joint account is governed under Article 239 of the Code of Commerce, and still referred to as a corporate taxpayer under the

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 c

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 c

for it is not bounded by any legal requirements like the registration requirements for partnerships where the real pr

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 con

doctrines and the common law principles on trust. There is no element of mutual agency or co-ownership in a busin

relationship, and in fact the trust relationship is centered upon the splitting in the properties contributed (the corpus) of

or naked title in the trustee who then manages and control the properties, and beneficial or equitable title in the benef

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

succession, a corporation has a stronger legal personality, enabling it to continue despite the death, incapacity, withd

insolvency of any of its stockholders or members. In a partnership, the withdrawal, death, incapacity or insolvenc

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 n

what they have invested in the partnership but even as to their other properties. (Articles 1816, 1817, 1824, and 18

Code)

Generally, every partner is an agent of the partnership, (Articles 1803(1), 1818, and 1819, Civil Code), and by his so

can bind the partnership (Articles 1822 and 1823, Civil Code), whereas in a corporation, only the Board of Directors o

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 inte

buyer or transferee does not assume transferor’s position as partner, but merely has a right to demand for acco

35



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 adefective 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 t

absence of the first, the contracting parties would have gone along with the latter. Limited liability, centralized man

and easy transferability of the units of ownership in a corporation are by themselves strong factors for parties’ intenti

bound in the corporate relationship, and one cannot presume that if these features are not met that they wou

alternative wish to be covered by a partnership relationship, which has generally would involve unlimited liability

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 “togethe

is known in Partnership Law as “delectus personae” and not just the joint venture. The essence of partnership is the

relationship, i.e., that each would-be partner goes into the venture precisely because he wants the other co-venturer

other person, to be with him in the venture. A venturer who seeks to enter into a corporate relationship perhaps does

care about the personality of the other co-venturers, and fully aware that he himself and others have the ability to tran

investments to outsiders.

Nonetheless, there indications of a contrary view to the above. Under Section 21 of the Corporation Code, when pa

and pretend to be a corporation, when in fact none exist, the law would impute to them a juridical personality to vali

contract under the corporation by estoppel doctrine; however, it would treat the parties as partners since it expressl

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 co

by estoppel doctrine, and the “corporate” creditors of the corporation by estoppel, as to the assets invested into the

The author would presume that it would have to be the corporate creditors that would have priority over the “corporat

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.

Appeals,175 SCRA 668 (1989), when it resolved the issue raised: “What legal rules govern the relationship am

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 positio

among themselves the rights of the stockholders in a defectively incorporated association should be governe

supposed charter and the laws of the state relating thereto and not by the rules governing partners (Quoting from

JURIS SECUNDUM which cited Cannon v. Brush Electric Co. , 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), neverthele

36



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, t hen:

(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 of centralized management , there is

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

fact they was no intention among the co-venturers to formally incorporate a juridical entity, then there can be no do

what was really the meeting of minds among them was a partnership, for in essence they agreed to set up a comm

(i.e., pursue a business venture), with clear indication to divide the profits among themselves. This is exactly the

covered in the decision in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999), where the

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 b

boats worth P3.35 million, financed by a loan . . . In their Compromise Agreement, they subsequently revealed their

to pay the loan with the proceeds of the sale of the boats, and to divide equally among themselves the excess or

These boats, the purchase and the repair of which were financed with borrowed money, fell under the term ‘comm

under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like

industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided

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-ventu

being pursued, was entered into on behalf of “Ocean Quest Fishing Corporation,” although no such corporation ex

was there any attempt to incorporate such entity. Consequently, both the unlimited liability principle under Partnership

the corporation by estoppel doctrine in Corporate Law were applied to determine the personal liability of each of the p

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 p

liable for partnership debts and liabilities, even when the underlying transaction was effected by another partner, or ev

a partner does not participate at all in the affairs of the partnership. On the other hand, under the corporation by

doctrine now embodied in Section 21 of the Corporation Code, it is only the active or managing officers who assliability of a general partner, thus: “All persons who assume to act as a corporation knowing it to be without authority

shall be liable as general partners, for all debts, liabilities and damages incurred or arising as a result thereof;”

37



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 satback 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 collec

among themselves and solely for their own protection and not for profit. ( Republic v. Sunlife Assurance Company of

473 SCRA 129 [2005]).

Unlike ordinary corporations, cooperatives are governed by principles of democratic control where the members in

cooperatives shall have equal voting rights on a one-member-one-vote principle (Articles. 4(2), R.A. 6938); where t

of Directors manages the affairs of the cooperative, but it is the general assembly of full membership that exercise

rights and performs all of the obligations of the cooperative (Articles 5(3) and 34, R.A. 6938); and are under the su

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 organize

eleemosynary purpose and no part of the net income is to be distributed to the officers and members thereof, the

objective of every cooperative is self-help: “to provide goods and services to its members and thus enable them

increased income and savings, investments, productivity, and purchasing power and promote among them

distribution of net surplus through maximum utilization of economies of scale, cost-sharing and risk-sharing without co

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 vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development a

justice. (Article 2, R.A. 6938). In one case, the Court held that cooperatives are established to provide a strong so

economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms

v. Grospe, 333 SCRA 425 [2000]).

—oOo—

38



9 – CLASSES OF PARTNERSHIPS AND PARTNERS

[Updated 12 October 2009]

_______________

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 thetime 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

belongs to them to a common fund, with the intention of dividing the same among themselves, as well as

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.

___________

In order to have a better understanding of the various legal relationships created within the partnership, and the con

rights and obligations arising from such varied relationships, it may be helpful to determine the classes of partners

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

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

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 b

them to a common fund, with the intention of dividing the same among themselves, as well as all the profits they ma

therewith.” (Article 1778, Civil Code). This means that “the property which belonged to each of the partners at the tim

constitution of the partnership, becomes the common property of all the partners, as well as all the profits which t

acquire therewith.” (Article 1779, Civil Code). The Civil Code further clarifies that “A stipulation for the common enjo

any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, le

donation cannot be included in such stipulations, except the fruits thereof.” (Article 1779, Civil Code).

39



In a universal partnership of profits “all that the partners may acquire by their industry or work during the existence of the

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 abroa

change his mind about not joining the venture. In any event, the San Juan estate project proved very successful, and

local partner died, the partner abroad sought to recover one-half of the profits of the venture on the ground that h

partner therein, in spite of his previous refusal to be part of it, and mainly because partnership property was used as

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

never a partner thereto, Lyons resolution revolved around the principle that the two partners never were part of a partnership, but that they were at best partners in particular partnerships for the previous projects entered into before

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 a

relation of partnership had existed in the money used, the case might be different; and much emphasis is laid in the a

brief upon the relation of partnership which, it is claimed, existed. But there was clearly no general relation of pa

between the parties; and the most that can be said is that Elser and Lyons had been coparticipants in various transa

real estate. No objection can be made to the use of the word partnership as a term descriptive of the relation in those

transactions, but it must be remembered that it was in each case a particular partnership, under article 1678 of the C

It is clear that Elser, in buying the San Juan Estate, was not acting for any partnership composed into a propositi

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

transactions or ventures concluded between the partners. The default rule therefore should be that unless the pa

stipulate in their articles of partnership that they are entering into a universal partnership, it would be presumed that t

existing between them merely a particular partnership.

Apart from the foregoing, the concept and medium of universal partnership serves no reasonable commercial pur

legally it can only come about when it is so expressly stipulated in contract of partnership, and practically, it is diffic

how two or more persons not bounded by marriage, faith or vocation (which makes the partnership a particular oncommit to one another all that they have and all the fruits of what they do, to one another.

Th th i t t ti th t b k d i “ B d fi iti d A ti l 1776 th t th b lid t hi f I i ith ld th f i d f it ifi d ti th t t t f ti l

40



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 t hat 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 partner’s 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 purpo

creation prevent the dissolution of any partnership by an act or will of a partner. Among partners, mutual agency arise

doctrine of delectus personae allows them to have the power, although not necessarily the right, to dissolve the par

An unjustified dissolution by the partner can subject him to a possible action f or 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 w

The “purpose” of the partnership is not the specific undertaking referred to in the law. Otherwise, all partnership

necessarily must have a purpose, would all be considered as partnerships for a definite undertaking. There would the

no need to provide for articles on partnership at will as none would so exist. Apparently what the law contempla

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 part

and subsequently the original partners accept an industrial partner but do not register a new partnership, and there

industrial partner retires from the business, and the original partners continue under the same set-up as th

partnership, then although the second partnership was dissolved with the withdrawal of the industrial partner, there r

reversion back into the original partnership under the terms of the registered articles of partnership. There is not con

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,

Code distinguishes between a general partnership, where all the partners are unlimitedly liable; and a limited par

where there is one or more general partner who are unlimitedly liable, with one or more limited partners, who are

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), Jus

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 i

1816 which posits that all partners shall be liable pro rata beyond the partnership assets for all the contracts which m

been entered into in its name, under its signature, and by a person authorized to act for the partnership. This rule

construed along with other provisions of the Civil Code which postulate that the partners can be held soidarily liable with the case of an incoming partner his liability with respect to the partnership obligations which were incurred prior to his a

41



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

partnership–consistently 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 a

into the partnership shall be satisfied only out of partnership property, unless it is otherwise stipulated. (Articles 1

1840, Civil Code).

Partnership Law also refers to the managing partner who has been given the management of the partnership e

(Articles 1800 and 1801, Civil Code); the liquidating partner , who takes charge of the liquidation and windi

partnership affairs (Article 1836, Civil Code); a retiring partner , who ceases to be part of the partnership which is c

after dissolution, as compared with the partners who remain with the venture as continuing partners (Articles 181840 and 1841, Civil Code); and the partner by estoppel , who is not a formal partner in an existing partnership, but b

he has led third-parties dealing with the partnership to believe he is a partner, and thereby becomes liable as a regula

as so such relying creditors (Article 1815, Civil Code).

—oOo—

partnership; and consequently spouses may validly become partners to one another in a particular partnership whic

42



10 – 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, whic

include a professional partnership, and both general and limited partnerships. The critical question must be as

spouses just between themselves or with third parties validly enter into a contract of partnership for gain provided the

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

v. Suter, 27 SCRA 152 (1969), which currently is the only decision to deal with the issue, the Supreme Court affir

particular view, relying only on the provisions of Article 1677 of the old Civil Code (now Article 1782), that since the pfor spouses covers expressly only universal partnerships, then they can validly be partners in a limited partnership

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 “spou

respect to any contract of universal partnership made between them during the marriage,” and other than repo

relevant portions of the decision in Suter , he did not comment on whether spouses can validly enter into other

partnership for gains. Tolentino does not comment on the provisions of Article 1782, although his discussion on th

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 17

Civil Code. Certainly Article 1782 constitutes an important statutory provision to resolve that issue, but there are other

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

because the contract of partnership started out where there was no legal obstacle with the parties entering int

registered limited partnership: Suter as the general partner, with Spirig and Carlson, as limited partners. Eventually, S

Spirig were married, and bought out the interest of Carlson. Under the provisions of the Tax Code, the Commiss

Internal Revenue then sought to recover income taxes individually against Suter for partnership income under the th

the separate juridical personality of the partnership by which it was taxed separately as a corporate taxpayer, was ext

with the marriage of Suter and Spirig, who ended up as the only partners in the venture. The Court held: “The theo

petitioner, Commissioner of Internal Revenue, is that the marriage of Suter and Spirig and their subsequent acquisiti

interests of remaining partner Carlson in the partnership dissolved the limited partnership, and if they did not, the

juridical personality of the partnership should be disregarded for income tax purposes because the spouses have exclusive Although it can be argued that contributions to a partnership are not in the nature of “donations” or “gratuitous adv

43



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 writer’s 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 adv

because a contract of partnership is essentially an onerous and commutative contract, whereby the contributions com

cost (e.g., becoming unlimitedly liable for partnership obligations), nevertheless, such contributions would then vi

provisions of Article 1490 of the Civil Code, which prohibits sales or any other form of onerous dispositions, between

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 m

accordance with the provisions of said Code, and cannot be the subject of regular partnership rules under the Partner

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 marriag

consequently, it cannot exist consistently with another set of rules governing partnerships for gains under the Partner

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 part

which beyond doubt should include spouses, yet under Article 75 of the Family Code, “In the absence of marriage se

or when the regime agreed upon is void, the system of absolute community of property as established in this Co

govern,” and which under Article 88 of the Family Code, “shall commence at the precise moment that the ma

celebrated [and that any] stipulation, express or implied, for the commencement of the community regime at any o

shall be void.

The absolute community of property regime actually establishes a sort of “universal partnership” between the spouse

it includes “all property owned by the spouses at the time of the celebration of the marriage or acquired thereafter.” (A

Family Code). Can spouses governed by the absolute community of property regime, vary the effects between

certain community property, by contributing them into a particular partnership for gain? The answer ought to be in the

and such partnership agreement would be void, since under Article 89 of the Family Code “No waiver of rights, interes

and effects of the absolute community of property during the marriage can be made except in case of judicial sepa

property.” In other words, Article 1782 in Partnership Law is not the main rule on regulating property rights between s

but merely suppletory to the primary rules set out by the Family Code.

(2) Spouses Governed by the Conjugal Partnership of Gains of the marriage,” and which provide that “The marriage settlement and any modification thereof shall be in writing, s

44



( ) p y j g p

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 suchseparate 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

g , p g y g,

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 o

the more specific provisions on the Law on Marriages under the Family Code, which govern specifically the propert

that should prevail between spouses. The provisions of Partnership Law are geared towards providing for the a co

relationship that seeks to undertake a business venture; whereas, the Family Code provisions governing the propert

prevailing between spouses have considerations that transcend profit motives, and seek to strengthen the institu

marriage and the family. Consequently, a contract of partnership between spouses should be held void in that it

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 th

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 itse

Partnership Law, every partner is an agent of the partnership and for the other partners when it comes to transact

pertain to partnership affairs; thus, the act of one partner binds the other partners and the partnership property

1803[1] and 1818, Civil Code). On the other, the general rule under the Family Code, when it comes to absolute com

property regime (Article 96, Family Code) and conjugal partnership of gains (Article 124, Family Code), is that both

are co-administrators of the conjugal properties; and any contract, especially an act of disposition or encumbranc

community or the conjugal property, done by one without the consent of the other partner, would be void. ( Guiang v

Appeals, 291 SCRA 372 [1998]; Cirelos v. Hernandez, 490 SCRA 625 [2006]; Bautista v. Silva, 502 SCRA 334 [200

the case of allowing the spouses to enter into a particular partnership, and they both contribute community or

properties thereto, would the rules under Partnership Law therefore allow one spouse, without the consent of t he othe

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

separate estate, without need of the consent of the other. To each spouse shall belong all earnings from his or her pr

business or industry and all fruits, natural, industrial or civil, due or received during the marriage from his or her s

property.” Under a complete separation of property regime, spouses separately manage and control their

properties. Can spouses who are governed by the regime of separation of property, thereby partially overcome the governing 2. May Corporations Validly Qualify to Become Partners?

45



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.

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 w

corporations or with individuals, for, in entering into a partnership, the identity of the corporation is lost or merged wit

another and the direction of the affairs is placed in other hands than those provided by law of its creation. . . A corpor

act only through its duly authorized officers and agents and is not bound by the acts of anyone else, while in a pa

each member binds the firm when acting within the scope of the partnership.” (FLETCHER CYC. CORPORATION

Ed.) 2520).

The doctrine is grounded on the theory that the stockholders of a corporation are entitled, in the absence of any notic

contrary in the articles of incorporation, to assume that their directors will conduct the corporate business without sha

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-

jurisprudence that “a corporation has no power to enter into a partnership.” (Ibid , at p. 109). Nevertheless, Tuason ru

corporation may validly enter into a joint venture agreement, “where the nature of that venture is in line with the b

authorized by its charter.” ( Ibid , quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletch

Corp., Sec. 1082).

A joint venture is essentially a partnership arrangement, although of a special type, since it pertains to a particular p

undertaking (BAUTISTA, supra, at p. 50). In Torres v. Court of Appeals, 278 SCRA 793, the Supreme C

unequivocally that a joint venture agreement for the development and sale of a subdivision project would co

partnership pursuant to the elements thereof under Article 1767 of the Civil Code that defines when a partnership

AlthoughTuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arra

it would seem that the policy behind the prohibition on why a corporation cannot be made a partner do not apply

venture arrangement. Being for a particular project or undertaking, when the Board of Directors of a corporation eva

risks and responsibilities involved, they can more or less exercise their own business judgment is determining the

which the corporation would be involved in the project and the likely liabilities to be incurred. Unlike in an ordinarily pa

arrangement which may expose the corporation to any and various liabilities and risks which cannot be evaluated and partners are “general partners so that all corporate partners shall take part in the management and thus be jo

46



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 Board’s business appreciation and anticipation.

It is clear therefore that what makes a project or undertaking a “joint venture” to authorize a corporation to be a co-venturer

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

severally liable with the other partners.” (SEC Opinion, dated 23 February 1994, XXVII SEC Quarterly Bulletin 18 (No

1994).

The rationale given by the SEC for the second condition was that if the corporation is allowed to be a limited partner o

is no assurance that the corporate partner shall participate in management of the partnership which may create a

wherein the corporation may not be bound by the acts of the partnership in the event that, as a limited partner, the co

chooses not to participate in the management. (Ibid).

However, in 1995, the SEC reversed such interpretation and practically dropped the second requirement, when it adm

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

corporate investor should also be allowed to make passive investments in partnerships as a limited partner, who wo

not be bound beyond the amount of its investment by the acts of the other partners who are not its duly appoi

authorized agents and officers. Hence, the very reason why as a general rule, a corporation cannot enter into a co

partnership, as stated in the 1966 SEC opinion, would no longer be present, as the corporation, which is merely

partner, will now be protected from the unlimited liability of the other partners who are not agents or officers of the cor

2. Section 42 of the Corporation Code which permits a corporation to invest its funds in another corporation or busine

not require that the investing corporation be involved in the management of the investee corporation with a view to p

investment therein. By entering into a contract of limited partnership, a corporation would continue to manage

corporate affairs while validly abstaining from participation in the management of the entity in which it has

Accordingly, as there is generally no threat that a corporate limited partner would be solidarily liable with the partners

would be no reason for requiring a corporate partner to actually manage the partnership, if it makes the business de

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

that, as a general rule, corporations could not form a partnership; that corporations cannot become limited partners,

on an assumption which is no longer current. Jurisprudence and common commercial practice in the U.S., indic

corporations are not barred from acting as limited partners. Current American laws support the position that a corpor

enter into a contract of limited partnership. For example, the Revised Uniform Limited Partnership Act of 1976 (as am

1985), specifically confirms, that corporations may act as limited partners. Almost all states in the U.S. have adopted limited

47



partnership laws which provide, in the same manner as the Revised Uniform Limited Partnership Act, that corporations may

act as limited partners. This indicates that many other jurisdictions simply follow the broad language of the Revised Model

Business Corporations Act which suggests that corporations may act as limited partners and in no event prohibits that activity.

These statutes reaffirm what is indicated by the commercial practice in the U.S., that corporations can act as limited partners.

The proliferation of statutes reversing the doctrine forbidding corporations to become partners is proof of the unsoundness of

and dissatisfaction with such doctrine. (SEC Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8-9 (No. 1, June 1996).

In that opinion, the SEC conceded on the points raised by confirming that “inasmuch as there is no existing Philippine law that

expressly prohibits a corporation from becoming a limited partner in a partnership, the Commission is inclined to adopt your

view on the matter,” ( Ibid ) provided that the power to enter into a partnership is provided for in the corporation’s charter. The

SEC went on to say:

“We agree with your statements that a reconsideration of the present policy of the Commission on the matter is timely in order

to permit the Philippine commercial environment to maintain its pace in terms of legal infrastructure with similar developments

in the international arena with a view to encouraging and facilitating greater domestic and foreign investments in Philippine

business enterprise.” (Ibid )

—oOo—

1. When Capital Contributions Total P3,000.00 or More

48



11 – PARTNERSHIP FORMAL AND REGISTRATION REQUIREMENTS

[Updated 14 October 2009]

_____

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are


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 juridicalpersonality. 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 withthe 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.”

_____

Art. 1772. Every contract of partnership having a capital of Three thousand pesos or more, in money or prope

appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commiss

Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partner

the members thereof to third persons (n)

_____

Under modern day setting, most partnerships would be formed or constituted having contributed capital of m

P3,000.00, for it is doubtful whether two or more persons would come together in pursuit of business with a capital of

P3,000.00. This means that the twin requirements under Article 1772 of the Civil Code of having the contract of partn

a public document and registered with the SEC apply almost universally to all modern-day partnerships. But even

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 m

adverse legal consequence; and

(b) The law expressly provides that “Failure to comply with the requirements . . . shall not affect the liabil

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

void as among the partners, and the claims of its creditors are unaffected, why should any partner worry about non-co

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 reg

contract of partnership with the SEC does not invalidate a contract that has the essential requisites of a partners

purpose of registration of the contract of partnership is to give notice to third parties. Failure to register the co

partnership does not affect the liability of the partnership and of the partners to third persons. Neither does such failure to When the venture was not getting off the ground, they invited Pahamatong as industrial partner, and they ex

49



register affect the partnership’s 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 r equirements 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.”

“Supplemental Articles of Co-partnership” adopting the original name of the company, but this time providing for a

thirty (30) years for the life of the venture, and providing for equal distribution of profits among the three partners.

articles were not registered with the SEC. Although the firm began to operate with profits, eventually Pahamatong

from the arrangement and his equity was bought back by Maglana and Rojas, who then proceeded to operate the fir

the same original name, and with the verbal agreements that the profits would be distributed 80%-20% in favor of Mag

When Rojas abandoned the enterprise to set-up a competing venture in another logging concession, he withdrew so

equipment contributed to EDE to be used in his new venture. Maglana notified Rojas of his (Maglana’s) withdrawal

partnership arrangement in EDE, and for Rojas to account fully for the amounts withdrawn from the partnership treasu

when totaled up would necessitated for Rojas to pay the promised contributions under the original articles of co-partn

The case reached the Supreme Court on the issues of the nature of the partnership that existed between Maglana a

after the withdrawal of the industrial partner; on whether it became a partnership at will as provided under the origina

of partnership as to have justified Maglana’s termination thereof when the second articles of partnership provided for

of 30 years; and the basis of the distribution of profits and losses from the EDE venture, whether it would be the “sh

share alike” under the first articles of partnership, on the basis of capital contributions based on the second a

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 w

registered with the SEC, and held that when the second articles of co-partnership was executed (but not registered), t

every intention to abide by the original partnership arrangement existing under the registered articles, since it cov

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

the intention of the partners to dissolve the first partnership, upon the constitution of the second one, which they unm

called an “Additional Agreement” . . . Except for the fact that they took in one industrial partner; gave him an equa

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 purpo

the capital contributions of Rojas and Maglana as stipulated in both partnerships call for the same amounts. Just as

is the fact that all subsequent renewals of Timber License No. 35-36 were secured in favor of the First Partnership, th

licensee. To all intents and purposes therefore, the First Articles of Partnership were only amended, in the form of Art. 1771. A partnership may be constituted in any form, except where immovable property or real rig

50



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. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inve

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 i

shown by the formal requirements mandated under Article 1773 of the Civil Code, which requires the executi

inventory covering such properties to be attached to the public instrument ( i.e., the articles of incorporation) that s

registered with the SEC, but also by what seems to be a superfluous Article 1774 of the Civil Code which reitera

obvious legal capacity of a partnership to own properties as a juridical person, where it provides that “Any immovable

or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the pa

name.”

Then also, we have the long provisions of Article 1819 of the Civil Code, which detail all the scenarios under wh

property owned by the partnership may be legally dealt with, under various circumstances where title is not register

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 partnershi

designated business to be engaged in, that determine whether there should be deemed contributed immovable pro

the venture to trigger the application of Article 1773 of the Civil Code. The Court held in Agad that since the a

partnership indicated that the partners were going to contribute cash into the venture, then the fact that the partners

expressly organized “to operate fishpond,” did not necessarily mean that either a fishpond or a real right to any fishp

contributed into the venture.

The ruling would also support the position that just because the partnership venture owns or operates immovables does not

it i t th ti f A ti l 1773 h h i bl t t ib t d b th t b t

what momentarily suits their purpose. Parties cannot adopt inconsistent positions in regard to a contract and c

t l t h l h ti

51



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 r egistered 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

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

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

and that the declaration that the “partnership is void” does not affect the intra-partnership relationship between and a

partners and between the partners and the partnership itself. Thus, Torres held that the “alleged nullity of the partne

not prevent courts from considering the Joint Venture Agreement [or any contract of partnership] an ordinary cont

which the parties’ rights and obligations may be inferred and enforced.” Therefore, from the intra-partnership poin

there are dire consequences that befall the partners and the partnership for failing to comply with the formalities m

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 pa

creditors, and every third person who deals with the partnership, I do not see how the imposition of the rule “partn

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 th

partners and partnership on one hand, and the partnership creditors on the other hand, for to do so would adversely a

contractual rights and standing of the creditors vis-a-vis the partners on their unlimited liability rule and the partnership

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 perta

partners directly as co-owners, since no contract of partnership exist between them (it is void and inexistent)

partnership person has arisen with a juridical personality separate and distinct from each of the partners. Not only d

scenario affect the integrity of the contracts entered into directly with the partnership, but it also means that the contrib

earned partnership assets pertain directly to the persons of the partners and priority as to them pertains to their

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 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

Annex “ A-1,” on its face, contains typewritten entries, personal in tone, but is unsigned and undated . As an

document there can be no quibbling that Annex “A 1” does not meet the public instrumentation requirements exact

52



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 author’s 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 in Litonjua, 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 dealing with the business

enterprise. Yet, the Supreme Court did not at all 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 —

document, there can be no quibbling that Annex A-1 does not meet the public instrumentation requirements exact

Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to a partnership involving m

P3,000.00 in money or property, Annex “ A-1” cannot be presented for notarization, let alone registered with the Secu

Exchange Commission (SEC), as called for under the Article 1172 of the Code . And inasmuch as the inventory req

under the succeeding Article 1773 goes into the matter of validity when immovable property is contributed to the par

the next logical point of inquiry turns on the nature of petitioner’s contribution, if any, to the supposed partnership. (

italics supplied)

It is clear from the afore-quoted passage that Litonjua considers are binding and effective to purely intra-partnership i

mandatory provisions of Article 1771 and 1773 of the Civil Code that requires that even when there is no issue

meeting of the minds involves the formation of a partnership ( i.e., the typewritten note “doubtless referring to a pa

involving more than P3,000.00 in money or property”) then the requirement that it contract be cast in a public instrum

registered with the SEC were deemed to be essential to sustain a claim that a contract of partnership exist betw

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 o

Code renders the contract of partnership as unenforceable can be deduced from the following portion of the Litonjua

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 inde

Annex “ A-1,” is a promise which is not to be performed within one year from “contract” execution on June 22

Accordingly, the agreemend embodied in Annex “ A-1” is covered by the Statute of Frauds and ergounenforceable

compliance therewith. By force of the statute of frauds, an agreement that by its terms is not to be performed with

from the making thereof shall be unenforceable by action, unless the same, or some note or memorandum there

writing and subscribed by the party charged. Corollarily, no action can be proved unless the requirement exacte

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

contracts is lifted the moment there is partial or full execution of the terms of the contract. Thus, in the future

anticipated that the rule of partial execution, ( i.e., the actual contribution made to the partnership, the pursuit of the

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

to contribute money, property or industry to a common fund with the intention of dividing the profits between o

themselves ” (at pp 590-591; italics supplied)

53



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 if Litonjua 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 Angeles which 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

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 co

partnership arose between the Litonjua sibling even on the basis of the arrangement purported, since it lacked the e

element of “contributing to a common fund.” Thus, the rulings on the failure to comply with the provisions of Article

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 form

partnership where real property is contributed, the Court held in Borja v. Addison, 44 Phil. 895 (1922), that “knowled

existence of the new partnership or community of property must, at least, be brought home to third persons dealing

surviving husband in regard to community real property in order to bind them by the community agreement.” (a

Consequently, third parties without knowledge of the existence of the partnership who deal with the property still reg

the name of one of the partners have a right to expect full effectivity of such transaction on the property, in sp

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 Rule

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 righ

partners, the partnership and the partnership creditors, when it comes to the binding effect of transactions relatin

estate and other immovables where the controlling doctrine is that such transactions do not bind the public unless

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

deed is binding between the parties, it cannot be considered binding on third persons if it is not embodied in

instrument and recorded in the Registry of Deeds. When it comes to contributions of real estate to a partnership, e

when it covers registered land, then the peremptory provisions of the Property Registration Decree (Pres. De

1459) will prevail as to who has a better claim, right or lien on the property, since “registration in good faith and for

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

Those who, not being members of the partnership, include their names in the firm name, shall be subjec

liability of a partner. (n)

54



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 toprotect 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.

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 incl

names in the partnership name; but that if an individual includes his name in the firm name, then he becomes boun

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 Person

indicates clearly the essence of having a firm name: that since a partnership is given a separate juridical personal

allows it to deal with legal capacity and enter into contracts with the public, then it must adopt a firm name by which

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, Artic

was taken from Article 126 of the Code of Commerce (TOLENTINO, at p. 353). Yet the principle on partnership nam

Article 126 was quite different, for it actually required that the partnership name should be registered containing all th

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 re

general partnership to transact business under the name of all its members, of several of them, or of one only, was t

the public from imposition and fraud; and that Article 126 was for the protection of the creditors rather than of the

themselves. Jo Chung Cang held that the legal requirement as to firm name must be construed as rendering contracts

violation thereof unlawful and unenforceable only as between the partners and at the instance of the violating party,

the sense of depriving innocent parties of their rights who may have dealt with the offenders in ignorance of the latt

violated the law; and that contracts entered into by commercial associations defectively organized are valid when vo

executed by the parties, and the only question was whether or not they complied with the agreement. It essence J

Cang ruled that partners cannot avoid the consequences of a partnership contract entered into by invoking in their de

anomaly in the firm name which they themselves adopted. The ruling was reiterated in Philippine National Bank v. Lo

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

Where a shareholder of an association is called upon to respond to a liability as such, and where a party has contract

corporation and is sued upon the contract, neither is permitted to deny the existence or the legal validity of such co

55



p p p p pp p p

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 Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the principles of corporation by estoppel doctrine

(Section 21, Corporation Code), even as to unregistered partnerships, thus:

Persons who assume to form a corporation or business association, and exercise corporate functions, and enter into business

relations with third persons, are estopped from denying that they constitute a corporation. So also are the third persons who

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).

x x x .

p p , p y g y

To hold otherwise would be contrary to the plainest principles of reason and good faith. Parties must take the consequ

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

of Commerce were mandatory in the sense that they were addressed to the partners and partnership more for the pro

partnership creditors, and non-compliance therewith could not prejudice creditors, then what would be their usefuln

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

commercial partnerships under the Code of Commerce. The present rule under Article 1815 of the Civil Code which e

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 e

and

(c) more importantly, the arising of the separate juridical personality of the partnership comes with the perfecti

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 m

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

dealing with a partnership, or are dealing with a partner to a partnership enterprise.

a. Intra-Partnership Relationship Failure to comply with the requirements under Article 1772 may also be basis for the SEC to refuse to give support

partners who have not registered their agreement with the SEC.

56



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 t he 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 partnershi

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 p

purported partnership in the ordinary course of business of such partnership, has a right to expect that his contrac

enforced, and intra-partnership and technical issues pertaining to the partnership or on the distribution of power and

between the partners cannot generally be raised against such third party to undermine the enforceability of his co

dealings with the corporation.

Various statutory provisions in the Partnership Law of the Civil Code, support this doctrine of reliance by third parties dgood 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 na

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 th

every partner, including the execution in the partnership name of any instrument, for apparently carrying on in t

way the business of the partnership . . . binds the partnership, unless the partner so acting has in fact no authority to a

partnership in the particular manner, and the person with whom he is dealing with has knowledge of the fact tha

no such authority;”

(c) Under Article 1834, partnership creditors who extend credit to the partnership even after there has been d

can can claim payment thereof against all the partners, when such creditors have “no knowledge or notice of the disso

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

firm form part of the its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the

powers of the partner.” ( Ibid, at p. 969).

57



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 latter’s authority to do so, or that he should first ascertaining whether or not the other partners has given their consent

thereto.” (Ibid , at p. 957).

The reason why the general rule in Agency Law that one dealing with an agent must ascertain the extent of the power of the

agent does not normally apply with the same effect in Partnership Law was also explained in Goquiolay in the following

manner: “It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only to manage the property, and

that it did not include the power to alienate . . . What this argument overlooks is that the widow was not a mere agent, because

she had become a partner upon her husband’s death, as expressly provided by the articles of co-partnership.” ( Ibid , at p. 965).

Being therefore a partner, the general rule of Partnership Law, every partner had the power to dispose of partnership property

even of its real estate, which is in the normal course of the partnership business of dealing with real property: “where the

avowed purpose of the partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the

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 re

partnership void, nor does it undermine the enforceability of contracts entered into in the partnership name, and

generally impose legal consequences on the partners for non-compliance, then what is the usefulness of such

provisions?

The answer had been addressed early in our jurisdiction in Thunga Chui v. Que Bentec, 2 Phil. 561 (1903), whic

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 art

contracting parties may compel each other to observe that form, once the contract has been perfected. This right

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

fact that plaintiff has not made use of same does not bar his action. x x x . Article 1279 [now Article 1356], far from m

enforceability of the contract dependent upon any special extrinsic form, recognizes its enforceability by the me

granting to the contracting parties an adequate remedy whereby to compel the execution of a public writing, or a

special form, whenever such form is necessary in order that the contract may produce the effect which is desired, acc

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

the authority of a purported partner acting in the ordinary course of partnership business, nor to review the registratio

of the partnership, the rule is that any important changes in partnership relationship must be brought to the knowledgpartnership 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

58



business instead of insisting on the liquidation of the partnership, will not relieve such withdrawing partner from her liability to

the partnership creditors. The Court held that even if the withdrawing partner acted in good faith, this cannot overcome the

position of partnership creditors who also acted in good faith, without knowledge of her withdrawal from the partnership. In

particular, Singson ruled that when the partnership executes a chattel mortgage over its properties in favor of a withdrawing

partner, and the withdrawal was not published to bind the partnership creditors, and in fact the partnership itself was not

dissolved but allowed to be operated as a going concern by the remaining partners, the partnership creditors have standing to

seek the annulment of the chattel mortgage for having been entered into adverse to their interests.

—oOo—

12 – RIGHTS AND POWERS OF PARTNERS

The foregoing doctrinal approaches shall animate the discussions hereunder on the rights and obligations of partn

partnership arrangement.

59




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.

1. Partner’s 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 busin

the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying o

usual way the business of the partnership of which he is a member binds the partnership.” This principle is supported

1803 which provides “When the manner of management has not been agreed upon . . . All the partners shall be co

agents and whatever any one of them may do alone shall bind the partnership.” Article 1818 goes on to provide that “

a partner which is not apparently for the carrying on of the business of the partnership in the usual way does not

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 part

with a juridical entity to rely upon the validity and enforceable of contracts entered into with an officer or represent

has been by practice endowed with apparent authority to act for the juridical person. In every partnership, th

presumption of apparent authority for every partner to act for and thereby bind the partnership in all that is “apparent

carrying on of the business of the partnership in the usual way.” Thus, the Court held in Munasque v. Court of App

SCRA 533 (1985), that a presumption exists that each partner is an authorized agent for the firm and that he has au

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 t

interpreted the original provision of Article 1803 of the Civil Code (then Article 1695 of the old Civil Code), that allo

partner to act to bind the partnership, to apply only when there has been no provision at all in the articles of partnersh

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

provision for the management of the partnership business. In the case at bar we think that the articles of the Veteran

the Philippines do so provide. It is true that an express disposition to that effect is not found therein, but we think one

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

partnership business without knowledge of such special arrangement, and who are not mandated to seek f ormal auth

that in fact are deemed to have a right to expect, unless otherwise indicated, that their dealings with the managing

60



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 f ormalized within the terms of

the articles of partnership, generally such special arrangements do not bind or prejudice third parties who deal with the

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

money was sought to be recovered from the partnership Hill & Ceron in whose name it was entered into by on

managing partners, when in fact the articles of partnership provided expressly that: “Sixth. That the managemen

business affairs of the copartnership shall be entrusted to both copartners who shall jointly administer the business

transactions and activities of the copartnership.” In ruling that the act of just one of the managing partners should

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 managemen

business of the partnership has been entrusted to both partners thereof, but we dissent from the view of the Court of

that for one of the partners to bind the partnership the consent of the other is necessary. Third persons, like the pla

not bound in entering into a contract with any of the two partners, to ascertain whether or not this partner with w

transaction is made has the consent of the other partner. The public need not make inquiries as to the agreem

between the partners. Its knowledge is enough that it is contracting with the partnership which is represented by o

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 tha

authority to bind the firm in carrying on the partnership transaction, and that the presumption is sufficient to per

persons to hold the firm liable on transactions entered into by one of the members of the firm acting apparently in it

and within the scope of his authority. This was especially true under the circumstances in Litton where the transact

gave rise to the partnership obligation was in the ordinary course of the partnership’s business.

Litton also supports the legal position that even with the registrations of the article of partnership with the SEC, the sa

not constitute a public document that binds those who deal with the partnership enterprise. In other words, even a re

articles of partnership constitutes first and foremost a intra-partnership document that is binding upon the partners, a

party acting in good faith without actual knowledge of the contents thereof is not bound by the terms of the art

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

The right of a partner to manage the affairs of the partnership or to act as an agent of the partnership is expressly af

the following statutory provisions:

61



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 latter’s 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)

(a) Article 1820, which provides that an admission or representation made by any partner concerning partnersh

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 kno

partner acting in the particular matter, acquired while a partner or then present to his mind, and the knowledge of

partner who reasonably could and should have communicated it to the acting partner, operate as notice or knowled

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 reas

wrongful act or omission of a partner acting in the ordinary course of the business of the partnership or with the autho

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 misapplica

partner acting within the scope of his apparent authority of money or property belonging to, or received by the pa

from, a third person.

In the cases of items (c) and (d) above-enumerated, Article 1824 of the Civil Code provides expressly that “All par

liable solidary with the partnership for everything chargeable to the partnership.”

b. Transactions Not in the Ordinary Course of Partnership Business

Article 1818 of the Civil Code enumerates what are certainly not“apparently for the carrying on of the busine

partnership in the usual way,” and will not therefore be valid transactions unless done by or approved by all the partne

(a) Assigning of partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partne

(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

partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm from p

stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary powers of the p

(Ibid t 671 672)

62



(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 partnership’s 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 f irm was not organized to exploit these preciselots 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 (Vivante’s “taller o banco social”) for the partnership. Where the partnership business is to deal in

merchandise and goods, i.e., movable property, the sale of its real property (immovables) is not within the ordinary powers of a

partner, because it is not in line with the normal business of the firm. But where the express and avowed purpose of the

(Ibid , at pp. 671-672).

The foregoing discussions in Goquiolay certainly began to appreciate an act or transaction in the ordinary course of

which basically may involve only a sale of assets, from an extraordinary act or contract, which either disposes of the

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

agency” (i.e.,that the partners are all managers of the partnership enterprise). Thus, under Article 1800 of the Civil C

possible to appoint only one managing partner in the articles of partnership, in which case the managing partner “may

all acts of administration despite the opposition of his partners,” and his powers are irrevocable without just or lawfu

The same rule would apply when a partner is designated as managing partner outside of the articles of incorporatio

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 o

of the partners, including the power to purchase goods in the ordinary course of business ( Smith, Bell & Co. v. Aznar

1882 [1941]); to hire employees (Garcia Ron v. La Compania de Minas de Batau , 12 Phil. 130 [1908]), as well to

employees (Martinez v. Cordoba & Conde, 5 Phil. 545 [1906]); to secure a loan to finish the construction of the bo

partnership (Agustia v. Mocencio, 9 Phil. 135 [1907]); to employ a bookkeeper by his sole authority ( Fortis v.

Hermanos, 6 Phil. 100 [1906]); and to commence a suit in the name of the partnership against partnership debtors (

Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988). Curiously though, the Court has also held that the m

partner has no power to purchase “barge, a truck and an adding machine” in the name of the partnership inasmuch as

the properties were considered to be “supplies for partnership business.” (Teague v. Martin, 53 Phil. 504 [1929]) The

is contrary to the doctrine of apparent authority in the usual or normal pursuit of the business of the partnership em

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 par

affairs without specification of their respective duties, or without stipulation that one of them shall not act without the c

all the others, each one may separately execute all acts of administration, but if any of them should oppose the ac

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.

(i) Any partner may convey title to such property by a conveyance executed in the partnership name; the partner

recover such property only when the partner so conveying has no such power to so convey, but not against a tran

good faith and for value;

63



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 court’s 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:

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

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

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 P

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

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 any

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 titl

property; and the partnership may recover only when the partners so conveying acted without authority, but not 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 co

to such property, and the partnership may recover against any transferee when the partners so conveying acted

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.

A better way of looking at the purported co-ownership rights of partners to specific partnership property is to conside

law constitute the partners as trustees of the corporate properties, whereby they hold naked title to the partnership p

with full power to manage and control the same for the benefit of the partnership venture thus “A partner has eq

64



2. Partner’s Right to Specific Partnership Property

Although Article 1811 of the Civil Code defines or explains a partner’s “right in specific partnership property” to mean that “A

partner is [merely a] co-owner with his partners of specific partnership property,” and the enumeration of the “incidents of this

co-ownership” would show that what is being defined is merely an implementation of the principle of mutual agency, thus:

(a) “A partner . . . has an equal right with his partners to possess specific partnership property for partnership purposes;”

(b) “A partner’s 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 partner’s right in specific partnership property is not subject to attachment or execution, except on a claim against the

partnership;” and

(d) “A partner’s 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.

with full power to manage and control the same for the benefit of the partnership venture, thus, A partner . . . has eq

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 mortg

foreclosed, the redemptio by any of the partners, even when using his separate funds, does not allow such redemptio

his sole favor: “Under the general principle of law, a partners is an agent of the partnership (Art. 1818, new Civi

Furthermore, every partner becomes a trustee for his copartner with regard to any benefits or profits derived from his

partner (Article 1807, new Civil Code). Consequently, when Catalan redeemed the properties in question be became

and held the same in trust for his copartner Gatchalian, subject of course to his right to demand from the latter his co

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 partn

in specific partnership property is not assignable except in connection with the assignment of rights of all the partne

same property.” Bautista had written that the reasons why a partner’s right in partnership property is non-assignab

follows:

(a) it would effectively allow a third party (the assignee) to participate in the affairs of the partnership, and would basic

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 propertie

directly to the payment of partnership debts; and

(c) it would indirectly go against the principle that partner’s right in specific partnership property cannot be attached

upon,” (BAUTISTA, at p. 162), as provided in paragraph (3) of Article 1811. In line with the same rationale, p

numbered (4) of Article 1811 also provides that a partner’s right in specific partnership property is also not subject to s

Bautista reminded us in his treatise that the whole of Article 1811 of the Civil Code was taken from the Uniform Partne which, based on common law, adheres to the “aggregate theory of partnership under which, because it is not cons

entity or a legal person, a partnership cannot hold title and hence partnership property is deemed held or owned in co

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,

In other words, under Article 1813, the only thing that can be conveyed by a partner as an equity holder, is the sole

receive profits and surplus assets upon the dissolution of the partnership, thus: “i merely entitles the assignee to re

accordance with his contract the profits to which the assigning partners would otherwise be entitled.” The only instan

65



3. Equity Rights of Partners

Article 1812 of the Civil Code defines a “partner’s interest in the partnership” essentially as his equity interest, thus: “his share

of the profits and surplus.” A partner’s interest in the partnership defines his equity position as a co-proprietor of the

partnership enterprise, which entitles him ipso facto to share in the profits and to share in the losses of the venture.

“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 Partner’s Equity Right

A partner’s 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 partner’s equity is generally transferable or assignable. Nonetheless

under Article 1813 of the Civil Code, the transfer or assignment of a partner’s 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.

accordance with his contract the profits to which the assigning partners would otherwise be entitled. The only instan

said provision that the transferee or assignee may avail himself of the usual remedies is “in case of fraud in the man

of the partnership.

Unlike in Corporate Law where the rule on equity is that they are essentially transferable, in Partnership Law, equity

of partners are not essentially transferable. This statement is not even accurate because if you look at the language

1813 the proper rule would be, every partner shall have an absolute right to transfer or assign his equity interest, b

transaction will not transfer his other rights as a partner. The article also recognizes that just because a partner “cash

his equity rights in the partnership, which he has every right to do, the same does not mean that he ceases to be a pa

partnership contract nor does it trigger the dissolution of the partnership, which means that with respect to his othe

management the partnership affairs and act as agent of the other partners, these remain in tact.

So separate and divisible is a partner’s equity rights from his other rights as a partner that even during the ter

partnership Article 1814 of the Civil Code allow the personal judgment creditors of a partner to have his equity r

partnership to “charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment

interest thereon; and may then or later appoint a receiver of his share of the profits, and of any other money due or t

to him in respect of the partnership.” The article allows of the partners or the partnership itself to either to rede

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 Partners

1890, and it was adopted formally to a decided purpose of providing a means by which the separate creditors of a par

seize upon his property rights without having to disrupt the operations of the partnership enterprise or effectively f

dissolution of the partnership. (BAUTISTA, at pp. 184-185). Thus, Article 1814, which allows the attachment or exec

partner’s equity rights in a partnership is the remedy given to a partner’s separate creditors in lieu of the express proh

seeking an attachment or levy upon the partnership assets and properties themselves to cover the partner’s right to

partnership property.

Under Article 1827, the separate creditors of each partner may ask for the attachment and public sale of the shar

partner in the partnership assets, which must be upon dissolution and only after the partnership creditors have b

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 partner’s right in specific partnership property is not subject to attachment or execution.”

Under Article 1767 of the Civil Code, the essence of a partnership arrangement is the existence of a common fu

business enterprise, and which under Article 1770 must be “established for the common benefit or interest of the p

and which is the reason why under Article 1799, a stipulation in the contract of partnership which excludes one or mo

66



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 partner’s] demise. The provision in

the articles stating that “in the event of death of any one of the partners within the 10-year term of the partnership, the

deceased partner shall be represented by his heirs”, could not have referred to the managerial right given to [the deceased

husband]; more appropriately, it related to the succession in the proprietary interest of each partner. (Ibid , at pp. 954-955).

b. Right to Participate in Profits; the Obligation to Participate in Losses

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.

y , p p p

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

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 t he losses shall be in

proportion;

(c) In the absence of any such agreement, the share of each partner in the profits and losses shall be in proportion t

may have contributed, except that the industrial partner shall not be liable for the losses; as to the profits, the industria

shall receive such share as may be just and equitable under the circumstances; and if he contributed also capital,

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 pr

losses, such designation may be impugned only when it is manifestly inequitable; and in no case may a partnership

begun to execute the decision of third person, or who has not impugned the same within three (3) months from the tim

knowledge thereof, complain of such decision. The article also provides that the designation of losses and profits ca

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 m

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.

On the other hand, iIn Hanlon v. Haussermann and Beam, 40 Phil. 796 (1920), the Court ruled that former partners

undertaking to rehabilitate a mining plant have no right to demand accounting for the profits of such undertaking w

partnership arrangement had been terminated with the failure of the claiming partners to raise the promised investm

67



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 action mandamus. 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 partner’s 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 partner’s right to accounting exists

as long as the partnership exists, and that prescription begins to run only upon the dissolution of the partnership and final

accounting is done.

the enterprise, and that the other two partners pursued the venture on their own account and only after the par

arrangement had terminated.

In Lim Tanhu v. Ramolete, 66 SCRA 425 (1975), the Court held that a partner’s right to accounting for properti

partnership that are within the custody or control of the other partners shall apply only when there is proof that such p

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 p

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 partners

consonance with the doctrine of delectus personae that establishes a fiduciary relationship between and among the p

In Rojas v. Maglana, 192 SCRA 110 (1990), the Court confirmed the right of a partner to “unilaterally dissolve the par

by a notice of dissolution, which in effect is a notice of withdrawal from the partnership, thus: “Under Article 1830(2) o

Code, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even b

expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was gi

withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdr

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, W

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:

deals in good faith with the firm that he is a partner thereto. Consequently, under said article, “[t]hose who, not being m

of the partnership, include their names in the firm name, shall be subject to the liability of a partner.”

68



(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

(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 pub

deals with can only arise from the acts of the partnership’s authorized agent or agents, which by default rule would

partner (Article 1818, Civil Code).

The liability that the partnership must bear from the acts of the partners pursuant to partnership business applies only

person who deals in good faith with the partnership; Thus, a third person who knows of the lack of authority of th

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 pe

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

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 kno

the restriction” (Article 1818, Civil Code).

—oOo—

13 – DUTIES AND OBLIGATIONS OF PARTNERS

This is not to say that some of the elements of the trust fund doctrine do not apply to the partnership setting, for they

as the rule that creditors have preference over partners against the partnership properties. Thus, Article 1826 of

Code provides that “The creditors of the partnership shall be preferred to those of each partner as regards the pa

69




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 t he 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.

property.”

Why is it then necessary for Partnership Law to declare expressly that a partner is a debtor of the partnership for wha

may have promised to contribute thereto? The answer lies in the primary principle which Partnership Law seeks to

which is that the promise or obligation to contribute to the common fund is of the essence of the contract of partne

binds the partners to one another as the very privity of their relationship, and the breach of which would break the co

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 partner

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 contribu

shares to the capital of the partnership.” Under Article 1830(4), the partnership is automatically dissolved “When a

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 comcontribution obligation takes the normal remedies of interest and damages, including compensatory damages consti

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, an

no desire to dissolve the partnership, the remedy that is available to the other partners cannot be rescission, but rathe

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 wi

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.”

at p. 91, citing Francisco, Partnership at p. 150 [1958]) But in such case, under Article 1829(4), “[w]hen a specific thin

partner had promised to contribute to the partnership, perishes before the delivery,” dissolves the partnership.

70



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 Property—In 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,

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 co

goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of s

it shall be made by experts chosen by the partners, and according to the current prices, the subsequent changes ther

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 th

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 contr

an inventory of said property is not made, signed by the parties, and attached to the public instrument mandated und

1771 of the Civil Code, which requires in such case that the contract of partnership must be in a public instrument, a

under Article 1772 of the Civil Code would have to be filed with t he Securities and Exchange Commission (SEC) b

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 fou

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 t

his time towards fulfilling the nature of the service he has contracted himself to contribute. The difficulty arises from

that the obligation essentially involves the personal obligation “to do”, and generally an industrial partner who d

contribute the services promised cannot be compelled to do so, otherwise specific performance on the matter would v

public policy against involuntary servitude. The other difficulty that arises is that even non-industrial partners, bein

agents with one another and generally empowered to jointly manage the partnership affairs, also contribute their se

the partnership for which they do not also obtain, as in the case of the industrial partner, a compensation therefor, unless

otherwise stipulated.

Th A i f M h’ ’ A l (69 P St 30 t d i B ti t t 92 94) di th i t f ll

Since the nexus of the obligation of a partner arises from the contract of partnership, there is generally no obligation

partner to contribute beyond what was originally stipulated in the articles of partnership, unless there is a stipulation

for additional contributions. Even in the case where additional contribution to capital becomes necessary “in ca

71



The American case of Marsh’s’ 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 aspecial 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”

imminent loss of the business of the partnership,” no partner can be compelled to give additional contribution, but

consequence under Article 1791, is that “any partner who refuses to contribute an additional share to the capital, e

industrial partner, to save the venture, shall be obliged to sell his interest to the other partners.” Even such a penalty c

applied according to Article 1791 “if there is an agreement to the contrary,” that is a stipulation in the contract of pa

that even in case of necessity to the save the venture, partners cannot be compelled to make additional contribution

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 t

partners when one of them fails to comply with his obligation to contribute, would either be specific performance or re

Under the provisions of the old Civil Code, the Court held in Sancho v. Lizarraga, 55 Phil. 601 (1931), that the re

rescission of the contract of partnership which would mean the return of the contribution of the complaining par

interest and damages proven, is not available because then Articles 1681 and 1682 [now Articles 1786 and 1788] pro

specific remedies to the contract of partnership, thus:

Owing to the defendant’s failure to pay to the partnership the whole amount which he bound himself to pay, he

indebted to it for the remainder, with interest and any damages occasioned thereby, but the plaintiff did not thereby ac

right to demand rescission of the partnership contract according to article 1124 of the Code. This article cannot be a

the case in question, because it refers to the resolution of obligations in general, whereas articles 1681 and 1682 sp

refer to the contract of partnership in particular. And it is a well known principle that special provisions prevail over

provisions. (Ibid, at pp. 603-604).

In Sancho the Court affirmed the decision of the lower court which effectively denied the prayer for rescission, an

directed the dissolution of the partnership, the accounting and liquidation of its affairs. In other words, the remedy of re

which seeks to extinguish the contractual relationship and effect mutual restitution, is not allowed under the co

partnership. The proper remedies would be to seek a collection of the promised contribution, with recovery of inter

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.

The subsidiary and pro rata liability feature under the old Civil Code was retained under the new Civil Code, which

adopt the primary and solidary liability feature for commercial partners under the Code of Commerce.

72



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 or progressive 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. Andthe pro-rata obligation of the partners does not mean that they become personally liable proportionately in relation to their

contributions in the partnership, but actually means they are liable jointly.

2. Fiduciary Duties of Partners

The fiduciary duties of the partners among one another and to the partnership subsists only while the partnership

consequently the termination of the partnership relation (as distinguished from mere dissolution) also terminates the

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

plant, where the engagement of the three of them was limited to raising money within a stated period by subscrib

selling shares of the mining company. One of the parties who had undertaken thus to raise money defaulted, and u

express resolutory conditions of the contract the two other parties were discharged. Subsequently, the two par

discharged, who were at the same time stockholders and officials of the mining company, procured a contract from th

company by which they proceeded to restore the mining plant upon their own account. The other two members of th

enterprise sued to recover shares in the mining company and dividends declared upon such shares on the ground

were earned pursuant to the joint enterprise to which they were entitled to receive their shares. In denying the cla

Court held –

After the termination of an agency, partnership, or joint adventure, each of the parties is free to act in his own interest,

he has done nothing during the continuance of the relation to lay a foundation for an undue advantage to himself. T

agent for another does not necessarily imply the creation of a permanent disability in the agent to act for himself in

the same subject-matter; and certainly no case has been called to our attention in which the equitable doctrine above

to has been so applied as to prevent an owner of property from doing what he pleased with his own after such a co

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

on how they acquired properties in their names, when such acquisition were effected “long after the partnership h

automatically dissolved as a result of the death of Po Chuan [the primary managing partner]. Accordingly, defendants

obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of P

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

Although the term is more properly associated to officers and directors of corporations, partners, being manage

partnership, and agents to one another, owe both the partnership and one another the duly of loyalty, which incl

avoiding of entering into transactions or situations that present a conflict-of-interests. The duty of loyalty in the pa

tti i il f th t l l ti hi i ti b t d th t

73



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 partner’s duty of diligence to the partnership affairs:

Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate them

with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitable

lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have

been realized.

Under Article 1800 of the Civil Code, a duly designated managing partner who acts in bad faith, his particular exercise of

power administration may effectively be opposed by the other partners. When he acts without just or lawful cause, then his

power may be revoked, except of course when he has been appointed the managing partner under the terms of the articles of

partnership.

c. Duty of Loyalty

setting arises necessarily as a consequence of the mutual agency relationship existing between and among the partne

In the event a partner takes any amount from the partnership funds for himself, he becomes a debtor of the partne

well for the interests and damages, which liability under Article 1789 of the Civil Code “shall begin from the time he c

the amount to his own use.”

An aspect of a partner’s duty of loyalty arising from the fact that he acts as an agent of the partnership is manifested

1792 of the Civil Code, which provides that when a partner authorized to manage collects a demandable sum which w

to him in his own name, but from a person who owned the partnership another sum also demandable, the sum thus

shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his ow

only; but should the partner have given it for the account of the partnership credit, the amount shall be fully applied

account of the partnership. The article provides for an exception to its application: “The provisions of this article are un

to be without prejudice to the right granted to the debtor by Article 1252 [on right of debtor to stipulate the applic

payment], but only if the personal credit of the partner should be more onerous to him.”

Another aspect of a partner’s duty of loyalty is shown in Article 1793, which provides that a partner who has receivedor in part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if th

should thereafter become insolvent, to bring to the partnership capital what he received even though he may have

receipt for his share only.

In Catalan v. Gatchalian, 105 Phil. 1270 (1959), the Court ruled that when partnership real property had been mortg

foreclosed, the redemption by any of the partners, even when using his separate funds, does not allow such redemp

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). Furthermo

partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partne1807, new Civil Code). Consequently, when Catalan redeemed the properties in question he became a trustee and

same in trust for his copartner Gatchalian, subject of course to his right to demand from the latter his contributio

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

entitlement by which Judge Abad Santos had arranged for a loan financing for the company to be paid only after the

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 Estr

74



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 hisfellow 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

It is an admitted fact that since before the execution of the amended articles of partnership . . . the appellee Estr

Santos has been, and up to the present time still is, one of the judges of the City Court of Manila, devoting all her tim

performance of the duties of her public office. This fact proves beyond peradventure that it was never contemplated

the parties, for she could not lawfully contribute her full time and industry which is the obligation of an industria

pursuant to Art. 1789 of the Civil Code.

The Court ruled as follows:

One cannot read appellee’s testimony just quoted without gaining the very definite impression that, even as she was a

a Judge of the City Court of Manila, she has rendered services for appellants without which they would not have

wherewithal to operate the business for which appellant company was organized. . .

x x x .

It is not disputed that the prohibition against an industrial partner engaging in business for himself seeks to prevent an

of interest between the industrial partner and the partnership, and to insure faithful compliance by said partner

prestation. There is no pretense, however, even on the part of appellants that appellee is engaged in any

antagonistic to that of appellant company, since being a Judge of one of the branches of the City Court of Manila can

characterized as a business. That appellee has faithfully complied with her prestation with respect to appellants

shown by the fact that it was only after the filing of the complaint in this case and the answer thereto that appellants e

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 whe

herein plaintiff has been excluded from, and deprived of, her alleged share, interest or participation, as an alleged i

partner, in the defendant partnership and/or in its net profits or income, on the ground that plaintiff has never contrib

industry to the partnership, and instead she has been and still is a judge of the City Court (formerly Municipal Court) o

of Manila, devoting her time to the performance of her duties as such judge and enjoying the privileges and emo

appertaining to the said office, aside from teaching in law school in Manila, without the express consent of th

defendants’ (Record On Appeal, pp. 24-25). Having always known appellee as a City Judge even before she joined

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 t o 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

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 ob

of the partnership arising before his admission as though he had been a partner when such obligations were incurre

75



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 f ully 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.”

p p g g p g

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 ob

when there is estoppel, or when the public is made to believe that one person is a partner of the partnership when in

not, thus:

(a) Under Article 1815, those who, not being members of the partnership, include their names in the firm na

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 representin

anyone, as a partner in an existing partnership or with one or more persons not actual partners, he is liablsuch persons to whom such representation has been made, who has, on the faith of such representation, given

the actual or apparent partnership;

(c) Under Article 1825, when such a person has made such representation or consent to its being ma

public manner he is liable to such person, whether the representation has or has not been made or communicated

person so giving credit by or with the knowledge of the apparent partner making the representation or consenting to

made;

(d) Under Article 1825, when a person has been thus represented to be a partner in an existing partnership, or w

more persons not actual partners, he is an agent of the persons consenting to such representation to bind them to

extent and in the same manner as though he were a partner in fact; and

(e) Under Article 1825, when all the members of the existing partnership consent to the representation, a partnership act

or obligation results; but in all other cases it is the joint act or obligation of the person acting and persons consenting to

the representation.

76



—oOo—

partnership villanueva

Documents