1

CLV NOTES ON PROPERTY

AUGUST 2010
1 HISTORICAL BACKGROUND ON PHILIPPINE
PARTNERSHIP LAW page 3
2 THREE LEVELS OF EXISTENCE OF PARTNERSHIPS
page 14
3 PARTNERSHIP IS PRIMARILY A
CONTRACTUAL RELATIONSHIP page 22
4 ESSENTIAL ELEMENTS OF THE CONTRACT
OF PARTNERSHIP page 32
5 PARTNERSHIP AS A MEANS OF DOING BUSINESS,
THROUGH THE JURIDICAL PERSON page 55
6 PARTNERSHIP AS A BUSINESS ENTERPRISE page 68

7 ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP page

72

8 PARTNERSHIP DISTINGUISHED FROM OTHER

BUSINESS MEDIA page 84
9 CLASSES OF PARTNERSHIPS AND PARTNERS page 97
10 SPECIAL ISSUES OF WHO MAY QUALIFY TO
BECOME PARTNERS page 107
11 PARTNERSHIP FORMAL AND
REGISTRATION REQUIREMENTS page 122
12 RIGHTS AND POWERS OF PARTNERS page 149
13 DUTIES AND OBLIGATIONS OF PARTNERS page 175
14 DISSOLUTION, WINDING-UP AND TERMINATION OF
THE PARTNERSHIP page 194
15 LIMITED PARTNERSHIPS page 230

1 HISTORICAL BACKGROUND ON PHILIPPINE

PARTNERSHIP LAW
[Updated: 23 August 2010]

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 lawsamong the
Babylonians from the time of Hammurabi, among the Babylonian
Jews as early as the fourth century, and among the Romans almost
from the time they laid the foundation of their monumental legal
system. (BAUTISTA, ESTEBAN B., TREATISE ON PHILIPPINE
PARTNERSHIP LAW, Rex Book Store, 1995 Ed., at p. 1, hereinafter
referred to as BAUTISTA; citing 12 ENCYCLOPEDIA OF SOCIAL
SCIENCE 3 [1948]). He also wrote that in medieval times, the
device was prominent among the merchant princes in the Italian
cities; it also thrived in thirteenth century England where it was
regulated by guilds merchant. (BAUTISTA, at p. 1,citing 4
COLLIERS ENCYCLOPEDIA 257 [1952] and 12 ENCYCLOPEDIA OF
SOCIAL SCIENCE 4 [1948])
Professors Hector S. de Leon and Hector M. de Leon, Jr. write that
As early as 2300 B.C., Hammurabi, the famous king of Babylon, in
his compilation of the system of laws of that time, provided for the
regulation of the relation called partnership. Commercial
partnerships of that time were generally for single transactions or
undertakings. (DE LEON, HECTOR S., and DE LEON, HECTOR M.,

JR., COMMENTS AND CASES ON PARTNERSHIP, AGENCY AND

TRUST, Rex Book Store, Inc., Manila, Philippines, 2005 ed. , at p. 2,
hereinafter referred to as DE LEONS). They also write that
Following the Babylonian period, we find clear-cut references to
partnerships in Jewish law . . . however, it must be remembered
that the ancient Jews were a pastoral people, and, therefore, the
partnership as a business organization under Jewish law was
concerned with the holding of title to land by two or more persons.
(DE LEONS, at p. 2)

b. Civil and Common Law Bases of Partnership Laws

The De Leons trace the origins of the modern-day partnership
through the English commercials courts which eventually was
integrated by then Chief Justice Lord Mansfield into the common law
system and that it was not until the latter years of the 18th
century that the law of partnership as we know it today began to
assume both form and substance. (DE LEONS, at p. 3)
They write that eventually in the United States, in 1914 the Uniform
Partnerships Act was endorsed by the National Conference of
Commissioners on Uniform State Laws, which had many points of
similarity with the English Partnership Act of 1890, and that For
this reason, the practical operation of the Uniform Partnership Act
has a background of application in the workings of the English Act.
(DE LEONS, at p. 5)
Bautista suggested that the modern world provisions on
partnership of every legal system providing for and regulating this
type of business organization are based upon the Roman law, of
course with several important modifications; . . . and that civil law
countries or jurisdiction regard the partnership as a legal entity,
while the common law ones generally do not. (BAUTISTA, at p.
1, citing 17 ENCYCLOPEDIA BRITANNICA 420 [1969]). The De
Leons observe that In fine, modern partnership law may be said to
contain combination of principles and concepts developed from

three sources: the Roman Law, the law [on] merchant and equity,
and the common law courts. (DE LEONS, at p. 5)

c.

Particular Bases of Philippine Law on Partnerships

Before the promulgation of the New Civil Code, the Philippine

partnership laws formerly distinguished between civil partnership
and commercial partnerships. Civil partnerships were governed in
Title VIII of Book IV of the old Civil Code of 1889 (Articles 1665 to
1708); while commercial or mercantile partnership were governed
by Title I of Book II of the Code of Commerce (Articles 116 to 238).
According to Bautista, both sets of laws had their origin in the
Roman Law. (BAUTISTA, at p. 2)
The present Philippine Law on Partnership is provided under Title IX,
Book V of the New Civil Code (Republic Act No. 386), which took
effect on 30 August 1950, superseding the old Civil Code and
repealed in toto the provisions of the Code of Commerce on
partnerships, which has resulted in the abolition of the distinction
between civil and commercial partnerships. (BAUTISTA, at p. 2). In
particular, Article 45 of the New Civil Code expressly provides that
Partnerships and associations for private interest or purpose are
governed by the provisions of this Code concerning partnerships.
While the bulk of the present provisions in the Civil Code were taken
from the old Civil Code provisions, the Code Commission reported
that some provisions were taken from the Code of Commerce, and
other rules were adopted from the Uniform Partnership Act and the
Uniform Limited Partnership Act of the United States. Bautista
assessed that [o]n the whole, it may be stated that the bulk of the
provisions of the New Civil Code on this subject are of American
origin, i.e., based on the United States Uniform Partnership Act and
Uniform Limited Partnership Act. (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 timeconsuming negotiations and contract drafting. The essential
characteristics of partnership as governed by law (under modern
settings,
they
would
be:
juridical
personality,
mutual
agency, delectus personae and unlimited liability of partners); and
allow would-be partners the ability to rely upon the default legal
rules, with the assurance of the backings of the State by which to
enforce such default rules. This is what may be termed as the
nominate and principal characteristic of the contract of
partnership.
Secondly, that the partnership relationship being essentially
contractual in nature, assures would-be partners of the expedience
of contractual stipulation, to be able to tailor-fit their relationships in
a way that would best address their individual needs and their
working relationships with their co-partners, as well as the demands
of the business enterprise they have decided to embark upon.
Partnership Law therefore provides a stable platform by which
individuals may provide an active means to pursue jointly a
business enterprise.
The other significant reason coming from the historical background
of our Philippine Law on Partnerships is that it draws it strength and
its weakness from the fact that it is really an amalgam between two
sets of legal traditions: the Civil Law system upon which most of the
provisions of the New Civil Code had been drawn, and from the

Common Law tradition, particularly from the Uniform Partnership

Act of the United States. Properly appreciated, that means that the
Philippine Law on Partnerships can truly be molded into a
framework that provides a stability from the set of rules and
principles that are laid out in the provisions of the New Civil Code,
and yet be dynamic and progressive in characteristic to allow
Filipino businessmen and the legal profession to be able to evolve
them effectively through application in the business world of
innovative changes and advances, confirmed and made
precedential in decisions of our courts resolving the acceptability
of such cutting-edge innovations.

2. Old Branches of Partnership Law

a. Distinguishing Between Civil and Commercial Partnerships
Before the New Civil Code, resolution of partnership issues
depended on whether it covered a civil partnership for which the
provisions of the old Civil Code were made to apply, or commercial
partnership, and therefore covered by the Code of Commerce. There
was even a third type of partnerships, the industrial partnerships,
which may have the characteristics of commercial or civil
partnerships, according to whether they have been established in
accordance with the requirements of the Code of Commerce or
without regard to the latter. (Prautch, etc. v. Hernandez, 1 Phil.
705, 709-710 [1903]).
The essence of a commercial partnership was that it was
undertaken by merchants, and essentially possessed of the
characteristic of habitualness (or more properly referred to as
pursued as a going concern) to be governed under the provisions
of the Code of Commerce. Article 1 of the Code of Commerce
provided that For purposes of this Code, the following are
merchants: 1. Those who, having legal capacity to engage in
commerce, habitually devote themselves thereto. . .

To illustrate, Evangelista v. Commissioner of Internal Revenue, 102

Phil. 140 (1957), held that there would exists the elements of
common fund and intention to divide the profits among the
members of the family who borrowed money as a group, when the
facts showed that the
1. Said common fund was not something they found already in
existence. It was not a property inherited by them pro indiviso.
They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in
a series of transactions. x x x The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of
the property acquired . . . In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in
for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to
other personal uses, of petitioners herein. The properties were
leased separately to several persons who, from 1945 to 1948
inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
(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 inPrautch v. Hernandez, 1 Phil. 705 (1903), that a
commercial or mercantile partnership had for its object the pursuit
of industry or commerce, and was then treated like a merchant that
must necessarily be governed by the Code of Commerce and had to
comply with the registration requirements thereof to lawfully come
into existence.
In a commercial partnership, both the partnership and the separate
partners thereof may be joined in one action, but the private
property of the partners could be taken in payment of the
partnership debts only after the common property of the
partnership had been exhausted. (La Compaia Maritima v. Muoz,
9 Phil. 326 [1907]).
The commercial partnership under the Code of Commerce tended to
be a more solemn affair, and when it failed to register its articles of
partnership in the mercantile registry, it did not become a juridical
person nor did it have any personality distinct from the personality
of the individuals who composed it (Hung-Man-Yoc v. Kieng-ChiongSeng, 6 Phil. 498 [1906];Bourns v. Carman, 7 Phil. 117 [1906]; Ang
Seng Quen v. Te Chico, 7 Phil. 541 [1907]); and therefore could not
also maintain an action in its namePrautch, etc. v. Hernandez, 1
Phil. 705 [1903]).

10

In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), which

involved a commercial partnership, but the requirements of the
Code of Commerce for the execution of public document and
registration in the mercantile registry (Art. 119, Code of Commerce)
were not complied with, the Supreme Court held that the alleged
partnership never had any legal existence nor has it acquired any
juridical personality in the acts and contracted executed and made
by it, (Ibid, at pp. 500-501) and what was applied was Article 119
of the Code of Commerce which made liable for the debts incurred
by such partnership de facto the persons in charge of the
management of the association . . . together with persons not
members of the association with whom they may have transaction
business in the name of the same. (Ibid, at p. 500.) Thus, the
legal consequence of failing to comply with the registration
requirements under the Code of Commerce was to make the acting
partners personally and primarily liable for all partnership debts.
The doctrine is similar to the agency doctrine that an agent who
enters into a transaction on behalf of a non-existing principal
becomes personally liable for the obligations incurred thereby.
In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the
civil partnership was engaged in the laundry business and governed
by the provisions of the Civil Code, it was held that the partnership
existed as a separate juridical person even when no formal
partnership agreement was entered into and registered, and
thereby the obligations of the partners for partnership debts were
held to be pro-rata.
Nonetheless, the registration requirements under the Code of
Commerce were never interpreted to undermine the obligatory force
of contracts entered into in the name of the commercial partners.
Thus, it was held inPrautch, 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.

11

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

12

repealed the said provisions of the Code of Commerce, but did say
instead that a civil partnership may be organized in any form.
Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2
(1904), what the Supreme Court held critical was proper application
of Article 1670 of the old Civil Code which provided that civil
partnerships, on account of the objects to which they are devoted,
may adopt all the forms recognized by the Commercial Code, and
thereby held that
It will be seen from this provision that whether or not partnerships
shall adopt the forms provided for by the Civil or Commercial Codes
is left entirely to their discretion. And furthermore, that such civil
partnerships shall only be governed by the forms and provisions of
the Commercial Code when they expressly adopt them, and then
only in so far as they (rules of the Commercial Code) do not conflict
with the provisions of the Civil Code. In this provision the legislature
expressly indicates that there may exist two classes of commercial
associations, depending not upon the business in which they are
engaged but upon the particular form adopted in their organization.
. . We are inclined to the belief that the respective codes, Civil and
Commercial, have adopted a complete system for the organization,
control,
continuance,
liabilities,
dissolutions,
and
juristic
personalities of associations organized under each. . . It is our
opinion that associations organized under the different codes are
governed by the provisions of the respective code. (Ibid, at pp. 1011)

b. Significance of Knowing the Historical Distinctions

Between Civil and Commercial Partnerships
What may be considered as a good development in our present Law
on Partnerships is the removal of the distinctions between civil and
commercial partnerships, and which are now governed by a
common set of laws, i.e., the relevant provisions of the New Civil
Code. The main drawback of such a development is that even
commercial partnerships (and admittedly there may not be quite a

13

number operating due to the availability of the corporate medium),

would find themselves governed by non-commercial doctrines, such
as the non-central role of the institution of registration. And in fact,
many issues have arisen under our current Law on Partnerships
arising from having adopted in the New Civil Code provisions from
the Code of Commerce on registration requirements.
In addition, the civil-coding of some of the provisions of the Code
of Commerce which were copied into the New Civil Code, should
provide a better understanding of the legal consequences of current
provisions of the Philippine Law on Partnerships, and a better
constructions of the effects they have on the commercial field, by
providing a comparison with the old jurisprudential rulings for
commercial partnerships under the provisions of the Code of
Commerce.
oOo

14

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 a contractual relationship between and among the partners;
(b) As a means or medium of doing business, through the structure
of separate juridical personality, or as the basis of creating multileveled contractual relations among various parties; and
(c) As a business enterprise, or a business venture, or what is
termed in other disciplines as a going concern.
Knowing the three levels at which the Law on Partnerships treats
the partnership arrangement is important in determining the legal
significance of the various provisions of the New Civil Code
regulating partnerships, as well as a manner of appreciating the
doctrinal value of such provisions.

1. Illustrative Interplay of the Tri-Level Existence of the

Partnership
It would be important to illustrate the legal interplay between the
three (3) levels of partnership existence, and the legal doctrines
that result from such interplay. For this purpose we will use the
decision of the Supreme Court inYu v. NLRC, 224 SCRA 75 (1993).

15

In that decision, the facts indicated that a limited partnership was

duly registered with the firm name of Jade Mountain Products
Company Limited (Jade Mountain), with the partnership
business consisting of exploiting a marble deposit found on land
situated in Bulacan, but with the partnership having its main office
in Makati, Metropolitan Manila. Benjamin Yu was for many years the
Assistant General Manager of the partnership business, but only half
of his contracted salary was paid under the agreement that the rest
would be paid when the partnership is able to source more funding.
Majority of the partners eventually sold their equity (about 82%)
and the business to a new set of investors who retained the
business enterprise under the original name of Jade Mountain, but
moved the head office to Mandaluyong. When Benjamin Yu learned
later of the new address he proceeded to Mandaluyong but was told
that the new partnership did not wish to retain his services. He then
sought to recover from the new partnership his salary claims which
accrued with the original partnership.
Benjamin Yu filed a complaint for illegal dismissal and recovery of
unpaid salaries accruing from November 1984 to October 1988,
moral and exemplary damages and attorneys fees, against Jade
Mountain under the new partnership. The new partners contended
that Mr. Yu was never hired as an employee by the present or new
partnership. One of the issues raised was whether the new
partnership could be held liable for the claims of Yu pertaining to
the old partnership which had been dissolved due to the withdrawal
of the leading partners.
The basic contention of Mr. Yu was the principle that a partnership
has a juridical personality separate and distinct from that of each of
its members, which subsisted notwithstanding changes in the
identities of the partners. Consequently, the employment contract
between Benjamin Yu and the partnership and the partnership Jade
Mountain could not have been affected by changes in the latters
membership.
The Court defined the inextricable link of the contract of partnership
between the original partners and the juridical personality that
arose from the nexus of that contract, and that when the contract

16

was rescinded with the withdrawal of the majority of the partners,

then the partnership was dissolved and its separate juridical
personality ceased to exists to cover the new set of partners, thus:
Two (2) main issues are thus posed for our consideration in the case
at bar:
(1) whether the partnership which had hired petitioner Yu as
Assistant General Manager had been extinguished and replaced by a
new partnership composed of Willy Co and Emmanuel Zapanta; and
(2) if indeed a new partnership had come into existence, whether
petitioner Yu could nonetheless assert his rights under his
employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the
NLRC, that is, that the legal effect of the changes in the
membership of the partnership was the dissolution of the old
partnership which had hired petitioner in 1984 and the emergence
of a new firm composed of Willy Co and Emmanuel Zapanta in
1987. (Ibid, at p. 80.)
The Court held that the applicable rule would be Article 1828 of the
Civil Code which defines dissolution of a partnership [as] the
change in the relation of the partners caused by any partner ceasing
to be associated in the carrying on as distinguished from the
winding up of the business. Nonetheless, the determination of the
right of Mr. Yu to recover from the new partnership which
constituted its own separate juridical personality was based on the
fact that it continued the old business enterprise of the dissolved
partnership, thus:
In the ordinary course of events, the legal personality of the
expiring partnership persists for the limited purpose of winding up
and closing of the affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business of the old
partnership was simply continued by the new partners, without the
old partnership undergoing the procedures relating to dissolution
and winding up of its business affairs. In other words, the new

17

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. 8182)
Yu therefore recognized the applicability of the successor liability
arising from business enterprise transfer (i.e., that the creditors of
the business enterprise have a right to recover payment of their
claims against the transferee of the business enterprise), and
recognized that the business enterprise transfer doctrine is
governed in details under Article 1840 of the Civil Code.
Yu also recognized one of the principles in business enterprise
transfers, that the new owners of the business enterprise do have a
right to choose who would be employed in their newly acquired
business, and they cannot be compelled to maintain the
employment contracts of the managers and employees existing with
the transferor, thus:
It is at the same time also evident to the Court that the new
partnership was entitled to appoint and hire a new general or

18

assistant general manager to run the affairs of the business

enterprise taken over. An assistant general manager belongs to the
most senior ranks of management and a new partnership is entitled
to appoint a top manager of its own choice and confidence. The
non-retention of Benjamin Yu as Assistant General Manager did not
therefore constitute unlawful termination, or termination without
just or authorized cause. We think that the precise authorized cause
for termination in the case at bar was redundancy. 10 The new
partnership had its own new General Manager, apparently Mr. Willy
Co, the principal new owner himself, who personally ran the
business of Jade Mountain. Benjamin Yus old position as Assistant
General Manager thus became superfluous or redundant. 11 It
follows that petitioner Benjamin Yu is entitled to separation pay at
the rate of one months pay for each year of service that he had
rendered to the old partnership, a fraction of at least six (6) months
being considered as a whole year. (Ibid, at p. 83-84.)
Another illustrative case is the decision in United States v. Clarin, 17
Phil. 84 (1910), where a partner filed estafa charges against his copartners for the latters failure to deliver to him his half of the
profits from the partnership venture. In denying the applicability of
the charges of estafa the Court held
The P172 having been received by the partnership, the business
commenced and profits accrued, the action that lies with the
partner who furnished the capital for the recovery of his money is
not a criminal action for estafa, but a civil one arising from the
partnership contract for a liquidation of the partnership and a levy
on its assets if there should be any. x x x [Estafa] . . . does not
include money received for a partnership; otherwise the result
would be that, if the partnership, instead of obtaining profits,
suffered losses, as it could not be held liable civilly for the share of
the capitalist partner who reserved the ownership of the money
brought in by him, it would have to answer to the charge of estafa,
for which would be sufficient to argue that the partnership had
received money under the obligation to return it. The complaint for
estafa is dismissed without prejudice to the institution of a civil

19

action. (Ibid, at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341
[1952]).
The ruling in Clarin should be distinguished from that in People v. de
la Cruz, (G.R. No. 21732 [1957], 03 September 1924, cited in
People v. Campos, (CA) 54 O.G. 681 [1957]) where the industrial
partner was held liable for estafa for appropriating money that has
been given to him by the capitalist partner for a particular
transaction. The doctrine was reiterated in Liwanag v. Court of
Appeals, 281 SCRA 255 (1997), Thus, even assuming that a
contract of partnership was indeed entered into by and between the
parties, we have ruled that when money or property have been
received by a partner for a specific purpose (such as that obtaining
in the instant case) and he later misappropriated it, such partner is
guilty of estafa.
Perhaps the interplay of the various levels of existence of the
partnership arrangement is best exemplified by the decision of the
Supreme Court inRojas 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 copartnership 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 copartnership.
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

20

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 factopartnership at will. In overruling the court a quo, the
Court held
. . . [I]t appears evident that it was not the intention of the partners
to dissolve the first partnership, upon the constitution of the second
one, which they unmistakable called an Additional Agreement . . .
Except for the fact that they took in one industrial partner, gave him
an equal share in the profits and fixed the term of the second
partnership to thirty (30) years, everything else was the same.
Thus, they adopted the same name, . . . they pursued the same
purposes and the capital contributions of Rojas and Maglana as
stipulated in both partnership call for the same amounts. Just as
important is the fact that all subsequent renewal of Timber License
No. 35-36 were secured in favor of the First Partnership, the original
licensee. . . To all intents and purpose therefore, the First Articles of
Partnership were only amended, in the form of Supplementary
Articles of Co-Partnership . . . which was never registered . . .
Otherwise stated, even during the existence of the second
partnership, all business transactions were carried out under the
duly registered articles. (Ibid, at pp. 117-118)
The Court then proceeded to hold that

21

On the other hand, there is no dispute that the second partnership

was dissolved by common consent. Said dissolution did not affect
the first partnership which continued to exist as shown by the
subsequent acts of the original partners carrying one with the
original partnership business and confirming the obligations
constituted under the original articles of partnership. The conclusion
of the Court was thus: Under the circumstances, the relationship of
Rojas and Maglana after the withdrawal of [the industrial partner]
can neither be considered as a de facto partnership, nor a
partnership at will, for as stressed, there is an existing partnership,
duly registered. (Ibid, at p. 118)
Rojas therefore affirms two important aspects in Partnership
Law: Firstly, that registration of the contract of partnership with the
SEC has the legal effect of binding the partners (and perhaps even
third parties dealing with the partnership), as to the contractual
obligations, the rights and duties of the partners, and which has
effective force even as the partnership undergoes changes within its
constitution by the acceptance into and withdrawal of partners into
the venture. Secondly, the underlying business enterprise, the
manner of its operation, has much legal influence of determining
the contractual intents of the partners in the determination of interpartnership rights and obligations.
oOo

22

3 PARTNERSHIP IS PRIMARILY A
CONTRACTUAL RELATIONSHIP
[Updated: 23 August 2010]

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)
_____

23

Article 1767 of the Civil Code defines a contract of partnership as

one where two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention
of dividing the profits among themselves, and includes in its
coverage the exercise of a profession pursued in partnership form.
The fact that a partnership is first and foremost a contractual
relationship, means that it is subject to the rules, principles and
doctrines pertaining to contracts in general, but modified in the
sense that a partnership is at the same time a medium of doing
business or a device for undertaking a venture. This means that
the Law on Partnerships must balance between the principles
governing the relationship of partners among themselves as
contractual parties, and also their rights and obligations with
respect to the business venture or undertaking that brought them
together in the first place. In other words, parties to a partnership
do not come together for the sake of coming together, but in order
to achieve as a group, a business venture or undertaking. The
various provisions of the Law on Partnerships embodied in the Civil
Code address either separately or coordinately these levels of
existence of a partnership: as contractual relationship, and as a
means of doing business.
An example showing the essence of a partnership as a contract is
provided under Article 1771 which bears the doctrine of
consensuality governing contracts in general: A partnership may
be constituted in any form, except where immovable property or
real rights are contributed thereto, in which case a public
instrument shall be necessary. Article 1770 also embodies the
principle that the provisions of law are deemed incorporated into
every contract, even a contract of partnership as it provides that A
partnership must have a lawful object or purpose.
The primary doctrine that first and foremost the partnership must
find its nexus in a contractual relationship is exemplified in the
decision in Lyons v. Rosentock, 56 Phil. 632 (1932). In that case,
Lyons and Elser were already partners in particular real estate
undertakings. Subsequently, Lyons became interested in purchasing
for the venture the San Juan estate, and moved forward towards

24

negotiating its acquisition and communicating to Elser in the United

States to join him in the venture. Elser wrote back clearly indicating
that he was not joining Lyons in the San Juan estate venture. The
Court held that the fact that Lyons had used as security for the
acquisition of the San Juan estate one of the partnership properties
in anticipation that Elser would accept the partnership arrangement,
but which Elser definitive refused and the partnership property was
substituted by Lyons separate property to secure the venture, did
not make Lyons a partner in the San Juan estate venture, since
there was never any meeting of minds to constitute such
partnership. Lyons demonstrate that before there can be a
partnership enterprise, it is necessary that there must having been
a meeting of minds to constitute a contract of partnership.

1. Characteristics of the Partnership Contract

a. Nominate and Principal
The contract of partnership is a nominate contract, not only because
it has been given a specific name under the New Civil Code, but it is
a principal contract and can exists on its own upon the essential
elements coming together at perfection; and that once created
there is a set of rules (Law on Partnerships of the New Civil Code)
that govern such contract, and the parties to such contract cannot
refuse generally to be governed by such provisions. Thus, Article 45
of the Civil Code provides that Partnerships and associations for
private interest or purpose are governed by the provisions of this
Code concerning partnerships.
To illustrate the nominate and principal nature of the contract of
partnership,Fernandez v. Dela Rosa, 1 Phil. 671 (1903), held that
The essential points upon which the minds of the parties must meet
in a contract of partnership are, therefore, (1) mutual contribution
to a common stock, and (2) a joint interest in the profits. If the
contract contains these two elements the partnership relation
results, and the law itself fixes the incidents of this relation if the

25

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 setup, or whether or not the contributions have been made into the
partnership coffers, do not detract from the coming into existence of
a valid partnership contract. And failure to comply with the
undertaking to deliver the promised contribution does not make a
contract of partnership void, but merely gives a ground for its
dissolution.
Thus, in the early decision in Fernandez v. De la Rosa, 1 Phil. 671
(1903), the Court held that The execution of a written agreement
was not necessary in order to give efficacy to the verbal contract of
partnership as a civil contract, the contributions of the partners not
having been in the form of immovables or rights in
immovables. (Ibid, at p. 677). This feature of consensuality of a
contract of partnership is now embodied in Article 1772 which
provides that A partnership may be constituted in any form except
where immovable property or real rights are contributed thereto, in
which case a public instrument shall be necessary.
Although Articles 1772 and 1773 provide for public instrument and
registration when the capital contribution is more than P3,000.00,
and that of an inventory attached to the public instrument whenever
immovable property is contributed, nonetheless jurisprudence even

26

discount the nullity of the resulting contract of partnership, as will

be discussed hereunder.
In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the
Court held that when members of the family leased out a parcel of
land to SHELL Company, and used the advance rentals paid them to
allow one of their members to capitalize the dealership with SHELL,
then a partnership has been constituted among them:
There is no doubt that the parties hereto formed a partnership when
they bound themselves to contribute money to a common fund with
the intention of dividing the profits among themselves. The sole
dealership by the petitioner and the issuance of all government
permits and licenses in the name of petitioner was in compliance
with the [policy that a dealership can only be granted to one
person] of SHELL and the understanding of the parties of having
only one dealer of the SHELL products. (Ibid, at p. 837.)
In essence, Estanislao demonstrates that it is the true meeting of
the minds of the parties (in this case, to pursue a common venture
as a family group) that shall govern the rights and obligations of the
contracting parties, and not the evidence of a purported agreement
(in this case the dealership agreement being registered only in the
name of a brother).
In contrast, in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), the
parties executed a partnership agreement, to conduct and carry
on the business of operating a theatre for the exhibition of motion
and talking pictures; nonetheless, the Court held that the real
intention of the parties was to effect a sub-lease of the property and
the partnership agreement was resorted to in order to avoid the
provision in the main lease agreement prohibiting a sublease of the
premises. The Court took into consideration the following actuations
of the supposed Yulo partner to show that there as never a real
agreement to form a partnership, thus:
In the first place, plaintiff did not furnish the supposed P20,000
capital. In the second place, she did not furnish any help or
intervention in the management of the theatre. In the third place, it

27

does not appear that she has ever demanded from defendant any
accounting of the expenses and earnings of the business. Were she
really a partner, her first concern should have been to find out how
the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was
absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of
P3,000 a month, which can not be interpreted in any manner than a
payment for the use of the premises which she had leased from the
owners. Clearly, plaintiff had always acted in accordance with the
original letter of defendant of June 17, 1945 (Exh. A), which
shows that both parties considered this offer as the real contract
between them. (Ibid, at p. 117.)
Yulo demonstrates the principle that a contract of partnership is
consensual in nature and is constituted by the real meeting of the
minds; such that even when formal articles of partnership are
drawn-up between the parties, when it fact the evidence shows that
they never intended to enter into a partnership, the article of
partnership cannot create a partnership when in fact there has
never been a meeting of minds to constitute one.
In contrast, we view the decision in Woodhouse v. Halili, 93 Phil.
526 (1953), as a little dubious when it distinguishes between the
obligation to enter into a contract of partnership, from that of
executing the certificate of partnership itself. In Woodhouse, the
plaintiff and the defendant had come to an agreement to enter into
a partnership business to bottle and distribute an American brand
softdrinks in the Philippines; and that defendant, who would
primarily finance the business, agreed to grant plaintiff the right to
receive 30% of the profits under his obligation to secure the bottling
franchise for the venture. When the venture was eventually set-up,
the defendant had refused to finalize the articles of partnership
when he learned during the negotiations in the United States that
plaintiff did not have for himself the bottling franchise he promised
he had secured. The plaintiff brought action to have the articles of
partnership executed and to receive his 30% share in the earnings.
Prescinding from the language of the original agreement executed

28

between the parties that the very language of the agreement that
the parties intended that the execution of the agreement to form a
partnership was to be carried out at a later date. They expressly
agreed that they shall form a partnership, (Ibid, at p. 539) the
Court held
As the trial court correctly concluded, the defendant may not be
compelled against his will to carry out the agreement nor execute
the partnership papers. Under the Spanish Civil Code, the defendant
has an obligation to do, not to give. The law recognizes the
individuals freedom or liberty to do an act he has promised to do,
or not to do it, as he pleases. It falls within what Spanish
commentators call a very personal act (acto personalisimo), of
which courts may not compel compliance, as it is considered an act
of violence, to do so. (Ibid, at p. 539.)
We disagree with the afore-quoted ruling of the Court in that it fails
to appreciate the consensual nature of a contract of partnership,
and that the moment the parties come to an agreement which
basically embodies the formation of a common fund with the
intention of dividing the profits, as was the case between the parties
in Woodhouse, a contract of partnership arises, and the incidents
thereof governed by Partnership Law, even in the absence of a
formal certificate or articles of co-partnership.
Only recently, Tocao v. Court of Appeals, 342 SCRA 20 (2000),
summarized the prevailing doctrine on the nature of the contract of
partners, thus
To be considered a juridical personality, a partnership must fulfill
these requisites: (1) two or more persons bind themselves to
contribute money, property or industry to a common fund; and (2)
intention on the part of the partners to divide the profits among
themselves. It may be constituted in any form; a public instrument
is necessary only where immovable property or real rights are
contributed thereto. This implies that since a contract of partnership
is consensual, an oral contract of partnership is as good as a written
one. Where no immovable property or real rights are involved, what
matters is that the parties have complied with the requisites of a

29

partnership. The fact that there appears to be no record in the

Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of
the Civil Code did not cause the nullification of the partnership. . .
(Ibid, at pp. 30-31.)
Tocao held that so long as the two essential elements of a
partnership are present, then the fact that the business was
operated under the name of a registered sole proprietorship was of
no moment, especially when the registration of the business name
with the Bureau of Domestic Trade was only for purpose of being
able to secure such business name. (Ibid, at p. 36.)

c. Onerous and Bilateral

The onerous and bilateral characteristics of the contract of
partnership are demonstrated by the fact that the existence of a
partnership requires an agreement for the creation of a common
fund from the contributions of the partners, which may either be in
money, property or industry. Under Article 1786, a partner becomes
by its very constitution, a debtor of the partnership for whatever he
may have promised to contribute thereto. All partners are bound to
contribute to the common fund, or to the partnership, including
even the industrial partner who is bound to contribute his service.

d. Preparatory and Progressive

A contract of partnership is not entered into for the sake of merely
creating a contractual relationship between and among the
partners, but primarily to pursue a business enterprise
(i.e., creation of a common fund with intent to share profits and
losses). Consequently, falling within the contractual meeting of the
minds of the parties is that the inter-partnership relationship
continues to evolve as the underlying business enterprise itself
evolves and progresses. In other words, the contract of partnership

30

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

31

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

32

4 ESSENTIAL ELEMENTS OF THE CONTRACT

OF PARTNERSHIP
[Updated: 12 October 2009]

IV. ESSENTIAL ELEMENTS OF THE CONTRACT OF

PARTNERSHIP

______
Art. 1767. By the contract of partnership two or more
persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the
profits among themselves.
Two or more persons may also form a partnership for
the exercise of a profession. (1665a).
Art. 1770. A partnership must have a lawful object or
purpose, and must be established for the common benefit or
interest of the partners.
When an unlawful partnership is dissolved by a judicial
decree, the profits shall be confiscated in favor of the State,
without prejudice to the provisions of the Penal Code
governing the confiscation of the instruments and effects of
a crime. (1666a)
Art. 1771. A partnership may be constituted in any
form, except where immovable property or real rights are

33

contributed thereto, in which case a public instrument shall

be necessary. (1667a)
Art. 1784. A partnership begins from the moment of
the executio of the contract, unless it is otherwise stipulated.
(1679).
_____

The Law on Partnership under the New Civil Code begins with its
definition under Article 1776 as contract of partnership,
emphasizing that first and foremost the nexus of the legal
relationship is contractual in nature. As in any other contract, the
essential elements for a contract of partnership to be valid would be
as follows:
(a) CONSENT: The meeting of minds between two or more persons
to form a partnership (i.e., to pursue jointly a business enterprise,
or to jointly exercise a profession);
(b) SUBJECT MATTER: The creation of a common fund or more
specifically, to undertake a business venture with the intention of
dividing the profits among themselves, or in the case of a
professional
partnership,
to
exercise together
a
common
profession; and
(c) CONSIDERATION: The contribution of cash, property or
service to the business venture.

34

1. Element of CONSENT
______
Art. 1769. In determining whether a partnership
exists, these rules shall apply:
(1) Except as provided by Article 1825, pesons who
are not partners as to each other are not partners as to third
persons;
(2) Co-ownership or co-possession does not of itself
establish a partnership, whether such co-owners or copossessors do or do not share any profits made by the use of
the property;
(3) The sharing
establish a partnership,
them have a joint or
property from which the

of gross returns does not of itself

whether or not the persons sharing
common right or interest in any
returns are derived;

(4) The receipt by a person of a share of the profits of

a business is prima facie evidence that he is a partner in the
business, but no such inference shall be drawn if such profits
were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a
deceased partner;

35

(d) As interest on a loan, though the amount of

payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a
business or other property by installments or otherwise. (n)
_____
a. Consent to Pursue a Business Jointly Is the Nexus of the
Partnership Relationship
The agreement of two or more persons to bind themselves to
jointly pursue a business venture constitutes the very nexus by
which the contract of partnership arises under Article 1767 of the
Civil Code. Under Article 1769 of the Civil Code, in determining
whether a partnership exists, the first and foremost rule is that
persons who are not partners as to each other are not partners as
to third persons. In other words, the general rules is that no
person can find himself a partner in a partnership, even as to third
parties, unless he previously consented to be in such contractual
relationship.
One does not become a partner, nor is a partnership constituted,
but the fact alone that they are associated together in situation
where there is co-ownership or profits earned therefrom. Thus,
under Article 1769(2), Co-ownership or co-possession does not of
itself establish a partnership, whether such co-owners or copossessors 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

36

universal partnership. Under Article 87 of the Family Code, a

married woman may enter into a contract of partnership even
without her husbands consent, but the latter may object under
certain conditions.

c.

Admission of New Partner into an Existing Partnership

Since consent is the nexus of all partnership relationships, the

principle is exemplified under Article 1804 of the Civil Code which
provides even in an already existing partnership, that no person
shall be admitted into a partnership, or become a party to the
partnership arrangement without the consent of all the partners.

2. SUBJECT MATTER: Pursuit of a Business Enterprise

Essentially, the consent or meeting of the minds of the parties in a
contract of partnership must be upon a particular type of subject
matter, which essentially is the pursuit of a business enterprise:
(a) an agreement to contribute to a common fund; and
(b) with joint interest in the profits and losses thereof.
The agreement to share profits and losses from the business
venture is the hallmark of a partnership arrangement. It is also the
essence of the equity position of the partners vis-a-vis the
business enterprise, as differentiated from partnership suppliers and
creditors, and company employees, who bear no proprietary
interest with the business enterprise they deal with.
Article 1769 of the Civil Code, in providing for the rules In
determining whether a partnership exists, states under paragraph
(4) that The receipt by a person of a share of the profits in

37

the business is prima facie evidence that he is a partner in the

business. In contrast, the same article provides, The sharing of
gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or
interest in any property from which the returns are derived.
It is fairly implied under Article 1767, as it defines a contract of
partnership, that the essence of the agreement among the partners
is to become equity-holders in a business enterprise, because their
consent must be the creation of a common fund with the intention
of dividing the profits among themselves. The essence of an equity
holder is to take the profits from the business, and consequently, to
absorb also the losses sustained thereby. Therefore, when a person
is entitled to share in the gross returns of the business venture,
he is not an equity holder, and if it is operated under the medium of
a partnership, such person is not a partner in the venture.
In Santos v. Reyes, 368 SCRA 261 (2001), the fact that in their
Articles of Agreement, the parties agreed to divide the profits of a
lending business in a 70-15-15 manner, with the petitioner getting
the lions share . . . proved the establishment of a
partnership, (Ibid, at p. 269.) even when the other parties to the
agreement were given separate compensations as bookkeeper and
creditor investigator.
In Tocao v. Court of Appeals, 365 SCRA 463 (2001), the Court held
that a creditor of a business enterprise cannot seek recovery of his
claim against the partnership from a person who is without any
right to participate in the profits and who cannot be deemed as a
partner in the business enterprise, since the essence of partnership
is that the partners share in the profits and losses.
In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court
held that
Being a contract of partnership, each partner must share in the
profits and losses of the venture. That is the essence of a
partnership. And even with an assurance made by one of the
partners that they would earn a huge amount of profits, in the

38

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

39

residences thereon because of the high cost of construction, they

decided to resell the properties to dissolve the co-ownership. The
Court ruled that no partnership was constituted among the siblings,
since the original intention was merely to collectively purchase the
lots and eventually to partition them among themselves to build
their residences; and that in fact they had no choice but to resell
the same to dissolve the co-ownership. Obillos found that the
division of the profits was merely incidental to the dissolution of the
co-ownership which was in the nature of things a temporary state;
and that there could not have been any partnership, but merely a
co-ownership, since there was utter lack of intent to form a
partnership or joint venture.
In contrast, in Reyes v. Commissioner of Internal Revenue, 24
SCRA 198 (1968), the Court found that where father and son
purchased a lot and building and had it administered by an
administrator, and divided equally the net income, there was a
partnership formed because profit was the original intention for the
common fund.
Likewise in Evangelista v. Collector of Internal Revenue, 102 Phil.
140 (1957), where three sisters bought four pieces of real property
with every intention to lease them out, and which they in fact
leased to various tenants and derived rentals therefrom, there was
a partnership formed.

b. Receipt By a Person of a Share of the Net Profit

Under Article 1769(4), the receipt by a person of a share of the net
profits of a business is prima facie evidence that he is a partner in
the business. However, in the following cases, where there is legal
and contractual basis for the receipt of the profits other than as
equity holder, there is no partnership constituted, thus:
(a) As installment payments of debt and/or interests thereof;
(b) As wages of an employee;

40

(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 loan was obtained to
purchase lorchas needed to expand the shipping business of an
existing shipping partnership venture under the condition that the
lender would receive part of the profits of the business in lieu of
interests.
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.

41

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 facieevidence that the recipient is a partner in the
business, the evidence in the case at bar controverts an employeremployee 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 in Yulo 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 lease from subleasing the property, and the
other party (the sublessee) wanted to operate a threater in said
premises. The Court held
The most important issue raised in the appeal is that contained in
the fourth assignment of error, to the effect that the lower court
erred in holding that the written contracts, Exhs. A, B, and C,
between plaintiff and defendant, are one of lease and not one of
partnership. We have gone over the evidence and we fully agree
with the conclusion of the trial court that the agreement was a
sublease, not a partnership. The following are the requisites of

42

partnership: (1) two or more persons who bind themselves to

contribute money, property, or industry to a common fund; (2)
intention on the part of the partners to divide the profits among
themselves. (Art. 1767, Civil Code.)
In the first place, plaintiff did not furnish the supposed P20,000
capital. In the second place, she did not furnish any help or
intervention in the management of the theatre. In the third place, it
does not appear that she has ever demanded from defendant any
accounting of the expenses and earnings of the business. Were she
really a partner, her first concern should have been to find out how
the business was progressing, whether the expenses were
legitimate, whether the earnings were correct, etc. She was
absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of
P3,000 a month, which can not be interpreted in any manner than a
payment for the use of the premises which she had leased from the
owners. Clearly, plaintiff had always acted in accordance with the
original letter of defendant of June 17, 1945 (Exh. A), which
shows that both parties considered this offer as the real contract
between them. (Ibid, at pp. 116-117)
In the more contemporary decision in Estanislao, Jr. v. Court of
Appeals, 160 SCRA 830 (1988), the Court affirmed the decision of
the trial court Ordering the defendant to execute a public
instrument embodying all the provisions of the partnership
agreement entered into between plaintiffs and defendant as
provided for in Article 1771, Civil Code of the Philippines. In that
case, the siblings in a family leased out to SHELL a family
commercial lot for the establishment of a gasoline station, and they
invested the advanced rentals they received from SHELL to allow
one their brother to be the registered dealer of SHELL under the
latters policy of one station, one dealer, and that in fact the
registered dealer had accounted for the operations to the other
members of the family. When later on he stopped accounting for the
operations, and refused to acknowledge the existence of a
partnership over the gasoline station, the Court held

43

Moreover other evidence in the record shows that there was in fact
such partnership agreement between the parties. . . Petitioner
submitted to private respondents periodic accounting of the
business. . . gave a written authority to private respondent . . ., his
sister, to examine and audit the books of their common business
(aming negosyo). . . . There is no doubt that the parties hereto
formed a partnership when they bound themselves to contribute
money to a common fund with the intention of dividing the profits
among themselves. The sole dealership by the petitioner and the
issuance of all government permits and licenses in the name of
petitioner was in compliance with the afore-stated policy of SHELL
and the understanding of the parties of having only one dealer of
the SHELL products. (Ibid, at p. 837)
The other important aspect is determining whether a partnership
has been constituted among several persons, is that under our tax
laws, a partnership is treated like a corporate taxpayer and liable
separately for income tax for its operations apart from the individual
income tax liabilities of each of the partners.
Thus, in Evangelista v. Collector of Internal Revenue, 102 Phil. 140
(1957), three sisters borrowed a huge amount of money from their
father, and with their personal funds, purchased under several
transactions real estate properties, and subsequently appointed
their brother as manager thereof who leased them out to various
lessees. Eventually, the Collector of Internal Revenue assessed
them for the payment of corporate income tax they have been
operating the real estate venture. In arguing that they have never
formed a partnership, and that they merely constituted themselves
a co-owners of the properties bought pro indiviso, the Court held
Pursuant to this article, the essential elements of a partnership are
two, namely: (a) an agreement to contribute money, property or
industry to a common fund; and (b) intent to divide the profits
among the contracting parties. The first element is undoubtedly
present in the case at bar, for, admittedly, petitioners have agreed
to, and did, contribute money and property to a common fund.
Hence, the issue narrows down to their intent in acting as they did.
Upon consideration of all the facts and circumstances surrounding

44

the case, we are fully satisfied that their purpose was to engage in
real estate transactions for monetary gain and then divide the same
among themselves, because:
1. Said common fund was not something they found already in
existence. It was not a property inherited by them pro indiviso.
They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a
series of transactions. . . . The number of lots (24) acquired and
transactions undertaken, as well as the brief interregnum between
each, particularly the last three purchases, is strongly indicative of a
pattern or common design that was not limited to the conservation
and preservation of the aforementioned common fund or even of
the property acquired by petitioners in February, 1943. In other
words, one cannot but perceive a character of habituality peculiar to
business transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to
other personal uses, of petitioners herein. The properties were
leased separately to several persons, who, from 1945 to 1948
inclusive, paid the total sum of P70,068.30 by way of rentals.
Seemingly, the lots are still being so let, for petitioners do not even
suggest that there has been any change in the utilization thereof.
4. Since August, 1945, the properties have been under the
management of one person, namely, Simeon Evangelista, with full
power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and
checks. Thus, the affairs relative to said properties have been
handled as if the same belonged to a corporation or business
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10)
years, or, to be exact, over fifteen (15) years, since the first
property was acquired, and over twelve (12) years, since Simeon
Evangelista became the manager.

45

6. Petitioners have not testified or introduced any evidence, either

on their purpose in creating the set up already adverted to, or on
the causes for its continued existence. They did not even try to offer
an explanation therefore. (Ibid, at pp. 144-146.)
In other words, the essence of the contract of partnership is that
the partners contract or bind themselves under a contractual
arrangement to be joint owners and managers of a business
enterprise, which is highlighted by the right to receive the net
profits and share the losses therein. Article 1770 of the Civil Code
provides that for a partnership contract to be valid it must be
established for the common benefit or interest of the partners,
which clearly indicates the equity or proprietorship position of the
partners. Consequently, if there is no clear meeting of the minds to
form a partnership venture, the fact that a person participates in
the gross receipts of a business enterprise or from a property
arrangement does not make him a partner because he is not made
to bear the burdens of ownership, i.e., to be liable for expenses and
losses of the business enterprise.
The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA
74 (1972), is illustrative of this principle. In Ona, in the project
partition agreed upon by the heirs the agreed to keep the properties
of the estate together and to divide the profits in proportion to their
stipulated interests therein. In holding that there was thereupon
constituted among the co-heirs an unregistered partnership subject
to corporate income tax under the Tax Code, the Court held
It is thus incontrovertible that petitioners did not, contrary to their
contention, merely limited themselves to holding the properties
inherited by them. Indeed, it is admitted that during the material
years herein involved, some of the said properties were sold at
considerable profit and that with said profit, petitioners engaged,
thru Lorenzo T. Ona, in the purchase and sale of corporate
securities. It is likewise admitted that all the profits from these
ventures were divided among petitioners proportionately in
accordance with their respective shares in the inheritance. . . the
moment petitioners allowed not only the incomes from their
respective shares of the inheritance but even the inherited

46

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

47

been unceremoniously booted out of the partnership . . . she still

received her overriding commission (Ibid, at p. 36) . . . The winding
up of partnership affairs has not yet been undertaken by the
partnership. This is manifest in petitioners claim for stocks that had
been entrusted to private respondent in the pursuit of the
partnership business. (Ibid, at p. 38.)

e. Doctrine of Attributes of Proprietorship as a Means to

Prove or Disprove the Existence of a Partnership
There are a number of decisions that use the hazy doctrine of
attributes of proprietorship as one of the indications of the
existence of a contract of partnership or a partnership venture.
We take the decision in Tocao v. Court of Appeals, 342 SCRA 20
(2000), where the main issue was whether there existed a contract
of partnership between three parties, namely Tocao, Bello and
Anay, in the face of the assertions of both Tocao and Bello that
there was no partnership agreement entered into considering that:
(a) there was no written agreement embodying the alleged
partnership agreement, and that in fact the business was registered
with the government authorities as a single proprietorship in the
style of Geminesse Enteprise in the name of Tocao; (b) Bello
asserts that he never gave any contribution to the venture, but
merely guaranteed its credit standing; and (c) Anay never
contributed anything to the business, and she was receiving
overriding commission and participation in profits directly as a result
of her handling the marketing of the products, and not as a partner
to the venture.
In brushing aside the assertions of no contract of partnership, the
Court, apart from holding that a contract of partnership need not be
in writing to be valid and enforceable, held that all three parties had
by the evidence adduced exercised rights of proprietorship on the
business venture as to show without doubt the existence of a
partnership, thus:

48

Petitioners [Tocao and Belo] admit that private respondent [Anay]

had the expertise to engage in the business of distributorship of
cookware. Private respondent contributed such expertise to the
partnership and hence, under the law, she was the industrial or
managing partner. It was through her reputation with the West
Bend Company that the partnership was able to pen the business of
distributorship of that companys cookware products; it was through
the same efforts that the business was propelled to financial
success. Petitioner Tocao herself admitted private respondent
[Anay] held the positions of marketing manager and vice-president
for sales . . . x x x. (Ibid, at p. 31; underscoring supplied)
By the set-up of the business, third persons were made to believe
that a partnership had indeed been forged between petitioners
[Tacao and Belo] and private respondent [Anay] . . .
On the other hand, petitioner Belos denial that he financed the
partnership rings hollow in the face of the established fact that he
presided over meeting regarding matters affecting the operation of
the business. Moreover, his having authorized in writing . . . that
private respondent should receive thirty-seven (37%) of the
proceeds of her personal sales, could not be interpreted otherwise
than that he had a proprietary interest in the business. His claim
that he was merely a guarantor is belied by that personal act of
proprietorship in the business . . . (Ibid, at p. 32;underscoring
supplied)
The business venture operated under Geminesse Enterprise did not
result in an employer-employee relationship between petitioners
and private respondent. While it is true that the receipt of a
percentage of net profits constitutes only prima facie evidence that
the recipient is a partners in the business, the evidence in the case
at bar controverts an employer-employee relationship between the
parties. In the first place, private respondent had a void in the
management of the affairs of the cookware distributorship, including
selection of people who would constitute the administrative staff
and the sales force. . . (Ibid, at pp. 33-34; underscoring supplied)

49

The exercise of the prerogatives of a proprietor should be viewed as

merely collaborative evidence of the partnership relationship
between the parties in a business venture; in the end the existence
of the contract of partnership must be located in the actual meeting
of minds to constitute a common fund and to divide the profits
thereof among themselves. The reason why exercising the
prerogatives of proprietorship or participating in the management of
the business enterprise cannot on their own be weighty evidence to
prove the existence of a partnership agreement is because, it is
logical for a business enterprise, whether it is operated as a
partnership or a single proprietorship, to actually appoint a manager
or other agents, authorized to exercise acts of management,
without being owners or partners of the business venture.
In any event, the application of the suppletory doctrine of
attributes of proprietorship in jurisprudence is a recognition that a
partnership arrangement is in essence a contractual aggregation of
sole proprietors, who come together to form a common venture,
each acting very much a proprietor of the business venture, while at
the same time as agents to one another.
The recent decision in Sy v. Court of Appeals, 398 SCRA 301
(2003), succinctly summarizes the badges that would normally
accompany a partnership relationship, thus:
Article 1767 of the Civil Code states that in a contract of partnership
two or more persons bind themselves to contribute money, property
or industry to a common fund, with the intention of diving the
profits among themselves. Not one of these circumstances is
present in this case [which sought to make the truck driver of the
company of many years to be characterized as an industrial
partner]. No written agreement exists to prove the partnership
between the parties. Private respondent did not contribute money,
property or industry for the purpose of engaging inthe supposed
business. There is no proof that he was receiving a share in the
profits as a matter of course, curing the period when the trucking
business was under operation. Neither is there any proof that he
had actively participated in the management, administration and
adoption of policies of the business. (Ibid, at p. 308.)

50

In contrast, we should consider the decision in Heirs of Tan Eng Kee

v. Court of Appeals, 341 SCRA 740 (2000), where a partnership was
insisted to have been constituted yet no direct evidence of the
contribution to a common fund or sharing of profits had been
adduced during trial. The Court held
Besides, it is indeed odd, if not unnatural, that despite the forty
years the partnership was allegedly in existence, Tan Eng Kee never
asked for an accounting. The essence of a partnership is that the
partners share in the profits and losses. Each has the right to
demand an accounting as long as the partnership exists. We have
allowed a scenario wherein [i] excellent relations exists among the
partners at the start of the business and all the partners are more
interested in seeing the firm grow rather than get immediate
returns, a deferment of sharing in the profits is perfectly plausible.
[Fue Lung v. IAC, 169 SCRA 764, 755 (1989)]. But in the situation
in the case at bar, the deferment, if any, had gone too long to be
plausible. A person is presumed to take ordinary care of his
concerns. . . A demand for periodic accounting is evidence of a
partnership. (Ibid, at pp. 755-756, citing Estanislao, Jr. v. Court of
Appeals, 160 SCRA 830, 837 [1988]).

f. When Subject Matter (the Business Venture) Is Unlawful

or Against Public Policy
When the subject matter of a contract of partnership is unlawful,
Article 1770 of the Civil Code provides that the contract is void; and
being void the purported partners have no right to participate in any
profits that may have been earned by the partnership enterprise.
Thus, the article provides that the profits shall be confiscated in
favor of the State.
In Arbes v. Polistico, 53 Phil. 489 (1929), a partnership organized to
engage in illegal gambling was declared void by judicial order, and
pursuant to the provisions of Article 1770, all the profits earned
were deemed confiscated in favor of the state. However, it decreed
that the partners had a right to recover their contributions, thus:

51

Our Code does not state whether, upon the dissolution of the
unlawful partnership, the amounts contributed are to be returned to
the partners, because it only deals with the disposition of the
profits; but the fact that said contributions are not included in the
disposal prescribed for said profits, shows that in consequence of
said exclusion, the general rules of law must be followed, and
hence, the partners must be reimbursed the amount of their
respective contributions. Any other solution would be immoral, and
the law will not consent to the latter remaining in the possession of
the manager or administrator who has refused to return them, by
denying to the partners the action to demand them. (Ibid, at p.
495, quoting from MANRESA, COMMENTARIES ON THE SPANISH
CIVIL CODE, Vol. XI, pp. 262-264.)
In Deluao v. Casteel, 26 SCRA 475 (1968), the Court held that a
contract of partnership that sought to divide between the two
partners-applicants the fishpond in contravention of the prohibitory
provisions of law was deemed dissolved when the Government did
finally issue a fishpond permit to one of the partners.

3. CAUSE or CONSIDERATION: Promised Contributions

In a contract of partnership, it is held that the cause or
consideration for each partner is the undertaking of the other or
others to contribute money, property or industry to a common fund
(i.e., to the business venture). Being essentially a consensual is
characteristic, a contract of partnership is perfected by the
agreement by the partners to make such contribution (i.e., by the
assumption of the obligation to contribute or to render service).
The essence of the element of cause or
every contract of partnership is emphasized in:

consideration

in

(a) Article 1786, which declares every partner to be a debtor of the

partnership for whatever he may have promised to contribute;

52

(b) Article 1787, which makes a partner liable for interest and
damages for failing to contribute the sum of money he was bound
to pay under the articles of partnership;
(c) Article 1789, which prohibits an industrial partner from engaging
in business for himself, since he bound himself to contribute service
to the partnership;
(d) Article 1790, which presumes an obligation to contribute equal
shares among the partners when there is no stipulation as to
manner and amount of contribution; and
(e) Article 1830(4), which decrees the dissolution of a partnership
when the specific thing, which a partner had promised to contribute
to the partnership, perishes before the delivery.
City of Manila v. Cumbe, 13 Phil. 677 (1909), held that credit,
such as a promissory note or other evidence of obligation, or even a
mere goodwill, may be validly contributed into the partnership. In
other words, if service is a valid contribution to the common fund,
then more so when it comes to intangible things, rights and chooses
in action.

4. Other Essential Elements of Partnership

Although American jurisprudence would consider two other
elements to be essential for the contract of partnership to exist,
namely:
(a) the purpose of a purpose must be to engage in some business
enterprise; and
(b)

the element of joint control (BAUTISTA, at p. 4);

the same are also present in Philippine Partnership Law.

As discussed above, the subject matter of every contract of
partnership must be the agreement to jointly pursue a business

53

enterprise. Thus, inFernandez v. De la Rosa, 1 Phil. 671 (1903), it

was held that a joint interest in the profits would constitute one of
the essential points upon which the minds of the parties must meet
in a contract of partnership. (Ibid, at pp. 675-676) The element of
joint control is embodied in the provisions of law that provides for
mutual agency in a partnership arrangement. (Art. 1810(3)
provides that one of the property rights of a partner is His right to
participate in the management. Art. 1818 of the Civil Code
provides that Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of
which he is a member binds the partnership.
In Council of Red Men v. Veterans Army, 7 Phil. 685 (1907), Article
3 of the constitution of the Veteran Army of the Philippines provides
as follows: The constitution of the association provided for the
following purpose: The object of this association shall be to
perpetuate the spirit of patriotism and fraternity those men who
upheld the Stars and Stripes in the Philippine Islands during the
Spanish war and the Philippine insurrection, and to promote the
welfare of its members in every just and honorable way; to assist
the sick and afflicted and to bury the dead, to maintain among its
members in time of peace the same union and harmony with which
they served their country in times of war and insurrection. (Ibid,
at p. 686.) The Court had raised the point that: It seems to be the
opinion of the commentators that where the society is not
constituted for the purpose of gain, it does not fall within this article
of the Civil Code. Such an organization is fully covered by the Law
of Associations of 1887, but that law was never extended to the
Philippine Islands. (Ibid, at p. 687.) Nonetheless, Council of Red
Men applied the then old Civil Code rule on civil partnership.
The only form of partnership where business consideration or the
gaining of profits is not the primary consideration for the common
fund would be the authorized professional partnerships; but even in
such cases the Court has considered that a profession is pursued as
part of the livelihood undertaking of the partners. (In the Matter of

54

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

55

5 PARTNERSHIP AS A MEANS OF DOING

BUSINESS, THROUGH THE JURIDICAL PERSON
[Updated: 23 August 2010]

V. PARTNERSHIP AS A MENAS OF DOING BUSINESS,

THROUGH THE JURIDICAL ENTITY
Art. 1768. The partnership has a juridical personality
separate and distinct from that of each of the partners, even
in case of failure to comply with the requirements of Article
1712, first paragraph. (n)
Art. 44. The following are juridical persons:
x x x.
(3) Corporations, partnerships and associations for
private interest or purpose to which the law grants a
juridical personality, separate and distinct from that of each
shareholder, partner or member. (35a)
Art. 45. x x x . Partnerships and associations for
private interest or purpose are governed by the provisions of
this Code concerning partnerships.
Art. 46. Juridical persons may acquire and possess
property of all kinds, as well as incur obligations and bring
civil or criminal actions, in conformity with the laws and
regulations of their organization. (38a)

56

Art. 1774. Any immovable property or an interest

therein may be acquired in the partnership name. Title so
acquired can be conveyed only in the partnership name. (n)

1. Legal Bases of the Partnership Juridical Personality

Immediately after defining partnership as a contract under Article
1767 of the Civil Code, the Law on Partnerships provides under
Article 1768 that the partnership has a juridical personality
separate and distinct from that of each of the partners, even in case
of failure to comply with the [registration] requirements of Article
1772.
Article 44 of the Civil Code expressly recognizes partnerships as
being juridical persons, and provides that partnerships and
associations for private interest or purpose to which the law grants
a juridical personality, separate and distinct from that of each . . .
partner or member.
Under Article 45 of the Civil Code, it is provided that Partnerships
and associations for private interests or purpose are governed by
the provisions of this Code concerning partnerships.

2. Underlying Business Ends of the Partnership Juridical

Person
The importance of the grant of separate juridical personality to the
partnership is to make it an efficient means by which several
persons can collectively pursue business. Thus, under Article 46 of
the Civil Code it is provided that Juridical persons may acquire and
possess property of all kinds, as well as incur obligations and bring
civil or criminal actions, in conformity with the laws and regulations
of their organization.
In the Law on Partnerships, the business purpose of the partnership
juridical person is best exemplified by Article 1774 of the Civil Code

57

which provides that Any immovable property or an interest therein

may be acquired in the partnership name, to avoid the
cumbersome need of having all the names of the partners listed in
the title to the property. Consequently, the article provides that title
to real property acquired in the partnership name may be conveyed
only in the partnership name.
Although a partnership is treated as a person before the law, such
juridical personality does not occupy the same level as the person
of an individual. The person of an individual is considered
sacrosanct under modern societal doctrine; the State and civil
society are organized towards protecting that person and
engendering its safety and well-being. On the other hand, the
person of a partnership is a legislative grant by the State or a
fiction created by the law, not for the benefit of the juridical person,
but precisely only as a means or medium by which individuals in
society may achieve certain ends, and often they are business or
commercial ends.
That a partnership is really a creature of the law as a means by
which society may pursue certain business or commercial ends
means therefore that it is regulated under the Law on Partnerships
for the benefit of those who employ it as their medium (the
partners) and those who are authorized to deal with said medium
(the creditors, the clients and customers). This philosophical
understanding of the essence and purpose of the partnership
juridical person is best exemplified by the provisions of Article
1775 of the Civil Code which denies juridical personality to
Associations and societies, whose articles are kept secret among
the members, and wherein any one of the members may contract in
his own name with third persons. In other words, if an aggregation
of individuals is not meant to undertake a business or commercial
venture that is supposed to deal with the public at large, then it is
not intended to be a medium of doing business, and there is not
purpose of granting it a separate juridical personality.

a. The Case for Secret Associations

58

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 coownership. The phrase kept secret among the members,
according to Manresa, does not mean that the articles are known to
all the members but withheld from third persons. It contemplates a
situation where the articles, which allow any one of the members to
contract in his own name with third persons, are known to some
members only and kept secret from the rest. In other words, the
secrecy is not directed to third persons but to some of the partners.
This rule is intended to preserve the equality which must exist
among the partners and to prevent any of them from defrauding the
partnership or the other members. This being the case it does not
prohibit secret stipulations which are not designed to produce this
result. It would not, for instance, have the effect of rendering
invalid a separate agreement between two members of a
partnership pursuant to which one guarantees the other against loss
of his capital contribution or assures him of profit. Neither can the
rule be invoked as against third persons by the partners entering

59

into the secret stipulations, in consonance with the general principle

that a party should not be allowed to take advantage of a nullity
which he himself has caused. (BAUTISTA, at pp. 58-59, citing 11
Manresa 289 to 291)

b. Jurisprudential Application of the Doctrine of Separate

Juridical Personality of the Partnership
In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the
contention that since the defendant sued was a partnership that
summons must be served upon each of the partners, the Court
held
[I]t has been the universal practice in the Philippine Islands since
American occupation, and was the practice prior to that time, to
treat companies of the class to which the plaintiff belongs as legal
or juridical entities and to permit them to sue and be sued in the
name of the company, the summons being served solely on the
managing agent or other official of the company by the section of
the Code of Civil Procedure. (Ibid, at p. 448)
The decision in Campos Rueda & Co. v. Pacific Commercial Co., 44
Phil. 916 (1923), demonstrates how the separate juridical
personality accorded to a partnership arrangement makes certain
rules on insolvency work differently as compared to American
jurisprudence on the same matter. In Campos Rueda a petition for
involuntary insolvency was filed by the creditors of the limited
partnership for an act of insolvency provided under the Insolvency
Act (i.e., having failed to its obligations with three creditors for
more than thirty days). The trial court denied the petition on the
ground that it was not proven, nor alleged, that the partners of the
firm were insolvent at the time the application was filed; and that as
said partners are personally and solidary liable for the consequences
of the transactions of the partnership, it cannot be adjudged
insolvent so long as the partners are not alleged and proven to be
insolvent. In ruling that the denial of the petition for insolvency was
in error, the Court held

60

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.

61

3. Application of the Doctrine of Piercing the Veil of Separate

Juridical Fiction
The doctrine of piercing the veil of corporate fiction finds
relevance in Corporate Law because it is the means by which to bypass the effects of the doctrine of limited liability, and through
piercing acting stockholders and/or officers may be held personally
liable for corporate debts.
In spite of the partnership being accorded also a separate juridical
partnership, the piercing doctrine has less application in Partnership
Law because the partners are unlimitedly liable (i.e., personally
liable with their separate properties) for partnership debts. And yet,
the doctrine found application to partnerships in Commissioner of
Internal Revenue v. Suter, 27 SCRA 152 (1969), where the Court
addressed the legal position of the Tax Commissioner seeking to
make the individual partners liable for income tax for the income
earned by the limited partnership, thus:
It being a basic tenet of the Spanish and Philippine law that the
partnership has a juridical personality of its own, distinct and
separate from that of its partners (unlike American and English law
that does not recognize such separate juridical personality). The
bypassing of the existence of the limited partnership as a taxpayer
can only be done by ignoring or disregarding clear statutory
mandates and basic principles of our law. The limited partnerships
separate individuality makes it impossible to equate its income with
that of the component members. . . (Ibid, at pp. 158-157.)
x x x.
. . . In the cited cases, the corporations were already subject to tax
when the fiction of their corporate personality was pierced; in the
present case, to do so would exempt the limited partnership from
income taxation but would throw the tax burden upon the partnersspouses in their individual capacities. The corporations, in the cases
cited, merely served as business conduits or alter egos of the

62

stockholders, a factor that justified a disregard of their corporate

personalities for tax purposes. This is not true in the present case.
Here, the limited partnership is not a mere business conduit of the
partner- spouses; it was organized for legitimate business
purposes; it conducted its own dealings with its customers prior to
appellees marriage; and had been filing its own income tax returns
as such independent entity. . . . As far as the records show, the
partners did not enter into matrimony and thereafter buy the
interests of the remaining partner with the premeditated scheme or
design to use the partnership as a business conduit to dodge the tax
laws. Regularity, not otherwise, is presumed. (at p. 159.)
In other words, Suter holds that when the facts show that the
juridical personality of the partnership is but a means to evade the
law or a sham, then the courts will pierce the veil of its separate
juridical personality to treat the partners as directly liable or
accountable for the consequences of the acts or contracts done in
the partnership name.
The piercing doctrine also found recognition, albeit by way of obiter,
inAguila, Jr. v. Court of Appeals, 319 SCRA 246 (1999), but only in
the limited area of determining standing in a suit brought against
claims pertaining to the partnership. In Aguila, Jr. the complaint
was filed against the partners and officers to enforce essentially a
partnership obligation. In ruling that the judgment rendered by the
trial court (affirmed by the Court of Appeals) against the individual
defendants was void, the Court held
Under Art. 1768 of the Civil Code, a partnership has a juridical
personality separate and distinct from that of each of the partners.
The partners cannot be held liable for the obligations of the
partnership unless it is shown that the legal fiction of a different
juridical personality is being used for fraudulent, unfair, or illegal
purposes. In this case, private respondent has not shown that A.C.
Aguila & Sons, Co., as a separate juridical entity, is being used for
fraudulent, unfair or illegal purposes. Moreover, the title to the
subject property is in the name of A.C. Aguila & Sons, Co. and the
Memorandum of Agreement was executed between private
respondent with the consent of her late husband, and A.C. Aguila &

63

Sons, Co., represented by petitioner. Hence, it is the partnership,

not its officers, or agents, which should be impleaded in any
litigation involving property registered in its name. A violation of
this rule will result to dismissal of the complaint. We cannot
understand why both the Regional Trial Court and the Court of
Appeals sidestepped this issue when it was squarely raised before
them by petitioner. (At p. *)

4. Entitlement to Constitutional Rights and Guarantees

The more interesting topic under the juridical personality doctrine
pertaining to partnerships is whether they are entitled to the
constitutional rights of due process, equal protection, unreasonable
searches and seizures and the right against self-incrimination.
It is well established in Philippine Corporate Law, that corporations
as persons before the law are entitled to the constitutional
guarantee to due process and equal protection, (Smith, Bell & Co. v.
Natividad, 40 Phil. 136 [1919]; Bache & Co. (Phil.), Inc. v. Ruiz, 37
SCRA 823 [1971]) the rights against unreasonable searches and
seizure; (Stonehill v. Diokno, 20 SCRA 383 [1967]) but not to the
right against self-incrimination. (Bataan Shipyard and Engineering
Co., Inc.. v. PCGG, 150 SCRA 181 [1987]).
In Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919), discusses the
rationale why corporations would be entitled to constitutional
guarantees accorded to individuals, thus:
The guarantees of the Fourteenth Amendment and so of the first
paragraph of the Philippine Bill of Rights, are universal in their
application to all persons within the territorial jurisdiction, without
regard to any differences of race, color, or nationality. The word
person includes aliens . . . Private corporations, likewise, are
persons within the scope of the guaranties in so far as their
property is concerned. . . (Ibid, at p. 144) The Smith, Bell &
Co. rationale has equal application to partnerships which are
accorded as separate persons under the Partnership Law. The better

64

rationale applicable to partnership would be the ruling in Bache &

Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971), where the Court held
that a corporation is entitled to immunity against unreasonable
searches and seizures because A corporation is, after all, but an
association of individuals under an assumed name and with a
distinct legal entity. In organizing itself as a collective body it
waives no constitutional immunities appropriate for such body. Its
property cannot be taken without compensation. It can only be
proceeded against by due process of law, and is protected, under
the 14th Amendment, against unlawful discrimination. (Ibid, at p.
837, quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652).
In fact, in the partnership setting there is closer identity between
the partners and the partnership in the sense that the partners not
only own the partnership and its affairs and they directly manage
the affairs of the partnership, but more so that the separate juridical
personality is closely identified with the personality of the partners
under delectus personaeconsiderations.
On the other hand, the Courts ruling on why corporations are not
entitled to the rights against self-incrimination, has less vigor to the
partnership setting. Consider the decision in Bataan Shipyard &
Engineering Co., Inc. v. PCGG, 150 SCRA 181 (1987), where the
Court held that the right against self-incrimination has no
application to corporations, extensively quoted in Bataan Shipyard
from Wilson v. United States, (55 L.Ed. 771, 780) thus:
* * * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It receives certain special
privileges and franchises, and holds them subject to the laws of the
state and the limitations of its charter. Its power are limited by law.
It can make no contract not authorized by its charter. Its right to
act as a corporation are only preserved to it so long as it obeys the
laws of its creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has exceeded its
powers. It would be a strange anomaly to hold that a state, having
chartered a corporation to make use of certain franchises, could not,
in the exercise of sovereignty, inquire how these franchises had
been employed, and whether they had been abused, and demand

65

the production of the corporate books and papers for that purpose.
The defense amounts to this, that an officer of the corporation
which is charged with a criminal violation of the statute may plead
the criminality of such corporation as a refusal to produce its books.
To state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless protected
by an immunity statute, it does not follow that a corporation, vested
with special privileges, and franchise may refuse to show its hand
when charged with an abuse of such privileges. . . (150 SCRA 181,
234-235, quoting from Wilson v. United States, 55 Law Ed. 771,
780.)
Every corporation is a direct creature of the law and receives an
individual franchise from the State. But a partnership, although is
deemed to be a juridical person by grant of the State, becomes a
juridical person through a private contract of partnership between
and among the partners, without needing to register its existence
with the State or any of its organs. More importantly, the
partnership person is a fiction of law given more for the
convenience of the partners, and thus can be dissolved by the will of
the partners or by the happening of an event that would constitute
the termination of the contractual relationship, whereas, no
corporation can be dissolved without the consent of the State, and
only after due notice and hearing. Likewise, the other features of
the partnership, mainly mutual agency, delectus personae and
unlimited liability on the part of the partners, that places a close
identity between the persons of the partners and that of the
partnership. This is unlike in corporate setting, where the
stockholders do not own corporate properties, have no participation
in management of corporate affairs, and enjoy personal immunity
from the debts and liabilities of the corporation, and where basically
the corporation is its own person, and acts through a professional
group of managers and agents called the Board of Directors.
While therefore it is understandable that a corporation, that has no
heart, feels pain, and has no soul that can be damned, cannot be
expected to be entitled to the constitutional right against selfincrimination, it is quite different in the case of the partnership,

66

since its person is merely an extension of the group of partners,

who having come together in business, and acting still for such
business enterprise, could not be presumed to have waived their
individual rights against self-incrimination.
As the author has observed in his writing on Philippine Corporate
Law, when it comes to the constitutional right against selfincrimination, the Court would rely upon old American doctrine
which views the corporation as a mere creature of the law and with
separate juridical personality apart from its stockholders or
members. In the partnership setting, the difference in the Courts
stance may lie in the fact that the right against self-incrimination
does not really result in physical intrusion into the premises of the
partnership, because it would require only that the partnership,
through its agents, produce records and books before the courts.
The denial of the right against self-incrimination from corporations
and partnerships does not really invite state authorities into the
premises or physical privacy of the stockholders, members or
partners who compose the juridical entity; but would deny acting
individuals the right to abuse the medium of separate juridical
personality as a means to do folly.
On the other hand, to deny the due process rights or right against
unreasonable searches and seizures to corporations and
partnerships would actually be to invite state authorities to
physically intrude into business premises, and therefore also intrude
into the personal and business privacy of the stockholders,
members or partners who compose the juridical person. Perhaps
that is the basis for the difference in stance by the Court between
two sets of constitutional rights with respect to corporations, and
also in the case of partnerships. Another view is that the
constitutional guarantees of due process, equal protection clause
and against unreasonable searches and seizures are all meant to
curb the abuse that the State and its representatives may employ
upon the citizenry, including the modes upon which they conduct
their lives and businesses. On the other hand, the constitutional
protection against self-incrimination is not meant to prevent an
actual State abuse but to avoid pressuring the individual from

67

having to tell a lie. The main purpose of the provision . . . is to

prohibit compulsory oral examination of prisoners before the trial, or
upon trial, for the purpose of extorting unwilling confessions or
declarations implicating them in the commission of a crime.
(U.S. v. Tan Teng, 23 Phil. 145, 152 [1912]) A corporation owes full
allegiance and subject to the unrestricted jurisdiction of the courts
of the State under which it has been organized. (Tayag v. Benguet
Consolidated, Inc., 26 SCRA 242, 248 [1968]) Likewise, it has no
soul that can be damned by a lie.
oOo

68

6 PARTNERSHIP AS A BUSINESS ENTERPRISE

[Updated: 23 August 2010]

VI. PARTNERSHIP AS A BUSINESS ENTERPRISE

Although not explicitly stated in the provisions of the Civil Code, the
partnership may constitute also a business enterprise or what is
known in the disciplines of Economics and Accounting, as a going
concern that is separately valued and accounted for from the
individual value of the assets and properties constituting it and from
the medium or means by which it is operated (in the case of
partnership, the juridical person created by express provision of
law).
Recognition of the existence and operation of the partnerships
business enterprise, as distinguished from the legal effects and
consequences of the contract of partnership among the partners
and the partnership juridical person, gives rise to legal
relationships, rights and obligations, and doctrines, that can only be
accounted for from that level.
For example, the right of the partners to specific partnership
property and to share in the profits and losses, as well as the right
to manage, are legal matters that necessarily refer to the
partnership business enterprise.
This understanding of the business enterprise of a partnership is
applicable even to a professional partnership. Our Supreme Court
has defined the term profession as a group of men pursuing a
learned art as a common calling in the spirit of public serviceno

69

less a public service because it may incidentally be a means of

livelihood. (In the Matter of the Petition for Authority to Continue
Use of Firm Name Sycip, Salazar, et. al. Ozaeta, Romulo, etc., 92
SCRA 1 (1979).)
The recognition of the inherent relationship between and among the
partners to be bound by the results of operations from the business
enterprise has been well-explained by the Court in Villareal v.
Ramirez, 406 SCRA 145 (2003), thus:
First, it seems that the appellate court was under the
misapprehension that the total capital contribution was equivalent
to the gross assets to be distributed to the partners at the time of
the dissolution of the partnership. We cannot sustain the underlying
idea that the capital contribution at the beginning of the partnership
remains intact, unimpaired and available for distribution or return to
the partners. Such idea is speculative, conjectural and totally
without factual or legal support.
Generally, in the pursuit of a partnership business, its capital is
either increased by profits earned or decreased by losses sustained.
It does not remain static and unaffected by the changing fortunes of
the business. In the present case, the financial statements
presented before the trial court showed that the business had made
meager profits. However, notable therefrom is the omission of any
provision for the depreciation of the furniture and the equipment.
The amortization of the goodwill (initially valued at P500,000) is not
reflected either. Properly taking these non-cash items into account
will show that the partnership was actually sustaining substantial
losses, which consequently decreased the capital of the partnership.
Both the trial and the appellate courts in fact recognized the
decrease of the partnership assets to almost nil, but the latter failed
to recognize the consequent corresponding decrease of the capital.
(Ibid, at p. 153.)
x x x.
Because of the above-mentioned transactions, the partnership
capital was actually reduced. When petitioners and respondents

70

ventured into business together, they should have prepared for the
fact that their investment would either grow or shrink. In the
present case, the investment of respondents substantially dwindled.
The original amount of P250,000 which they had invested could no
longer be returned to them, because one third of the partnership
properties at the time of dissolution did not amount to that much.
It is a long established doctrine that the law does not relieve parties
from the effects of unwise, foolish or disastrous contracts they have
entered into with all the required formalities and with full awareness
of what they were doing. Courts have no power to relieve them
from obligations they have voluntarily assumed, simply because
their contracts turn out to be disastrous deals or unwise
investments. (Ibid, at p. 154.)
In fact, it is only from the partnership business enterprise level
that we can fully appreciate the concept that essentially the
partners are owners of the business, or that they take the position
of equity holders, as distinguished from creditors who advance
money to the partnership as debt holders. Thus, it is an essential
element to the existence of the partnership under Article 1767 of
the Civil Code, the obligation assumed by each partner to
contribute money, property or industry to a common fund, which
essentially represents the business enterprise to be pursued, to
thereby assume the position of being owners or equity holders,
and thereby to be entitled to the profits made from the pursuit of
the business enterprise, and logically to assume the risks connected
with it, including absorbing the losses sustained. This critical
position of equity holders of partners is confirmed under Article
1770 Civil Code which requires that a partnership must be
established for the common benefit or interest of the partners,
which aptly describes their positions as owners of the partnership
business enterprise.
The importance of being aware that the partnership would
eventually constitute a business enterprise is important in applying
certain doctrines of succession of liability that apply peculiarly to
business enterprise. Likewise, the rules on dissolution and
liquidation clearly appreciate the difference between the contract

71

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

72

ESSENTIAL
THE PARTNERSHIP

ATTRIBUTES

OF

[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).

73

An understanding of each of the partnership attributes provides a

better appreciation of the multifarious functions of the partnership
in the Philippine commercial setting.
2. Non-Solemn or Consensual Juridical Personality
In contrast to the corporate juridical personality which can only
arise and can only be terminated by complying with the formal
processes and procedures approved by the State, the juridical
personality accorded to every partnership under Article 1768 of the
Civil Code is best described to be informal, or better yet merely
consensual, as distinguished from being formal or solemn
characteristic.
It is very well implied from the substance and sequence of Articles
1767 and 1768 of the Civil Code that the existence of a separate
juridical personality for a partnership is conditioned on the
perfection and validity of a contract of partnership; and that the
separate juridical personality arises as a mandatory consequence
under the law from the perfection of a contract of partnership.
Consequently, as the contract of partnership is best described as a
consensual contract, it follows necessarily that the constitution of a
partnership juridical personality would also be consensual. The
general rule under Article 1771 is that a partnership may be
constituted in any form.
To illustrate, the partnerships separate juridical personality arises
in the privacy of the perfection of the contract of partnership: Article
1768 provides that the partnership has a juridical personality
separate and distinct from that of each of the partnership, which
under Article 1784 begins from the moment of the execution of the
contract, unless it is otherwise stipulated. So informal or casual is
the attitude of the law on the partnerships juridical personality that
under Article 1785, such juridical personality can be extended
beyond the original fixed term or particular undertaking by the mere
continuation of the business by the partners or such of them as
habitually acted therein during the term, without any settlement or
liquidation of the partnership affairs.

74

What is the reason for the legal attitude of being rather informal
on the juridical personality of the partnership? It seems from the
provisions of the Law on Partnerships of the Civil Code that the
separate juridical personality granted to the partnership
contractual relationship between and among the partners, and the
underlying partnership business enterprise, is not the centerpiece of
the Partnership Law, but merely an add on to allow the business
venture to be run more efficiently by the owners thereof (the
partners), and to make dealings by it with the public easier and
pursued with more efficiency. After all, in common law traditions the
partnership has survived and thrived in a setting that does not
accord it a juridical personality. In other words, the civil law
tradition of providing a partnership with a juridical personality
separate and distinct from the partnersor properly speaking, to
clothe the business enterprise with a juridical person by which it can
better deal with the publicis meant to add to the commercial
efficiency of the partnership both as a medium of association and as
a medium of doing business.
The default rule of according by operation of law a juridical
personality to a partnership arrangement, makes it a cheaper
medium of doing business. Therefore, if the manner by which to
achieve juridical personality be made more rigorous and formal,
then it makes the partnership medium a more expensive
proposition, and therefore unattractive especially for businessmen
and merchants who embark on modest ventures.
a. Exceptions to Informal or Consensual Nature of Juridical
Personality
The only time in the Civil Code when the contract of partnership
(and therefore likewise with the partnership juridical person) must
assume a solemn or formal character covers three expressed
instances:
(a) Under Article 1772, that every contract of partnership having a
capital of P3,000 or more shall appear in a public instrument, which
must be recorded with the Securities and Exchange Commission
(SEC).

75

(b) Under Articles 1771 and 1773, where immovable property or

real rights are contributed to the partnership:
(i)

in which case a public instrument shall be necessary; and

(ii)
the contract of partnership is void, if an inventory of said
property is not made, signed by the parties and attached to the
public instrument;
(c) Under Articles 1843 and 1844, which requires particular
provisions describing limited partners in the articles of limited
partnership, and which must be formally registered with the SEC.
When the capital contributions not involving real property are in
excess of P3,000, and there is failure to comply with the
requirement for public instrument and recording with the SEC,
Article 1772 does not expressly state what happens to the legal
status of the contract of partnership. In fact, Article 1772 provides
that Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of the partnership and the
members thereof to third persons. What then is the purpose of the
law in imposing solemn requirements for partnerships with capital
contributions of P3,000, if failure to comply therewith does not
present any dire legal consequences?
On the other hand, the law is clear that when what is contributed to
the partnership is immovable property, and there is failure to
provide for an inventory thereof to be attached to the public
instrument to be registered with the SEC, the resulting partnership
is void. The exception when it comes to real property contributions
is the public policy contained in our Civil Code and in other special
laws, that considers real property as constituting a cornerstone in
our economic life, and that dealings therewith must be formal and
public, which would afford to the public a reliable means to
determine the status of ownership and the existing liens of real
property.
The only other exception to the informal or consensual nature of the
partnership juridical personality would be the mandatory

76

registration requirements for the valid constitution of the limited

partnership. Again, this is in line with the principle that limited
liability to the owners of a business enterprise is unusual, and if it is
to exist to bind the public, it must be pursued and reflected in a
formal manner.
As shown in the decision in MacDonald v. National City Bank of New
York, 99 Phil. 156 (1956), even under the Code of Commerce where
registration was essential for the coming into existence of a
commercial partnership, nonetheless in a proper case of estoppel,
the courts treated such unregistered commercial partnership as a de
facto partnership with a personality of its own in order to protect
the rights of third persons.
3. Weak Juridical Personality
On the other hand, the juridical personality of the partnership is
weak because it can be put asunder without need of formal
dissolution process, and by the will of any of the partners or all of
them, or even by chance.
To illustrate, under Article 1830 of the Civil Code, the partnership
may be dissolved by:
(a) Express will of any partner, either acting in good faith or even
when not in good faith and in contravention of the agreement;
(b) Express will of all the partners;
(c) Expulsion of any partner;
(d) Any event which makes the partnership business unlawful;
(e) Loss before delivery of the property promised to be contributed
by the partner;
(f)

Death, insolvency, or civil interdiction of any partner;

(g) By court decree, when a partner has been declared insane or

incapacitated, or guilty of conduct prejudicial to the partnership

77

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.

78

Article 1818 of the Civil Code provides that Every partner is an

agent of the partnership for the purpose of its business, and the act
of every partner, including the execution in the partnership name of
any instrument, for apparently carrying on in the usual way the
business of the partnership of which he is a member binds the
partnership.
The principle of mutual agency lies at the heart of the partnership
arrangement because it defines the prerogative of every partner to
participate in the management of the partnership business. It is one
of the more important manifestation of the position of the partners
as owners or equity holders of the partnership business
enterprise. It also brings into focus the reality that the partnership
arrangement is of the most personal of nature, that the parties
thereto are not only investors but exercise the prerogatives of
ownership and control into the partnership business.
Properly appreciated, a partnership is simply a conglomeration of
two or more sole proprietorships, where the original sole proprietor
continues to manage his business and also the business of the other
proprietors in the association. Consequently, as a sole proprietor is
liable with his other assets for the liabilities incurred by his
business, then in the same manner, the partners will also be liable
personally and for other non-contributed assets for the liabilities
incurred by their combined business enterprises.
5. Delectus Personae
Bautista refered to delectus personae as follows: . . . For, in
accordance with the principle of delectus personae (selection of
persons), one selects his partners on the basis of their personal
qualifications and qualities, such as solvency, ability, honesty, and
trustworthiness, among others. It is for this reason that there is
mutual representation among the partners so that the act of one is
considered the act and responsibility of the others as well.
(BAUTISTA, at p. 95)
The best way to define the concept of delectus personae is that the
contract of partnership creates the most personal relationship

79

between and among the partners which when broken, also breaks
the bond of the partnership. The doctrine emphasizes the personalcontractual relationship between and among the partners as being
more important than the property rights and the business enterprise
created in the partnership. Thus, Article 1770 of the Civil Code
provides that [a] partnership . . . must be established for the
common benefit or interest of the partners.
The doctrine of delectus personae can be viewed in two ways:
Firstly, it is the embodiment of the principle of relativity or privity in
contracts: a partnership arrangement being primarily a contractual
relationship, then the privity that is created by its perfection is
between and among the partners thereto at the point of perfection;
and that such privity cannot be extended beyond the partners
without the consent of all the other parties to the contract of
partnership.
To illustrate the point, although Article 1810 of the Civil Code
recognizes that interest in the partnership is a property right of a
partner, nevertheless under Article 1804, although a partner may
associate another person with him in his share, the associate shall
not be admitted into the partnership without the consent of all the
other partners, even if the partner having an associate should be a
manager.
The privity created by the contract of partnership is of the group of
partners who consent, that the moment one partner is gone the
privity is broken and the partnership contract is terminated. In
other words, if five parties come together into a partnership
agreement, the privity retains its integrity among the five, and not
just between two or three or four of the members. Thus, under
Article 1830, the partnership is dissolved by the expulsion, death,
insolvency, civil interdiction of any of the partners.
Secondly, that the relationship established in a contract of
partnership is of the most fiduciary character, or of the most
confidential manner, that once that thrust or confidence is lost, the
contract is deemed breached or at least at an end. This is fortified

80

by the fact that the partners are mutual agents to one another, and
essentially the relationship between and among them is of fiduciary
character, and the character of every agency relation is that it is
essentially revocable. Consequently, when the articles of
partnership provide for a definite term of existence, under Article
1830, a partnership can be dissolved in midstream By the express
will of any partner, who must act in good faith. Even the separate
juridical personality of the partnership enterprise cannot save the
partnership from being dissolved under the rule that the termination
of the contract of partnership terminates the separate juridical
personality as well.
The features of mutual agency and delectus personae define the
rights and liabilities of the partners in a partnership arrangement,
and constitute the underlying reason why partners are personally
liable for partnership debts beyond their contributions and to the
extent of their separate properties.
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), Justice Vitug
wrote one of the best piece of doctrinal description the nature and
essence of the doctrine of delectus personae in every partnership,
thus
The birth and life of a partnership at will is predicated on the mutual
desire and consent of the partners. The right to choose with whom a
person wishes to associate himself is the very foundation and
essence of that partnership. Its continued existence is, in turn,
dependent on the constancy of that mutual resolve, along with each
partners capability to give it, and the absence of a cause for
dissolution provided by the law itself. Verily, any one of the partners
may, at his sole pleasure, dictate a dissolution of the partnership at
will. He must, however, act in good faith, not that the attendance of
bad faith can prevent the dissolution of the partnership but that it
can result in a liability for damages. (Ibid, at pp. 535-536)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held
An unjustified dissolution by a partner can subject him to action for
damages because by the mutual agency that arises in a partnership,
the doctrine ofdelectus personae allows the partners to have the

81

power, although not necessarily

partnership. (Ibid, at p. 37)

the

right

to

dissolve

the

6. Partners Subject to Unlimited Liability

Both Articles 44 and 1768 of the Civil Code recognize that a
partnership is granted with a juridical personality, separate and
distinct from that of each . . . . partner or member, and that Article
46 recognizes the legal capacity of the partnership therefore to
enter into contracts, own and possess properties, thus: Juridical
persons may acquire and possess property of all kinds, as well as
incur obligations and bring civil or criminal actions, in conformity
with the laws and regulations of their organizations.
The ordinary principle of relativity under the Law on Contracts that
Contracts take effect only between the parties, their assigns and
heirs (Article 1311, New Civil Code), should mean that that when a
juridical person enters into a contract and assumes an obligation by
reason thereof, its members or constituents, and its agents, do not
ordinarily become liable for the obligations assumed by their
principal. And yet, in defiance of the very essence of separate
juridical personality of the partnership, the general rule is that every
partner is liable personally for his other property not contributed to
the partnership for partnership debts and obligations.
Articles 1816 and 1817 of the Civil Code thus provide that [a]ll
partners, including industrial ones, shall be liable pro rata with all
their property and after all the partnership assets have been
exhausted . . . [and that] [a]ny stipulation against [such] liability
shall be void, except as among the partners. Why does the law
make partners personally liable for partnership debts contracted as
a separate juridical person, and would such unlimited liability still
apply without express provision of law?
Even without any express provision of law and despite the separate
juridical personality of the partnership, unlimited liability would be
the rule for partners in a partnership setting for the basic reason
that partners essentially occupy the position of sole proprietors
albeit associated with other sole proprietors; the basic rule is that

82

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 nonbusiness 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 partnerships
profitable operations, they must thereby stand liable personally for
the debts and obligations contracted even in the partnership name.
Otherwise (i.e., to provide for limited liability as to allow creditors
recourse only to the partnership assets), would be tantamount to
letting the partnership creditors take the risks and consequences of

83

the losses of the partnership enterprise when they draw no

advantage from its profits.
oOo

84

8 PARTNERSHIP DISTINGUISHED FROM OTHER

BUSINESS MEDIA
[Updated: 12 October 2009]

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. 4142) 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 copartners; (Ibid) and
(d) A joint adventure has no firm name, while a partnership
is required to operate under a firm name. (Ibid)

85

To the writer, the foregoing distinctions only affirms the fact that a
joint venture is a species of the genus partnership as defined under
Article 1767 of the Civil Code, since it contains the two essential
elements of the creation of a common fund and undertaking to
divide profits; that in fact it is a particular partnership for a specific
undertaking fully recognized under Article 1783 covering a specific
undertaking, and Article 1830 that recognizes the dissolution of a
partnership By the termination of the . . . particular undertaking
specified in the agreement. The position that in a joint venture the
co-venturers do not become mutual agents is a conclusion that can
only be drawn if we premise that a co-venture is not a species of
partnerships. Finally, that a partnership adopts no firm name does
not make it void as a contract or a partnership, so also with a joint
venture.
In any event, the distinction between a joint venture as a business
medium not falling within the ambit of Partnership Law, or as not
constituting a species of partnerships, has really become mute since
in Kilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), it
was held:
Joint venture is defined as an association of persons or companies
jointly undertaking some commercial enterprise; generally all
contribute assets and share risks. It requires a community of
interest in the performance of the subject matter, a right to direct
and govern the policy in connection therewith, and duty, which may
be altered by agreement to share both in profit and losses. The acts
of working together in a joint project. (Ibid, citingBLACKS LAW
DICTIONARY, Sixth ed., at p. 839.)
In Torres v. Court of Appeals, 320 SCRA 428 (1999), the Court took
no exception to defining the terms, rights and obligations of the
parties to a Joint Venture Agreement covering the development of
a subdivision project under provisions of the Civil Code governing
partnerships. The Chapter on Joint Ventures provides for a more
thorough discussion of the joint venture as a medium of doing
business under Philippine setting.
2. Distinguished from Co-Ownership

86

Although the Law on Partnerships recognizes that partners have coownership interest in the partnership properties (Article 1811, Civil
Code), nonetheless a co-ownership constitutes merely a property
relation whereby two or more persons own pro-indiviso a property,
but the relationship does not seek the business or mercantile
pursuit of the property relationship. In other words, a co-ownership
situation comes about other than by a contractual intent to pursue a
business venture in common, and consequently, no separate
juridical personality arises from a purely co-ownership relationship.
Without the contractual intent to pursue a business venture through
a common fund, the fact that co-owners happen to share in the
profits that may be produced by the property owned in common,
there is still no partnership arrangement. Thus, Article 1769 of the
Civil Code provides that In determing whether a partnership exists
. . . Co-ownership or co-possession does not of itself establish a
partnership, whether such co-owners or co-possessors do or do not
share any profits made by the use of the property.
3. Distinguished from Joint Account (Sociedad de Cuentas en
Participacion)
A joint account is governed under Article 239 of the Code of
Commerce, and still referred to as a corporate taxpayer under the
National Internal Revenue Code. But its use is a rarity in our
jurisdiction because it does not lend itself to commercial or business
efficiency, as shown by the discussion of its features in Bourns v.
Carman, 7 Phil. 117 (1906), thus
. . . A partnership constituted in such manner, the existence of
which was only known to those who had an interest in the same,
there being no mutual agreement between the partners, and
without a corporate name indicating to the public in some way that
there were other people beside the one who ostensibly managed
and conducted the business, is exactly the accidental partnership
of cuentas en participacion defined in Article 239 of the Code of
Commerce.

87

Those who contract with the person under whose name the business
of such partnership of cuentas en participacion is conducted, shall
have only a right of action against such person and not against the
other persons interested, and the latter, on the other hand, shall
have no right of action against the third person who contracted with
the manager unless such manager formally transfers his right to
them. (Art. 242 of the Code of Commerce) . . . (at pp. 119-120).
4. Distinguished from Agency
In a pure agency agreement, the agent is merely a legal extension
of the personality of the principal and thereby under the complete
control of the principal.
The partnership relationship among the partners makes them
mutual agents of one another, and thereby the control that a
principal has over his agent does not pertain between and among
the partners. Likewise, unlike in a pure agency relationship where
the agent who acts within the scope of his authority does not bind
himself to the contract or transaction he enters into, in a
partnership situation, the partner binds not only the other partners
and the partnership, but also himself in the pursuit of the
partnership enterprise.
In Binglangawa v. Constantino, 109 Phil. 168 (1960), the Court held
that just because a duly appointed agent has made personal
advances for the expenses of the business venture that he had been
designated to administer, does not make him a partner of his
principal.
In United States v. Muhn, 6 Phil. 164 (1906), it was held that the
agent cannot escape the criminal liabilities of the crime of estafa for
conversion of the funds given to him by his principal by claiming
that he had become a partner when the books of accounts kept for
the business showed that the amount was charged to him since the
same was merely a method of keeping an account of the business,
so that the parties would know how much money had been invested
and what the condition thereof was at any particular time. (Ibid, at
p. 166)

88

5. Distinguished from the Business Trust

As compared to a partnership, a business trust is constituted by
deed of trust which is easier and less expensive to constitute for it is
not bounded by any legal requirements like the registration
requirements for partnerships where the real property or more than
P3,000 worth of property is contributed to the partnership.
The creation of a business trust does not give rise to a separate
juridical personality, and is mainly governed by contractual
doctrines and the common law principles on trust. There is no
element of mutual agency or co-ownership in a business trust
relationship, and in fact the trust relationship is centered upon the
splitting in the properties contributed (the corpus) of the legal or
naked title in the trustee who then manages and control the
properties, and beneficial or equitable title in the beneficiary and for
whose benefit the trustee shall manage and control the properties of
the corpus.
6. Distinguished from the Corporation
The most important distinction between the corporation and the
partnership are their legal capacities. With the right of succession, a
corporation has a stronger legal personality, enabling it to continue
despite the death, incapacity, withdrawal or insolvency of any of its
stockholders or members. In a partnership, the withdrawal, death,
incapacity or insolvency of any partner would automatically bring
about the dissolution of the partnership. (Articles . 1828 and 1830,
Civil Code.)
Limited liability is a main feature in a corporate setting, whereas
partners are liable personally for partnership debts not only to what
they have invested in the partnership but even as to their other
properties. (Articles 1816, 1817, 1824, and 1839, Civil Code)
Generally, every partner is an agent of the partnership, (Articles
1803(1), 1818, and 1819, Civil Code), and by his sole act, he can
bind the partnership (Articles 1822 and 1823, Civil Code), whereas

89

in a corporation, only the Board of Directors or its duly authorized

agents can bind the corporation.
In a partnership setting, although a partner has the power to sell or
dispose of his capital interest or proprietary interest, the buyer or
transferee does not assume transferors position as partner, but
merely has a right to demand for accounting or distribution of the
profits pertaining thereto. (Articles 1804 and 1813, Civil Code) In a
corporate setting, every stockholder has the right to transfer his
shares in the corporation, and the buyer or transferee assumes the
role of stockholder of said shares when the transfer has been duly
registered in the corporate books Section 63, Corporation Code. In
other words, the position of being partner is inherently not
transferable, whereas, shares are freely transferable in the
corporate setting.
a. Does a Defective Incorporation Process Result into a
Partnership?
The clear distinctions between the corporation and partnership can
best be illustrated by discussing the issue of whether a defective
incorporation process that does not result into a corporate entity,
would at least result into a partnership.
It is a legal principle that when parties come together and all the
elements of a particular contract are present, although the parties
may have nominated it otherwise, the law will impose such
contractual relationship upon them. In other words, the contract or
relationship is what the law says it is, not how the parties wish to
call it. Therefore, it may agreed when five or more persons come
together to contribute money or property to a common venture or
fund, with the intention of dividing the profits among themselves,
the parties may wish to call it otherwise, however, under the
definition of the Article 1767 of the Civil Code, it would still be a
partnership, even if the parties had intended a corporation but did
not materialize because of certain registration deficiencies.
If the parties have in fact pursued the incorporation process, by
executing and filing with the SEC the articles of incorporation, then

90

there should be no resulting partnership in the event that the

incorporation process does not bear fruition, based on the following
grounds:
Firstly, both corporate and partnership relationships are
fundamentally contractual relationship created by the co-venturers
who consent to come together under said relationships. If the
parties had intended to create an association in the form of a
corporation, a partnership cannot be created in its stead since such
is not within their intent, and therefore does not constitute a part of
their consent to the contractual relationship.
More importantly, while partnership lies essentially within the norms
of Contract Law, the corporation gets it essence from a particular
State-grant of separate juridical personality. In other words, parties
to a corporate venture are fully aware that it is the process of
incorporation and the issuance of the certificate of incorporation by
which the corporate entity comes into being. There is therefore no
doubt in the minds of incorporators that they could effect a venture
under a juridical being, and thereby achieve both the advantages
and suffer the burdens associated with such corporate medium, by
the mere meeting of minds.
Secondly, the important differences between the corporation and
the partnership cannot lead one to the conclusion that in the
absence of the first, the contracting parties would have gone along
with the latter. Limited liability, centralized management and easy
transferability of the units of ownership in a corporation are by
themselves strong factors for parties intention to be bound in the
corporate relationship, and one cannot presume that if these
features are not met that they would in the alternative wish to be
covered by a partnership relationship, which has generally would
involve unlimited liability, mutual agency among the partners, and
the delectus personae feature.
The essence of what constitutes the contractual relationship of
partnership under Article 1767 is the coming together or what is
known in Partnership Law as delectus personae and not just the
joint venture. The essence of partnership is the personal

91

relationship, i.e., that each would-be partner goes into the venture
precisely because he wants the other co-venturers, and no other
person, to be with him in the venture. A venturer who seeks to
enter into a corporate relationship perhaps does not even care
about the personality of the other co-venturers, and fully aware that
he himself and others have the ability to transfer their investments
to outsiders.
Nonetheless, there indications of a contrary view to the above.
Under Section 21 of the Corporation Code, when parties act and
pretend to be a corporation, when in fact none exist, the law would
impute to them a juridical personality to validate the contract under
the corporation by estoppel doctrine; however, it would treat the
parties as partners since it expressly makes them liable as general
partners.
Under such contrary view, the main issue would be the priority
between the personal creditors of the partners in a corporation by
estoppel doctrine, and the corporate creditors of the corporation
by estoppel, as to the assets invested into the venture. The author
would presume that it would have to be the corporate creditors that
would have priority over the corporate assets as this seems to be
the moving spirit of the corporation by estoppel doctrine.
This position of the author has been partially justified by the
discussions of in Pioneer Insurance & Surety Corp. v. Court of
Appeals, 175 SCRA 668 (1989), when it resolved the issue raised:
What legal rules govern the relationship among co-investors whose
agreements was to do business through the corporate vehicle but
who failed to (Ibid, at p. 681).
Quoting from American jurisprudence, the Supreme Court in Pioneer
Insurance held that there has been the position that as among
themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed
charter and the laws of the state relating thereto and not by the
rules governing partners (Quoting from CORPUS JURIS SECUNDUM
which cited Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94
Am. S.R. 584), nevertheless it has been held that ordinarily

92

persons who attempt, but fail, to form a corporation and who carry
on business under the corporate name occupy the position of
partners inter se(Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl.
615, Ann. Cas. 1913 A. 1065), and their rights as members of the
company to the property acquired by the company will be
recognized. (Ibid, citing Smith v. Schoodoc Pond Packing Co., 84 A,
268m 109 Me. 555; Whipple v. Parker, 29 Mich 369).
Notwithstanding the foregoing, the Court took the position that such
partnership relationship does not exist, for ordinarily persons
cannot be made to assume the relation of partners, as between
themselves, when their purpose is that no partnership shall exist . .
. and it should be implied only when necessary to do justice
between the parties; thus, one who takes no part except to
subscribe for stock in a proposed corporation which is never legally
formed does not become a partner with other subscribers who
engage in business under the name of the pretended corporation, so
as to be liable as such in an action for settlement of the alleged
partnership and contributions. . . A partnership relation between
certain stockholders and other stockholders, who were also
directors, will not be implied in the absence of an agreement, so as
to make the former liable to contribute for payment of debts
illegally contracted by the latter. (Ibid, at p.683, quoting
from CORPUS JURIS SECUNDUM, Vol. 68, p. 464). Nor will it make
the investor to a would-be corporation liable for losses sustained
from its operations under a partnership inter se theory. (Ibid, at p.
685). The key elements in resolving the issue seem to have been in
Pioneer Insurance those of intent and participation in business
activities.
The doctrinal pronouncement in Pioneer Insurance can be
summarized as follows: When parties come together intending to
form a corporation, but no corporation is formed due to some legal
cause, then:
(a) Parties who had intended to participate or actually participated
in the business affairs of the proposed corporation would be
considered as partners under a de facto partnership, and would be
liable as such in an action for settlement of partnership obligations;

93

- 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 no intent to
participate in the corporate operations, and for which limited liability
is afforded by law.
On the other hand, where the parties to a venture merely use a
business name that pretends there is a corporation, when in fact
they was no intention among the co-venturers to formally
incorporate a juridical entity, then there can be no doubt that what
was really the meeting of minds among them was a partnership, for
in essence they agreed to set up a common fund (i.e., pursue a
business venture), with clear indication to divide the profits among
themselves. This is exactly the situation covered in the decision
in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317
SCRA 728 (1999), where the liabilities of the parties were adjudged
under the corporation by estoppel doctrine. (See more detailed
discussions in Chapter 5).
In Lim Tong Lim, the Court found that three co-venturers agreed to
engage in a fishing business, which they started by buying boats
worth P3.35 million, financed by a loan . . . In their Compromise
Agreement, they subsequently revealed their intention to pay the
loan with the proceeds of the sale of the boats, and to divide equally
among themselves the excess or loss. . . These boats, the purchase
and the repair of which were financed with borrowed money, fell
under the term common fund under Article 1767. The contribution
to such fund need not be cash or fixed assets; it could be an

94

intangible like credit or industry. That the parties agreed that any
loss or profit from the sale and operation of the boats would be
divided equally among them also shows that they had indeed
formed a partnership. (Ibid, at p. 739)
The only complication in Lim Tong Lim was that the transaction
upon which the personal liabilities of the co-venturers was being
pursued, was entered into on behalf of Ocean Quest Fishing
Corporation, although no such corporation existed nor was there
any attempt to incorporate such entity. Consequently, both the
unlimited liability principle under Partnership Law and the
corporation by estoppel doctrine in Corporate Law were applied to
determine the personal liability of each of the partners in the
business venture, which resulted in legal incongruency.
In a partnership, as a legal consequence of the application of the
doctrine of mutual agency, every partner shall be personally liable
for partnership debts and liabilities, even when the underlying
transaction was effected by another partner, or even when a
partner does not participate at all in the affairs of the partnership.
On the other hand, under the corporation by estoppel doctrine now
embodied in Section 21 of the Corporation Code, it is only the active
or managing officers who assume the liability of a general partner,
thus: All persons who assume to act as a corporation knowing it to
be without authority to do so shall be liable as general partners, for
all debts, liabilities and damages incurred or arising as a result
thereof; and that consequently, passive stockholders are not
deemed to be personally liable for debts incurred on behalf of the
ostensible corporation.
This was in fact the defense raised by the petitioner in Lim Tong
Lim, where he held that since he did not participate actively in the
business venture, then under the principles of corporation by
estoppel doctrine, he cannot be made personally liable for the debts
incurred in pursuing the business venture. Instead of holding that
the primary doctrine to apply would be the rules of unlimited liability
since there was duly constituted a valid partnership, the Court
instead humored the argument and went on to also apply the

95

corporation by estoppel doctrine with a jurisprudential twist when it

held
The doctrine of corporation by estoppel may apply to the alleged
corporation and to a third party. . . . a third party who, knowing an
association to be unincorporated, nonetheless treated it as a
corporation and received benefits from it, may be barred from
denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the
transaction made by the ostensible corporation, despite knowledge
of its legal defects, may be held liable for contracts they impliedly
assented to or took advantage of. (Ibid, at p. 743)
The result is that by mixing principles in Partnership Law and
Corporate Law in Lim Tong Lim, the corporation by estoppel
doctrine has grown out of the confines of Section 21 of the
Corporation Code, as to make liable as general partners, not only
those parties to acted for the ostensible corporation, but also all
passive parties who knowing there is no such corporation sat back
and benefited from the venture.
6. Cooperative
A cooperative is a duly registered association of persons, with a
common bond of interest, who have voluntarily joined together to
achieve lawful common social or economic end, making equitable
contributions to the capital required and accepting a fair share of
the risks and benefits of the undertaking in accordance with
universally accepted cooperative principles. (Article 3, Cooperative
Development Authority Act [R.A. 6938]).
A cooperative, like an ordinary corporation and a partnership, has a
juridical personality separate and distinct from its members, and
has limited liability feature. (Articles. 12 and 30, R.A. 6938)
The Tax Code defines a cooperative as an association conducted by
the members thereof with the money collected from among
themselves and solely for their own protection and not for profit.

96

(Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129

[2005]).
Unlike ordinary corporations, cooperatives are governed by
principles of democratic control where the members in primary
cooperatives shall have equal voting rights on a one-member-onevote principle (Articles. 4(2), R.A. 6938); where the Board of
Directors manages the affairs of the cooperative, but it is the
general assembly of full membership that exercises all the rights
and performs all of the obligations of the cooperative (Articles 5(3)
and 34, R.A. 6938); and are under the supervision and control of
the Cooperative Development of Authority, and not the SEC.
Unlike a partnership which should be organized for profit, and a
non-stock corporation which can be organized for any eleemosynary
purpose and no part of the net income is to be distributed to the
officers and members thereof, the primary objective of every
cooperative is self-help: to provide goods and services to its
members and thus enable them to attain increased income and
savings, investments, productivity, and purchasing power and
promote among them equitable distribution of net surplus through
maximum utilization of economies of scale, cost-sharing and risksharing without conducting the affairs of the cooperative for
eleemosynary or charitable purposes. (Article 7, R.A. 6938)
The Law on Cooperatives declares it a policy of the State to foster
the creation and growth of cooperatives as a practical vehicle for
promoting self-reliance and harnessing people power towards the
attainment of economic development and social justice. (Article 2,
R.A. 6938). In one case, the Court held that cooperatives are
established to provide a strong social and economic organization to
ensure that the tenant-farmers will enjoy on a lasting basis the
benefits of agrarian reforms. (Corpuz v. Grospe, 333 SCRA 425
[2000]).
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97

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 the
time of the constitution of the partnership, becomes the

98

common property of all the partners, as well as all the profits

which they may acquire therewith.
Art. 1778. A partnership of all present property is that in
which the partners contribute all the property which actually
belongs to them to a common fund, with the intention of
dividing the same among themselves, as well as all the
profits which they may acquire therewith. (1673)
Art. 1777. A universal partnership may refer to all the
present property or to all the profits. (1672)
As regards the liability of the partners, a partnership may be
general or limited. (1671a)
Art. 1776. As to its object, a partnership is either universal or
particular.
___________
In order to have a better understanding of the various legal
relationships created within the partnership, and the consequent
rights and obligations arising from such varied relationships, it may
be helpful to determine the classes of partnerships and partners
defined under the New Civil Code.
1. As
to
Object:
Partnership versusParticular Partnership

Universal

When it comes to the object or purpose, or the nature of the

business enterprise to be pursued, under Article 1776, a partnership
is either auniversal partnership or a particular partnership.
A universal partnership is one where the contract of partnership
encompasses expressly or impliedly either all the present properties
of the partners or just covering all of the profits. (Article 1777, Civil
Code)
In a universal partnership of all present property is one where the
partners contribute all the property which actually belongs to them

99

to a common fund, with the intention of dividing the same among

themselves, as well as all the profits they may acquire therewith.
(Article 1778, Civil Code). This means that the property which
belonged to each of the partners at the time of the constitution of
the partnership, becomes the common property of all the partners,
as well as all the profits which they may acquire therewith. (Article
1779, Civil Code). The Civil Code further clarifies that A stipulation
for the common enjoyment of any other profits may also be made;
but the property which the partners may acquire subsequently by
inheritance, legacy, or donation cannot be included in such
stipulations, except the fruits thereof. (Article 1779, Civil Code).
In a universal partnership of profits all that the partners may
acquire by their industry or work during the existence of the
partnership, as well as the usufruct of all [m]ovable or immovable
property which each of the partner may possess at the time of the
celebration of the contract of partnership, shall all pertain to the
partnership. (Article 1780, Civil Code).
The default rule under Article 1781 of the Civil Code is that when
the Articles of universal partnership [are] entered into without
specification of its nature, [it will] only constitute a universal
partnership of profits. The real question that must be asked is
when is a partnership agreement deemed to be even a universal
partnership for the default rule under Article 1781 to apply?
Under Article 1782, Persons who are prohibited from giving each
other any donation or advantage cannot enter into universal
partnership.
On the other hand, Article 1783 of the Civil Code defines a
particular partnership [to be one that] has for its object
determinate things, their use or fruits, or a specific undertaking, or
the exercise of a profession or vocation There is no doubt then that
every professional partnership and joint venture arrangement would
constitute particular partnerships.
What is the practical and legal importance of distinguishing between
universal and particular partnerships? So far, statutorily the only

100

critical usefulness of the distinction is that persons who are

disqualified from donating to one another (like spouses under Article
187 of the Family Code), cannot enter into a universal partnership
of any sort. Is it therefore fair to conclude that spouses can validly
enter into a particular partnership between each other, when
actually their property relations are governed already by a legal
property regime?
In Commissioner of Internal Revenue v. Suter, 27 SCRA 152
(1969), the Court held that the prohibition under now Article 1782
does not apply when the partners entered into a limited partnership,
the man being the general partner and the woman being the limited
partner, and a year later the two get married.
On the more general question of what are the practical and legal
significance of knowing the difference between universal and
particular partnership, may best be exemplified in the decision
in Lyons v. Rosentock, 56 Phil. 632 (1932). In that case, the two
partners have been together in two previous real estate projects.
While one partner was abroad, the other partner seized upon a
potentially lucrative piece of property (the San Juan estate) and
although he had tried his best to convince his partner abroad to
commit to be part of the new venture, the latter declined. In any
event, when the property was purchased by the local partner he had
temporarily used a partnership property in the previous venture to
secure the loan drawn by the local partner in his own name, but
later released it and had his own property mortgaged when it was
clear that the partner abroad did not change his mind about not
joining the venture. In any event, the San Juan estate project
proved very successful, and after the local partner died, the partner
abroad sought to recover one-half of the profits of the venture on
the ground that he was a partner therein, in spite of his previous
refusal to be part of it, and mainly because partnership property
was used as security for the loan obtained by the local partner to
finance his acquisition of the estate.
In resolving that the partner abroad was not entitled to any profits
derived from the San Juan estate project, because he was never a
partner thereto,Lyons resolution revolved around the principle that

101

the two partners never were part of a universal partnership, but

that they were at best partners in particular partnerships for the
previous projects entered into before the San Juan estate project,
thus
In the purely legal aspect of the case, the position of the appellant
is, in our opinion, untenable. . . . Of course, if an actual relation of
partnership had existed in the money used, the case might be
different; and much emphasis is laid in the appellants brief upon
the relation of partnership which, it is claimed, existed. But there
was clearly no general relation of partnership between the parties;
and the most that can be said is that Elser and Lyons had been
coparticipants in various transactions in real estate. No objection
can be made to the use of the word partnership as a term
descriptive of the relation in those particular transactions, but it
must be remembered that it was in each case a particular
partnership, under article 1678 of the Civil Code. It is clear that
Elser, in buying the San Juan Estate, was not acting for any
partnership composed into a proposition which would make Lyons a
participant in this deal contrary to his express determination. (Ibid,
at pp. 641-642)
The other conclusion we can draw from Lyons is that a universal
partnership is never presumed, not even from various transactions
or ventures concluded between the partners. The default rule
therefore should be that unless the parties so stipulate in their
articles of partnership that they are entering into a universal
partnership, it would be presumed that they have existing between
them merely a particular partnership.
Apart from the foregoing, the concept and medium of universal
partnership serves no reasonable commercial purpose, for legally it
can only come about when it is so expressly stipulated in contract of
partnership, and practically, it is difficult to see how two or more
persons not bounded by marriage, faith or vocation (which makes
the partnership a particular one), would commit to one another all
that they have and all the fruits of what they do, to one another.

102

The other important question that may be asked is By definition

under Article 1776 that there can be a valid partnership for the
practice of a profession, why would Article 1783, in defining a
particular partnership, include the exercise of a vocation which
may not include one that seeks to provide a livelihood for the socalled 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

103

partners capability to give it, and the absence of a cause for

dissolution provided by law itself. Verily, any one of the partners
may, at his sole pleasure, dictate a dissolution of the partnership at
will. He must, however, act in good faith, not that the attendance of
bad faith can prevent the dissolution of the partnership but that it
can result in a liability for damages. (Ibid, at pp. 535-536)
Nonetheless, by way of obiter, Ortega also described the ability of
every partner even in a partnership with fixed term or for a
particular undertaking, to be able to dissolve the partnership upon
the application of the principles of mutual agency and delectus
personae, thus
In passing, neither would the presence of a period for its specific
duration or the statement of a particular purpose for its creation
prevent the dissolution of any partnership by an act or will of a
partner. Among partners, mutual agency arises and the doctrine
of delectus personae allows them to have the power, although not
necessarily the right, to dissolve the partnership. An unjustified
dissolution by the partner can subject him to a possible action for
damages. (Ibid, at p. 536)
Ortega also clarified that the designation of the purpose in the
articles does not prevent it from being a partnership at will, thus:
The purpose of the partnership is not the specific undertaking
referred to in the law. Otherwise, all partnerships, which necessarily
must have a purpose, would all be considered as partnerships for a
definite undertaking. There would therefore be no need to provide
for articles on partnership at will as none would so exist. Apparently
what the law contemplates, is a specific undertaking or project
which has a definite or definable period of completion.
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court held that
where there has been duly registered articles of partnership, and
subsequently the original partners accept an industrial partner but
do not register a new partnership, and thereafter the industrial
partner retires from the business, and the original partners continue
under the same set-up as the original partnership, then although

104

the second partnership was dissolved with the withdrawal of the

industrial partner, there resulted a reversion back into the original
partnership under the terms of the registered articles of
partnership. There is not constituted a new partnership at will.
3. As to Extent of Partners Liabilities
When it comes to the kinds of liabilities that the partners may be
exposed to for partnership debts and obligations, the Civil Code
distinguishes between ageneral partnership, where all the
partners are unlimitedly liable; and alimited partnership, where
there is one or more general partner who are unlimitedly liable, with
one or more limited partners, who are liable for partnership debts
only to the extent of their stipulated contributions under the articles
of partnership.
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., 317 SCRA 728 (1999), Justice Vitug summarized
the nature of the liabilities of general partners, thus:
. . . The liability of general partners (in a general partnership as so
opposed to a limited partnership) is laid down in Article 1816 which
posits that all partners shall be liable pro rata beyond the
partnership assets for all the contracts which may have been
entered into in its name, under its signature, and by a person
authorized to act for the partnership. This rule is to be construed
along with other provisions of the Civil Code which postulate that
the partners can be held soidarily liable with the partnership
specifically in these instances(1) where, by any wrongful act or
omission of any partner acting in the ordinary course of the
business of the partnership or with the authority of his co-partners,
loss or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is liable
therefor to the same extent as the partner so acting or omitting to
act; (2) where one partner acting within the scope of his apparent
authority receives money or property of a third person and the
money or property so received is misapplied by any partner while it
is in the custody of the partnershipconsistently with the rules on

105

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 anoriginal partner who is with the partnership at the time of its
constitution, and subsequent or incoming partners, who come

106

during the life of a pre-existing partnership. In the case of an

incoming partner, his liability with respect to the partnership
obligations which were incurred prior to his admission into the
partnership shall be satisfied only out of partnership property,
unless it is otherwise stipulated. (Articles 1826 and 1840, Civil
Code).
Partnership Law also refers to the managing partner who has
been given the management of the partnership enterprise (Articles
1800 and 1801, Civil Code); the liquidating partner, who takes
charge of the liquidation and winding-up of partnership affairs
(Article 1836, Civil Code); a retiring partner, who ceases to be
part of the partnership which is continued after dissolution, as
compared with the partners who remain with the venture
ascontinuing partners (Articles 1837, 1839, 1840 and 1841, Civil
Code); and the partner by estoppel, who is not a formal partner
in an existing partnership, but by his act he has led third-parties
dealing with the partnership to believe he is a partner, and thereby
becomes liable as a regular partner as so such relying creditors
(Article 1815, Civil Code).
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107

10 SPECIAL ISSUES OF WHO MAY QUALIFY TO

BECOME PARTNERS
[Updated: 12 October 2009]

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

108

to prevent persons disqualified from making donations each other

from doing indirectly what the law prohibits them from doing
directly. (BAUTISTA, at p. 62).
From the placement of Article 1782 (coming after the two articles
covering the definition, nature and effects of universal partnerships,
and immediately before the article defining particular partnerships),
it seems pretty well implied that spouses, whatever the regime of
property relations prevails in their marriage, are disqualified from
entering into any sort of universal partnership; and consequently,
spouses may validly become partners to one another in a particular
partnership, which would include a professional partnership, and
both general and limited partnerships. The critical question must be
asked: Can spouses just between themselves or with third parties
validly enter into a contract of partnership for gain provided the
resulting partnership is not a universal partnership?
If one refers only to the provision of Article 1782, the answer would
be in the affirmative. In Commissioner of Internal Revenue v.
Suter, 27 SCRA 152 (1969), which currently is the only decision to
deal with the issue, the Supreme Court affirmed this particular view,
relying only on the provisions of Article 1677 of the old Civil Code
(now Article 1782), that since the prohibition for spouses covers
expressly only universal partnerships, then they can validly be
partners in a limited partnership, with the husband being the
general partner and the wife being the limited partner.
On this particular issue, Bautista limited his comment to the effect
that the provisions of Article 1782 disqualifies spouses, with
respect to any contract of universal partnership made between
them during the marriage, and other than reporting the relevant
portions of the decision in Suter, he did not comment on whether
spouses can validly enter into other forms of partnership for gains.
Tolentino does not comment on the provisions of Article 1782,
although his discussion on the matter under his old work under the
Code of Commerce was quoted in Suter.
To the writer, it seems that in addressing the issue raised, it would
be error to base the resolution only on of Article 1782 of the Civil

109

Code. Certainly Article 1782 constitutes an important statutory

provision to resolve that issue, but there are other statutory
provisions more primordial in addressing the issue.
Suter, which was decided under the terms of the old Civil Code and
the Code of Commerce, is quite peculiar in its facts because the
contract of partnership started out where there was no legal
obstacle with the parties entering into a duly registered limited
partnership: Suter as the general partner, with Spirig and Carlson,
as limited partners. Eventually, Suter and Spirig were married, and
bought out the interest of Carlson. Under the provisions of the Tax
Code, the Commissioner of Internal Revenue then sought to recover
income taxes individually against Suter for partnership income
under the theory that the separate juridical personality of the
partnership by which it was taxed separately as a corporate
taxpayer, was extinguished with the marriage of Suter and Spirig,
who ended up as the only partners in the venture. The Court held:
The theory of the petitioner, Commissioner of Internal Revenue, is
that the marriage of Suter and Spirig and their subsequent
acquisition of the interests of remaining partner Carlson in the
partnership dissolved the limited partnership, and if they did not,
the fiction of juridical personality of the partnership should be
disregarded for income tax purposes because the spouses have
exclusive ownership and control of the business. (27 SCRA 152, at
p. 156).
The Court found no merit in the position of the Commissioner, and
quoted from the commentaries of Tolentino, thus:
A husband and a wife may not enter into a contract of general
copartnership, because under the Civil Code, which applies in the
absence of express provision in the Code of Commerce, persons
prohibited from making donations to each other are prohibited from
entering into universal partnerships. (2 Echaverri, 196) It follows
that the marriage of partners necessarily brings about the
dissolution of a pre-existing partnership (1 Guy de Montella 58).
(Ibid, at p. 157, quoted from Tolentino, Commentaries and
Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th
ed., at p. 58).

110

Thus, the Court held that the partnership at issue was not a
universal partnership, but a particular one. . . since the
contributions of the partners were fixed sums of money, . . . and
neither one of them was an industrial partner. It follows that [it] . .
. was not a partnership that [the] spouses were forbidden to enter
under Article 1677 of the Civil Code of 1889 [now Article 1782]. In
essence, Suter holds that spouses are not disqualified from
becoming partners in a limited partnership, provided one of them
(or at least both of them) is a limited partner.
b. Spouses Are Not Qualified to Enter into Other Forms of
Partnership for Gain
It is the writers position that apart from a professional partnership,
spouses cannot enter into any form of partnership, be it universal or
particular, general or limited partnership, as a separate property
arrangement apart from the property regime prevailing in their
marriage, for the reasons discussed below.
Firstly, apart from a universal partnership, every form of
partnership, including a limited partnership, effectively makes
partners donors to one another of their contributions in the
partnership. Although a partnership would have a personality
separate and distinct from each of the partners, so that it can hold
contributed property in its name, nonetheless, partners are
expressly granted by Partnership Law co-ownership interest in the
partnership property as to then have a direct co-ownership interest
therein. (Articles 1810 and 1811, Civil Code). Effectively, even in a
limited partnership, such as the Suter situation, the contribution of
the limited partner wife belonged to the partnership which would
then be under the control and management of the general partner
husband. A partnership arrangement between spouses would
thereby be an indirect violation of the provisions of Article 87 of the
Family Code which provides that Every donation or grant of
gratuitous advantage, direct or indirect, between the spouses during
the marriage shall be void.
Although it can be argued that contributions to a partnership are not
in the nature of donations or gratuitous advantage, because a

111

contract of partnership is essentially an onerous and commutative

contract, whereby the contributions comes with a cost (e.g.,
becoming
unlimitedly
liable
for
partnership
obligations),
nevertheless, such contributions would then violate the provisions of
Article 1490 of the Civil Code, which prohibits sales or any other
form of onerous dispositions, between spouses not governed by the
complete separation of property regime .
Secondly, there is clear implication under the Family Code, that the
property regime that must govern spouses must be in accordance
with the provisions of said Code, and cannot be the subject of
regular partnership rules under the Partnership Law of the New Civil
Code.
(1) Spouses Governed
Property Regime

by

the

Absolute

Community

of

To begin with, the Family Code sets the absolute community of

property regime as the default rule for marriages, and
consequently, it cannot exist consistently with another set of rules
governing partnerships for gains under the Partnership Law of the
Civil Code. Although Article 1782 provides that
Persons who are prohibited from giving each other any donation or
advantages cannot enter into a universal partnership, which
beyond doubt should include spouses, yet under Article 75 of the
Family Code, In the absence of marriage settlements, or when the
regime agreed upon is void, the system of absolute community of
property as established in this Code shall govern, and which under
Article 88 of the Family Code, shall commence at the precise
moment that the marriage is celebrated [and that any] stipulation,
express or implied, for the commencement of the community
regime at any other time shall be void.
The absolute community of property regime actually establishes a
sort of universal partnership between the spouses, in that it
includes all property owned by the spouses at the time of the
celebration of the marriage or acquired thereafter. (Article 91,
Family Code). Can spouses governed by the absolute community of

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property regime, vary the effects between them on certain

community property, by contributing them into a particular
partnership for gain? The answer ought to be in the negative, and
such partnership agreement would be void, since under Article 89 of
the Family Code No waiver of rights, interest, shares and effects of
the absolute community of property during the marriage can be
made except in case of judicial separation of property. In other
words, Article 1782 in Partnership Law is not the main rule on
regulating property rights between spouses, but merely suppletory
to the primary rules set out by the Family Code.
(2) Spouses Governed by the Conjugal Partnership of Gains
Take then the cases of spouses governed by the conjugal
partnership of gains, which under Article 105 of the Family Code,
can come into play between spouses only when it has been so
stipulated in the marriage settlements. May spouses therefore enter
into a contract of particular partnership for gain by contributing
thereto either conjugal property, or their separate properties? When
it comes to conjugal property, the answer ought to be in the
negative, since the effect is that spouses would be donating to one
another, as discussed below, contrary to the provisions of Article 87
of the Family Code. In addition, by entering into a contract of
particular partnership and thereby invoking the provisions of the
Partnership Law of the Civil Code on the conjugal property
contributed, would that not in effect be amending, or perhaps even
contravening, the provisions of the marriage settlements invoking
the Family Code rules covering conjugal partnership of gains? Article
108 of the Family Code provides that The conjugal partnership
shall be governed by the rules on the contract of partnership in all
that is not in conflict with what is expressly determined in this
Chapter or by the spouses in their marriage settlements. This
shows the primacy of the Family Code provisions on governing the
conjugal partnership between the spouses, and any attempt to
govern conjugal properties under a contract of particular
partnership would undermine such primacy and therefore void.
For the same reasons, spouses governed by the conjugal
partnership of gains cannot also validly enter into a contract of

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particular partnership for gain, even when they contribute thereto

their separate properties, because that would in effect constitute
donations to one another as discussed below, and would undermine
the rules of the Family Code on how such separate properties
should answer for the charges on family affairs.
(3) Spouses Governed
Property Regime

by

the

Complete

Separation

of

May spouses governed by the complete separation of property

regime validly enter into a contract of particular partnership? The
answer ought to be in the negative, for the contribution of any of
their separate properties into the partnership for gain would amount
to donation, and under Article 87 of the Family Code, which
prohibits any form of donation or gratuitous advantage between
spouses during marriage, makes no distinction, much less an
exception, for spouses governed by the complete separation of
property regime.
c. Contract of Partnership May Offend Against the Provisions
of the Family Code
A contract of partnership between spouses entered into during
marriage would be void because it would contravene the rules under
Articles 76 and 77 of the Family Code that prohibit any modification
in the marriage settlements after the celebration of the marriage,
and which provide that The marriage settlement and any
modification thereof shall be in writing, signed by the parties and
executed before the celebration of the marriage.
In essence, the Partnership Law under the New Civil Code, which
should be considered general provisions, cannot overcome the more
specific provisions on the Law on Marriages under the Family Code,
which govern specifically the property regime that should prevail
between spouses. The provisions of Partnership Law are geared
towards providing for the a contractual relationship that seeks to
undertake a business venture; whereas, the Family Code provisions
governing the property regime prevailing between spouses have
considerations that transcend profit motives, and seek to strengthen

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the institutions of marriage and the family. Consequently, a contract

of partnership between spouses should be held void in that it seeks
to overcome or undermine the mandatory provisions of the Family
Code.
There are several areas where there arises real conflict between
doctrines under Partnership Law and those under the Family Code.
(1) Issue on Control and Binding Effects of Acts of Partners
We take the area of control and binding effect of the acts of
partners against other partners and the partnership itself. Under
Partnership Law, every partner is an agent of the partnership and
for the other partners when it comes to transactions that pertain to
partnership affairs; thus, the act of one partner binds the other
partners and the partnership property (Articles 1803[1] and 1818,
Civil Code). On the other, the general rule under the Family Code,
when it comes to absolute community of property regime (Article
96, Family Code) and conjugal partnership of gains (Article 124,
Family Code), is that both spouses are co-administrators of the
conjugal properties; and any contract, especially an act of
disposition or encumbrance of the community or the conjugal
property, done by one without the consent of the other partner,
would be void. (Guiang v. Court of Appeals, 291 SCRA 372
[1998]; Cirelos v. Hernandez, 490 SCRA 625 [2006];Bautista v.
Silva, 502 SCRA 334 [2006]). Take the case of allowing the
spouses to enter into a particular partnership, and they both
contribute community or conjugal properties thereto, would the
rules under Partnership Law therefore allow one spouse, without the
consent of the other spouse, to dispose of such property pursuant to
partnership affairs?
Article 145, Family Code provides that Each spouse shall own,
dispose of, possess, administer and enjoy his or her own separate
estate, without need of the consent of the other. To each spouse
shall belong all earnings from his or her profession, business or
industry and all fruits, natural, industrial or civil, due or received
during the marriage from his or her separate property. Under a
complete separation of property regime, spouses separately

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manage and control their separate properties. Can spouses who are
governed by the regime of separation of property, thereby partially
overcome the governing provisions of the Family Code, by being
allowed to validly enter into a particular partnership agreement?
(2) Charges to Partnership Properties
We should look also into the areas of charges against the
partnership properties and the effects of dissolution. Under
Partnership Law, partnership properties would be chargeable
against any claim or contract entered into pursuant to partnership
affairs. On the other hand, under both the absolute community of
property regime and the conjugal partnership of gains, there are
specific listings of what should first be chargeable against the
community property (Articles 94 and 95, Family Code), or the
conjugal property (Articles 121 to 123, Family Code), like support
and debts contracted for the benefit of the marriage. Under a
regime of separate property, both spouses shall bear the family
expenses in proportion to their income, or, in case of insufficiency
or default thereof, to the current market value of their separate
properties (Article 146, Family Code).
When community, conjugal or separate property is allowed to be
contributed into the partnership for gain, the rules of first
preference of partnership creditors to partnership property would
undermine the claims of personal creditors of spouses, as well as
the ability of marriage properties to properly provide for the family
support and upkeep. In addition, contributions by spouses of
marriage property into a partnership for gain would certainly allow a
means by which spouses may defraud their marriage creditors, by
making certain marriage properties subject to greater claims
outside of marriage affairs.
d.

Professional Partnerships

May spouses by themselves, or together with other professionals,

enter validly into a contract of professional partnership, which by
definition of Article 1783 of the Civil Code is always a particular
partnership? The answer seems to be in the affirmative. The reason

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is that a professional partnership essentially covering the

contribution of service by the spouses, does not primarily bind
actual community or conjugal properties, and therefore thus not
operate in violation of the property rules governing marriage
property regimes.
More importantly, professional partnership are not really pursued
for profit, but more for civic or vocational ends and therefore do not
address proprietary ends; but rather, the exercise of a profession,
even in the partnership medium, has more to do with the
expression of ideals held by an individual or towards achieving a
fruitful life in the mundane world. This fact is recognized even under
the Family Code, where Article 73 provides that Either spouse may
exercise any legitimate profession, occupation, business or activity
without the consent of the other.

2. May Corporations Validly Qualify to Become Partners?

The prevailing rule in the United States is that
Unless it is expressly authorized by statute or charter, a
corporation cannot ordinarily enter into partnerships with other
corporations or with individuals, for, in entering into a partnership,
the identity of the corporation is lost or merged with that of another
and the direction of the affairs is placed in other hands than those
provided by law of its creation. . . A corporation can act only
through its duly authorized officers and agents and is not bound by
the acts of anyone else, while in a partnership each member binds
the firm when acting within the scope of the partnership.
(FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520).
The doctrine is grounded on the theory that the stockholders of a
corporation are entitled, in the absence of any notice to the contrary
in the articles of incorporation, to assume that their directors will
conduct the corporate business without sharing that duty and
responsibility with others. (BAUTISTA, at p. 9).

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a. Jurisprudential Rule
Tuason v. Bolanos, 95 Phil. 106 (1954), recognized at that time in
Philippine jurisdiction the doctrine in Anglo-American jurisprudence
that a corporation has no power to enter into a partnership. (Ibid,
at p. 109). Nevertheless, Tuason ruled that a corporation may
validly enter into a joint venture agreement, where the nature of
that venture is in line with the business authorized by its charter.
(Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80
A.L.R., 1043, citing Fletcher Cyc. of Corp., Sec. 1082).
A joint venture is essentially a partnership arrangement, although of
a special type, since it pertains to a particular project or
undertaking (BAUTISTA, supra, at p. 50). In Torres v. Court of
Appeals, 278 SCRA 793, the Supreme Court held unequivocally that
a joint venture agreement for the development and sale of a
subdivision project would constitute a partnership pursuant to the
elements thereof under Article 1767 of the Civil Code that defines
when a partnership exists). Although Tuason does not elaborate on
why a corporation may become a co-venturer or partner in a joint
venture arrangement, it would seem that the policy behind the
prohibition on why a corporation cannot be made a partner do not
apply in a joint venture arrangement. Being for a particular project
or undertaking, when the Board of Directors of a corporation
evaluate the risks and responsibilities involved, they can more or
less exercise their own business judgment is determining the extent
by which the corporation would be involved in the project and the
likely liabilities to be incurred. Unlike in an ordinarily partnership
arrangement which may expose the corporation to any and various
liabilities and risks which cannot be evaluated and anticipated by
the Board, the situation therefore in a joint venture arrangement,
allows the Board to fully bind the corporation to matters essentially
within the Boards business appreciation and anticipation.
It is clear therefore that what makes a project or undertaking a
joint venture to authorize a corporation to be a co-venturer
therein is not the name or nomenclature given to the undertaking,
but the very nature and essence of the undertaking that limits it to
a particular project which allows the Board of Directors of the

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participating corporation to properly evaluate all the consequences

and likely liabilities to which the corporation would be held liable for.
b. SEC Rules
The SEC, in a number of opinions, has recognized the general rule
that a corporation cannot enter into a contract of partnership with
an individual or another corporation on the premise that it would be
bound by the acts of the persons who are not its duly appointed and
authorized agents and officers, which is inconsistent with the policy
of the law that the corporation shall manage its own affairs
separately and exclusively. (SEC Opinion, 22 December 1966, SEC
FOLIO 1960-1976, at p. 278; citing 13 Am. Jr. Sec. 823 (1938); 6
Fletcher Cyc. Corp., Perm. Ed. Rev. Repl. 1950, at p. 2520).
However, the SEC has on special occasions allowed exceptions to
the general rule when the following conditions are complied with:
(a) The authority to enter into a partnership relation is expressly
conferred by the charter or the articles of incorporation of the
corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business
authorized by the charter or articles of incorporation of the
corporation involved (SEC Opinion, 29 February 1980);
(b) The agreement on the articles of partnership must provide that
all the partners shall manage the partnership, and the articles of
partnership must stipulate that all the partners shall be jointly and
severally liable for all the obligations of the partnership. (Ibid)
The second condition set by the SEC would have the effect of
allowing a corporation to enter as a general partner in general
partnership, which would still have contravened the doctrine of
making the corporation unlimitedly liable for the acts of the other
partners who are not its authorized officers or agents. This
interpretation of the second condition was confirmed by the SEC in
1994, to mean that a partnership of corporations should be
organized as a general partnership wherein all the partners are
general partners so that all corporate partners shall take part in

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the management and thus be jointly and severally liable with the
other partners. (SEC Opinion, dated 23 February 1994, XXVII SEC
Quarterly Bulletin 18 (No. 3, Sept. 1994).
The rationale given by the SEC for the second condition was that if
the corporation is allowed to be a limited partner only, there is no
assurance that the corporate partner shall participate in
management of the partnership which may create a situation
wherein the corporation may not be bound by the acts of the
partnership in the event that, as a limited partner, the corporation
chooses not to participate in the management. (Ibid).
However, in 1995, the SEC reversed such interpretation and
practically dropped the second requirement, when it admitted the
following reasoning for allowing a corporation to invest in a limited
partnership, thus:
1. Just as a corporate investor has the power to make passive
investments in other corporations by purchasing stock, a corporate
investor should also be allowed to make passive investments in
partnerships as a limited partner, who would then not be bound
beyond the amount of its investment by the acts of the other
partners who are not its duly appointed and authorized agents and
officers. Hence, the very reason why as a general rule, a
corporation cannot enter into a contract of partnership, as stated in
the 1966 SEC opinion, would no longer be present, as the
corporation, which is merely a limited partner, will now be protected
from the unlimited liability of the other partners who are not agents
or officers of the corporation;
2. Section 42 of the Corporation Code which permits a corporation
to invest its funds in another corporation or business, does not
require that the investing corporation be involved in the
management of the investee corporation with a view to protect its
investment therein. By entering into a contract of limited
partnership, a corporation would continue to manage its own
corporate affairs while validly abstaining from participation in the
management of the entity in which it has invested. Accordingly, as
there is generally no threat that a corporate limited partner would

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be solidarily liable with the partnership, there would be no reason

for requiring a corporate partner to actually manage the
partnership, if it makes the business decision no to do so and opts
to become a limited partner; and
3. The SEC policy that a corporation cannot enter into a limited
partnership, is an offshoot of the outdated view in the U.S., that, as
a general rule, corporations could not form a partnership; that
corporations cannot become limited partners, is based on an
assumption which is no longer current. Jurisprudence and common
commercial practice in the U.S., indicate that corporations are not
barred from acting as limited partners. Current American laws
support the position that a corporation can enter into a contract of
limited partnership. For example, the Revised Uniform Limited
Partnership Act of 1976 (as amended in 1985), specifically confirms,
that corporations may act as limited partners. Almost all states in
the U.S. have adopted limited partnership laws which provide, in the
same manner as the Revised Uniform Limited Partnership Act, that
corporations may act as limited partners. This indicates that many
other jurisdictions simply follow the broad language of the Revised
Model Business Corporations Act which suggests that corporations
may act as limited partners and in no event prohibits that activity.
These statutes reaffirm what is indicated by the commercial practice
in the U.S., that corporations can act as limited partners. The
proliferation of statutes reversing the doctrine forbidding
corporations to become partners is proof of the unsoundness of and
dissatisfaction with such doctrine. (SEC Opinion, 17 August 1995,
XXX SEC Quarterly Bulletin 8-9 (No. 1, June 1996).
In that opinion, the SEC conceded on the points raised by
confirming that inasmuch as there is no existing Philippine law that
expressly prohibits a corporation from becoming a limited partner in
a partnership, the Commission is inclined to adopt your view on the
matter, (Ibid) provided that the power to enter into a partnership
is provided for in the corporations charter. The SEC went on to
say:
We agree with your statements that a reconsideration of the
present policy of the Commission on the matter is timely in order to

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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

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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
contributed thereto, in which case a public instrument shall
be necessary. (1667a)
Art. 1784. A partnership begins from the moment of the
execution of the contract, unless it is otherwise stipulated.
(1679)
_____
Since the contract of partnership is essentially consensual in
character, there is generally no form required, much less a need for
the actual delivery of the promised contributions, to perfect it, and
thereby lead to the arising of a separate juridical personality. Article
1771 of the Civil Code provides that A partnership may be
constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument
shall be necessary. The other exception is provided in Article 1772
which provides that Every contract of partnership having a capital
of Three thousand pesos or more, in money or property, shall
appear in a public instrument, which must be recorded in the Office
of the Securities and Exchange Commission.
Public documents and other forms of registration are features of
commercial law system, for indeed the public must deal on the basis
of systems, infrastructures and institutions that are manifest and
made known to them, and in line with the characteristic
of uniformity of commercial transactions. But as will be shown

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hereunder, the forms and registration requirement for partnerships

under the Civil Code are meant more to regulate the relationship of
the partners among themselves and with the partnership, but do
not really bear into the rights of creditors who deal with the
business enterprise. For indeed, Article 1772 of the Civil Code
provides that Failure to comply with the [formal] requirements [of
public instrument and SEC registration] shall not affect the liability
of the partnership and the members thereof to third persons.

1. When Capital Contributions Total P3,000.00 or More

_____
Art. 1772. Every contract of partnership having a capital of
Three thousand pesos or more, in money or property, shall
appear in a public instrument, which must be recorded in the
Office of the Securities and Exchange Commission.
Failure to comply with the requirements of the preceding
paragraph shall not affect the liability of the partnership and
the members thereof to third persons (n)
_____

Under modern day setting, most partnerships would be formed or

constituted having contributed capital of more then P3,000.00, for it
is doubtful whether two or more persons would come together in
pursuit of business with a capital of less than P3,000.00. This
means that the twin requirements under Article 1772 of the Civil
Code of having the contract of partnership in a public document and
registered with the SEC apply almost universally to all modern-day
partnerships. But even then, the twin requirements may have no
legal or commercial significance based on the following grounds:
(a) The law does not declare the partnership void when the twin
requirements are not met, nor is non-compliance meted any
adverse legal consequence; and

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(b)
The law expressly provides that Failure to comply with
the requirements . . . shall not affect the liability of the
partnership and the members thereof to third persons.
In a situation where a partnership is constituted not having
complied with the twin requirements of Article 1772 is not declared
void as among the partners, and the claims of its creditors are
unaffected, why should any partner worry about non-compliance
with the twin requirements of public document and SEC
registration?
In Angeles v. Secretary of Justice, 465 SCRA 106 (2005), the
Supreme Court held that the mere failure to register the contract
of partnership with the SEC does not invalidate a contract that has
the essential requisites of a partnership. The purpose of registration
of the contract of partnership is to give notice to third parties.
Failure to register the contract of partnership does not affect the
liability of the partnership and of the partners to third persons.
Neither does such failure to register affect the partnerships juridical
personality. A partnership may exist even if the partners do not use
the words partner or partnership. (Ibid, at p. 115).
According to the Code Commission, the business purpose of the
requirements under Articles 1771 and 1772 is to prevent evasion of
tax liabilities by big partnership and to safeguard the public by
enabling it to determine more accurately the membership and
capital of partnerships before dealing with them. (Memorandum of
Code Commission, Lawyers Journal, October 1955, p. 518, cited in
Bautista, at pp. 71-72).
Under current tax rules, which essentially taxes the partnership
separately as corporate taxpayer, formal registration requirements
with the BIR on matters as getting a taxpayer identification number
(TIN), to be registered as withholding agent, etc., would require
submission of the registered articles of partnership. But then if the
motivation is to go below the government radar, and to operate
within the underground economy as a means of avoiding tax and
administrative burdens, then non-registration with the SEC and
other government agencies would be the likely scheme to be

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followed. And yet if there are no deleterious consequences provided

by the Law on Partnerships in not complying the formalities under
Article 1771, why would they be complied with?
In any event, since Articles 1771 and 1772 do not expressly declare
that failure to comply with the public document requirement render
the contract of partnership void, then the general rule is that such
failure does not render the contract void, but only affects the
manner of its registration and affords to the parties affected the
remedy of demanding that it be executed in a public instrument.
(Dauden-Hernaez v. De los Angeles, 27 SCRA 1276 [1969]; Fule v.
Court of Appeals, 286 SCRA 698 [1998]; Dalion v. Court of Appeals,
182 SCRA 872 [1990]).
It must be pointed out however, that the decision in Rojas v.
Maglana, 192 SCRA 110 (1990), points to the legal usefulness of
complying with the twin requirements mandated under Articles
1771 and 1772 of the Civil Code.
In that case, Maglana and Rojas executed their Articles of CoPartnership, calling their company the Eastcoast Development
Enterprises (EDE), with the purpose to apply or secure timber
and/or minor forests products licenses and concessions over public
and/or private forest lands and to operate, develop and promote
such forests rights and concessions. The articles were duly
registered with the the SEC, indicating therein an indefinite period
for the venture, and providing that the profits would be divided
share and share alike.
When the venture was not getting off the ground, they invited
Pahamatong as industrial partner, and they executed a
Supplemental Articles of Co-partnership adopting the original
name of the company, but this time providing for a period of thirty
(30) years for the life of the venture, and providing for equal
distribution of profits among the three partners. The new articles
were not registered with the SEC. Although the firm began to
operate with profits, eventually Pahamatong withdrew from the
arrangement and his equity was bought back by Maglana and Rojas,
who then proceeded to operate the firm under the same original

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name, and with the verbal agreements that the profits would be
distributed 80%-20% in favor of Maglana.
When Rojas abandoned the enterprise to set-up a competing
venture in another logging concession, he withdrew some of his
equipment contributed to EDE to be used in his new venture.
Maglana notified Rojas of his (Maglanas) withdrawal from the
partnership arrangement in EDE, and for Rojas to account fully for
the amounts withdrawn from the partnership treasury, which when
totaled up would necessitated for Rojas to pay the promised
contributions under the original articles of co-partnership.
The case reached the Supreme Court on the issues of the nature of
the partnership that existed between Maglana and Rojas after the
withdrawal of the industrial partner; on whether it became a
partnership at will as provided under the original articles of
partnership as to have justified Maglanas termination thereof when
the second articles of partnership provided for a period of 30 years;
and the basis of the distribution of profits and losses from the EDE
venture, whether it would be the share and share alike under the
first articles of partnership, on the basis of capital contributions
based on the second articles of partnership, or on the verbal
agreement of 80%-20% in favor of Magalana.
The Court placed much weight on the original articles of
incorporation executed by Maglana and Rojas, which was duly
registered with the SEC, and held that when the second articles of
co-partnership was executed (but not registered), there was every
intention to abide by the original partnership arrangement existing
under the registered articles, since it covered the same venture and
used the same firm name, thus
After a careful study of the records as against the conflicting claims
of Rojas and Maglana, it appears evident that it was not the
intention of the partners to dissolve the first partnership, upon the
constitution of the second one, which they unmistakably called an
Additional Agreement . . . Except for the fact that they took in
one industrial partner; gave him an equal share in the profits and

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fixed the term of the second partnership to thirty (30) years,

everything else was the same.
Thus, they adopted the same name, EASTCOAST DEVELOPMENT
ENTERPRISES, they pursued the same purposes and the capital
contributions of Rojas and Maglana as stipulated in both
partnerships call for the same amounts. Just as important is the fact
that all subsequent renewals of Timber License No. 35-36 were
secured in favor of the First Partnership, the original licensee. To all
intents and purposes therefore, the First Articles of Partnership were
only amended, in the form of Supplementary Articles of CoPartnership . . . 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).

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In Rojas, the Court refers to a partnership arrangement that is not

covered by duly registered articles of co-partnership as a de
facto partnership; 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 Rojasis that
compliance with the formal requirements mandated under the Law
on Partnerships indeed has a very useful legal purpose: the duly
registered articles of co-partnership shall serve to bind the partners
as to their contractual intent, and the default rules provided for
under the Law on Partnerships in the Civil Code cannot apply to
overcome the provisions of the articles of co-partnership that is duly
registered with the SEC, except by another instrument that seeks to
amend or modify the same and duly registered also with the SEC.

2. When Immovable Property Contributed

_____
Art. 1771. A partnership may be constituted in any form,
except where immovable property or real rights are
contributed thereto, in which case a public instrument shall
be necessary. (1667a)
Art. 1773. A contract of partnership is void, whenever
immovable property is contributed thereto, if an inventory of
said property is not made, signed by the parties, and
attached to the public instrument. (1668a)
_____
a. Importance of Immovable Property in the Partnership
Scheme
The importance that the law places upon immovable properties
which constitute part of the assets of the partnership is not only
shown by the formal requirements mandated under Article 1773 of
the Civil Code, which requires the execution of the inventory

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covering such properties to be attached to the public instrument

(i.e., the articles of incorporation) that should be registered with the
SEC, but also by what seems to be a superfluous Article 1774 of the
Civil Code which reiterates the obvious legal capacity of a
partnership to own properties as a juridical person, where it
provides that Any immovable property or an interest therein may
be acquired in the partnership name. Title so acquired can be
conveyed only in the partnership name.
Then also, we have the long provisions of Article 1819 of the Civil
Code, which detail all the scenarios under which real property
owned by the partnership may be legally dealt with, under various
circumstances where title is not registered in the name of the
partnership.
b. When Immovable Property Deemed Contributed
Agad v. Mabato, 23 SCRA 1223 (1968), reminds us that it is not the
purpose clause of the articles of partnership or the designated
business to be engaged in, that determine whether there should be
deemed contributed immovable properties to the venture to trigger
the application of Article 1773 of the Civil Code. The Court held
in Agad that since the articles of partnership indicated that the
partners were going to contribute cash into the venture, then the
fact that the partnership was expressly organized to operate
fishpond, did not necessarily mean that either a fishpond or a real
right to any fishpond was contributed into the venture.
The ruling would also support the position that just because the
partnership venture owns or operates immovables does not mean it
comes into the operation of Article 1773, as when such immovables
were not contributed by the partners but were purchased during the
operations of the partnership business.
c. Rationale Behind the Formal Requirements under Article
1773
It is when immovable property is contributed into the capital of the
partnership that the twin requirements of public document and SEC

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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 intrapartnership relations of the partners among themselves and the
partnership, or to the extra-partnership relationship with the
creditors, or to both? The decision inTorres 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 coventurers covering the terms for the development of a subdivision
project, the contributions of the co-venturers and the manner of
distribution of the profits. Specifically, the agreement required from
the capitalist partners to contribute the parcels of land upon which
the project was to be developed. No articles of partnership was
registered with the SEC, much less was the requisite inventory
mandated under Article 1773 of the Civil Code executed and
attached to the public document. In ruling against the contention of
the capitalist partners that the partnership was void, the Court held

. . . First, Article 1773 was intended primarily to protect third

persons. Thus, the eminent Arturo M. Tolentino states that under
the aforecited provision which is a complement of Article 1771, the
execution of a public instrument would be useless if there is no
inventory of the property contributed, because without its
designation and description in the Registry of Property, and their
contribution cannot prejudice third persons. This will result in fraud
to those who contract with the partnership in the belief [in] the
efficacy of the guaranty in which the immovables may consist. Thus,
the contract is declared void by law when such inventory is made.
The case at bar does not involve third parties who may be
prejudiced.

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Second, petitioners themselves invoke the allegedly void contract as

basis for their claim that respondent should pay them 60 percent of
the value of the property. They cannot in one breath deny the
contract and in another recognize it, depending on what
momentarily suits their purpose. Parties cannot adopt inconsistent
positions in regard to a contract and courts not tolerate, much less
approve, such practice.
In short, the alleged nullity of the partnership will not prevent
courts from considering the Joint Venture Agreement an ordinary
contract from which the parties rights and obligations to each other
may be inferred and enforced. (Ibid, at p. 438).
It is clear from Torres that the formalities mandated under Article
1773 are meant for the protection of the partnership creditors, and
that the declaration that the partnership is void does not affect
the intra-partnership relationship between and among the partners
and
between
the
partners
and
the
partnership
itself.
Thus, Torres held that the alleged nullity of the partnership will not
prevent courts from considering the Joint Venture Agreement [or
any contract of partnership] an ordinary contract from which the
parties rights and obligations may be inferred and enforced.
Therefore, from the intra-partnership point of view, there are dire
consequences that befall the partners and the partnership for failing
to comply with the formalities mandated under Article 1773 of the
Civil Code.
If we follow therefore the Torres reasoning that the formalities
mandated under Article 1773 are meant to protect partnership
creditors, and every third person who deals with the partnership, I
do not see how the imposition of the rule partnership is void,
could be beneficial or protective of the rights of partnership
creditors, for the following reasons:
Firstly, the declaration of nullity of the partnership cannot be
ascribed to the extra-partnership relationship between the partners
and partnership on one hand, and the partnership creditors on the
other hand, for to do so would adversely affect the contractual
rights and standing of the creditors vis-a-vis the partners on their

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unlimited liability rule and the partnership, which must be deemed

to exist to protect the integrity of the contracts entered in its name.
Secondly, declaring the partnership void means that all contributed
and earned assets of the partnership pertain to the partners directly
as co-owners, since no contract of partnership exist between them
(it is void and inexistent), and no partnership person has arisen with
a juridical personality separate and distinct from each of the
partners. Not only does this scenario affect the integrity of the
contracts entered into directly with the partnership, but it also
means that the contributed and earned partnership assets pertain
directly to the persons of the partners and priority as to them
pertains to their separate creditors and not to the partnership
creditors.
Neither of the afore-described scenarios seem to promote the
interests or protect the rights of partnership creditors.
The Torres ruling has therefore removed any force or teeth on
the declaration of nullity of the partnership under Article 1773: it
cannot hurt but must protect the partnership creditors, and yet it
has no bearing or application to the partners and the partnership in
their intra-partnership relationship.
The authors position, as a result of resolving this issue in class
discussions, is that contrary to the Torres ruling, the formalities
under Article 1773 should be understood as to create adverse
consequences for the partners who refuse to comply with the
requirements
vis-a-vis
their
relationship
with
partnership
creditors. When the partners fail to comply with the formalities
under Article 1773, it ought to mean that they cannot avail of any
advantage that the partnership medium affords them. The primary
advantage that the partners have under a de 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

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partners were deemed to be acting for themselves when they

entered into partnership contracts and transactions; and that,
similar to the principle in Agency Law that makes the agent
primarily liable for contracts entered into in behalf of an inexistent
principal, then partners can be held directly liable by partnership
creditors for all contracts entered into, and all obligations assumed,
in the name of a partnership which is declared void.
The landscape has become more complicated with the recent ruling
inLitonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005), where
presented in evidence was a typewritten note (referred to as Annex
A-1)whereby the elder brother purportedly promised to the
younger brother that I will make sure that you get ONE MILLION
PESOS (P1,000,000.00) or ten percent (10%) equity, whichever is
greater, of the business that the younger brother would help
manage, consisting of theatre business and other real estate
properties. The typewritten note was not signed by the elder
brother, who denied its authenticity during trial.
The main issue resolved in Litonjua was whether a contract of
partnership or joint venture arrangement existed between the
siblings, a purely intra-partnership issue that essentially did not
involve the rights of third parties 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
Annex A-1, on its face, contains typewritten entries, personal in
tone, but is unsigned and undated. As an unsigned document, there
can be no quibbling that Annex A-1 does not meet the public
instrumentation requirements exacted under Article 1771 of the
Civil Code. Moreover, being unsigned and doubtless referring to a
partnership involving more than P3,000.00 in money or property,
Annex A-1 cannot be presented for notarization, let alone

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registered with the Securities and Exchange Commission (SEC), as

called for under the Article 1172 of the Code. And inasmuch as the
inventory requirement under the succeeding Article 1773 goes into
the matter of validity when immovable property is contributed to
the partnership, the next logical point of inquiry turns on the nature
of petitioners contribution, if any, to the supposed partnership. (at
p. 585; italics supplied)
It is clear from the afore-quoted passage that Litonjua considers are
binding and effective to purely intra-partnership issues the
mandatory provisions of Article 1771 and 1773 of the Civil Code
that requires that even when there is no issue that the meeting of
the minds involves the formation of a partnership (i.e., the
typewritten note doubtless referring to a partnership involving
more than P3,000.00 in money or property) then the requirement
that it contract be cast in a public instrument and registered with
the SEC were deemed to be essential to sustain a claim that a
contract of partnership exist between the parties, otherwise the
purported contract is deemed to be unenforceable.
The doctrine that failure to comply with the public instrument and
SEC-registration requirements under Article 1772 of the Civil Code
renders the contract of partnership as unenforceable can be
deduced from the following portion of the Litonjua decision which
relied on provision of the Statute of Frauds, thus:
It is at once apparent that what respondent Eduardo imposed upon
himself under the above passage, if he indeed wrote Annex A-1,
is a promise which is not to be performed within one year from
contract execution on June 22, 1973. Accordingly, the agreemend
embodied in Annex A-1 is covered by the Statute of Frauds
and ergo unenforceable for non-compliance therewith. By force of
the statute of frauds, an agreement that by its terms is not to be
performed within a year from the making thereof shall be
unenforceable by action, unless the same, or some note or
memorandum thereof, be in writing and subscribed by the party
charged. Corollarily, no action can be proved unless the requirement
exacted by the statute of frauds is complied with. (at p. 590)

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Unfortunately, the Court failed to consider the fact that even under
the Statute of Frauds, the unenforceability of covered contracts is
lifted the moment there is partial or full execution of the terms of
the contract. Thus, in the future it can be anticipated that the rule
of partial execution, (i.e., the actual contribution made to the
partnership, the pursuit of the business enterprise, etc.), would
make mitigate against the deleterious effect of non-compliance with
the public instrument and SEC-registration requirement under
Article 1771 and 1772 of the Civil Code.
In any event, what rendered the purported contract of partnership
void inLitonjua 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 Litonjua doctrine 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

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the claimant that a contract of partnership has been duly

constituted relies only upon a note or instrument, and does not
have other evidence to prove that indeed a contract of partnership
has been constituted, such as his exercise with the tolerance of the
other partners, of acts of ownership, demanding for an accounting,
participation in the profit, etc. Indeed, in Litonjua the best evidence
presented by the younger brother to prove a contract of partnership
has been constituted was the unsigned typewritten note, and he
failed to prove the essential elements of the contract of partnership,
as observed by the Court, thus:
Lest it be overlooked, petitioner is the intended beneficiary of the P1
Million or 10% equity of the family businesses supposedly promised
by Eduardo to give in the near future. Any suggestion that the
stated amount or the equity component of the promise was
intended to go to a common fund would be to read something not
written in Annex A-1. Thus, even this angle alone argues against
the very idea of a partnership, the creation of which requires two or
more contracting minds mutually agreeing to contribute money,
property or industry to a common fund with the intention of dividing
the profits between or among themselves. (at pp. 590-591; italics
supplied).
Perhaps the afore-quoted passage is the best way to appreciate the
decision in Litonjua, that in the end no contract of partnership arose
between the Litonjua sibling even on the basis of the arrangement
purported, since it lacked the essential element of contributing to a
common fund. Thus, the rulings on the failure to comply with the
provisions of Article 1771 to 1773 of the Civil Code ought to be
considered as obiter dictum.
c. Historical Background of Article 1773
Ruling under the provisions of the Code of Commerce and the old
Civil Code which prescribed formalities for the formation of a
partnership where real property is contributed, the Court held
in Borja v. Addison, 44 Phil. 895 (1922), that knowledge of the
existence of the new partnership or community of property must, at
least, be brought home to third persons dealing with the surviving

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husband in regard to community real property in order to bind them

by the community agreement. (at p. 907) Consequently, third
parties without knowledge of the existence of the partnership who
deal with the property still registered in the name of one of the
partners have a right to expect full effectivity of such transaction on
the property, in spite of the protestation of the other partners and
perhaps even the partnership creditors.
d. Registration Requirements under Article 1773 Should Be
Considered in Connection with the Priority Rules Set for
Claims of Partnership Creditors and the Separate Debtors of
the Partners
Failure to comply with the inventory and public documents
requirements may, however, adversely affect the rights of the
partners, the partnership and the partnership creditors, when it
comes to the binding effect of transactions relating to real estate
and other immovables where the controlling doctrine is that such
transactions do not bind the public unless they are found in a public
document, and duly registered.
Thus, in Secuya v. Vda. de Selma, 326 SCRA 244 (2000), the Court
held that while the sale of land appearing in a private deed is
binding between the parties, it cannot be considered binding on
third persons if it is not embodied in a public instrument and
recorded in the Registry of Deeds. When it comes to contributions of
real estate to a partnership, especially when it covers registered
land, then the peremptory provisions of the Property Registration
Decree (Pres. Decree No. 1459) will prevail as to who has a better
claim, right or lien on the property, since registration in good faith
and for value, is the operative rule under the Torrens system.
The proper registration of real property contributed into the
partnership would have much to do with the priority rules set under
the Law on Partnerships between claims of partnership creditors and
those of the separate creditors of the each of the partners.
Under Article 1839(8), When partnership property and the
individual properties of the partners are in possession of a court for

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distribution, partnership creditors shall have priority on partnership

property and separate creditors on individual property, saving the
rights of lien or secured creditors.
Again, under Article 1839(9), Where a partner has become
insolvent or his estate is insolvent, the claims against his separate
property shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution. (n)
Since Torres specifically held that the rules of inventory, public
instrument and SEC registration under Articles 1772 and 1773 of
the Civil Code are meant to protect partnership creditors, and as to
them the partnership contract is void, if it is necessary to protect
their interests, what happens then to real property contributions
that have not complied with the statutory formalities, would first
priority towards them pertain to the separate creditors of the
contributing partner?

3. The Partnership Name

Article 1815 of the Civil Code provides that
________
Art. 1815. Every partnership shall operate under a firm
name, which may or may not include the name of one or
more of the partners.
Those who, not being members of the partnership, include
their names in the firm name, shall be subject to the liability
of a partner. (n)
________

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The language of Article 1815 of the Civil Code shows unmistakably

that its not an obligation of the partners to include their names in
the partnership name; but that if an individual includes his name in
the firm name, then he becomes bound to third parties who rely
thereon to the same liabilities as the partners in the partnership.
Article 1815 is the first article under the section which reads
Obligations of the Partners with Regard to Third Persons, which
indicates clearly the essence of having a firm name: that since a
partnership is given a separate juridical personality which allows it
to deal with legal capacity and enter into contracts with the public,
then it must adopt a firm name by which it can be identified as the
party to a contract.
a. Historical Basis of Article 1815
Although the codal provision indicates that it is a new [(n)]
provision in the Civil Code, according to Tolentino, Article 1815 was
taken from Article 126 of the Code of Commerce (TOLENTINO, at p.
353). Yet the principle on partnership name under Article 126 was
quite different, for it actually required that the partnership name
should be registered containing all the names of the
partners. (Article 126, Code of Commerce).
In Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923),
the Court held that the object of Article 126 in requiring a general
partnership to transact business under the name of all its members,
of several of them, or of one only, was to protect the public from
imposition and fraud; and that Article 126 was for the protection of
the creditors rather than of the partners themselves. Jo Chung
Cang held that the legal requirement as to firm name must be
construed as rendering contracts made in violation thereof unlawful
and unenforceable only as between the partners and at the instance
of the violating party, but not in the sense of depriving innocent
parties of their rights who may have dealt with the offenders in
ignorance of the latter having violated the law; and that contracts
entered into by commercial associations defectively organized are
valid when voluntarily executed by the parties, and the only
question was whether or not they complied with the agreement. It

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essence Jo Chung Cang ruled that partners cannot avoid the

consequences of a partnership contract entered into by invoking in
their defense the anomaly in the firm name which they themselves
adopted. The ruling was reiterated in Philippine National Bank v. Lo,
50 Phil. 802 (1927).
The earlier decision in Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil.
498 (1906), held that failure to register a commercial partnership
would mean that there is no partnership constituted and that the
rule applicable to protect parties who have dealt in good faith with
the enterprise was the application of Article 120 of the Code of
Commerce, that the right of action would be against the person in
charge of the management of the association.
Jo Chung Cang refused to apply the ruling in Hung-Man-Yoc because
there was actual registration of the partnership, and consequently
decreed that a general partnership had been constituted as to make
the partners thereof solidarily liable for partnership debt in the
event the partnership itself becomes insolvent. Although failure to
comply with the mandatory registration provisions of the Code of
Commerce did not affect the cause of action of creditors to enforce
their contracts against the partnership, did it mean then that as a
consequence, if it were the partners and partnership seeking to
enforce such contracts, they would be barred from doing so as a
consequence of their failure to comply with the registration
requirements under the law? No categorical ruling was made on this
issue in Jo Chung Cang although it did quote a ruling from the
Supreme Court of Michigan on the common law rule:
As this acts involves purely business transactions, and affects only
money interests, we think it should be construed as rendering
contracts made in violation of it unlawful and unenforceable at the
instance of the offending party only, but not as designed to take
away the rights of innocent parties who may have dealt with the
offenders in ignorance of their having violated the statute. (Ibid, at
pp. 154-155, citing Cashing v. Pliter 168 Mich 386; Ann. Cas.
[1913-C], 67 [1912]; underscoring supplied by author)

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To prevent such members of a commercial partnership from

recovering on the contracts entered into on the ground that there
was no valid registration or that it did not comply with the rule on
firm name would constitute unjust enrichment. Eventually, the
Court applied in Compaia Agricola de Ultramar v. Reyes, 4 Phil. 2
(1904), the principles of corporation by estoppel doctrine (Section
21, Corporation Code), even as to unregistered partnerships, thus:
Persons who assume to form a corporation or business association,
and exercise corporate functions, and enter into business relations
with third persons, are estopped from denying that they constitute a
corporation. So also are the third persons who deal with such a de
facto association or corporation, recognizing it as such and thereby
incurring liabilities, estopped, when an action is brought on such
obligations, from denying the juristic personality of such
corporations or associations. (Ibid, at p. 12).
xxx.
Where a shareholder of an association is called upon to respond to a
liability as such, and where a party has contracted with a
corporation and is sued upon the contract, neither is permitted to
deny the existence or the legal validity of such corporation. To hold
otherwise would be contrary to the plainest principles of reason and
good faith. Parties must take the consequences of the position they
assume. (Ibid, at p. 13).
The
question
in
the Jo
Chung
Cang, PNB and Compania
Agricola rulings was that if the provisions of Article 126 of the Code
of Commerce were mandatory in the sense that they were
addressed to the partners and partnership more for the protection
of partnership creditors, and non-compliance therewith could not
prejudice creditors, then what would be their usefulness if no
adverse consequence visits the partners and the partnership
whenever they are not complied with?
There is no doubt that there were serious difficulties with enforcing
the mandatory provisions on registration and firm name for
commercial partnerships under the Code of Commerce. The present

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rule under Article 1815 of the Civil Code which essentially allows the
partners and the partnership to adopt any firm name they fancy is a
more market-friendly rule since:
(a) one who opts to have his name included in the firm name runs
to risk of being made liable for partnership debts;
(b) the articles of partnership, when registered provides anyway
for the listing of the partners of the partnership enterprise; and
(c)
more importantly, the arising of the separate juridical
personality of the partnership comes with the perfection of the
contract of partnership, and not with registration thereof.
4. Registration Given Little Use in Partnership Law
The essence of what constitutes a partnership contract is split into
two levels in Philippine Partnership Law:
(a)
As between and among the partners, it is the point of
perfection, when two or more parties have come to a meeting of
minds to constitute a common fund and the distribution of profits
and losses among themselves; and
(b) In relation to third parties who deal with a business
enterprise, when a representation has been made that they are
dealing with a partnership, or are dealing with a partner to
a partnership enterprise.
a. Intra-Partnership Relationship
Within the intra-partnership relationship, the main doctrine that
applies is that unless there is a meeting of minds as to the elements
of common fund and distribution of profits, then there can be no
contract of partnership between the parties involved. On the other
hand, once there is such a meeting of minds, the partnership
contract arises, and needs no particular form in order to be valid,
binding and enforceable. Thus, Article 1784 provides that A
partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated. The partnership

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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 nonlethal 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

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of action to have the partnership constituted in a manner that

allows its terms and conditions be made known to the public
through a public instrument and registration with the SEC.
Failure to comply with the requirements under Article 1772 may
also be basis for the SEC to refuse to give supportive aid to partners
who have not registered their agreement with the SEC.
b. Dealings with Third Parties
There are basically two areas that are important to consider when it
comes to partnership dealings with third parties:
(a) The validity and enforceability of contracts entered into with
a purported partner of an existing partnership or with
purported partnership that has not been legally constituted; and
(b)
The standing of partnership creditors to enforce partnership
liability personally against the partners.
The general principle in Partnership Law is that a member of the
public who deals in good faith with a purported partner or purported
partnership in the ordinary course of business of such partnership,
has a right to expect that his contract can be enforced, and intrapartnership and technical issues pertaining to the partnership or on
the distribution of power and authority between the partners cannot
generally be raised against such third party to undermine the
enforceability of his contractual dealings with the corporation.
Various statutory provisions in the Partnership Law of the Civil
Code, support this doctrine of reliance by third parties dealing in
good faith with the purported partner or purported partnership,
thus:
(a) Under Article 1815, Those who, not being members of the
partnership, include their names in the firm name, shall be subject
to the liability of partner.
(b)
Under Article 1818, Every partner is an agent of the
partnership for the purpose of its business, and the act of

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every partner, including the execution in the partnership name

of any instrument, for apparently carrying on in the usual way the
business of the partnership . . . binds the partnership, unless the
partner so acting has in fact no authority to act for the partnership
in the particular manner, and the person with whom he is dealing
with has knowledge of the fact that he has no such authority;
(c) Under Article 1834, partnership creditors who extend credit to
the partnership even after there has been dissolution can can claim
payment thereof against all the partners, when such creditors have
no knowledge or notice of the dissolution.
In fact, even when a partnership has been duly registered with the
SEC, the doctrine of the Supreme Court seems clear that third
parties who deal with the partnership are not bound by the terms of
the registered articles of partnership, and unless they have actual
knowledge thereof, they have a right to rely upon what is the
normal right and authority of every partner to generally bind the
partnership and the other partners.
Thus, Litton v. Hill & Ceron, 67 Phil. 509 (1939), laid down the rule
that
Third persons . . . are not bound in entering into a contract with any
of the two partners, to ascertain whether or not this partner with
whom the transaction is made has the consent of the other partner.
The public need not make inquiries as to the agreements had
between the partners. Its knowledge is enough that it is contracting
with the partnership which is represented by one of the managing
partners. (Ibid, at p. 513).
This ruling was reiterated in Goquiolay v. Sycip, 108 Phil. 947
(1960), which held that the statutory rule on how management
power is distributed or exercised within the partnership, and the
consequences of failure to comply with such statutory rule is an
obligation that is imposed by law on the partners among
themselves, that does not necessarily affect the validity of the acts
of a partner, while acting within the scope of the ordinary course of
business of the partnership, as regards third persons without notice.

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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 copartners. The regular course of business procedure does not require
that each time a third person contracts with one of the managing
partners, he should inquire as to the latters authority to do so, or
that he should first ascertaining whether or not the other partners
has given their consent thereto. (Ibid, at p. 957).
The reason why the general rule in Agency Law that one dealing
with an agent must ascertain the extent of the power of the agent
does not normally apply with the same effect in Partnership Law
was also explained in Goquiolay in the following manner: It is
argued that the authority given by Goquiolay to the widow Kong
Chai Pin was only to manage the property, and that it did not
include the power to alienate . . . What this argument overlooks is
that the widow was not a mere agent, because she had become a
partner upon her husbands death, as expressly provided by the
articles of co-partnership. (Ibid, at p. 965). Being therefore a
partner, the general rule of Partnership Law, every partner had the
power to dispose of partnership property even of its real estate,
which is in the normal course of the partnership business of dealing
with real property: where the avowed purpose of the partnership is
to buy and sell real estate (as in the present case), the immovables
thus acquired by the firm form part of the its stock-in-trade, and the
sale thereof is in pursuance of partnership purposes, hence within
the ordinary powers of the partner. (Ibid, at p. 969).
c. What Is the Value of the Statutory Requirements on Form
and Registration?
If non-compliance
under Partnership
partnership void,
contracts entered
generally impose
compliance, then
provisions?

with the formal and registration requirements

Law of the Civil Code does not render the
nor does it undermine the enforceability of
into in the partnership name, and does not
legal consequences on the partners for nonwhat is the usefulness of such statutory

147

The answer had been addressed early in our jurisdiction in Thunga

Chui v. Que Bentec, 2 Phil. 561 (1903), which applied Article 1279
of the old Civil Code, now found as Article 1357 of the new Civil
Code, which reads:
If the law requires a document or other special form, as in the acts
and contracts enumerated in the following articles, the contracting
parties may compel each other to observe that form, once the
contract has been perfected. This right may be exercised
simultaneously with the action upon the contract.
In Thunga Chui, the Court held
Article 1279 [now Article 1356] does not impose an obligation, but
confers a privilege upon both contracting parties, and the fact that
plaintiff has not made use of same does not bar his action. x x x .
Article 1279 [now Article 1356], far from making the enforceability
of the contract dependent upon any special extrinsic form,
recognizes its enforceability by the mere act of granting to the
contracting parties an adequate remedy whereby to compel the
execution of a public writing, or any other special form, whenever
such form is necessary in order that the contract may produce the
effect which is desired, according to whatever may be its object.
(Ibid, at pp. 563-564).
Not only is the general rule under Partnership Law jurisprudence
that partnership creditors do not have an obligation to verify the
authority of a purported partner acting in the ordinary course of
partnership business, nor to review the registration papers of the
partnership, the rule is that any important changes in partnership
relationship must be brought to the knowledge of the partnership
creditors in order to be binding on the latter.
Thus, in Singson v. Isabela Sawmill, 88 SCRA 623 (1979), the Court
held that the failure of a partner to have published her withdrawal
from the partnership, and her agreeing to have the remaining
partners proceed with running the partnership business instead of
insisting on the liquidation of the partnership, will not relieve such
withdrawing partner from her liability to the partnership creditors.

148

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

149

12 RIGHTS AND POWERS OF PARTNERS

[Updated: 14 October 2009]

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

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that those rights that pertain to agency and personal relations are
not affected by dealings on those which are strictly proprietary in
nature. In other words, the bundle of property rights of a partner
is not indivisible, and in fact the philosophy under Philippine
Partnership Law is to consider them divisible, and capable of being
treated and transacted separately.
The foregoing doctrinal approaches shall animate the discussions
hereunder on the rights and obligations of partners in the
partnership arrangement.

1. Partners Right to Manage the Partnership

a. General Rule on Partnership Management
Article 1818 of the Civil Code provides that Every partner is an
agent of the partnership for the purpose of its business, and the act
of every partner, including the execution in the partnership name of
any instrument, for apparently carrying on in the usual way the
business of the partnership of which he is a member binds the
partnership. This principle is supported by Article 1803 which
provides When the manner of management has not been agreed
upon . . . All the partners shall be considered agents and whatever
any one of them may do alone shall bind the partnership. Article
1818 goes on to provide that An act of a partner which is not
apparently for the carrying on of the business of the partnership in
the usual way does not bind the partnership unless authorized by
the other partners.
Embodied clearly with the language of Article 1818 is the doctrine
of apparent authority which allows a third party dealing with a
juridical entity to rely upon the validity and enforceable of contracts
entered into with an officer or representative who has been by
practice endowed with apparent authority to act for the juridical
person. In every partnership, there is a presumption of apparent
authority for every partner to act for and thereby bind the
partnership in all that is apparently for the carrying on of the

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business of the partnership in the usual way. Thus, the Court held
inMunasque v. Court of Appeals, 139 SCRA 533 (1985), that a
presumption exists that each partner is an authorized agent for the
firm and that he has authority to bind it in carrying on the
partnership transaction.
We should therefore consider the old ruling in Council of Red Men v.
Veterans Army, 7 Phil. 685 (1907), where the Court interpreted the
original provision of Article 1803 of the Civil Code (then Article 1695
of the old Civil Code), that allowed one partner to act to bind the
partnership, to apply only when there has been no provision at all in
the articles of partnership on the exercise of power or management,
thus:
One partner, therefore, is empowered to contract in the name of the
partnership only when the articles of partnership make no provision
for the management of the partnership business. In the case at bar
we think that the articles of the Veteran Army of the Philippines do
so provide. It is true that an express disposition to that effect is not
found therein, but we think one may be fairly deduced from the
contents of those articles. They declare what the duties of the
several officers are. In these various provisions there is nothing said
about the power of making contracts, and that faculty is not
expressly given to any officer. We think that it was, therefore,
reserved to the department as a whole; that is, that in any case not
covered expressly by the rules prescribing the duties of the officers,
the department were present. It is hardly conceivable that the
members who formed this organization should have had the
intention of giving to any one of the sixteen or more persons who
composed the department the power to make any contract relating
to the society which that particular officer saw fit to make, or that a
contract when so made without consultation with, or knowledge of
the other members of the department should bind it. We therefore,
hold that no contract, such as the one in question, is binding on the
Veteran Army of the Philippines unless it was authorized at a
meeting of the department. No evidence was offered to show that
the department had never taken any such action. In fact, the proof
shows that the transaction in question was entirely between Apache

152

Tribe, No. 1, and the Lawton Post, and there is nothing to show that
any member of the department ever knew anything about it, or had
anything to do with it. The liability of the Lawton Post is not
presented in this appeal. (7 Phil. 685, at pp. 688-689).
We are of the strong position that the doctrine in Council of Red
Men,rendered at a time when our legal jurisdiction was still deciding
the proper formulation of the doctrines in Philippine Partnership
Law, no longer applies.
Firstly, the prevailing doctrine now embodied in Articles 1803[1]
and 1818 of the Civil Code is that every partner has the apparent
authority to act for and in behalf of the partnership in carrying on
the ordinary or usual business of the partnership.
Secondly, the ruling in Council of Red Men was based on the
principal that the special rules of management of partnership affairs
provided for in the articles of partnership is binding on the public, or
at least on every person dealing with the partnership. This is not
the rule under Philippine Partnership Law which characterizes the
contract of partnership and the arising of the partnership juridical
person, as being merely consensual with no specific formalities
being required in general. Thus, even when the articles of
partnership has been formally executed and registered with the
SEC, the same is not considered to be a public document binding on
the public. Therefore, notwithstanding what specific provisions may
be found in the articles of partnership on the management of the
partnership business, the same is binding inter se among the
partners, but does not prejudice the rights of a third party who
deals in good faith with the partners without actual knowledge of
the content of the articles of partnership.
Although special management arrangements may be made among
partners, and even when so formalized within the terms of the
articles of partnership, generally such special arrangements do not
bind or prejudice third parties who deal with the partnership
business without knowledge of such special arrangement, and who
are not mandated to seek formal authority and that in fact are
deemed to have a right to expect, unless otherwise indicated, that

153

their dealings
partnership.

with

the

managing

partner

should

bind

the

This situation is best exemplified in the decision in Litton v. Hill &

Ceron, 67 Phil. 509 (1935), where an obligation in a sum of money
was sought to be recovered from the partnership Hill & Ceron in
whose name it was entered into by one of the managing partners,
when in fact the articles of partnership provided expressly that:
Sixth. That the management of the business affairs of the
copartnership shall be entrusted to both copartners who shall jointly
administer the business affairs, transactions and activities of the
copartnership. In ruling that the act of just one of the managing
partners should properly make the partnership liable for the
payment of the debt, the Court held
It follows from the sixth paragraph of the articles partnership of Hill
& Ceron above quoted that the management of the business of the
partnership has been entrusted to both partners thereof, but we
dissent from the view of the Court of Appeals that for one of the
partners to bind the partnership the consent of the other is
necessary. Third persons, like the plaintiff, are not bound in
entering into a contract with any of the two partners, to ascertain
whether or not this partner with whom the transaction is made has
the consent of the other partner. The public need not make inquiries
as to the agreements had between the partners. Its knowledge is
enough that it is contracting with the partnership which is
represented by one of the managing partners. (Ibid, at p. 513).
Litton held that there is a general presumption that each individual
partner is an authorized agent for the firm and that he has authority
to bind the firm in carrying on the partnership transaction, and that
the presumption is sufficient to permit third persons to hold the firm
liable on transactions entered into by one of the members of the
firm acting apparently in its behalf and within the scope of his
authority. This was especially true under the circumstances
in Litton where the transaction which gave rise to the partnership
obligation was in the ordinary course of the partnerships business.

154

Litton also supports the legal position that even with the
registrations of the article of partnership with the SEC, the same
does not constitute a public document that binds those who deal
with the partnership enterprise. In other words, even a registered
articles of partnership constitutes first and foremost a intrapartnership document that is binding upon the partners, and a third
party acting in good faith without actual knowledge of the contents
thereof is not bound by the terms of the articles of partnerships.
In Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941), the Court held
that in a transaction covering the purchase and delivery of
merchandise within the ordinary course of the partnership business
effected by the industrial partner without the consent of the
capitalist partner, the provisions in the articles of partnership that
the industrial partner shall manage, operate and direct the affairs,
businesses and activities of the partnership, constitute sufficient
authority to make such transaction binding against the partnership,
as against another provision of the articles by which the industrial
partner is authorized To make, sign, seal, execute and deliver
contracts . . upon terms and conditions acceptable to him duly
approved in writing by the capitalist partner, which must cover only
the execution of formal contracts in writing and not necessarily to
routine transactions such as ordinary purchases and sale of
merchandise.
In addition, Aznar applied the doctrine of apparent authority and
the estoppel doctrine when it held that The evidence also shows
that previous purchases made by [the industrial partner] in the
name of the Aznar & Company from the same plaintiff were honored
and paid for by the said firm, and we may well also assume that the
goods herein in question which were delivered to defendant firm
were made use of by the latter. It is, therefore, but just that the
firm answer for their value. (at p. *).
In Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court even took
into consideration the provisions of Article 129 of the Code of
Commerce to the effect that If the management of the general
partnership has not been limited by special agreement to any of the
members, all shall have the power to take part in the direction and

155

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 copartners. The regular course of business procedure does not require
that each time a third person contracts with one of the managing
partners, he should inquire as to the latters authority to do so, or
that he should first ascertain whether or not the other partners had
given their consent thereto. In fact, Article 130 of the same Code of
Commerce provides that even if a new obligation was contracted
against the express will of one of the managing partners, it shall
not be annulled for such reason, and it shall produce its effects
without prejudice to the responsibility of the member or members
who contracted it, for the damages they may have caused to the
common fund. (Ibid, at p. 957)
The right of a partner to manage the affairs of the partnership or to
act as an agent of the partnership is expressly affirmed by the
following statutory provisions:
(a)
Article 1820, which provides that an admission or
representation made by any partner concerning partnership affairs
within the scope of his authority is evidence against the
partnership;
(b) Article 1821, which provides that notice to any partner of any
matter relating to partnership affairs, and the knowledge of partner
acting in the particular matter, acquired while a partner or then
present to his mind, and the knowledge of any other partner who

156

reasonably could and should have communicated it to the acting

partner, operate as notice or knowledge of the partnership (except
in case of a fraud on the partnership);
(c) Article 1822, which provides that any loss or injury caused to
any third person or any penalty incurred by reason of any wrongful
act or omission of a partner acting in the ordinary course of the
business of the partnership or with the authority of his co-partners,
shall make the partnership liable therefore; and
(d)
Article 1823, which provides that the partnership is bound to
make good the loss caused by the misapplication by a partner
acting within the scope of his apparent authority of money or
property belonging to, or received by the partnership from, a third
person.
In the cases of items (c) and (d) above-enumerated, Article 1824 of
the Civil Code provides expressly that All partners are liable
solidary with the partnership for everything chargeable to the
partnership.
b. Transactions Not in the Ordinary Course of Partnership
Business
Article 1818 of the Civil Code enumerates what are
certainly notapparently for the carrying on of the business of the
partnership in the usual way, and will not therefore be valid
transactions unless done by or approved by all the partners, thus:
(a) Assigning of partnership property in trust for creditors or on
the assignees promise to pay the debts of the partnership;
(b) Disposition of the goodwill of the business;
(c) Confession of a judgment;
(d) Entering into a compromise concerning a partnership claim or
liability;
(e) Submitting a partnership claim or liability to arbitration; or

157

(f) Renouncing a partnership claim.

The foregoing
administration,
effected by the
deemed to be
enterprise.

cases are considered to be not merely acts of

but rather acts of ownership which can only be
concurrence of all the partners who are collectively
the owners of the partnership and its business

One would consider therefore that when the transaction involves the
sale, transfer or encumbrance of the entire partnership business
enterprise, it would constitute an act of strict ownership or an act of
alteration, which cannot be considered as within the ordinary course
of business that would come within the apparent authority of one
partner. And yet in the early case of Goquiolay v. Sycip, 108 Phil.
947 (1960), the Court held that the sale of the partnerships
business enterprise can be considered to be within the power of the
managing partner, thus:
Appellants also question the validity of the sale covering the entire
firm realty, on the ground that it, in effect, threw the partnership
into dissolution, which requires consent of all the partners. This
view is untenable. That the partnership was left without the real
property it originally had will not work its dissolution, since the firm
was not organized to exploit these precise lots but to engage in
buying and selling real estate, and in general real estate agency
and brokerage business. Incidentally, it is to be noted that the
payment of the solidary obligation of both the partnership and the
late Tan Sin An, leaves open the question of accounting and
contribution between the co-debtors, that should be ventilated
separately. (Ibid, at p. 960).
Perhaps Goquiolay was decided at an earlier time in our jurisdiction
when the concept and doctrines pertaining to business enterprise
transfers were not yet developed, much less appreciated. On ruling
on the motion for reconsideration, the resolution of Goquiolay v.
Sycip, 9 SCRA 663 (1969), returned on this point and clarified the
applicable doctrine as follows:

158

It is next urged that the widow, even as a partner, had no authority

to sell the real estate of the firm. This argument is lamentably
superficial because it fails to differentiate between real estate
acquired and held as stock-in-trade and real estate held merely as
business site (Vivantes taller o banco social) for the partnership.
Where the partnership business is to deal in merchandise and
goods, i.e., movable property, the sale of its real property
(immovables) is not within the ordinary powers of a partner,
because it is not in line with the normal business of the firm. But
where the express and avowed purpose of the partnership is to buy
and sell real estate (as in the present case), the immovables thus
acquired by the firm from part of its stock-in-trade, and the sale
thereof is in pursuance of partnership purposes, hence within the
ordinary powers of the partner. . . (Ibid, at pp. 671-672).
The foregoing discussions in Goquiolay certainly began to appreciate
an act or transaction in the ordinary course of business, which
basically may involve only a sale of assets, from an extraordinary
act or contract, which either disposes of the business enterprise or
has the effect of preventing the pursuit of the business enteprise.
c.

Specific Modification on the Power of Management

It is a policy in Partnership Law for the partners to be allowed to

expressly contract around the default principle of mutual agency
(i.e., that the partners are all managers of the partnership
enterprise). Thus, under Article 1800 of the Civil Code it is possible
to appoint only one managing partner in the articles of partnership,
in which case the managing partner may execute all acts of
administration despite the opposition of his partners, and his
powers are irrevocable without just or lawful cause. The same rule
would apply when a partner is designated as managing partner
outside of the articles of incorporation, but in such case his
designation as managing partner is essentially revocable.
Thus, the Supreme Court has held that: a manager of a partnership
can execute acts of administration without need of consent of the
partners, including the power to purchase goods in the ordinary
course of business (Smith, Bell & Co. v. Aznar, 40 O.G. 1882

159

[1941]); to hire employees (Garcia Ron v. La Compania de Minas de

Batau, 12 Phil. 130 [1908]), as well to dismiss employees (Martinez
v. Cordoba & Conde, 5 Phil. 545 [1906]); to secure a loan to finish
the construction of the boat of the partnership (Agustia v. Mocencio,
9 Phil. 135 [1907]); to employ a bookkeeper by his sole authority
(Fortis v. Gutierrez Hermanos, 6 Phil. 100 [1906]); and to
commence a suit in the name of the partnership against partnership
debtors (Tai Tong Chuache & Co. v. Insurance Commission, 158
SCRA 366 (1988). Curiously though, the Court has also held that
the managing partner has no power to purchase barge, a truck and
an adding machine in the name of the partnership inasmuch as
none of the properties were considered to be supplies for
partnership business. (Teague v. Martin, 53 Phil. 504 [1929]) The
old ruling is contrary to the doctrine of apparent authority in the
usual or normal pursuit of the business of the partnership embodied
in Article 1818 of the Civil Code, especially when it comes to the
adding machine.
Under Article 1801 of the Civil Code, if two or more partners have
bee entrusted with the management of the partnership affairs
without specification of their respective duties, or without stipulation
that one of them shall not act without the consent of all the others,
each one may separately execute all acts of administration, but if
any of them should oppose the acts of the others, the decision of
the majority shall prevail; and in case of a tie, the matter shall be
decided by the partner owning the controlling interest.
On the other hand, under Article 1802, if it has been stipulated that
none of the managing partners shall act without the consent of the
others, the concurrence of all shall be necessary for the validity of
the acts, and the absence or disability of any one of them cannot be
alleged, unless there is imminent danger of grave or irreparable
injury to the partnership.
It should be emphasized though that the provisions of Articles 1800
to 1802 should be considered to be intramural rules that govern the
relationship between and among the partners, and the breach of
which can bring about a cause of action against the breaching
partners. The rules provided therein do not bind nor apply to

160

invalidate the contract and transactions had with third parties acting
in good faith and under the doctrine of apparent authority provided
under Article 1818.
d. Power of Alteration
The power of management of the partnership business, should be
distinguished from the power of ownership and control which is
subject to a higher level of requirements. Under Article 1803(2) of
the Civil Code, none of the partners may, without the consent of the
others, make any important alteration in the immovable property of
the partnership, even if it may be useful to the partnership. But if
the refusal of consent by the other partners is manifestly prejudicial
to the interest of the partnership, the courts intervention may be
sought.
e. Power Over Real Properties of the Partnership
Although Article 1774 of the Civil Code provides that immovable
property or an interest therein may be acquired in the partnership
name, the partnership title is not rendered void if the registration
thereof is not in the name of the partnership but in one or more, or
all, of the partners names (or for that matter in the name of a
third-party who holds it in trust for the partnership).
Article 1819 of the Civil Code sets specific rules on how partners
may bind real properties pertaining to the partnership, depending
on the manner by which such title was registered, thus:
(1) Where Title Is in the Partnership Name:
(i) Any partner may convey title to such property by a conveyance
executed in the partnership name; the partnership may recover
such property only when the partner so conveying has no such
power to so convey, but not against a transferee in good faith and
for value;
(ii) A partner who conveys the property but in his own name
passes the equitable interest of the partnership only when the

161

partner so conveying acted with authority; otherwise, no title at all

to the immovable property passes to the transferee.
The immediately preceding rule is consistent with the provision of
Article 1774 which states that title to immovable property acquired
in the partnership name can be conveyed only in the partnership
name.
(2) Where Title Is Not in Partnership Name (i.e., in the
Name of One or More, or All the Partners, or a Third Person
in Trust for the Partnership):
(i) A conveyance executed by a partner in the name of the
partnership or in his own name only passes equitable interest of the
partnership, only when the partner conveying acted with authority;
(ii) A conveyance executed by a partner in the name of the
partnership or in his own name does not even pass anything (not
even equitable interest of the partnership) when the partner so
conveying acted without authority;
(3) Where Title Is in the Name of One or More But Not All the
Partners:
(i) When the records disclose partnership interests, the partners in
whose name the title stands may convey title to such property; and
the partnership may recover only when the partners so conveying
acted without authority, but not against a purchaser in good faith
and for value;
(ii) When the records do not disclose the right of the partnership,
the partners in whose name the title stands may convey title to
such property, and the partnership may recover against any
transferee when the partners so conveying acted without authority;
(4) Where Title Is in the Name of All of the Partners:
(i) Conveyance executed by all the partners (in whose ever name
so conveyed) passes all their rights in such property. In this case
the will of all the partners is the will of the partnership.

162

2. Partners Right to Specific Partnership Property

Although Article 1811 of the Civil Code defines or explains a
partners right in specific partnership property to mean that A
partner is [merely a] co-owner with his partners of specific
partnership property, and the enumeration of the incidents of this
co-ownership would show that what is being defined is merely an
implementation of the principle of mutual agency, thus:
(a) A partner . . . has an equal right with his partners to possess
specific partnership property for partnership purposes;
(b) A partners right in specific partnership property is not
assignable except in connection with the assignment of rights of all
the partners in the same property;
(c) A partners right in specific partnership property is not subject
to attachment or execution, except on a claim against the
partnership; and
(d) A partners right in specific partnership property is not subject
to legal support.
Unlike the proprietary right of an ordinary co-owner to use the
thing owned in common, provided he does so in accordance with the
purpose for which it is intended and in such a way as not to injure
the interest of the co-ownership or prevent the other co-owners
from using it according to their rights (Article 1486, Civil Code),
the right of every partner in specific partnership property is merely
an extension of his right to participate in the management of the
partnership affairs, and bears no proprietary title to himself
personally apart from pursuing the partnership affairs.
It may also be observed that the recognition by the Law on
Partnerships of the partners purported co-ownership interests in
specific partnership property would be in defiance of the grant of a
separate juridical personality to every partnership organized under
the Civil Code. Nonetheless, the purported co-ownership interest of
partners is essentially for the furtherance of the partnership affairs,

163

and emphasizes the fact that in the partnership setting equity

ownership is merged with management prerogatives, equivalent to
the recognition of the full-ownership by the partners, as collective
sole-proprietors so-to-speak, of the partnership enterprise and its
assets.
A better way of looking at the purported co-ownership rights of
partners to specific partnership property is to consider that the law
constitute the partners as trustees of the corporate properties,
whereby they hold naked title to the partnership properties, with full
power to manage and control the same for the benefit of the
partnership venture, thus, A partner . . . has equal right with his
partners to possess specific partnership property for partnership
purposes.
Thus, in Catlan v. Gatchalian, 105 Phil. 1270 (1959), it was held
that when partnership real property had been mortgaged and
foreclosed, the redemptio by any of the partners, even when using
his separate funds, does not allow such redemption to be in his sole
favor: Under the general principle of law, a partners is an agent of
the partnership (Art. 1818, new Civil Code). Furthermore, every
partner becomes a trustee for his copartner with regard to any
benefits or profits derived from his act as a partner (Article 1807,
new Civil Code). Consequently, when Catalan redeemed the
properties in question be became a trustee and held the same in
trust for his copartner Gatchalian, subject of course to his right to
demand from the latter his contribution to the amount of
redemption. (at p. 1271).
This is also the reason why paragraph numbered (2) of Article 1811
of the Civil Code provides expressly that A partners right in
specific partnership property is not assignable except in connection
with the assignment of rights of all the partners in the same
property. Bautista had written that the reasons why a partners
right in partnership property is non-assignable are as follows:
(a) it would effectively allow a third party (the assignee) to
participate in the affairs of the partnership, and would basically

164

have a stranger become a partner without the consent of all the

other partners; and
(b) it would interfere with the rights of the other partners and the
partnership creditors to have all partnership properties applied
directly to the payment of partnership debts; and
(c) it would indirectly go against the principle that partners right in
specific partnership property cannot be attached or levied upon,
(BAUTISTA, at p. 162), as provided in paragraph (3) of Article
1811. In line with the same rationale, paragraph numbered (4)
of Article 1811 also provides that a partners right in specific
partnership property is also not subject to support.
Bautista reminded us in his treatise that the whole of Article 1811 of
the Civil Code was taken from the Uniform Partnership Act
which, based on common law, adheres to the aggregate theory of
partnership under which, because it is not considered an entity or a
legal person, a partnership cannot hold title and hence partnership
property is deemed held or owned in common by the partners for
the benefit of the partnership, (BAUTISTA, at pp. 147-148) as
opposed to the civil law doctrine that affords the partnership a
separate juridical personality,

3. Equity Rights of Partners

Article 1812 of the Civil Code defines a partners interest in the
partnership essentially as his equity interest, thus: his share of
the profits and surplus. A partners interest in the partnership
defines his equity position as a co-proprietor of the partnership
enterprise, which entitles him ipso facto to share in the profits and
to share in the losses of the venture.
Profits represent the excess of receipts over expenses or the
excess of the value of returns over the value of advances (Citizens
National Bank v. Corl. 33 S.E.2d 613, 616 (1945); Fairchild v. Gray,
242 N.Y.S. 192 [1930];Crawford v. Surety Insurance Co., 139 P.

165

481, 484 [1970]); whereas; surplus has been defined as the

excess of assets over liabilities. (Tupper v. Kroc, 492 P. 2d 1275
[1972]; Anderson v. U.S., 131 F.Supp. 501 (1955);Balaban v. Bank
of Nevada, 477 P.2d 860 [1970]).
Bautista wrote that The interest of the partner in the partnership
has thus been otherwise described as the net balance remaining to
him; after all partnership debts or claims against it have been paid
and the equities and accounts between such partner and his
copartners have been adjusted. (BAUTISTA, at p. 176, citing
Claude v. Claude, 228 P.2d 776 [1951]; Preton v. State Industrial
Accident Commission, 149 P.2d 275 [1944]; Swirsky v. Horwich, 47
N.E.2d 452 [1943]; Cunningham v. Cunningham, 135 N.E. 21
[1922]).
a. Assignability of a Partners Equity Right
A partners equity interest in the partnership truly represents a
proprietary interest for his exclusive benefit as an owner of such
intangible right. Therefore, like any other property right, a partners
equity is generally transferable or assignable. Nonetheless under
Article 1813 of the Civil Code, the transfer or assignment of a
partners equity does not make the transferee or assignee step into
the shoes of the partner in his personal capacity as such in relation
to the other partners, thus:
A conveyance by a partner of his whole interest in the partnership
does not of itself dissolve the partnership, or, as against the other
partners in the absence of agreement, entitle the assignee, during
the continuance of the partnership, to interfere in the management
or administration of the partnership business or affairs, or to require
any information or account of partnership transactions, or to inspect
the partnership books.
In other words, under Article 1813, the only thing that can be
conveyed by a partner as an equity holder, is the sole right to
receive profits and surplus assets upon the dissolution of the
partnership, thus: i merely entitles the assignee to receive in
accordance with his contract the profits to which the assigning

166

partners would otherwise be entitled. The only instance under said

provision that the transferee or assignee may avail himself of the
usual remedies is in case of fraud in the management of the
partnership.
Unlike in Corporate Law where the rule on equity is that they are
essentially transferable, in Partnership Law, equity interests of
partners are not essentially transferable. This statement is not even
accurate because if you look at the language of Article 1813 the
proper rule would be, every partner shall have an absolute right to
transfer or assign his equity interest, but such transaction will not
transfer his other rights as a partner. The article also recognizes
that just because a partner cashes in on his equity rights in the
partnership, which he has every right to do, the same does not
mean that he ceases to be a party to the partnership contract nor
does it trigger the dissolution of the partnership, which means that
with respect to his other right to management the partnership
affairs and act as agent of the other partners, these remain in tact.
So separate and divisible is a partners equity rights from his other
rights as a partner that even during the term of the partnership
Article 1814 of the Civil Code allow the personal judgment creditors
of a partner to have his equity right in a partnership to charge the
interest of the debtor partner with payment of the unsatisfied
amount of such judgment debt with interest thereon; and may then
or later appoint a receiver of his share of the profits, and of any
other money due or to fall due to him in respect of the partnership.
The article allows of the partners or the partnership itself to either
to redeem or to purchase the equity executed without thereby
causing a dissolution of the partnership.
Bautista wrote that Article 1814 was taken from the Uniform
Partnership Act, and patterned after the English Partnership Act of
1890, and it was adopted formally to a decided purpose of providing
a means by which the separate creditors of a partner may seize
upon his property rights without having to disrupt the operations of
the partnership enterprise or effectively force the dissolution of the
partnership. (BAUTISTA, at pp. 184-185). Thus, Article 1814, which
allows the attachment or execution of a partners equity rights in a

167

partnership is the remedy given to a partners separate creditors in

lieu of the express prohibition of seeking an attachment or levy
upon the partnership assets and properties themselves to cover the
partners right to specific partnership property.
Under Article 1827, the separate creditors of each partner may ask
for the attachment and public sale of the share of the partner in the
partnership assets, which must be upon dissolution and only after
the partnership creditors have been fully satisfied. To construe the
provision of Article 1827 literally would mean that it would run
counter to the provision under Article 1811(3) which provides that
A partners right in specific partnership property is not subject to
attachment or execution.
Under American jurisprudence, since an equity right in partnership
is a present, existing, and not a mere contingent, right, it can be
assigned, nevertheless, the partners may agree that one of them
cannot sell or assign his interest without the consent of the other or
others (Pokrzywnicki v. Kozak, 47 A.2d 144 [1946]), or they may
enter
into
an
agreement
prohibiting
such
assignment
altogether (Chaiken v. Employment Security Commission, 274 A.2d
707 [1971]). Why is a right of refusal or right of first refusal
generally valid for partnership equity and not for shares of stock in
a corporation?
A good illustration of the sheer divisibility between the property
rights of a partner is shown in the decision in Goquiolay v. Sycip,
108 Phil. 947 (1960), where the particular provision on succession
in the articles of partnership specifically provided as follows: In the
event of the death of any of the partners at any time before the
expiration of said term, the copartnership shall not be dissolved but
will have to be continued and the deceased partner shall be
represented by his heirs or assigns in said copartnership. When the
duly designated sole managing partner under the articles died and
was succeeded by his widow, it was contended that under the terms
of the articles she also succeeded to the sole management of the
partnership. In ruling against such a conclusion, the Court held

168

. . . While, as we previously stated in our narration of facts, the

Articles of Copartnership and the power of attorney . . . conferred
upon the [the sole managing partner] the exclusive management of
the business, such power, premised as it is upon trust and
confidence, was a mere personal right that terminated upon [the
sole managing partners] demise. The provision in the articles
stating that in the event of death of any one of the partners within
the 10-year term of the partnership, the deceased partner shall be
represented by his heirs, could not have referred to the managerial
right given to [the deceased husband]; more appropriately, it
related to the succession in the proprietary interest of each partner.
(Ibid, at pp. 954-955).
b.
Right to Participate
Participate in Losses

in

Profits; the Obligation

to

The rights of an equity holder are essentially linked to the

operations of the business enterprise, and as he takes the risk
connected with business down-turn, then to him would also accrue
the profits of the enterprise. One who merely participates in the
sharing of gross returns of an enterprise, as indicated in Article
1769(3) of the Civil Code does not necessarily mean that he is an
equity holder, for he does not expose him to the expenses and
losses of the business, in contrast to one who shares in the net
profits, who under Article 1769(4) is prima facie evidence that he is
a partner in the business, if such participation is not linked to some
other clear contractual arrangement.
Under Article 1767 of the Civil Code, the essence of a partnership
arrangement is the existence of a common fund or a business
enterprise, and which under Article 1770 must be established for
the common benefit or interest of the partners; and which is the
reason why under Article 1799, a stipulation in the contract of
partnership which excludes one or more of the partners from any
share in the profits or losses is void, but the partnership
arrangement remains subsisting.
Article 1797 of the Civil Code provides for the rules governing the
distribution of profits and losses in the partnership business, thus:

169

(a) Profits and losses shall be distributed in conformity with the

agreement between the partners;
(b) If only the share of each partner in the profits has been agreed
upon, the share of each in the losses shall be in the same
proportion;
(c) In the absence of any such agreement, the share of each
partner in the profits and losses shall be in proportion to what he
may have contributed, except that the industrial partner shall not be
liable for the losses; as to the profits, the industrial partner shall
receive such share as may be just and equitable under the
circumstances; and if he contributed also capital, the shall also
receive a share in the profits in proportion to his capital.
Article 1798 of the Civil Code provides that if the partners have
entrusted to a third person the designation of profits and losses,
such designation may be impugned only when it is manifestly
inequitable; and in no case may a partnership who has begun to
execute the decision of third person, or who has not impugned the
same within three (3) months from the time he had knowledge
thereof, complain of such decision. The article also provides that the
designation of losses and profits cannot be entrusted to one of the
partners.
What happens when one or more of the partners are designated to
distribute profits and losses? It would have to mean that the
designation and the exercise thereof would both be void.

4. Other Rights of a Partner

a. Right to Inspect
Article 1805 of the Civil Code expressly provides that every partner
shall at any reasonable hour have access to and may inspect and
copy the partnership books which shall be kept at the principal place
of business of the partnership.

170

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 partners right to inspect and
to demand true and full information on partnership matters.
b. Right to Demand True and Full Information
Article 1806 of the Civil Code provides that every partner or his
legal representative may demand true and full information from
other partners of all things affecting the partnership.
Consequently, in consonance with the fiduciary relationship existing
between and among partners, every partner has the obligations to
render true and full information to other partners of all things
affecting the partnership.
c. Right to Demand Accounting
Under Article 1807 of the Civil Code, every partner may demand
from every other partner an accounting to the partnership for any
benefit, and hold as trustee for it any profits derived by him without
the consent of the other partners from any transaction connected
with the formation, conduct, or liquidation of the partnership or
from any use by him of its property.
Under Article 1809 of the Civil Code, any partner shall have the
right to a formal account as to partnership affairs, when he is
wrongfully excluded from the partnership business or possession of
its property, if the right exists under the terms of the partnership
agreement, whenever circumstances render it just and reasonable.
In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746
(1989), the Court held that a partners right to accounting exists as
long as the partnership exists, and that prescription begins to run

171

only upon the dissolution of the partnership and final accounting is

done.
On the other hand, iIn Hanlon v. Haussermann and Beam, 40 Phil.
796 (1920), the Court ruled that former partners in a joint
undertaking to rehabilitate a mining plant have no right to demand
accounting for the profits of such undertaking when the partnership
arrangement had been terminated with the failure of the claiming
partners to raise the promised investments into the enterprise, and
that the other two partners pursued the venture on their own
account and only after the partnership arrangement had terminated.
In Lim Tanhu v. Ramolete, 66 SCRA 425 (1975), the Court held that
a partners right to accounting for properties of the partnership that
are within the custody or control of the other partners shall apply
only when there is proof that such properties, registered in the
individual names of the other partners, have been acquired from the
use of partnership funds, thus:
Accordingly, the defendants have no obligation to account to
anyone for such acquisitions in the absence of clear proof that they
had violated the trust of [one of the partners] during the existence
of the partnership. (Ibid, at p. 477).
d. Right to Dissolve the Partnership
The near-absolute legal power of any partnership in a partnership to
demand the dissolution of the partnership is in consonance with the
doctrine
of delectus
personae that
establishes
a
fiduciary
relationship between and among the partners.
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court confirmed the
right of a partner to unilaterally dissolve the partnership, by a
notice of dissolution, which in effect is a notice of withdrawal from
the partnership, thus: Under Article 1830(2) of the Civil Code, even
if there is a specified term, one partner can cause its dissolution by
expressly withdrawing even before the expiration of the period, with
or without justifiable cause. Of course, if the cause is not justified or
no cause was given, the withdrawing partner is liable for damages

172

but in no case can he be compelled to remain in the firm. With his

withdrawal, the number of members is decreased, hence, the
dissolution. (Ibid, at pp. 118-119).
The right of a partner to dissolve the partnership will be discussed in
more details on the chapter on Dissolution, Winding-up and
Termination.

5. Obligations of the Partnership

a. Obligations to the Partners
Partnership Law lays down specific provisions to govern the
obligation of the partnership to the partners arising from the
management of partnership affairs, thus:
(1) Amounts disbursed for and in Behalf of the Partnership
Article 1796 of the Civil Code provides that the partnership shall be
responsible to every partner for the amounts he may have
disbursed on behalf of the partnership and for the corresponding
interest, from the time the expenses are made;
(2) Contracts
Partnership

Entered

into

for

and

In Behalf

of

the

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.

173

b. Obligations to Third Persons

Partnership Law, particularly under Article 1768, accords to the
partnership venture a separate juridical personality, primarily to
allow a more feasible and efficient manner by which to deal with the
public and to organize the venture into a enterprise that provides
for a clear delineation of liability and a hierarchy of claims against
its assets.
(1) Liability Arising from the Firm Name
The name of a partnership venture becomes essential in its
commercial dealings because it identifies the person of the
partnership which is deemed to be party bound in each of the
contracts entered into. Thus, under Article 1815 of the Civil Code,
Every partnership shall operate under a firm name, which may or
may not include the name of one or more of the partners. The
inclusion of the name of a person in the partnership name becomes
a conclusive presumption to the public who deals in good faith with
the firm that he is a partner thereto. Consequently, under said
article, [t]hose who, not being members of the partnership, include
their names in the firm name, shall be subject to the liability of a
partner.
(2) Liability Arising from the Acts of the Agent
Since the corporate venture is
personality, then the liability that
deals with can only arise from
authorized agent or agents, which
partner (Article 1818, Civil Code).

accorded a separate juridical

it incurs with the public that it
the acts of the partnerships
by default rule would be every

The liability that the partnership must bear from the acts of the
partners pursuant to partnership business applies only to a third
person who deals in good faith with the partnership; Thus, a third
person who knows of the lack of authority of the partner acting in a
partnership transactions generally cannot claim against the
partnership, thus:

174

(a) When the partner so acting has in fact no authority to act for
the partnership in the particular matter, and the person with whom
he is dealing has knowledge of the fact that he has no such
authority (Article 1818, Civil Code); and
(b) An act of a partner which is not apparently for the carrying on
of the business of the partnership in the usual way does not bind
the partnership unless authorized by the other partners (Article
1818, Civil Code); and
(c) No act of a partner in contravention of a restriction on
authority shall bind the partnership to persons having knowledge of
the restriction (Article 1818, Civil Code).
oOo

175

13 DUTIES AND OBLIGATIONS OF PARTNERS

[Updated: 14 October 2009]

1. Obligation to Contribute to the Common Fund

Since the agreement to contribute to a common fund is an essential
element for a valid contract of partnership to arise, Philippine
Partnership Law provides for clear statutory provisions governing
such obligations.
In Corporate Law, equity obligations (i.e., the obligation to pay
subscriptions to capital stock) are not treated as debt obligations,
and the receivables arising therefrom are not considered as forming
part of the ordinary assets of the corporation. The rule takes it
rationale from the trust fund doctrine, that the assets of the
corporation corresponding to its capital stock are treated as a trust
fund preserved for the protection of the claims of the corporate
creditors who can, are under the corporate limited liability rule,
recover on their liabilities to the assets of the corporation and the
investments and promised investments of the stockholders. (Ong
Yong v. Tiu, 401 SCRA 1 [2003]; NTC v. Court of Appeals, 311
SCRA 508 [1999];Commissioner of Internal Revenue v. Court of
Appeals, 301 SCRA 152 [1999]; Boman Environmental Dev. Corp.
v. Court of Appeals, 167 SCRA 540 [1988]). Consequently, capital
contributions and obligations to contribute capital (i.e., subscription
contracts and subscription receivables) cannot be treated like
ordinary contracts and debts, and are not subject to rescission, setoff, 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

176

partnership for whatever he may have promised to contribute

thereto. The reason for this rule is that in Partnership Law, the
prevailing doctrine is unlimited liability on the part of the partners,
and there is no need to consider their capital accounts and promised
contribution as a trust fund for the protection of the partnership
creditors, who have the legal right to seek satisfaction of their
claims even against the separate properties of each of the partners
not contributed or promised to the partnership.
This is not to say that some of the elements of the trust fund
doctrine do not apply to the partnership setting, for they do, such as
the rule that creditors have preference over partners against the
partnership properties. Thus, Article 1826 of the Civil Code provides
that The creditors of the partnership shall be preferred to those of
each partner as regards the partnership property.
Why is it then necessary for Partnership Law to declare expressly
that a partner is a debtor of the partnership for whatever he may
have promised to contribute thereto? The answer lies in the primary
principle which Partnership Law seeks to promote, which is that the
promise or obligation to contribute to the common fund is of the
essence of the contract of partnership and binds the partners to one
another as the very privity of their relationship, and the breach of
which would break the contractual bond (delectus personae). The
point is best illustrated by the following doctrines:
(a) Under Article 1788 of the Civil Code, when a partner fails to
deliver his promised contribution to the partnership, he becomes
liable for interests and damages from the time he should have
complied with his obligation;
(b) Under Article 1790 of the Civil Code, Unless there is a
stipulation to the contrary, the partners shall contribute equal
shares to the capital of the partnership. Under Article 1830(4), the
partnership is automatically dissolved When a specific thing, which
a partner had promised to contribute to the partnership, perishes
before the delivery;

177

(c) The remedies available to the partnership and the other

partners with respect to the failure or refusal to comply with
contribution obligation takes the normal remedies of interest and
damages, including compensatory damages constituting his shares
of the profits (Uy v. Puzon, 79 SCRA 598 [1977]; Moran, Jr. v.
Court of Appeals, 133 SCRA 88 [1986]);
(d) When a partner fails to comply with his obligation to deliver
what he promised to contribute to the partnership, and there is no
desire to dissolve the partnership, the remedy that is available to
the other partners cannot be rescission, but rather one for specific
performance. (Sancho v. Lizarraga, 55 Phil. 601 [1930]); and
(e) The property contributed by a partner becomes the property of
the partnership and cannot be disposed of without the consent of
the other partners. Lozana v. Depakakibo, 107 Phil. 728 [1960]).
a.

When Promised Contribution Is a Sum of Money

Under Article 1788 of the Civil Code it is provided that A partner

who has undertaken to contribute a sum of money to the
partnership venture [and fails to do so,] becomes a debtor for the
interest and damages from the time he should have complied with
his obligation.
The article therefore allows the partners and the partnership to
recover from the defaulting partner not only interest due (at the
rate stipulated or in default thereof, the legal interest), but
damages, including loss opportunity, shown to have been sustained
by the partnership by reason of the failure of the partner to pay in
his contribution.
b.

When Promised Contribution Is PropertyIn General

Whenever a partner has bound himself to contribute a specific or

determinate thing to the partnership, he thereby assumes the
position of being a seller of determinate property contributed into
the partnership in that he is liable for:

178

(a) A breach of the warranty against eviction;

(b) The fruits thereof from the time he obliged himself to
deliver the determinate thing, and without need of demand.
In addition, Article 1795 of the Civil Code establishes the rules on
who assumes [t]he risk of specific and determinate things . . .
contributed to the partnership, thus:
(a) If they are not fungible, so that only their use and
fruits may be for the common benefit, the risk shall be borne by
the partner who owns them;
(b) If the things contributed, (i) are fungible, or (ii) cannot be
kept without deteriorating, or (iii) if they were contributed to be
sold: the risk shall be borne by the partnership.
(c) In the absence of stipulation, the risk of things brought
and appraised in the inventory, shall also be borne by the
partnership, and in such case the claim shall be limited to the value
at which they were appraised.
As to who bears the risk of loss of determinate things promised to
be contributed but prior to actual delivery to the partnership, the
prevailing view seems to be that it would be the partner who before
actual delivery retains ownership thereof. (BAUTISTA, at p. 91,
citing Francisco, Partnership at p. 150 [1958]) But in such case,
under Article 1829(4), [w]hen a specific thing which a partner had
promised to contribute to the partnership, perishes before the
delivery, dissolves the partnership.
c. Contribution is Goods
Under Article 1787 of the Civil Code, When the capital or a part
thereof which a partner is bound to contribute consists of goods,
their appraisal must be made in the manner prescribed in the
contract of partnership, and in the absence of stipulation, it shall be
made by experts chosen by the partners, and according to the

179

current prices, the subsequent changes thereof being for the

account of the partnership.
The requirements of the provision are made to ensure that the
capital account of a partner is properly credited with the correct
value of a property contributed.
d. Contribution is Real Property
Under Article 1773 of the Civil Code, a contract of partnership would
be void, whenever immovable property is contributed, if an
inventory of said property is not made, signed by the parties, and
attached to the public instrument mandated under Article 1771 of
the Civil Code, which requires in such case that the contract of
partnership must be in a public instrument, and which under Article
1772 of the Civil Code would have to be filed with the Securities
and Exchange Commission (SEC) because it would almost always
mean a capital of more than P3,000.00.
A more detailed discussion of the effects on the non-fulfillment with
the requirements mandated by law can be found on the chapter on
Formalities Required for Partnerships.
e.
Contribution of Service or Industry; the Industrial
Partner
There can be no doubt that once the contract of partnership is
constituted, the industrial partner is from then bound to devote his
time towards fulfilling the nature of the service he has contracted
himself to contribute. The difficulty arises from the fact that the
obligation essentially involves the personal obligation to do, and
generally an industrial partner who does not contribute the services
promised cannot be compelled to do so, otherwise specific
performance on the matter would violate the public policy against
involuntary servitude. The other difficulty that arises is that even
non-industrial partners, being mutual agents with one another and
generally empowered to jointly manage the partnership affairs, also
contribute their services to the partnership for which they do not

180

also obtain, as in the case of the industrial partner, a compensation

therefor, unless otherwise stipulated.
The American case of Marshs Appeal, (69 Pa. St. 30, quoted
in Bautista, at pp. 92-94) discusses the points as follows:
. . . The only question in this case is whether a partner who neglects
and refuses, without reasonable cause, to perform the personal
services which he has stipulated to render the partnership, is liable
to account to the firm for the value of the services in the settlement
of the partnership accounts. . . . It is undoubtedly true, as a general
rule, that partners are not entitled to charge each other, or the firm
of which they are members for their services in the copartnership
business, unless there is a special agreement to that effect, or such
agreement can be implied from the course of dealing between them.
By the well-settled law of partnership, every partner is bound to
work to the extent of his ability for the benefit of the whole, without
regard to the services of his copartners, and without comparison of
value; for services to the firm cannot, from their very nature, be
estimated and equalized by compensation of differences. . .
. . . The plaintiffs are not seeking compensation for the services
they rendered the partnership. They are simply seeking to charge
the defendant with the loss occasioned the partnership by this
refusal to render the services which he agreed to perform. If the
partnership has suffered loss by his breach of the agreement, why
should he not make good the loss, and put the firm in the same
condition it would have been if he had not broken the agreement? .
. . If, says Mr. Justice Story, the partnership suffers any loss from
the gross negligence, unskillfulness, fraud, or wanton misconduct of
any partner in the court of partnership business, he will ordinarily
be responsible over to the other partners for all the losses and
injuries, and damages sustained thereby, whether directly or
through their own liability to third persons. . . If this be the law,
why should not the defendant be answerable to the partnership for
breach of the agreement to perform the services stipulated?
It is clear therefore, that when an industrial partner has failed to
render the proper service he is obliged to render to the business of

181

the firm, he can be made liable for the damages sustained by the
firm for such failure. In addition, the breach by an industrial partner
of his primary obligation to render service to the partnership would
have repercussion on his share in the net profits of the company.
Under Article 1797 of the Civil Code, As for profits, the industrial
partner shall receive such share as may be just and equitable under
the circumstances.
The fiduciary duties of an industrial partner are discussed more in
detail hereunder.
f. Obligation for Additional Contribution
Since the nexus of the obligation of a partner arises from the
contract of partnership, there is generally no obligation for any
partner to contribute beyond what was originally stipulated in the
articles of partnership, unless there is a stipulation providing for
additional contributions. Even in the case where additional
contribution to capital becomes necessary in case of an imminent
loss of the business of the partnership, no partner can be
compelled to give additional contribution, but the legal consequence
under Article 1791, is that any partner who refuses to contribute
an additional share to the capital, except an industrial partner, to
save the venture, shall be obliged to sell his interest to the other
partners. Even such a penalty cannot be applied according to
Article 1791 if there is an agreement to the contrary, that is a
stipulation in the contract of partnership that even in case of
necessity to the save the venture, partners cannot be compelled to
make additional contribution, in which case the forfeiture of their
interest cannot even be enforced.
g. Remedies
Contribute

When

There

is

Default in

Obligation

to

Normally, the contract of partnership being one constituted of

bilateral (multilateral) obligations, the remedy to the other partners
when one of them fails to comply with his obligation to contribute,
would either be specific performance or rescission. Under the
provisions of the old Civil Code, the Court held in Sancho v.

182

Lizarraga, 55 Phil. 601 (1931), that the remedy of rescission of the

contract of partnership which would mean the return of the
contribution of the complaining partner with interest and damages
proven, is not available because then Articles 1681 and 1682 [now
Articles 1786 and 1788] provided for specific remedies to the
contract of partnership, thus:
Owing to the defendants failure to pay to the partnership the whole
amount which he bound himself to pay, he became indebted to it for
the remainder, with interest and any damages occasioned thereby,
but the plaintiff did not thereby acquire the right to demand
rescission of the partnership contract according to article 1124 of
the Code. This article cannot be applied to the case in question,
because it refers to the resolution of obligations in general, whereas
articles 1681 and 1682 specifically refer to the contract of
partnership in particular. And it is a well known principle that special
provisions prevail over general provisions. (Ibid, at pp. 603-604).
In Sancho the Court affirmed the decision of the lower court which
effectively denied the prayer for rescission, and instead directed the
dissolution of the partnership, the accounting and liquidation of its
affairs. In other words, the remedy of rescission, which seeks to
extinguish the contractual relationship and effect mutual restitution,
is not allowed under the contract of partnership. The proper
remedies would be to seek a collection of the promised contribution,
with recovery of interests and damages as provided for in Articles
1786 and 1788, or ask for dissolution of the partnership under
Article 1831.
It may be said that dissolution is a form of rescission unique to
partnerships (also for corporations, especially close corporations),
which only has a prospective effect of terminating the contractual
relationship, and thus not produce the retroactive effect of
extinguishing the contract as though it never existed and providing
for mutual restitution.
This special type of remedies is indicative of the essential nature of
the contract of partnership as (for lack of a better term)
a preparatory orprogressive contract in that it is entered into to

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pursue a transaction or series of transactions (i.e., to operate a

business enterprise) that changes the nature and content of the
things that have been contributed thereto, such that it becomes
nearly impossible to return the parties back to their original
position.
The ruling is also consistent with the rule that once a partner gives
a contribution to the partnership, he loses direct ownership over
said property which is now owned by the partnership as a separate
juridical person, and that it is integrated into the partnership
business enterprise, which upon application of the trust fund
doctrine, means that it shall be the partnership creditors who shall
first have priority over the partnership assets before any partner
can be entitled to recover from the net assets.
h. Personal Obligations for Partnership Debts; Doctrine of
Unlimited Liability
The unlimited liability feature in the partnership setting makes
partners personally liable for partnership debts, notwithstanding the
separate juridical entity of the partnership. However, such liabilities
of partners are better covered in the chapter on Dissolution,
Winding Up and Termination, because the triggering mechanism
would in effect be only if the partnership becomes insolvent. But
this is not to mean that the insolvency of the partnership
necessarily would trigger its dissolution, for it may happen that the
partners continue to pursue the business venture in the hope that
there may still be a turn-around.
Under Article 1816 of the Civil Code provides that All partners,
including industrial ones, shall be liable pro rata with all their
property and after all the partnership assets have been exhausted,
for the contracts which may be entered into in the name and for the
account of the partnership. Article 1817 provides that Any
stipulation against the liability laid down in [Article 1816] shall be
void, except as among the partners. Rightly stated, it is the
exhaustion of partnership assets to answer for partnership liabilities
that triggers the enforcement of the unlimited liability mechanism
as against partners and their separate assets. And the pro-

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rata obligation of the partners does not mean that they become
personally liable proportionately in relation to their contributions in
the partnership, but actually means they are liable jointly.
The subsidiary and pro rata liability feature under the old Civil Code
was retained under the new Civil Code, which does not adopt the
primary and solidary liability feature for commercial partners under
the Code of Commerce.

2. Fiduciary Duties of Partners

The fiduciary
partnership
consequently
distinguished
obligations of

duties of the partners among one another and to the

subsists only while the partnership subsists;
the termination of the partnership relation (as
from mere dissolution) also terminates the fiduciary
the partners to one another and to the partnership.

In Hanlon v. Haussermann, 40 Phil. 796 (1920), four contracting

parties agreed to a joint enterprise to rehabilitate a mining plant,
where the engagement of the three of them was limited to raising
money within a stated period by subscribing to or selling shares of
the mining company. One of the parties who had undertaken thus
to raise money defaulted, and under the express resolutory
conditions of the contract the two other parties were discharged.
Subsequently, the two parties thus discharged, who were at the
same time stockholders and officials of the mining company,
procured a contract from the mining company by which they
proceeded to restore the mining plant upon their own account. The
other two members of the original enterprise sued to recover shares
in the mining company and dividends declared upon such shares on
the ground that they were earned pursuant to the joint enterprise to
which they were entitled to receive their shares. In denying the
claims, the Court held
After the termination of an agency, partnership, or joint adventure,
each of the parties is free to act in his own interest, provided he has
done nothing during the continuance of the relation to lay a

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foundation for an undue advantage to himself. To act as agent for

another does not necessarily imply the creation of a permanent
disability in the agent to act for himself in regard to the same
subject-matter; and certainly no case has been called to our
attention in which the equitable doctrine above referred to has been
so applied as to prevent an owner of property from doing what he
pleased with his own after such a contract [of partnership] between
the parties to this lawsuit had lapsed. (Ibid, at p. 818) .
Likewise, in Lim Tanhu v. Remolete, 66 SCRA 425 (1975), the Court
held that former partners have no obligation to account on how they
acquired properties in their names, when such acquisition were
effected long after the partnership had been automatically
dissolved as a result of the death of Po Chuan [the primary
managing partner]. Accordingly, defendants have no obligation to
account to anyone for such acquisitions in the absence of clear proof
that they had violated the trust of Po Chuan during the existence of
the partnership. (Ibid, at p. 476)
a. Duty to Account
Since the partners are mutual agents to one another and to the
partnership, then necessarily they are obliged by such fiduciary
relationship to render a full accounting on matters they undertake
for the partnership affairs, and are prohibited from obtaining secret
benefits for themselves therefrom. The duty is closely linked to the
duty of loyalty.
Under Article 1806 of the Civil Code, partners shall render on
demand true and full information of all things affecting the
partnerships to any partner or the legal representative of any
deceased partner or of any partner under disability.
Under Article 1807 of the Civil Code , Every partner must account
to the partnership for any benefit, and hold as trustee for it any
profits derived by him without the consent of the other partners
from any transaction connected with the formation, conduct, or
liquidation of the partnership or from any use by him of its
property.

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Aside from the remedy of recovering the profits derived by a

partner from partnership affairs, the same may be a ground to seek
judicial dissolution of the partnership under Article 1831 of the Civil
Code.
b. Duty of Diligence
Article 1794 of the Civil Code covers a partners duty of diligence to
the partnership affairs:
Every partner is responsible to the partnership for damages suffered
by it through his fault, and he cannot compensate them with the
profits and benefits which he may have earned for the partnership
by his industry. However, the courts may equitable lessen this
responsibility if through the partners extraordinary efforts in other
activities of the partnership, unusual profits have been realized.
Under Article 1800 of the Civil Code, a duly designated managing
partner who acts in bad faith, his particular exercise of power
administration may effectively be opposed by the other partners.
When he acts without just or lawful cause, then his power may be
revoked, except of course when he has been appointed the
managing partner under the terms of the articles of partnership.
c. Duty of Loyalty
Although the term is more properly associated to officers and
directors of corporations, partners, being managers of the
partnership, and agents to one another, owe both the partnership
and one another the duly of loyalty, which includes the avoiding of
entering into transactions or situations that present a conflict-ofinterests. The duty of loyalty in the partnership setting arises
necessarily as a consequence of the mutual agency relationship
existing between and among the partners.
In the event a partner takes any amount from the partnership funds
for himself, he becomes a debtor of the partnership, as well for the
interests and damages, which liability under Article 1789 of the Civil

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Code shall begin from the time he converted the amount to his own
use.
An aspect of a partners duty of loyalty arising from the fact that he
acts as an agent of the partnership is manifested in Article 1792 of
the Civil Code, which provides that when a partner authorized to
manage collects a demandable sum which was owed to him in his
own name, but from a person who owned the partnership another
sum also demandable, the sum thus collected shall be applied to the
two credits in proportion to their amounts, even though he may
have given a receipt for his own credit only; but should the partner
have given it for the account of the partnership credit, the amount
shall be fully applied for the account of the partnership. The article
provides for an exception to its application: The provisions of this
article are understood to be without prejudice to the right granted
to the debtor by Article 1252 [on right of debtor to stipulate the
application of payment], but only if the personal credit of the
partner should be more onerous to him.
Another aspect of a partners duty of loyalty is shown in Article
1793, which provides that a partner who has received in whole or in
part, his share of a partnership credit, when the other partners have
not collected theirs, shall be obliged, if the debtor should thereafter
become insolvent, to bring to the partnership capital what he
received even though he may have given a receipt for his share
only.
In Catalan v. Gatchalian, 105 Phil. 1270 (1959), the Court ruled
that when partnership real property had been mortgage and
foreclosed, the redemption by any of the partners, even when using
his separate funds, does not allow such redemption to be in his sole
favor. The summary reported reads in part as follows:
. . . Under the general principle of law, a partner is an agent of the
partnership (Art. 1818, new Civil Code). Furthermore, every partner
becomes a trustee for his copartner with regard to any benefits or
profits derived from his act as a partner (Article 1807, new Civil
Code). Consequently, when Catalan redeemed the properties in
question he became a trustee and held the same in trust for his

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copartner Gatchalian, subject of course to his right to demand from

the latter his contribution to the amount of redemption. (Ibid, at p.
1271)
d. Specific Fiduciary Duties of Industrial Partner
Under Article 1789 of the Civil Code, an industrial partner is
prohibited from engaging in business for himself, unless the
partnership expressly permits him to do so. Since even capitalist
partners are expected (although not obliged) to contribute service
to the partnership enterprise, and when they do so they are not
entitled to separate compensation (unless otherwise stipulated),
then in order to make the contribution of service an industrial
partner more meaningful and truly an obligation, it must mean that
is saddled with more burden or prohibitions. The coverage of Article
1789 should mean also that:
(a) Since his main contribution to the partnership is his
industry, then an industrial partner owes to the venture and his
fellow partners the obligation to devote his industry towards
the partnership business.
(b) Even if the partnership is engaged in a particular form of
business, an industrial partner cannot devote his industry to another
type of undertaking for profit even when it is in a different line of
business not in competition with that of the partnership.
If an industrial partner breaches this duty, Article 1789 provides
that the capitalist partners may either:
(a) exclude him from the firm; or
(b) avail themselves of the benefits which the industrial partner
may have obtained in violation of such duty, with a right to
damages in either case.
It seems clear from jurisprudence that in order for an industrial to
be held liable for breach of duty under Article 1789, he must have

189

engaged during the term of the partnership into another business or

an activity that is essentially for profit.
In Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973), an
article of co-partnership was executed between three capitalist
partners on one hand, and Judge Abad Santos, as an industrial
partner on the other hand, with the capitalist partners being entitled
to 70% of the profits, while the industrial partner was entitled to
30% thereof. Several years into the partnership term, Judge Abad
Santos sought to have an accounting of the partnership affairs and
to be given her share of the profits of the company which had been
distributed only among the capitalist partners. The capitalist
partners sought to have the relationship declared as not a true
partnership on the ground that the articles were drawn-up merely to
cover the special arrangement entitlement by which Judge Abad
Santos had arranged for a loan financing for the company to be paid
only after the loan has been fully paid; and that in fact being an
incumbent judge she rendered to service to the company, thus:
It is an admitted fact that since before the execution of the
amended articles of partnership . . . the appellee Estrella Abad
Santos has been, and up to the present time still is, one of the
judges of the City Court of Manila, devoting all her time to the
performance of the duties of her public office. This fact proves
beyond peradventure that it was never contemplated between the
parties, for she could not lawfully contribute her full time and
industry which is the obligation of an industrial partner pursuant to
Art. 1789 of the Civil Code.
The Court ruled as follows:
One cannot read appellees testimony just quoted without gaining
the very definite impression that, even as she was and still is a
Judge of the City Court of Manila, she has rendered services for
appellants without which they would not have had the wherewithal
to operate the business for which appellant company was organized.
..
xxx.

190

It is not disputed that the prohibition against an industrial partner

engaging in business for himself seeks to prevent any conflict of
interest between the industrial partner and the partnership, and to
insure faithful compliance by said partner with his prestation. There
is no pretense, however, even on the part of appellants that
appellee is engaged in any business antagonistic to that of appellant
company, since being a Judge of one of the branches of the City
Court of Manila can hardly be characterized as a business. That
appellee has faithfully complied with her prestation with respect to
appellants is clearly shown by the fact that it was only after the
filing of the complaint in this case and the answer thereto that
appellants exercised their right of exclusion under [Article 1789] . . .
after around nine (9) years from June 7, 1955 . . .
That subsequent to the filing of defendants answer to the
complaint, the defendants reached an agreement whereby the
herein plaintiff has been excluded from, and deprived of, her alleged
share, interest or participation, as an alleged industrial partner, in
the defendant partnership and/or in its net profits or income, on the
ground that plaintiff has never contributed her industry to the
partnership, and instead she has been and still is a judge of the City
Court (formerly Municipal Court) of the City of Manila, devoting her
time to the performance of her duties as such judge and enjoying
the privileges and emoluments appertaining to the said office, aside
from teaching in law school in Manila, without the express consent
of the herein defendants (Record On Appeal, pp. 24-25). Having
always known appellee as a City Judge even before she joined
appellant company on June 7, 1955 as an industrial partner, why
did it take appellants so many years before excluding her from said
company as per aforequoted allegations? And how can they
reconcile such exclusion with their main theory that appellee has
never been such a partner because The real agreement evidenced
by Exhibit A was to grant the appellee a share of 30% of the net
profits which the appellant partnership may realize from June 7,
1955, until the mortgage loan of P30,000.00 obtained from the
Rehabilitation Finance Corporation shall have been fully paid. . .

191

The language of the decision in Evangelista & Co. leads to several

observations on the nature of the obligation of an industrial partner.
Firstly, unless otherwise stipulated, an industrial partner need not
devote his entire working hours to the partnership affairs, and he is
in fact not prohibited from engaging in other activities which must
be non-business in character.
Secondly, it is possible that the personal circumstances that a
would-be industrial partner as known to the capitalist partners at
the time they entered into the contract of partnership, would
prevent the industrial partner from devoting full-time to the
partnership affairs, would constitute an integral part of the manner
and nature of what type of service or industry he should devote to
partnership affairs.
Finally, even when an industrial partner fails to live-up to the
commitment of service he obliged himself, the matter must be
raised within a reasonable period by the other partners as the basis
for the remedies of exclusion or forfeiture of benefits as provided in
Article 1789; otherwise, such grounds are deemed waived by reason
by estoppel by laches.
e.

Specific Fiduciary Duties of Capitalist Partners

Under Article 1808 of the Civil Code, The capitalist partners cannot
engage for their own account in any operation which is of the kind
of business in which the partnership is engaged, unless there is a
stipulation to the contrary. If a capitalist partner breaches this duty
of loyalty, then he shall bring to the common funds any profits
accruing to him from his transactions, and shall personally bear all
the losses.

3. Obligation of Subsequently Admitted Partners

Under Article 1826 of the Civil Code, a person admitted as a partner
into an existing partnership is liable for all the obligations of the
partnership arising before his admission as though he had been a

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partner when such obligations were incurred, except that this

liability shall be satisfied only out of the partnership property,
unless there is a stipulation to the contrary.
This is the only aspect of limited liability in a general partnership
setting.

4. Obligations of Non-Partners
Under Partnership Law in the Civil Code, the only time when nonpartners become liable for the partner debts and obligation is when
there is estoppel, or when the public is made to believe that one
person is a partner of the partnership when in fact he is not, thus:
(a) Under Article 1815, those who, not being members of the
partnership, include their names in the firm name, shall be subject
to the liability of a partner;
(b) Under Article 1825, when a person by word or conduct,
represents himself, or consents to another representing him to
anyone, as a partner in an existing partnership or with one or more
persons not actual partners, he is liable to any such persons to
whom such representation has been made, who has, on the faith of
such representation, given credit to the actual or apparent
partnership;
(c) Under Article 1825, when such a person has made such
representation or consent to its being made in a public manner he is
liable to such person, whether the representation has or has not
been made or communicated to such person so giving credit by or
with the knowledge of the apparent partner making the
representation or consenting to its being made;
(d)
Under Article 1825, when a person has been thus
represented to be a partner in an existing partnership, or with one
or more persons not actual partners, he is an agent of the persons
consenting to such representation to bind them to the same extent
and in the same manner as though he were a partner in fact; and

193

(e)
Under Article 1825, when all the members of the
existing partnership consent to the representation, a partnership act
or obligation results; but in all other cases it is the joint act
or obligation of the person acting and persons consenting to
the representation.
oOo

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14 DISSOLUTION, WINDING-UP AND

TERMINATION OF THE PARTNERSHIP
[Updated: 14 October 2009]

1. Introduction and Definition of Terms

An understanding under Partnership Law in the new Civil Code, of
the three terms, namely dissolution, winding-up and
termination, would help clarify the multi-faceted legal
relationships that exist in the partnership arrangement.
Article 1828 of the Civil Code, defines dissolution as the change
in the relation of the partners caused by any partner ceasing to be
associated in the carrying on as distinguished from the winding up
of the business. Dissolution is the term that pertains primarily to
the contract of partnership, the breaking of the vinculum juris, so to
speak, between and among the partners in the partnership
arrangement. It is in Partnership Law equivalent to the terms
rescission and extinguishment of contract of partnership under
the general provisions of the Law on Contracts.
Article 1829 of the Civil Code implicitly distinguishes dissolution
from termination and winding-up when it provides that On
dissolution the partnership is not terminated, but continues until the
winding up of the partnership affairs is completed.
Termination therefore pertains essentially to the partnership as a
business enterprise, and defines the time when all matters
pertaining to the business enterprises, essentially the completion of
pending contracts, the payment of all obligations and the
distribution, if any, of the net assets of the partnership to the
partners, have been completed. The Court has defined termination
of a partnership as the point in time after all the partnership affairs
have been wound up. (Idos v. Court of Appeals, 296 SCRA 194,

195

206 [1998], quoting from Paras, Civil Code of the Philippines, Vol.
V, 7th ed., p. 516)
Winding-up of partnership affairs is therefore the process which is
commenced by the dissolution of the contract of partnership
between and among the partners, and is concluded upon the
termination or complete liquidation of the partnership business
enterprise. The Court has defined winding-up as the process of
settling business affairs after dissolution, (Idos v. Court of Appeals,
296 SCRA 194, 205 [1998], quoting from Paras, Civil Code of the
Philippines, Vol. V, 7th ed., p. 516), and it cites as examples of the
winding-up process, the following: the paying of previous
obligations; the collecting of assets previously demandable; even
new business if needed to wind up, as the contracting with a
demolition company for the demolition of the garage used in a used
car partnership. (Ibid.)
As will be seen from the discussions hereunder, dissolution which
breaks the contractual privity between and among the partners,
does not necessarily give rise to winding-up or termination of the
partnership business enterprise, as the dissolution of an existing
partnership contract may actually lead to the constitution of a new
partnership contract. What may therefore break the contractual
relationship between and among the partners, may not affect at all
the underlying partnership business enterprise, as when the
remaining partners choose to continue the partnership business.

2. Legal Effects of Dissolution

a.
Effect on
Personality

the

Partnership

Contract

and

Juridical

In Corporate Law, dissolution is the termination of the juridical

personality of the corporation which was originally constituted
to pursue new business, and that in fact and in law, the corporate
juridical personality continues to exist for three years with only the
capacity to wind-down the corporate affairs. (Republic v. Tancinco,

196

394 SCRA 386 [2002]) The dissolution of a corporation affects

directly the underlying corporate business enterprise in that it
ceases to pursue business as a going concern, and any contract
entered into as new business would be considered void as having
been entered into with a non-existing corporate party. (Alhambra
Cigar v. SEC, 24 SCRA 269 [1968]; Philippine National Bank v.
Court of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294
[1992]).
In stark contrast, the concept of dissolution in Partnership Law
focuses in the change of the contractual relationship between and
among the partners (the rescission of the partnership contract), as
the termination of their association in carrying the business venture
as a going concern. The contract of partnership remains but only in
the concept as an association to pursue liquidation process.
A direct effect of the dissolution of the partnership is provided in
Article 1832 of the Civil Code, which extinguishes the right and
power of the partners to represent one another to pursue the
partnership as a going concern: Except so far as may be necessary
to wind up partnership affairs or to complete transactions begun but
not then finished, terminates all authority of any partner to act for
the partnership. Dissolution of a partnership does not therefore
undermine existing contracts, nor modify or extinguish the then
existing obligations of the partnership and the partners, and that
the completion or performance of existing contracts and the
settlement of partnership obligations are in fact integral parts in the
winding-up process.
Since the juridical personality of a partnership is inextricably linked
to the underlying contract of partnership, it should mean that the
dissolution of the partnership would bring about the impairment of
the partnership juridical person in whose name the business is
pursued remains hovering.
b.

Effect on the Partnership Business Enterprise

Likewise, in a partnership setting the underlying partnership

business enterprise should cease to exist as as a going concern,

197

but only if the partners remaining do not wish to continue the

partnership business, whenever they are entitled under the law the
option to so continue. Dissolution therefore focuses mainly on the
breaking-up of the contractual relationship of the partners among
one another, and when Article 1832 provides that Except so far as
may be necessary to wind up partnership affairs or to complete
transactions begun but not then finished, dissolution terminates all
authority of any partner to act for the partnership, it means that
the force of the original contract of partnership between them as to
being mutual agents, as well as the enforceability of the doctrine
of delectus personae, are terminated, without prejudice to a new
partnership arrangement being constituted among the remaining
partners.
c. Effects on Contracts Entered into With Third Parties
In Corporate Law, after dissolution all contracts entered into that
pursue new business for the corporate venture are void even as to
persons who deal with the corporation in good faith. The reason for
this is that the public policy behind the capacity of the corporate
juridical personality pre-empts the consideration of protecting the
public that deal in good faith with a purportedly validly existing
corporation. Is this the same policy when it comes to contracts on
new business entered into for and in behalf partnership after
dissolution has occurred?
In covering the general legal effects of the dissolution of a
partnership, Bautista cited American decisions, showing that upon
dissolution the partnership continues to exist only for a limited
purpose of winding it affairs, and that no new business can be
pursued. (BAUTISTA, at p. 319). We feel that under the Partnership
Law provisions of our Civil Code, which expressly recognize that the
non-defaulting partners can choose to continue the business
enterprise, the answer to the question raised should be in the
negative, because there is no over-arching public policy of State
supervision and control over the juridical personalities of
partnerships. Under Philippine Partnership Law, the partnership
juridical personality is merely an added feature to the partnership
arrangement to improve the efficiency of partnership transactions,

198

and cannot overcome the more important public policy

considerations, such as the imperative need to protect the
contractual expectations of the public that deals in good faith with
the partnership venture.
We see the demonstration of this principle in Singson v. Isabela
Sawmill, 88 SCRA 623 (1979), where the Court held
It is true that the dissolution of a partnership is caused by any
partner ceasing to be associated in the carrying on of the business.
However, on dissolution, the partnership is not terminated but
continuous until the winding up of the business.
The remaining partners did not terminate the business of the
partnership Isabela Sawmill. Instead of winding up the business of
the partnership, they continued the business still in the name of
said partnership. It is expressly stipulated in the memorandumagreement that the remaining partners had constituted themselves
as the partnership entity, the Isabela Sawmill.
There was no liquidation of the assets of the partnership. The
remaining partners . . . used the properties of said partnership.
xxx.
It does not appear that the withdrawal of [a partner] from the
partnership was published in the newspapers. . . the public in
general had a right to expect that whatever credit they extended to
[the remaining partners] doing the business in the name of the
partnership Isabela Sawmill could be enforced against the
properties of said partnership. . . (Ibid, at p. 642)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held
that the fact that the managing partner excludes the industrial
partner from participation in the partnership business did not mean
that the partnership was extinguished automatically:
However, a mere falling out or misunderstanding between partners
does not convert the partnership into a sham organization. The

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partnership exists until dissolved under the law. Since the

partnership created by petitioners and private respondent has no
fixed term and is therefore a partnership at will predicated on their
mutual desire and consent, it may be dissolved by the will of a
partner. x x x In this case, petitioner Tocaos unilateral exclusion of
private respondent from the partnership effected her own
withdrawal from the partnership and considered herself as having
ceased to be associated with the partnership in the carrying on of
the business. Nevertheless, the partnership is not terminated
thereby; it continues until the winding up of the business. (Ibid, at
pp. 37-38).
d. Effects on Determining Liability of Partners for Damages
to One Another
In Soncuya v. De Luna, 67 Phil. 646 (1939), that for purposes of
determining whether a partner is entitled to damages allegedly
suffered by reason of the supposed fraudulent managment of the
partnership by the managing partner, it is first necessary that a
liquidation of the partnership business must be made to the end
that the profit and losses may be known and the causes of the latter
and the responsibility of the defnedant as well as the damages
which each partner may have suffered, may be determined. (at p.
647; citing Po Yeng Cheo v. Lim Ka Yam, 44 Phil. 172 [1922]).

3. Causes of Dissolution
Partnership Law classifies the causes of dissolution of partnerships
into the following categories:
I. Causes Which Legally Dissolve Ipso Jure Without Need of
Court Decree:
(a) Dissolution
Agreement

Effected

Without

Violation

Termination of the term of the partnership

of

the Partnership

200

Termination of the specific undertaking for which the partnership

was constituted

In a partnership at will, dissolution effected by the will of any

partner exercised in good faith

By mutual withdrawal by all the partners

Expulsion of a partner bona fide under powers granted in the

partnership agreement
(b) Dissolution Effected in Contravention of the Partnership
Agreement, Effected by the Will of Any Partner:

When the partnership term has not expired

When the particular undertaking for which the partnership has

been constituted has not yet terminated

At any time, in a partnership at will

(c) Dissolution Caused by Force Majeure or Outside the Will of the
Partners

Loss of the specific thing promised to be contributed

Partnership business becoming unlawful

Death, insolvency or civil Interdiction of any partner

Insolvency of the partnership

II. Dissolution Caused by Court Decree:
(a) When a partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind;
(b) When a partner becomes incapacitated in performing his part of
the partnership contract;
(c) When a partner has been guilty of such conduct as tends to
affect prejudicially the carrying on of the partnership business;

201

(d) When a partner willfully or persistently commits a breach of the

partnership agreement, or otherwise so conducts himself in matters
relating to the partnership business that it is not reasonably
practicable to carry on the business in the partnership with him;
(e) When the partnership business can only be carried on at a loss;
(f)

Other circumstances that render dissolution equitable;

(g) On the application of the purchaser of a partners interest in the

partnership:

After termination of specified term of the partnership

After termination of the particular undertaking for which the

partnership was constituted

At any time, in a partnership at will

a. Understanding of the Causes of Partnership Dissolution in

the Light of the Partnership Being Primarily a Contractual
Relationship
Notice that Articles 1830 and 1831 of the Civil Code clearly separate
the causes of partnership dissolution between those which may be
effected extrajudicially, and those which require a court decree in
order to be effective.
Partnership being primarily a contractual relationship between and
among the partners, the various modes of dissolution are akin to
the general principles covering the extinguishment of contracts.
When it comes to the first category of causes of partnership
dissolution, namely, those that are effected ipso jure or without
need of any court decree, perhaps a good way of understanding
those causes of dissolution dynamics for partnerships is to think of
dissolution in relation to terms very closely linked to principles of
obligatory force and relativity pertaining to contracts, namely,
the remedy of rescission, the legal concepts of breach of

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contract and the happening of resolutory condition or term, as

well as the other modes of extinguishment of contracts.
Take the first two causes for dissolution, namely, the termination of
the term or the termination or fulfillment of the particular
undertaking for which the partnership has been constituted, which
basically take the character of either full performance or fulfillment
of the resolutory condition or term. Whether it be full performance
or the happening of the resolutory condition or term, a contract is
deemed extinguished ipso jure, and there need not be any
particular act by which the legal effect comes about. The same legal
effect would be the act of any partner declaring the termination of a
partnership in a partnership at will.
When all the partners in a partnership comes to a unanimous
agreement to terminate the partnership, this is the same legal
effect as in another other contract which is extinguished by mutual
withdrawal. Finally, when a partner is expelled bona fide from the
partnership pursuant to the provisions granting such power in the
contract of partnership, then this is in accordance with exercising an
extrajudicial right to rescind or cancel a contract, which conforms to
the spirit of, and is not in breach, of the contractual commitment.
On the other hand, when a partner, without any legal or contractual
basis, seeks the dissolution of the partnership, the same would
indeed constitute a breach of contract for which he become
personally liable for damages, and for which he loses the right to
wind-up its affairs, but nevertheless the dissolution would take legal
effect, in the same manner as in all contracts that embody personal
obligations to do (like agency), i.e., that they are essentially
revocable in spite of contractual stipulations to the contrary. In this
case, there is the application of the doctrine of delectus personae in
the partnership relationships.
As has been discussed previously, the principle of delectus
personae, which treat of the contractual relationship between and
among the partners of the most extreme personal nature (i.e., the
principle of relativity in Contract Law applied at it most extreme
norm), would override the principle of obligatory force of

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contractual provisions. Thus, even when the contracting parties

agree that their partnership contract would be irrevocable for say
ten years, under the principle of delectus personae, any partner
even without cause may seek to terminate his relationship by
withdrawing from the partnership and thereby cause its dissolution;
there is no legal remedy allowed to the other partners to compel the
withdrawing partner to remain with the partnership arrangement
within the remaining term of the partnership provided in its articles
of partnership. Nevertheless, the withdrawal from the partnership
before the expiration of the agreed term of existence would be in
breach of a contractual agreement, and would subject the
withdrawing partnership to liability for damages.
When it comes to dissolutions caused by force majeure or outside
the will of the partners, their importance lies in the spirit of Contract
Law that says that force majeure excuses a contracting party from
his obligations, and would not make him liable for damages for the
occasion does not constitute a breach of contract.
Finally, the causes of dissolution which require a court decree for
their effectivity, usually cover causes of action which either go into
breach of contract or radical change in the conditions or
circumstances upon which the contract was entered into
(i.e., principal of rebus sic stantibus). In either case, the
intervention of the courts if required to establish the factual basis of
the breach of contract, or the radical change of the circumstances
binding the partners together into the contract of partnership.
The termination of the partnership at will by the act of any partner
or when there is a mutual withdrawal by all the partners. Under
either characterization of (namely, contract partners) the legal basis
upon which dissolution would come into effect is when there is a
breach of contract or when there has been the happening of the
resolutory condition or term, which then effects a rescission or
termination of the contract of partnership. The concepts of
rescission, breach of contract and happening of the resolutory
condition or term, as the effective criteria for dissolution to come
into play in a partnership setting, go into the application of the
doctrine ofdelectus personae in the partnership relationships.

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In essence, Philippine Partnership Law is careful to classify the

various causes of dissolution because of the varying legal
consequences of dissolution as an act of rescission or cancellation of
the partnership agreement.
b.
Dissolution
Effected
Partnership Contract

with

No

Violation

the

Article 1830 of the Civil Code, in enumerating the causes for

partnership dissolution distinguishes first between causes without
violation of the agreement, and those causes that are In
contravention of the agreement. Those classified as causes
without violation of the agreement, are consistent with the agreed
terms of the contract of partnership, thus:
(a) Termination of the term or particular undertaking specified in
the partnership agreement;
(b) By the exercise in good faith by any partner of the power to
withdraw in a partnership at will (no definite term or particular
undertaking specified in the agreement);
(c)
By the mutual
the partnership; and

withdrawal

by

all

the

partners

from

(d) By the bona fide expulsion of any partner in accordance with

the power provided for in the partnership agreement.
In any of the foregoing enumerated causes, there is no breach or
contravention of the partnership agreement, and the dissolution of
the partnership does not give rise to a liability for damages for
breach of contract. When it comes to the first three causes, there
being no partner at fault means that none of the partners would
be disqualified from participating in the winding-up of the affairs of
the partnership. Whereas, in the case of expulsion of a partner in
accordance with the power provided in the partnership agreement,
since it can only be exercised bona fide, it could only mean that the
partner was expelled for cause and consequently, he would be
disqualified from participating in the winding-up of the affairs of the

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partnership business, and electing to continue to pursue the

partnership business.
c.
Dissolution Causes In
Contract

Violation of

the

Partnership

In contrast, although any partner is recognized with the power to

withdraw from the partnership at any time, it would be [i]n
contravention of the agreement between the partners, where the
circumstances do not permit a dissolution under the provisions of
Article 1830. In that case, the partner seeking the dissolution would
be liable for damages, and he is without right to continue to pursue
the partnership business.
An example of the consequences of an expulsion of a partner
effected in bad faith is demonstrated in Tocao v. Court of Appeals,
342 SCRA 20 (2000), where in an oral partnership, the capitalist
partner Tocao had excluded the industrial partner Anay from
entrance into any of the business premises of the company or and
severed any further dealings she may have with the business
venture. In ruling that the excluded partner had a right to recover
damages, to have a formal accounting of the business, and to
receive her shares in the net profits, the Court ruled:
Undoubtedly, the petitioner Tocao unilaterally excluded private
respondent [Anay] from the partnership to reap for herself and/or
for petitioner Belo financial gains resulting from private
respondents efforts to make the business venture a success . . .
Her instruction . . . not to allow private respondent to hold office in
both the Makati and Cubao sales offices concretely spoke of her
perception that private respondent was no longer necessary in the
business operation, and resulted in a falling out between the two.
However, a mere falling out or misunderstanding between partners
does not convert the partnership into a sham organization. The
partnership exists until dissolved under the law. The partnership . . .
has no fixed term and is therefore a partnership at will predicated
on their mutual desire and consent, it may be dissolved by the will
of a partner . . . An unjustified dissolution by a partner can subject
him to action for damages because by the mutual agency that arises

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in a partnership, the doctrine of delectus personae allows the

partners to have the power, although not necessarily the right to
dissolve the partnership.
In this case, petitioner Tocaos unilateral exclusion of private
respondent from the partnership . . . effected her own withdrawal
from the partnership and considered herself as having ceased to be
associated with the partnership in the carrying on of the business.
Nevertheless, the partnership was not terminated thereby; it
continued until the winding up of the business. (Ibid, at pp. 36-38)
Essentially, the Court agreed with the decision of the trial court that
a partner who is excluded wrongfully from a partnership is an
innocent partner. Hence, the guilty partner must give him his due
upon the dissolution of the partnership as well as damages or share
in the profits realized from the appropriation of the partnership
business and goodwill. An innocent partner thus possesses
pecuniary interest in every existing contract that was incomplete
and in the trade name of the co-partnership and assets at the time
he was wrongfully expelled. (Ibid, at p. 29)
d. Force Majeure and Other Similar Causes
A third general category for causes of dissolution are recognized by
Article 1830 which occur by force majeure or events that are
outside of the will of the partners:
(a) Events which makes unlawful the partnership business;
(b) Loss of the specific thing promised to be contributed to the
partnership; and
(c) Death, insolvency or civil interdiction of any partner.
None of such causes of dissolution constitute a type of breach of the
partnership agreement.
An interesting issue would be if the loss of the specific thing
promised to be contributed to the partnership would cause the
dissolution of the partnership, then would the return back to a

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partner of his contribution be deemed to have dissolved the

partnership?
The decision in Fernandez v. Dela Rosa, 1 Phil. 671 (1902), covered
the issue of whether the receiving back by a partner of his
contribution to the partnership amount to withdrawal from the
partnership to have effected a dissolution thereof. The resolution of
this issue was essential in Fernandezbecause it determined whether
the partner so receiving his contribution had a right to participate in
the profits of the venture earned after he had allegedly withdrawn.
Thus, the Court asked specifically in Fernandez: Did the defendant
waive his right to such interest as remained to him in the
partnership property by receiving the money? Did he by so doing
waive his right to an accounting of the profits already realized, if
any, and a participation in them in proportion to the amount he had
originally contributed to the common fund? Was the partnership
dissolved by the will or withdrawal of one of the partners under
article 1705 of the Civil Code? (Ibid, at pp. 677-678) The Court
held
. . . We think these questions must be answered in the negative.
There was no intention on the part of the plaintiff in accepting the
money to relinquish his rights as a partner, nor is there any
evidence that by anything that he said or by anything that he
omitted to say he gave the defendant any ground whatever to
believe that he intended to relinquish them. On the contrary he
notified the defendant that he waived none of his rights in the
partnership. Nor was the acceptance of the money an act which was
in itself inconsistent with the continuance of the partnership
relation, as would have been the case had the plaintiff withdrawn
his entire interest in the partnership. There is, therefore, nothing
upon which a waiver, either express or implied, can be predicated.
The defendant might have himself terminated the partnership
relation at any time, if he had chosen to do so, by recognizing the
plaintiffs right in the partnership property and in the profits. Having
failed to do this he can not be permitted to force a dissolution upon
his copartner upon terms which the latter is unwilling to accept. We
see nothing in the case which can give the transaction in question

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any other aspect than that of the withdrawal by one partner with
the consent of the other of a portion of the common capital. (Ibid,
at p. 678)
e. Causes Equivalent to Rescission or Declaration That the
Central Basis Upon Which the Contract of Partnership Has
Been Constituted Is Lost
The fourth general category covers the grounds whereby a partner
may seek court order for the dissolution of the partners under
Article 1831 of the Civil Code, thus:
(a) When a partner has been declared insane in any judicial
proceeding or is shown to be of unsound mind;
(b) When a partner becomes in any other way incapable of
performing his part of the partnership contract;
(c) When a partner has been guilty of conduct as tends
to affect prejudicially the carrying on of the business;
(d) When a partner willfully or persistently commits a breach of
the partnership agreement, or otherwise so conducts himself in
matters relating to the partnership business that is not reasonably
practicable to carry on the business in partnership with him;
(e) When the business of the partnership can only be carried on at
a loss;
(f)

Other circumstances that render dissolution equitable.

In addition, Article 1831 of the Civil Code recognizes the standing of

the assignee of a partners interest to seek judicial dissolution of the
partnership when:
(a) Termination of the period upon which the partnership is
expressly constituted;
(b)
Termination of the particular undertaking upon
the partnership is expressly constituted; or

which

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(c) At any time, in a partnership at will.

The foregoing grounds enumerated in Article 1831 for which a court
order of dissolution may be sought need to be considered carefully,
for each represent a public policy which understands that the
business purpose of a partnership which cannot be placed in a
relatively clear vision at the time the contract of partnership is
entered into. The article recognizes the inherent risk that business
undertakings are exposed to, many of which cannot be anticipated
at the time the partnership agreement is entered into. Therefore, a
mechanism is set (i.e., an appropriate court proceeding for
dissolution) by which the parties may ask a tribunal to determine
that the circumstances has rendered the rationale of the partnership
agreement inutile. Likewise, each of the grounds provided under
Article 1831 would constitute substantial breach of the obligations
assumed by the partners, as the basis by which an action for
rescission may be pursued; consequently, the factual basis upon
which the substantial breach may arise must be determined to exist
by the courts, and cannot be left to the sole determination of any of
the partners.
One would think that when a partner has been judicially declared
insane, it would thereby ipso jure cause the dissolution of the
partnership, as in the case of death, insolvency or civil interdiction
of a partner. And yet under Article 1831, it would require a formal
petition in court to have the partnership dissolved. The legal
implication is that the partnership remains unaffected by the judicial
declaration of insanity of a partner, and the discretion is given to
the other partners to seek its dissolution. Judicial declaration of
insanity, like civil interdiction, would render the partner without
legal capacity to contract, and yet the former does not result in
automatic dissolution of the partnership. Perhaps it is because,
judicial declaration of insanity does not proceed from a criminal
conviction as in the case of civil interdiction, and that the law
recognizes that the insane partner still has an estate that has a
right to benefit from the properties and rights to which a partner is
entitled to, and the other partners are given the option to remain in
partnership with him to allow his estate to continue to benefit from

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the partnership business. After all, a partner who turns out to be

insane, may be a better partner to remain with, rather than another
partner who turns out to be a boor. This is the same rationale under
the second group for judicial dissolution: when a partner becomes in
any other way incapable of performing his part of the partnership
contract.
The last four grounds to seek judicial dissolution (when a partner
has been guilty of conduct as tends to affect prejudicially the
carrying on of the business; when a partner willfully or persistently
commits a breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership business that
is not reasonably practicable to carry on the business in partnership
with him; when the business of the partnership can only be carried
on at a loss; and other circumstances that render a dissolution
equitable), look at the primary rationale for the partnership
agreement: to operate a business venture for the benefit of all the
partners. When there are circumstances prevailing in the
partnership that endanger or undermine the viability of the
partnership enterprise, any of the partners is given standing to seek
for court determination of the existence of such situation and decree
the dissolution of the partnership.
For example, in Rojas v. Maglana, 192 SCRA 110 (1990), the Court
held that when a partner engages in a separate business enterprise
that is competitive with that of the partnership and even withdraws
equipment contributed into the partnership enterprise, the other
partners withdrawal from the partnership becomes thereby justified
and for which the latter cannot be held liable for damages. In such
an instance, a partner has violated his duty of loyalty, which under
the principle of delectus personaeshould allow the other partners to
break any further ties with him.

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4.

Effects of Dissolution Among the Partners Inter Se

We will now discuss the legal consequences, and the rights and
obligations that would govern the relationship of the partners under
the various causes of partnership dissolution.
a.
When Dissolution Is Caused in Any Way, Except in
Contravention of the Partnership Agreement
Under Article 1837 of the Civil Code, unless otherwise agreed, each
partner, as against his co-partners and all persons claiming through
them in respect of their interests in the partnership, may have the
partnership property applied to discharge its liability, and the
surplus applied to pay in cash the net amount owing to the
respective partners. In other words, when there has been no breach
of the partnership agreement upon the dissolution of a partnership,
every partner has a right to insist upon the winding-down of
partnership affairs.
When dissolution of the partnership is caused other than by a
breach of the contract of partnership, the remaining partners have
no option to continue the partnership business enterprise when the
withdrawing partner insists on winding-up the partnership affairs.
Consequently, the only way by which the remaining partners can
hope to continue the partnership business is to come into a
settlement of the liquidation of the withdrawing partners equity
interests in the partnership. The tendency therefore is that the
withdrawing partner may receive a premium or a higher price than
the actual liquidation value of his share in the net assets of the
partnership in exchange for his not agreeing not to demand the
formal winding-up and termination of the partnership business.
b. When Dissolution Is Caused by the Bona Fide Expulsion of
a Partner
Under Article 1837 of the Civil Code, when dissolution is caused by
the bona fide expulsion of a partner pursuant to the terms of the
partnership agreement, and if the expelled partner is discharged
from all partnership liabilities, either by payment or by express

212

agreement to that effect between himself, the creditor and the

remaining partners (as provided under the second paragraph of
Article 1835 of the Civil Code), then such expelled partner shall
receive in cash only the net amount due him from the partnership.
In other words, the expelled partner is without power or authority to
insist upon the formal winding-up and liquidation of the partnership
business enterprise; and that the choice whether to continue with
the business enterprise or to formally wind-up and terminate the
partnership is with the remaining partners.
c. When Dissolution Is Caused in Contravention of the
Partnership Agreement
In the event the dissolution of the partnership is in contravention of
the partnership agreement, there exists legally a formal breach of
contract, and the rights and/or liabilities of the partners shall be as
follows:
(1) Each partner who has not caused the dissolution wrongfully
shall have the right:
(i)
to participate in the net assets of the partnership after
discharge of all partnership liabilities;
(ii) to damages for breach of the agreement, as against each
partner who caused the dissolution wrongfully;
(2) The partners who have not caused the dissolution wrongfully,
may, if they so desire:
(i) continue the business in the same name either by themselves
or jointly with others, during the rest of the agreed term for
the partnership;
(ii) and for that purpose may possess the partnership property,
provided they secure the payment by bond approved by the court,
or pay to any partner who has caused the dissolution wrongfully,
the value of his interest in the partnership at the dissolution, less

213

any damages for breach of the agreement and in like manner

indemnify him against all present or future partnership liabilities;
(3) A partner who has caused the dissolution wrongfully shall only
have:
(i) If the business is not continued, all the rights of a partner for
share in the net assets of the partnership after payment of all its
liabilities, subject to liability for damages incurred due to such
wrongful dissolution;
(ii) If the business is continued, the right as against his co-partners
and all claiming through them in respect of their interests in
the partnership, to have the value of his interest in the partnership,
less any damage caused to his co-partners by the dissolution,
ascertained and paid to him in cash, or the payment secured by
a bond approved by the court, and to be release from
all existing liabilities of the partnership;
But in ascertaining the value of the partners interest the value of
the goodwill of the business shall not be considered.
d. When Dissolution Is Caused by the Rescission of the
Partnership
Agreement Because
of
Fraud
or
Misrepresentation (i.e.,By Judicial Decree)
Under Article 1838 of the Civil Code, without prejudice to any other
right, the party entitled to rescind or seek the dissolution of the
partnership shall be entitled:
(1) To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership liabilities to
third persons, for any sum of money paid by him for the purchase of
an interest in the partnership and for any capital or advances
contributed by him;
(2)
To stand, after all liabilities to third persons have
been satisfied, in the place of the creditors of the partnership for

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any payment made by him in respect of the partnership liabilities;

and
(3) To be indemnified by the person guilty of the fraud or making
the representation against all debts and liabilities of the partnership.

5. Effects of Dissolution on Partnership Liabilities

Existing or Accrued at the That Time
Discussions on dissolution of the partnership must center around
the fourth attribute of partnership of unlimited liability, i.e., that a
partner shall be liable jointly with the other partners, for partnership
debts which cannot be settled from the partnership assets. In fact,
it is the point of dissolution, that application of the attribute of
unlimited liability because most critical.
a.

General Rule on Existing Partnership Liabilities

Under Article 1835 of the Civil Code, the general rule is that the
dissolution of the partnership does not of itself discharge the
existing liability of any of the partners.
When it comes to a deceased partner, it provides that The
individual property of a deceased partner shall be liable for all
obligations of the partnership incurred while he was a partner, but
subject to the prior payment of his separate debts.
b.
Discharge
Liabilities

of

Partner

from

Existing

Partnership

Article 1835 provides that the only manner by which a partner may
be discharged from any existing liability upon dissolution of the
partnership, is by an agreement to that effect between himself, the
partnership creditor and the person or partnership continuing the
business.

215

Such an agreement may be inferred from the course of dealing

between the creditor having knowledge of the dissolution and the
person or partnership continuing the business.

6.
Effects of Dissolution on Partnership Liabilities
Contracted or Incurred After Dissolution
The rules when it comes to liabilities contracted or incurred on
behalf of the partnership after dissolution has come in should be
divided into the following categories:
(a) Those that were incurred pursuant to winding-up proceedings;
(b) Those that were incurred in the nature of new business in
spite of the fact that the partnership is in winding-up process; and
(c) Those that were incurred when the partnership enterprise has
been continued and no winding-up process have been pursued.
a. Liabilities Incurred Pursuant to Winding-up Proceedings
Article 1832 of the Civil Code clearly implies that even with the
dissolution of the partnership, the partners not at fault have full
authority to act for the partnership in all matters that may be
necessary to wind up partnership afffairs or to complete
transactions begun but not then finished.
Therefore, despite the dissolution of the partnership, it is clear
under Article 1829 that the partnership is not terminated on
dissolution, and that the partnership continues to exist until the
winding up of the partnership affairs is completed. During windingup stage, every partner authorized to wind-up partnership affairs
has full authority to enter into any contract or transaction that is
consistent with the winding-up of partnership affairs, and such
contracts and transactions shall be valid and binding upon the
partnership and those of the partners.

216

Whether considered from the inter-partnership relationship, or

viewed in relationship with third parties, all contracts and
transactions entered into after dissolution of the partnership, which
are in pursuit of the winding-up of partnership affairs, are valid and
binding. Thus, Article 1834 provides that After dissolution, a
partner can bind the partnership x x x (1) By any
transaction appropriate for winding up partnership affairs or
completing transactions unfinished at dissolution.
(i) Where Partnership Not Bound Even for Winding-Up
Liabilities
Under Article 1834, even when the liability incurred in behalf of the
partnership is incurred for winding-up purpose, nevertheless [t]he
partnership is in no case bound by any act of a partner after
dissolution x x x (3) Where the partner has no authority to wind up
partnership affairs; except by a transaction with one who
(a) Had extended credit to the partnership prior to dissolution and
had no knowledge or notice of the acting partners want of
authority; or
(b) Had not extended credit to the partnership prior to dissolution,
and, having no knowledge or notice of his want of authority, the fact
of his want of authority has not been advertised in the a newspaper
of general circulation in the place (or in each place if more than
one) at which the partnership business was regularly carried on.
b. Liabilities Incurred Constituting New Business During
the Winding-Up Process
Article 1832 of the Civil Code is also clear that after dissolution, and
winding-up stage has been reached, and there is no intention to
continue the partnership enterprise, then it terminates all authority
of any partner to act for and in behalf of the partnership and/or the
other partners involving new business or that which is not in
pursuit of the winding-up of partnership affairs.

217

The general rule applicable in Partnership Law would then be

equivalent to the Agency Law principal that would come into play is
that equivalent to an agent who acts without or outside the scope of
his authority, which renders the contract entered into unenforceable
against the principal, but valid against the agent in his personal
capacity. From the inter-partnership relationship, every contract
entered into or every liability incurred in the name of the
partnership as new business, is done without lawful authority, and
is non-binding on the partnership and the other partners. As and
between the partners, the liability incurred by the acting partner
shall then be for his sole account.
But the foregoing general rule applies only when the acting partner
acts with knowledge of the fact of dissolution of the partnership; for
a partner acting for and in behalf of the partnership after
dissolution, but acting in good faith, binds the partnership.
Therefore, in determining whether the acting partner acted in good
faith or not, distinguishes among the causes of dissolution.
(1) When Dissolution Is By the Act, Insolvency or Death of a
Partner
Under Article 1833 of the Civil Code, where the dissolution is caused
by the act, death or insolvency of a partner, the acting partner who
acts without knowledge of the act, death or insolvency of another
partner (i.e., without knowledge that dissolution has come about),
will legally bind the partners to any liability created for the
partnership as if the partnership had not been dissolved. On the
other hand, only the acting partner shall be liable for the liability
entered into in behalf of the partnership, when he knew at that time
of the fact of dissolution of the partnership.
(2) When Dissolution Is NOT By the Act, Insolvency or Death
of a Partner
Under Articles 1832 and 1833 of the Civil Code, when the
dissolution of the partnership is other than by the act, insolvency
or death of a partner, then knowledge of the fact of dissolution is
presume to have reached every partner and therefore, as between

218

and among them, a partner who incurs a liability in the name of the
partnership, is deemed to be acting without authority or in bad
faith, and only such acting partner shall be liable for the liability
incurred.
(3) As To Third Party Creditors
Whatever may have been the cause of the dissolution of the
partnership, third parties who in good faith (i.e., unaware of the
dissolution of the partnership) enter into any contract or transaction
with the partnership through any of the partners, are protected in
their contractual expectations that the contract is valid and binding
against the partnership. The central principal in Partnership Law is
that any third party who enters into a contract with the purported
partnership in good faith, shall have the validity and enforceability
of such contract protected.
Thus, Article 1834 of the Civil Code provides that After dissolution,
a partner can bind the partnership x x x (2) By any transaction
which would bind the partnership if dissolution had not taken place,
provided the other party to the transaction:
(a) Had extended credit to the partnership prior to dissolution and
had no knowledge or notice of the dissolution; or
(b) Though head not so extended credit, had nevertheless known of
the partnership prior to dissolution, and, having no knowledge or
notice of dissolution, the fact of dissolution had not been advertised
in a newspaper of general circulation in the place (or in each place if
more than one) at which the partnership business was regularly
carried on.
Notice how the law treats differently third parties who have
previously extended credit to the partnership prior to dissolution,
and those who have only known of the partnership before
dissolution: in the former it is onlyactual knowledge or notice of the
dissolution that would place him in bad faith; whereas, in the latter
mere notice of dissolution published in the newspapers would
transform him into a third party acting in bad faith.

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When it comes to the effects of dissolution, especially on the power

of any partner to bind the partnership and other partners in new
business contracts and transactions, jurisprudence has ruled that
unless otherwise published or made known personally, third
parties dealing with a partnership in good faith have a right to
expect that the partnership relation exist and that the partners are
authorized to pursue partnership business as a going concern.
Thus, in Singson v. Isabela, 88 SCRA 623 (1979), the Court held
since it did not appear that the withdrawal of a partner from the
partnership was published in the newspapers, then the public in
general had a right to expect that whatever, credit they extended to
[the remaining partners] doing the business in the [original] name
of the partnership Isabela Sawmill could be enforced against the
properties of said partnership, (Ibid, at p. 642) as well as against
the properties of the withdrawing partner.
(i) Particular Rule of Limited Liability
Although a partner may be bound personally to the liabilities
incurred with third parties who act in good faith, nonetheless, Article
1834 makes it clear that such liability is limited liability, that is
that The liability of a partner x x x shall be satisfied out of
partnership assets alone when such partner had been prior to
dissolution:
(a) Unknown as a partner to the person with whom the contract is
made; and
(b) So far unknown and inactive in partnership affairs that the
business reputation of the partnership could not be said to have
been in any degree due to his connection with it.
(ii) When Creditors Not Deemed to Be In Good Faith
It should be noted that Article 1834 provides that even when third
parties enter into a new business contract or transaction with the
partnership without actual knowledge or notice of the fact of its
dissolution, nonetheless, they will not be considered to be third

220

parties acting in good faith, and that [t]he partnership is in no case

bound by any act of a partner after dissolution, in the following
cases:
(a) Where the partnership is dissolved because it is unlawful to
carry on the business, unless the act is appropriate for winding up
partnership affairs; or
(b) Where the partner has become insolvent.
(iii) Particular Rule on Partner by Estoppel
Notwithstanding any of the foregoing rules, Article 1834 provides
that the liability of any person who after dissolution represents
himself or consents to another representing him as a partner in a
partnership engaged in carrying on business, shall be the same as
that provided under Article 1825 on partnership by estoppel.

7. Winding-Up of Partnership Affairs

a. Who Has Authority to Wind-up?
Under Article 1836 of the Civil Code, the person or persons who
have the power and authority to wind up the partnership affairs as a
consequence of its formal dissolution, is determined by the following
rules:
(a) If there is an agreement on this matter, it is the partner or
partners so provided to have such authority, shall wind-up
partnership affairs;
(b) In the absence of any such agreement:
(i)
The partners who have not wrongfully dissolved the
partnership or the legal representative of the last surviving partner,
not insolvent, has the right to wind up the partnership affairs;

221

(ii)
However, any partner or his legal representative
or assignee, upon cause shown, may obtain winding-up by the
courts.
b. Rules and Procedures for Winding-up and Liquidation of
Partnership Affairs
Since winding-up and liquidation of the partnership affairs must
apply the rules and principles relating to the partnership doctrine of
unlimited liability, the partners right to the benefit of excussion,
and the priority rules among conflicting claims, the Law on
Partnership under Article 1839 of the Civil Code lays down the
following tenets, subject to any agreement to the contrary:
(a) What Constitutes Partnership Property?
The assets of the partnership which shall be applied to pay
partnership liabilities are:
(i)

The partnership property,

(ii)
The contributions of the partners necessary for the payment
of all the liabilities of the partnership.
(b) What
Property?

Are

the

Priority

Rules

Against

Partnership

The liabilities of the partnership shall rank in order of payment as

follows:
(i) Those owing to creditors other than partners;
(ii) Those owning to partners other than for capital and profits;
(iii) Those owning to partners in respect of capital; and
(iv) Those owing to partners in respect of profits.
(1) Enforcing
Contributions
Partnership Debts

from

Partners

to

Cover

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Article 1839 specifically provides that the partners shall contribute

as provided by Article 1797, the amount necessary to satisfy the
liabilities, and that the individual property of a deceased partner
shall be liable for such contribution.
It also provides that an assignee for the benefit of the creditors or
any person duly appointed by the court shall have the right to
enforce the contribution specified.
In addition, any partner or his legal representative shall have the
right to enforce the contributions to the extent of the amount which
he has paid in excess of his share of the liability.
(2) Priority
Rules
Between
Partnership Creditors

Partners

Creditors

and

Under Article 1829(8), when partnership property and the individual

properties of the partners are in possession of a court for
distribution, partnership creditors shall have priority on partnership
property and separate creditors on individual property, saving the
right of lien of secured creditors.
(3) Priority Rules When Partner Is Insolvent
Where a partner has become insolvent or his estate is insolvent, the
claims against his separate property shall rank in the following
order:
(a) Those owing to separate creditors;
(b) Those owning to partnership creditors;
(c) Those owing to partners by way of contribution.
(4) Partner May Demand Share in Net Assets Only After
Liquidation and Settlement of Claims of Partnership Creditors
In Villareal v. Ramirez, 406 SCRA 145 (2003), the Court ruled that
A share in a partnership can be returned only after the completion
of the latters dissolution, liquidation and winding up of the

223

business. But even upon dissolution of the partnership, a partner

has no right to demand from the other partners for them to be
personally liable for the return of his contribution, especially when
the partnership operations have been at a loss, thus:
We hold that respondents have no right to demand from petitioners
the return of their equity share. Except as managers of the
partnership, petitioners did not personally hold its equity or assets.
The partnership has a juridical personality separate and distinct
from that of each of the partners. Since the capital was contributed
to the partnership, not to petitioners, it is the partnership that must
refund the equity of the retiring partners.
x x x.
Since it is the partnership, as a separate and distinct entity, that
must refund the shares of the partners, the amount to be refunded
is necessarily limited to its total resources. In other words, it can
only pay out what it has in its coffers, which consists of all its
assets. However, before the partners can be paid their shares, the
creditors of the partnership must first be compensated. After all the
creditors have been paid, whatever is left of the partnership assets
becomes available for the payment of the partners shares. (Ibid, at
pp. 151-152)
The Villareal ruling reiterates the decision in Magdusa v. Albaran, 5
SCRA 511 (1962). It should be noted that in Magdusa the Supreme
Court did not accept the theory of the Court of Appeals that
partners have a personal cause of action against the managing
partner for the latter to return their capital on the basis that
Plaintiffs action was based on the allegation, substantiated in
evidence, that Gregorion Magdusa, having taken delivery of their
shares, failed and refused and still fails and refuses to pay them
their claims. The liability, therefore, is personal to Gregorio
Magdusa, and the judgment should be against his sole interest, not
against the partnerships. (Ibid, at p. 513) This shows that even
when the cause for dissolution is fraud, the action to recover must
still be by way of dissolution and liquidation of the partnership

224

affairs, and cannot be in the form of a personal action against the

allegedly defaulting partner.
Note must be taken of the decision in Martinez v. Ong Pong Co., 14
Phil. 726 (1910), where two persons received from a capitalist
partner the latters contribution for the establishment of a business
with clear agreement on the sharing of profits and losses from such
venture. When the managing partners refused to render an
accounting of the operations of the venture although they admitted
there were small profits made, the trial court rendered judgment
directing the managing partners to return the investment of the
capitalist partner. The Court, in affirming the return of contribution,
rather than directing the dissolution and liquidation of the
partnership and determining the share of the partners in the net
assets, held
Inasmuch as in this case nothing appears other than the failure to
fulfill an obligation on the part of a partner who acted as agent in
receiving money for a given purpose, for which he has rendered no
accounting, such agent is responsible only for the losses which, by a
violation of the provisions of the law, he incurred. This being an
obligation to pay in cash, there are no other losses than the legal
interest, which interest is not due except from the time of the
judicial demand, or, in the present case from the filing of the
complaint. . . We do not consider that article 1688 is applicable in
this case, in so far as it proves that the partnership is liable to
every partner for the amounts he may have disbursed on account of
the same and for the proper interests, for the reason that no other
money that the contributed as capital is involved. (Ibid, at p. 729)
We believe that the decision in Martinez is wrong, for a
contemporaneously held in Villareal, a partner cannot seek recovery
of his contribution, much less share in the net assets of the
partnership, unless it be part of the dissolution and liquidation of
the partnership, whereby the claims of partnership creditors have
priority payment rights.
And yet the Supreme Court in Uy v. Puzon, 79 SCRA 598 (1977),
also ordered the primary partner to reimburse his co-partner the

225

latters investment and unrealized profits. In Uy, the Court found

that the primary partner in a construction venture did not comply
with his obligation to devote the project for the benefit of the
partnership:
Had the appellant not been remiss in his obligations as partner and
as prime contractor of the construction projects in question as he
was bound to perform pursuant to the partnership and sub-contract
agreements . . . it is reasonable to expect that the partnership
would have earned much more than the P334,255.61. . . The
award, therefore, made by the trial court of the amount of
P200,000.00, as compensatory damages, is not speculative, but
based on reasonable estimate. (Ibid, at p. 615).

8. Continuance of Partnership
Winding-Up

Business

Instead

of

Article 1840 recognizes that a partnership may be dissolved, but the

underlying partnership business enterprise would not be wound-up,
and in fact may be continued as a going concern.
a. Who May Continue Partnership Business and Obligations
Assumed?
Article 1837 of the Civil Code recognizes the right of the partners
who have not caused the dissolution wrongfully, if they so desire,
to continue the business in the same name either by themselves or
jointly with others during the agreed term for the partnership.
If such right to continue the partnership business is so exercised,
then such exercising partners must secure the payment by bond
approved by the court, or pay to any partner who has caused the
dissolution wrongfully, the value of his interest in the partnership at
the point of dissolution, less any damages recoverable from said
defaulting partner, as well as indemnify him against all present or
future partnership liabilities.

226

b.
Disposition of Liabilities When Partnership Business
Continued
Article 1840 provides that if the dissolved partnership is not
wounded-up and instead the partners so qualified have chosen to
continue the partnership enterprise as a going concern, then the
creditors of the dissolved partnership shall also be creditors of the
person or partnership continuing the business:
(a) When any new partner is admitted into an existing partnership,
or when any partner retires and assign (or the representative of the
deceased partner assigns) his rights in partnership property to two
or more of the partners and one or more third persons, if
the business is continued without liquidation of the partnership
affairs;
(b) When all but one partner retires and assigns (or
the representative of a deceased partner assigns) their rights in
partnership property to the remaining partner, who continues the
business without liquidation of partnership affairs, either alone or
with others;
(c) When any partner retires or dies and the business of the
dissolved partnership is continued, with the consent of the retired
partners or the representative of the deceased partner, without any
assignment of his right in partnership property;
(d) When all the partners or their representatives assigns their
rights in partnership property to one or more third persons who
promise to pay the debts and who continue the business of the
dissolved partnership;
(e) When any partner wrongfully causes a dissolution and
the remaining partners continue the business, either alone or with
others, and without liquidation of the partnership affairs;
(f) When a partner is expelled and the remaining partners continue
the business either alone or with others without liquidation of the
partnership affairs.

227

Article 1840 of the Civil Code provides also that the liability of a
third person becoming a partner in the partnership continuing the
business, to the creditors of the dissolved partnership shall be
satisfied out of the partnership property only, unless there is a
stipulation to the contrary. This is a form of limited liability on the
part of a new partner coming into an existing partnership.
The article likewise provides that when the business of a partnership
after dissolution is continued under any conditions set forth therein,
the creditors of the dissolved partnership, as against the separate
creditors of the retiring or deceased partner or the representative of
the deceased partner, have a prior right to any claim of the retired
partner or the representative of the deceased partner against the
person or partnership continuing the business, on account of the
retired or deceased partners interest in the dissolved partnership or
on account of any consideration promised for such interest or for his
right in partnership property. Nothing in the article shall be held to
modify any right of creditors to set aside any assignment on the
ground of fraud.
Finally, the article provides that the use by the person or
partnership continuing the business of the partnership name, or the
name of a deceased partner as part thereof, shall not of itself make
the individual property of the deceased partner liable for any debts
contracted by such person or partnership.
The foregoing rules of liabilities must always be construed in
consonance with the primary doctrine of protecting creditors who
deal in good faith with the partnership business and who cannot be
expected to be aware of the inner workings of the partnership and
the intramural dealings of the partners. Thus, in Singson v. Isabela
Sawmill, 88 SCRA 623 (1979), where the partnership executed a
chattel mortgage over its properties in favor of a withdrawing
partner, and the withdrawal was not published to bind the
partnership creditors, the Court ruled that the failure of a partner to
have published her withdrawal from the partnership, and her
agreeing to have the remaining partners proceed with running the
partnership business instead of insisting on the liquidation of the
partnership, did not relieve such withdrawing partner from her

228

liability to the partnership creditors. Even if the withdrawing partner

acted in good faith, it could not overcome the position of
partnership creditors who also acted in good faith, without
knowledge of her withdrawal from the partnership. Thus, the Court
affirmed the standing of the partnership creditors to seek the
annulment of the chattel mortgage for having been entered into
adverse to their interests.
e. Disposition of Liabilities When Dissolution Is Caused by
the Retirement or Death of a Partner
Under Article 1841 of the Civil Code, when any partner retires or
dies, and the business is continued under any of the conditions set
forth in Article 1840, or in Article 1837(2), without any settlement
of accounts as between him or his estate and the person or
partnership continuing the business, unless otherwise agreed, then
the following rules shall apply:
(a) The partner or his legal representative as against such person
or partnership may have the value of his interest at the date of
dissolution ascertained; and
(b) The partner or his legal representative shall receive as an
ordinary creditor an amount equal to the value of his interest in
the dissolved partnership, with option:
(i)

to receive interest; or

(ii) in lieu of interest, the profits attributable to the use of his right
in the property of the dissolved partnership.
Nonetheless, the article expressly provides that the creditors of the
dissolved partnership as against the separate creditors, or the
representative of the retired or deceased partner, shall have priority
on any claim arising under said article, as provided by Article 1840,
third paragraph.

229

9.

Partners Right to Demand an Accounting

Under Articled 1842 of the Civil Code, in the absence of any

agreement to the contrary, the right to receive an accounting of his
interest shall accrue to any partner, or his legal representative, as
against the winding-up partners, or the surviving partners, or the
person or partnership continuing the business, at the date of
dissolution.
In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746
(1989), the Court held that the right to accounting does not
prescribe during the life of the partnership, and that prescription
begins to run only upon the dissolution of the partnership and final
accounting is done, under the rationale that:
. . . As stated by the respondent, a partner shares not only in profits
but also in the losses of the firm. If excellent relations exist among
the partners at the start of business and all the partners are more
interested in seeing the firm grow rather than get immediate
returns, a deferment of sharing in the profits is perfectly plausible.
It would be incorrect to state that if a partner does not assert his
rights anytime within ten years from the start of operations, such
rights are irretrievably lost. The private respondents cause of action
is premised upon the failure of the petitioner to give him the agreed
profits in the operation of Sun Wah Panciteria. In effect the private
respondent was asking for an accounting of his interests in the
partnership. (Ibid, at p. 754).
oOo

230

15 LIMITED PARTNERSHIPS
[Updated: 14 October 2009]

1. Nature, Formation and Registration

According to Tolentino, the provisions of the Civil Code on limited
partnerships were taken from the Uniform Limited Partnership Act of
the United States of America. (See annotations in TOLENTINO,
CIVIL CODE OF THE PHILIPPINES, Vol V, pp. 382 to 395 [1992
ed.]; See also Report of the Code Commission, p. 149). In essence,
therefore, American decisions relating to explaining the effects of
the provisions of the Uniform Limited Partnership Act should be
taken as quite instructive in considering the provisions of the new
Civil Code on limited partnerships.
The De Leons give a more descriptive historical background of the
limited partnership as an outgrowth of the Roman Law, which
provided that one or more persons might turn over property to a
slave and avoid personal liability by trading through him. (De
Leons, p. 295). They describe how the institution of limited
partnership grew up in the civil law, rules governing this form of
business, substituting, of course, for the slaves, free persons who
become general partners with unlimited liability, and it
development into the United States, thus
Louisiana, which uses the civil instead of the common law,
recognized this form of organization. In 1822, the principal rules on
limited partnership which grew up in the civil law were codified and
enacted into a statute by the State of New York. New Yorks lead
has been followed by most common law jurisdictions though
England did not fall into line until 1907. (Charles W. Gertenberg,
Organization and Control, [1919], 3 Modern Business, p. 50).
(Ibid)

231

Bautista quoted from the New York decision in Ames v. Downing, 1

Brad. (N.Y. Surr. Cit.) 321, (BAUTISTA acknowledges that the
American decision is reproduced in CRANE AND MCGRUDER, CASES
ON PARTNERSHIP, 674-675.) to describe the origin and
development of limited partnerships, thus
The system of limited partnership, which was introduced by statute
into this state, and subsequently very generally adopted in many
other states of the Union, was borrowed from the French Code. (3
Kent. 36; Code de Commerce, 12, 23, 24.) Under the name of la
societe en commandite, it has existed in France from most authentic
commercial records, and in the early mercantile regulations of
Maseilles and Montpelier. In the vulgar latinity of the middle ages it
was styled commanda, and in Italyaccomenda. In the states of Pisa
and Florence, it is recognized so far back as the year 1166; also in
the ordinance of Louise-le Hutin, of 1315; the statutes of Marseilles,
1253; of Geneva, of 1588. In the middle ages it was one of the
most frequent combinations of trade, and was the basis of the
active and widely extended commerce of the opulent maritime cities
of Italy. It contributed largely to the support of the great and
prosperous trade carried on along the shores of the Mediterranean,
was known in Laguedoc, Provence, and Lombardy, entered into
most of the industrial occupations and pursuits of the age, and even
traveled under the protection of the arms of the Crusaders to the
city of Jerusalem. At a period when capital was in the hands of
nobles and clergy, who, from pride of caste, or cannonical
regulations, could not engage directly in trade, it afforded the
means of secretly embarking in commercial enterprises, and reaping
the profits of such lucrative pursuits, without personal risk; and thus
the vast wealth, which otherwise could have lain dormant in the
coffers of the rich, became the foundation, by means of this
ingenious idea, of the great commerce which made princes of the
merchants, elevated to the trading class, and brought the Commons
into position as an influential estate in the Commonwealth.
Independent of the interest naturally attaching to the history of a
mercantile contract, of such ancient origin, but so recently
introduced where the general partnership, known to the common
law has hitherto existed alone, I have been led to refer to the facts

232

just stated, for the purpose of showing that the special partnership
is, in fact, no novelty, but an institution of considerable antiquity,
well known, understood and regulated. Ducange defines it to be:
Societas mercatorem qua uni sociorum tota negotiationis cura
commendatur, certis conditionibus. It was always considered a
proper partnership, societas, with certain reserves and restrictions;
and in the ordinance of Louis XIV., of 1793, it is ranked as a regular
partnership. In the Code of Commerce it is classed in the same
manner. I may add, as an important fact, for the explanation of the
distinction to which I shall shortly advert, that the French Code
permits a special partnership, of which the capital may be divided
into shares, or stock, transmissible from hand to hand. In such a
case, the death of the special partner does not dissolve the firm, the
creation of transmissible shares being a proof that the association is
formedrespectu negotii, and not respectu peronsarum; but even in
such a partnership the death of the general partner effects a
dissolution, unless it is expressly stipulated otherwise. But, says M.
Troplong, in would be wrong to extend the rule that a partnership,
of which the capital is divided into transmissible shares, is not
dissolved by the death of a stockholder, to a special partnership, the
capital of which is not so divided. The statute of New York
recognizes only the latter kind of partnership, the names of the
parties being required to be registered, and any change in the name
working a dissolution, and turning the firm into a general
partnership. Such a partnership has always been held to be
dissolved by the death of the special partner. *** The partnership
remains under the dominion of the common law. It has created
between the special and general partner a tie, which is not
subjected to the caprice of unforseen changes; it has produced
mutual relations of confidence, which the general partner cannot be
forced to extend to strangers. (BAUTISTA, at pp. 399-400)
It should be recognized that prior to the New Civil Code provisions
on limited partnerships, such institution was covered by the Spanish
Code of Commerce. In Jo Chung Cang v. Pacific Commercial Co., 45
Phil. 142 (1923), our Supreme Court recognized that there existed
provisions in the Code of Commerce governing limited partners: To
establish a limited partnership there must be, at least one general

233

partner and the name of at least one of the general partners must
appear in the firm name. (Code of Commerce, Arts. 122(2), 146,
148). (Ibid, at pp. 150-151)
What seems clear from all the foregoing is that the institution of
limited partnership had its origin from civil law, was adopted into
the American common law system, from whence it found its current
adoption into the Philippine legal system through the provisions of
the new Civil Code of the Philippines. Likewise, limited partnerships
originated and grew primarily from commercial partnership
practices. Its origin in antiquity may be basis to say that under
modern setting, the limited partnership may be an inadequate
medium of doing business, for its main features and objectives
could be achieved by the modern corporation, especially the close
corporation vehicle.
a.

Essence of the Medium of Limited Partnership

Article 1843 of the Civil Code defines a limited partnership as one

formed by two or more persons under the provisions of the
following article, having as members one or more general partner
and one or more limited partners. The limited partners as such shall
not be bound by the obligations of the partnership.
The American decision in Hoefer v. Hall, 411 P.2d 230 (1966),
describes the purpose and essence of the limited partnership under
the terms of the Uniform Limited Partnership Act, thus
x x x. A limited partnership is strictly a creature of statute, its
object being to enable persons not desiring to engage in a particular
business, to invest capital in it and to share in the profits which
might be expected to result from its use, without becoming liable as
general partners for all partnership debts. In other words, it is a
form of partnership in which the liability to third persons of one or
more of its members is limited to a fixed amount. . . (Citing Vol 2,
ROWLEY ON PARTNERSHIP, 2d Ed., sec. 53.0, pp. 549-552; Vol. 8,
U.L.A., p. 2; Lanier v. Bowdoin, 282 N.Y. 32, 24 N.E. 2d
732; Ruzicka v. Rager, 305 N.Y. 191, 111 N.E. 2d 878, 39 A.L.R. 2d
288).

234

As a species of contract, a limited partnership may be characterized

as a formal or solemn contract, in that no limited partnership is
formed unless the formalities provided for under Article 1844 of the
Civil Code are complied with; and failure to so comply with the
formalities only brings about the creation of a general partnership.
Having complied with the formalities mandated by Partnership Law
to form such a medium of doing business, the distinguishing feature
of a limited partnership is that it has through the limited partners
been able to institute a form of limited liability, in that the limited
partner as such shall not be bound by the obligations of the
partnership.
The language used in the last sentence of Article 1843 of the Civil
Code (The limited partners as such shall not be bound by the
obligations of the partnership.) carries more the doctrine of no
liability for limited partners, and perhaps more accurately reflects
that in civil law, the debts and obligations of the partnership pertain
to it as a separate juridical person, and that generally noncontracting parties, such as the limited partners, are not bound by
said contractual debts and obligations under the principle of privity
or relativity under general contract law. But frankly, the use of the
term limited liability for limited partners is more appropriate since,
as will be discussed hereunder, limited partners do assume limited
liability pertaining to their contributions and partnership assets held
them under Article 1858.
As will also be shown in the discussions hereunder, the limited
liability feature of the limited partnership is achieved by taking away
from the persons of the limited partners most of the key features of
partnerships in general, namely, mutual agency, delectus personae,
and the right to manage partnership affairs.
b. Requirements for the Formation of a Limited Partnership
Article 1844 lays down the rules by which two or more persons
desiring to form a limited partnership need to comply with, thus:

235

(1) Sign and swear to a Certificate of Limited Partnership,

which shall contain the following provisions describing or
designating the:

partnership name, adding thereto Limited;

character of the business;

principal place of business;

the term of existence;

name and residence of each of the partners, with clear

designation of who are the general and limited partners; and the
right, if given, of partners to admit additional limited partners;

contributions to the partnership; and the terms under which

additional contribution are to be made by the limited partners;

right, if given, of a limited partner to substitute an assignee as

contributor in his place;

time, if agreed upon, when the contributions of limited partners

shall be returned; and the right, if given, to demand and receive
property other than cash in return for such contribution;

share of the profits or the other compensation by way of income

which each limited partner shall receive by reason of his
contribution; and the right, if given, of one or more of the limited
partners to priority over other limited partners, as to contributions
or as to compensation by way of income and the nature of such
priority;

right, if given, of the remaining general partner or partners to

continue the business on the death, retirement, civil interdiction,
insanity or insolvency of a general partner; and
(2) File such Certificate with the SEC
Hoefer v. Hall, 411 P.2d 230 (1966), explains the rationale in
American jurisdiction, on the formalities required of limited
partnership under the Uniform Limited Partnership Act, thus

236

x x x. The main purpose of the statutory regulation is to ensure the

limitation on the liability of limited partners. It naturally follows that
in order to obtain the privilege of limited liability, one must conform
to the statutory requirements. . . (Citing Gilman Pain & Varnish Co.,
v. Legum, 197 Md. 665, 80 A.2d 906; R.S. Oglesby Co. v.
Lindsay, 112 Va. 767, 72 S.E. 672; Mud Control Laboratories v.
Covey, 2 Utah 2d 85, 269 P. 2d 854; Bisno v. Hyde, 290 F.2d 560
[9th Cir. 1961]; 68 C.J.S. Partnership Sec. 450, p. 1006; and 40
Am.Jur., Partnership, Sec. 506, p. 475) Obviously, the purpose of
the requirement that the certificate shall be recorded is to acquaint
third persons dealing with the partnership with the essential
features of the partnership arrangement. . . Under the
circumstances of this case, where neither the rights of third parties
nor a partners claim of limited liability is involved, we cannot se
how the failure to record the certificate could affect the existence of
a limited partnership insofar as the parties, inter se, are concerned .
..
The indicated provisions under Article 1846 which would provide for
a right if given, must yield to the legal conclusion that in effect the
right alluded to does not exist if not expressly provided for in the
Certificate of Limited Partnership or by another provision in the New
Civil Code.
With respect to the contents, swearing and SEC-filing of the
Certificate of Limited Partnership, Article 1846 recognizes the
doctrine of substantial compliance: A limited partnership is
formed if there has been substantial compliance in good faith with
the foregoing requirements. While there is no doubt that the
execution of a sworn Certificate of Limited Partnership and its filing
with the SEC are essential elements to establish a limited
partnership, the question that arises is that which of the
enumerated contents of the Certificate under Article 1844 are a
must to reach the level of substantial compliance?
Thus, under the Code of Commerce then in place, Jo Chung Cang v.
Pacific Commercial Co., 45 Phil. 142 (1923), held:

237

To establish a limited partnership there must be, at least one

general partner and the name of at least one of the general
partners must appear in the firm name. (Code of Commerce, arts.
122[2], 146, 148.) But neither of these requirements have been
fulfilled. The general rule is, that those who seek to avail
themselves of the protection of laws permitting the creation of
limited partnerships must show a substantially full compliance with
such laws. A limited partnership that has not complied with the law
of its creation is not considered a limited partnership at all, but a
general partnership in which all the members are liable. (Ibid, at pp.
150-151, citing MECHEM, ELEMENTS OF PARTNERSHIP, p. 412;
GILMORE, PARTNERSHIP, pp. 499, 595; 20 R. C. L., 1064)
It can thus be concluded, that the institution of who is or are the
general partners, and who is or are the limited partners, including
the amount or nature of their contributions, are essential contents
of the Certificate of Limited Partnership. In other words, limited
partners cannot claim the benefits of limited liability unless they find
themselves expressly classified as such in the duly filed and
registered Certificate of Limited Partnership. (Same ruling in Lowe
v. Arizona Power & Light Co., 427 P.2d 366 [1967]).
Nonetheless, the formal requirements to establish a limited
partnership are relevant only insofar as establishing the limited
liability rights against third parties. Under American jurisprudence,
particularly under the Hoefer v. Halldecision, the issue as to
substantial compliance has no relevance in resolving issues inter
se among the partners, and general partners are bound by the
contractual commitment under the partnership agreement to hold
the limited partners liable for partnership debts and obligations only
to the extent of their contributions. To the same effect is the ruling
in Jo Chung Cang v. Pacific Commercial Co., (45 Phil. 142
[1923]) under the terms of the Code of Commerce which also
required execution of public document and formal registration of the
certificate of limited partnership, thus
The supreme court of Spain has repeatedly held that
notwithstanding the obligation of the members to register the
articles of association in the commercial registry, agreements

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containing all the essential requisites are valid as between the

contracting parties, whatever the form adopted, and that, while the
failure to register in the commercial registry necessarily precludes
the members from enforcing rights acquired by them against third
persons, such failure cannot prejudice the rights of third persons. . .
(Ibid, at p. 153).
The mandatory requirement of the filing of the certificate with the
SEC constitute the registration or notice that binds the public to the
essential nature of the partnership as one constituting a limited
liability on the part of the limited partners. This is consistent with
the commercial law practice that a diminution of rights or the
limitation of remedies brought about by a commercial medium shall
come about only when there has be registration that can bind the
dealing public.
American jurisprudence requires that the filing of the Certificate of
Limited Partnership with the proper government agency (the SEC in
our case), must be done within a reasonable time. (Stowe v.
Marrilees, 44 P.2d 368;Solomont v. Polk Development Co., 54 Cal.
Rptr. 22, 27 [1966]) In our jurisdiction, the fact of non-filing of the
certificate of limited partnership does not bring about a limited
partnership, and what is deemed constituted is a general
partnership.
c. False Statement in the SEC Certificate
Under Article 1847 of the Civil Code, if the Certificate contains a
false statement, one who suffers loss by reliance on such statement
may hold liable any party to the certificate who knew the
statement to be false at the time he signed the certificate or
subsequently failed to cancel or amend the certificate or to file a
petition for such cancellation or amendment.
The language covering liability under Article 1847 would indicate
that a limited partner who signs the Certificate knowing provisions
therein to be false, may thus become unlimitedly liable to a person
who suffers loss by reason of such false statement. But it does not
create general unlimited liability, because only third parties who

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relied upon such false statements, and have suffered loss thereby,
can hold the limited partner liable beyond his contribution. Thus, in
the American decision in Gilman Paint & Varnish Co. v. Legum, 80
A.2d 906, 29 A.L.R. 2d 286 (1951), it was held that falsely
indicating in the articles of limited partnership the contribution of
the limited partner at lower amount than what was actually
contributed cannot be a basis to hold such limited partner liable
beyond his contribution, since it would be inconceivable that a
creditor could suffer loss by relying on an investment stated in the
certificate of partnership which was smaller than the amount
actually contributed; and that it is when the actual contribution is
less than amount stated in the certificate that reliance upon it may
cause loss to a creditor.
d. Name of Limited Partnership
Like in the ordinary partnership, the determination of the liabilities
assumed by partners and non-partners, is very much tied-up with
the name given to the partnership venture; in other words, the
name which a partnership employs to deal with the public may allow
a member of the dealing public basis upon which to enforce the
personal liabilities against the partners that arise from partnership
dealings.
Under Article 1844, among the contents of the Certificate of Limited
Partnership should be The name of the partnership, adding thereto
the word Limited. In contrast, under Articles 122(2), 146 and 148
of the Code of Commerce, as found by Jo Chung Cang v. Pacific
Commercial Co., (45 Phil. 142 [1923]) To establish a limited
partnership, there must be, at least, one general partner and the
name of at least one of the general partners must appear in the firm
name. Today, it is not critical under the terms of Article 1844 that
the firm name should contain the names of the general partners, or
any of them, and what is imposed is to add the word Limited. In
fact, under Article 1815 (which is the first article under the section
denominated as Obligations of the Partners with Regard to Third
Persons), Every partner shall operate under a firm name, which
may or may not include the name of one or more of the partners.
This can only lead to the conclusion that under our present Law on

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Partnerships, it is not required as an essential element to establish a

limited partnership, that the firm name should contain the names of
the general partners, or any of them.
One of the key elements under Partnership Law by which limited
partners are to be accorded their limited liability rights, is that they
practically must become invisible to the public when it comes to
partnership dealings: they are mere passive investors in the
partnership business, and they do not participate in its management
nor are they agents of the partners and of the partnership. And
every indication that would lead the dealing public to believe or
presume that a limited partner participates in management or
control of the firm becomes a basis by which such limited partners
shall, insofar as the dealing public is concerned, be stripped of their
limited liability right.
Thus, under Article 1846, it is provided that the surname of a
limited partner shall not appear in the partnership name, unless it
happens to be the surname of a general partner or that prior to the
time when the limited partner became such, the business had been
carried or under a name in which such surname appeared. As a
consequence of the breach of such prohibition, [a] limited partner
whose surname appears in a partnership name . . . shall be liable as
a general partner to partnership creditors who extend credit to the
partnership without actual knowledge that he is not a general
partner. Estoppel is therefore the legal basis upon which a limited
partner becomes liable to a creditor who acted on the belief that by
the inclusion of his surname, the partner was a general partner.
The problem with this rule of estoppel is that it would be difficult to
imagine how such a partnership creditor could claim good faith,
since with the filing the SEC of the Certificate of Limited Partnership
indicating therein a partner as a limited partner, would amount to
constructive knowledge of such fact binding on the whole world.
Does Partnership Law not intend that compliance with the
mandatory requirements of execution, swearing and SEC-filing of
the Certificate of Limited Partnership shall amount to registration on
a public document binding on the whole world? In any event, Article

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1846 relies upon the principal of without actual knowledge, to the

exclusion of the principle of constructive knowledge.
It would seem therefore that the default rule in Philippine
Partnership Law is that articles of partnership and certificates of
limited partnership, even when formally registered with the SEC, do
not constitute a form of constructive notice to the public dealing
with such partnerships, and there is no obligation on the part of the
dealing public to determine the legal status of the partnership, and
the intramural arrangements between and among the partners,
much less to determine the extent of the sharing and division of
powers among the partners.
What happens if the firm name adopted by limited partnership
formally in the Certificate of Limited Partnership does not contain
the word Limited, does it qualify to be a limited partnership? We
believe this is only a formal and not a substantial requirement,
which cannot strip the limited partners of their right to claim limited
liability, for a member of the dealing public cannot claim to have
sustained loss by reason of the non-inclusion of the word Limited
in the firm name, since the Certificate clearly indicates who are the
limited partners. Again, the drawback of this position is that it
places the burden on the dealing public to know the contents of the
Certificate filed with the SEC.
What happens if the sworn Certificate on file with the SEC does not
provide at all for a firm name, would it break the limited liability
rights of the expressly designated limited partners therein. We
believe that in such a case, there is no substantial compliance with
the requirements under Article 1846. The firm name of every
partnership is the very means by which its existence as a juridical
person, separate and distinct from its members, and distinguishable
from other firms and juridical persons, constitutes the essence of
the person of the partnership and thereby the nexus upon which
the obligatory force of its contracts and transactions are fastened.
The firm name of a partnership is the essence by which to enforce
its standing in its contractual relationship, and the legal basis upon
which its creditors can enforce its obligations and other contractual
commitments. As the firm name is critical to partnerships in

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general, then it becomes more so in the case of a limited

partnership, where the named limited partners can fasten their
limited liability within the four corners of the partnership business
enterpriser duly constituted within the person of the created limited
partnership. Without the firm name, it is nearly impossible to
determine where those four corners lie, and may be a basis by
which partnership creditors may be defrauded.
e. Contributions to the Limited Partnership
Article 1846 of the Civil Code expressly provides that the
contributions of a limited partner may be cash or other property,
but not service. Contribution of service by a limited partner is not
allowed because to allow otherwise would be to place a limited
partner into the management of the firm, and thereby constitute a
breach of the fundamental reason for being accorded limited liability
privileges.
When the contribution of a limited partner is service or industry,
then he not only becomes unlimitedly liable, but really becomes a
general partner.
The contribution of service by a limited partner should be
distinguished from being allowed under Article 1855 of the Civil
Code to receive compensation by way of income stipulated for in
the certificate. This may seem to be a contradictory feature under
the Law on Partnership; for to allow a limited partner to assume
management or employment position in the partnership business
would lead a member of the dealing public to assume that he is a
regular partner. In other words, such employment arrangements,
although allowed under the law, may prove costly to a limited
partner. Actually compensation by way of income, should be
interpreted to mean that by the very position of being a limited
partner, and not because of any service or industry he will perform,
he will be accorded under the terms of the Certificate of Limited
Partnership, periodic payments whether or not the firm is making
profits. Nevertheless, in maintaining the preference of creditors to
partnership assets, such payments shall be considered as part of
profit distribution.

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The language of Article 1844(1)(f) which requires that the

Certificate of Limited Partnership should indicate The amount of
cash and a description of and the agreed value of the other
property contributed by each limited partner, has been taken to
mean that it is imperative that the contributions of limited partners
must be given prior to or at the time of the execution of the
Certificate of Limited Partnership, and that the indication of the
obligation to give the contribution is not sufficient, and would at
least constitute a false statement in the Certificate which would give
rise to an obligation to pay the loss suffered by any person who
relied upon such statement as provided under Article 1847. (DE
LEONS, at p. 308)
This position is not supported by the language of Article 1858 which
makes the limited partner liable to the partnership for the difference
between his contribution as having been made and [f]or any
unpaid contribution which he agreed in the certificate to make in the
future at the time and on the conditions stated in the certificate.
The unmistakable language of Article 1858 show that it is valid for
the partners to agree under the terms of the Certificate of Limited
Partnership, for the limited partner or partners to pay their
contributions at some future time.
Does the failure of a limited partner to give his contribution to the
limited partnership at the time of the execution and registration of
the Certificate of Limited Partnership, when it is indicated therein
that it has in fact been given, make him assume the liability of a
general partner? We do not think so, for the penalty for such false
statement is a special one provided under Article 1847 which does
not convert him into a general partner, but merely makes him
personally liable (beyond his promised contribution), and only to a
person who suffers loss by reliance on such false statement.
f. When Certificate Cancelled or Amended
(1) When Certificate Cancelled
Under Article 1864, the Certificate shall be cancelled when the
partnership is dissolved or all limited partners cease to be such. In

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these two cases, the partnership has ceased to be a limited

partnership, and may proceed but only as a general partnership. In
all other cases covered below, the Certificate need only be
amended.
Article 1865 of the Civil Code provides that the writing to cancel the
Certificate shall be signed by all members in order to be effective.
What happens in the two covered cases (dissolution and no more
limited partner remaining), if the Certificate of Limited Partnership
is formally cancelled? In the case of dissolution, usually caused by
the
(2) When Certificate Amended
Under Article 1864, the Certificate must be amended when:
(a) There is a change in the name of the partnership or in the
amount or character of the contribution of any limited partner;
(b)

A person is substituted as a limited partner;

(c)

An additional limited partner is admitted;

(d)

A person is admitted as a general partner;

(e) A general partner retires, dies, becomes insolvent or insane, or

is sentenced to civil interdiction and the business is continued;
(f)
There is a change in the character of the business of the
partnership;
(g)

There is a false or erroneous statement in the certificate;

(h) There is a change in the time as stated in the certificate for

the dissolution of the partnership or for the return of a contribution;
(i)

A time is fixed for the dissolution of the partnership, or

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(j)
the return of a contribution, no time having been specified in
the certificate; or
(k) The members desire to make a change in any other statement
in the certificate in order that it shall accurately represent the
agreement among them.
Except for the return of contributions of limited partners, the
foregoing provisions must be interpreted to mean that if the
certificate is not amended to cover the instances enumerated, then
such changes cannot be given legal affect as between and among
the partners and the public.
(3) Procedure to Amend Certificate
Article 1865 provides that the writing to amend a certificate shall:
(a)
Conform to the requirements of Article 1844 as far as
necessary to set forth clearly the change in the certificate which it is
desired to make; and
(b) Be signed and sworn to by all members, and an amendment
substituting a limited partner or adding a limited or general partner
shall be signed also by the member to be substituted or added, and
when a limited partner is to be substituted, the amendment shall
also be signed by the assigning limited partner.
The article also provides that when a person desiring the
cancellation or amendment of a certificate may petition the courts
to order such cancellation or amendment whenever any person
designated to execute the writing refuses to do so.
A certificate is amended or cancelled when there is filed for record
with the SEC:
(a) A writing accomplished in accordance with the provisions for
cancellation or amendment of the certificate;
(b) A certified copy of the order of court ordering such cancellation
or amendment; and

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(c) After the certificate is duly amended, the amended certificate

shall thereafter be for all purposes the certificate provided in the
provisions of the Law on Partnership.

2. The General and Limited Partners

a. The General Partners
(1) Who Is a General Partner in a Limited Partnership?
When a limited partnership is duly constituted, then every partner
who does not qualify as a limited partner by compliance with the
formal requirements mandated under Article 1844, is deemed to be
a general partner and subject to the unlimited liability for
partnership obligations.
(2) Rights and Powers of General Partners in a Limited
Partnership
Under Article 1850, a general partner shall have the rights and
powers and be subject to all the restrictions and liabilities of partner
in a partnership without limited partners, except that such general
partner or all of the general partners in a limited partnership have
no power nor authority to do any of the following acts, without the
written consent or ratification of the specific act by all the limited
partners, thus:
(a) Do any act in contravention of the Certificate;
(b) Do any act which would make it impossible to carry on the
ordinary business of the partnership;
(c) Confess a judgment against the partnership;
(d) Possess partnership property, or assign their rights in
specific partnership property, for other than a partnership purpose;
(e) Admit a person as a general partner;

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(f) Admit a person as a limited partner, unless the right so to do is

given in the certificate.
Article 1850 therefore enumerates six (6) instances when the acts
of the general partners on behalf of the partnership would not be
valid without the written consent of, or ratification in each
transaction by, all the limited partners. In other words, outside of
the enumerated instances under Article 1850, limited partners have
no voice in partnership affairs.
Notice that the nature of the six (6) instances enumerated under
Article 1850 would require unanimous written consent or ratification
by all the limited partners because they go into either of two
matters:
(a) would contravene the contractual stipulations with the limited
partners (limited partners must be protected in their contractual
rights);
(b) would affect the very commercial reason by which they agreed
to become passive investors: undermines the partnership business
venture; or
(c) would undermine the fiduciary duties of the general partners to
manage the partnership enterprise themselves for the limited
partners. Therefore, anything that affects the terms of the solemn
contract, which the Certificate of Limited Partnership is, would
require limited partnership approval because it would amount to a
novation of contract, and easily the following fall into that category:
do any act in contravention of the Certificate; admit a general
partner, admit an additional limited partner. The rest of the
enumerated instances under Article 1850 affect substantially the
partnership business enterprise, and therefore would require
unanimous consent or ratification by the limited partners.
Three things must be noted carefully from the provisions of Article
1850.

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Firstly, although Article 1850 provides that the written consent or

ratification of all the limited partners is required for the admission of
a new limited partner, unless the right to do so is given in the
certificate, the same cannot be interpreted to mean that when the
right to do so is given in the certificate, the admission of a new
limited partner no longer requires the consent of all the limited
partners. For even when such right is granted, the provisions of
Article 1865 in laying down the procedure for the amendment of the
Certificate provides within its coverage the admission of a limited
partner, which requires the written consent of all the partners.
Otherwise, if the Certificate is not amended to include formally the
additional limited partner, he or she does not become a limited
partner, and would be exposed to the unlimited liability of a general
partner.
The real advantage granted by having a specific provision in the
Certificate allowing the admission or substitution of limited partners
is that the same can be done even against the wishes of the limited
and general partners, and if their signature to the amendment of
the Certificate cannot be obtained, then there is basis to go to court
to obtain an order granting such amendment of the Certificate.
Secondly, although the act of the general partners in relation to any
of the six instances covered by Article 1850 would be void without
the written consent or ratification of all the limited partners, the
declaration refers to intra-partnership issues, because insofar as
third persons dealing in good faith with the partnership, the lack of
consent or ratification by the limited partners, cannot be a basis by
which they cannot treat their contracts with the partnership as
valid, binding and enforceable.
Thirdly, the enumeration of the instances under Article 1850 which
would require written consent or ratification of all the limited
partnership to be valid, is apart from the enumerated act of
ownership or acts of strict dominion under Article 1818 which
cannot be effected by less than all partners, which includes two of
the instances enumerated in Article 1850, thus

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(a) Assign a partnership property in trust for creditors or on the

assignees promise to pay the debts of the partnership;
(b) Dispose of the goodwill of the business;
(c) Confess a judgment;
(d) Enter into a compromise concerning a partnership claim or
liability;
(e) Submit a partnership claim or liability to arbitration; and
(f) Renounce a claim of the partnership.
Only two (2) instances are common to both Articles 1818 and 1850,
namely:
(a) Do any other act which would make it impossible to carry on the
ordinary business of a partnership; and
(b) Confess a judgment against the partnership.
Do we take it to mean that in a limited partnership, but expressly
enumerating the six (6) instances under Article 1850 of when the
written consent or ratification of all the limited partners is required,
that all the other instances granted under Article 1818 would only
need the consent of all the general partners and do not require
the consent of the limited partners, to be valid and binding? The
difference in the matters pertaining to Article 1818 is that without
the requisite unanimous consent, the acts done would be void, not
only against the partnership and the other partners who did not
consent, but even as to third parties who dealt on the other side of
the transactions, because such acts or transactions are not deemed
to be in the ordinary course of partnership business, and third
parties have no right to expect that the same is within the power of
any one or more, but not all of the partners, to enter into.
(3) Duties and Obligations of General Partner

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Article 1850 provides that A general partner shall . . . be subject to

all the restrictions and liabilities of a partnership without limited
partners. Must we therefore presume that every general partner in
a partnership is saddled with the same obligations, and has the
same duties and fiduciary obligations, to the limited partnership and
to all the partners, whether general or limited, as those prevailing in
a non-limited partnership arrangement?
Thus, a general partner who is a capitalist partner is saddled with
the same fiduciary duty of loyalty, in that he cannot engage in any
business that conflicts with that of the limited partnership. (Article
1789, Civil Code of the Philippines) A general partner who is such as
an industrial partner is also saddled with the same fiduciary duty of
loyalty, of being disqualified from engaging in any business venture.
(Article 1789, Civil Code of the Philippines)
While there is no doubt that the general partners, individually and
collectively, owe fiduciary duties to the limited partners in a
partnership setting, is the legal basis of such fiduciary relationship
that of principal and agency? There seems to be little doubt that the
limited partners do not have any rights of management, and
consequently do not act as agents to one another, of the
partnership itself, and of the general partners. On the other hand,
although the general partners are mutual agents to one another, as
well as being agents of the partnership, can we consider them
agents of the limited partners? The authors position on this matter
is that there can be no legal way by which the general partners can
be treated as agents of the limited partnership, for that legal
relationship would violate the rule under Article 1848 that limited
partners cannot involve themselves in the management of the
partnership affairs, since the act of the agents (the general
partners) would be equivalent to the act of the principal (the limited
partners).
It is our proposition that the fiduciary relationship that arises
between the limited partners on one hand, and the general partner
or partners on the other hand, rather than being borne out by an
agency relationship, actually arises more from that of business
trust: that the general partners become in effect the trustee for the

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limited partners, who assume the role of being beneficiaries to the

corpus, which can be considered to be the properties and the
business enterprise of the partnership itself. Not only does the
trustee-beneficiary not only support the existence of a fiduciary
relationship between the general partners and the limited partners,
but validates the structure of management and limited liability
existing in the limited partnership setting: that as trustees, the
management over the corpus (the properties and business
enterprise of the partnership) are placed in the hands of the general
partners, with an obligation to run the partnership affairs to serve
the beneficial interests of the limited partners (to receive their share
in the profits as stipulated under the Certificate of Limited
Partnership), and thereby make the limited partners, as mere
passive beneficiaries in a trust arrangement, thereby not personally
liable for the resulting debts and liabilities of the partnership
venture.
The foregoing thesis explains the reason why, being merely a
beneficiary in the partnership trust, limited partners do not thereby
owe any fiduciary obligations to one another, must less to the
general partners, and thereby can engaged in a business that may
even compete with that of the limited partnerships business.
Likewise, the thesis would explain why in areas covered under
Article 1818 which do not fall within the enumerations under Article
1850, which are acts of ownership, it may be presumed that in a
limited partnership setting, the requirement that they may be done
validly only with the agreement of all the partners would only
cover the general partners since they are deemed to be endowed
with the power to do acts of ownership as trustees having naked
title to the partnership assets and business enterprise.
b. The Limited Partner
(1) Who is a Limited Partner?
Under Article 1844, no member of a partnership shall be considered
a limited partner, unless he is so designated in the Certificate of
Limited Partnership duly filed with the SEC, and under Article 1846,
his surname cannot be part of the firm name, and under Article

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1845, he does not have the right or option to contribute service to

the partnership.
(2) Erroneous But in Good Faith Limited Partner
Under Article 1852, a person who has contributed to the capital of a
business conducted by a person or partnership erroneously
believing that he has become a limited partner in a limited
partnership, does not by his exercise of the rights of a limited
partner:
(a) become a general partner with the person or in the partnership
carrying on the business; nor
(b) be bound by the obligations of such person or partnership;
provided that on ascertaining the mistake he promptly renounces
his interest in the profits of the business or other compensation by
way of income.
The situations contemplated under Article 1852 must cover a
situation when although there exist a partnership business, it is
conducted not within the medium of a limited partner. Therefore, if
one becomes a member of the partnership with the intention that
he becomes a limited partner, and sticks only to exercising the
rights of a limited partner, he does not incur liability of a general
partner even as to the partnership creditors, provided he
undertakes the acts of good faith mandated by law. It is only
when he takes part in the control of the business (as provided in
Article 1848), that he then becomes liable as a general partner, or
when having realized the mistake in affiliating with the partnership
he does not renounce his interests in the partnership profits, and
severe his relationship with the partnership venture.
Why is it an essential feature of the acts of good faith of such
limited partner that he must renounce his interest in the profits of
the business or other compensation by way of income? The answer
to this question lies in the fact that the contract of limited
partnership is considered to be a solemn contract, and thereby void

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if the solemnities mandated by law have not been complied.

Therefore, in a situation where the party acts in good faith believing
himself to be a limited partner, when he learns that he has not been
duly instituted as such, then it can be considered to be a situation
where there is a void contract resulting, and if he is not to be bound
by the unlimited liability obligations of an ordinary partner in
general, then he must not also partake of any benefits or advantage
arising from the purported contractual relationship.
(3) When Limited and General Partner at the Same Time
Article 1853 provides that a person may be a general partner and a
limited partner in the same partnership at the same time, provided
that this fact shall be stated in the certificate of limited partnership.
Why would a general partner want to be a limited partner at the
same time, and vice versa? It pertains to availing of the rights of a
limited partner with respect to his contribution as such.
Under Article 1853, even when a limited partner is at the same time
a general partner, nonetheless in respect to his contribution, he
shall have the rights against the other members which he would
have had if he were not also a general partner. What would those
rights be peculiar to him as a limited partner, which are not
available to him as a general partner?
Certainly it cannot be limited liability rights, for being a general
partner at the same time, he cannot have any claim for limited
liability against partnership debts and claims. The only viable rights
of a limited partner which are not undermined by the fact that he is
also a general partner at the same time, may pertain only to the
priority right to the return of his contributions, share in the profits
as it pertains to him as a limited partner.
c.

The Rights and Powers of the Limited Partner

The provisions of the Civil Code provide the following rights to every
limited partner in a duly constituted limited partnership:
(a) Right to limited liability (Arts. 1843 and 1848);

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(b) Right to the return of his contribution (Art. 1851);

(c) Right to receive his share in the profits and compensation by
way of income (Art. 1851);
(d) Right to assign his equity interest (Art. 1851);
(e) Right to have the partnership books kept at the principal place
of business of the partnership, and at a reasonable hour to inspect
and copy any of them (Art. 1851[1]);
(f) Right to have on demand true and full information of all things
affecting the partnership, and a formal account of partnership
affairs whenever circumstances render it just and reasonable (Art.
1851[2]); and
(g) Right to have the dissolution and winding-up by decree of court
(Arts. 1851[3] and 1857).
Perhaps the best way to describe the rights of limited partners, the
nature and extent, even to those granted expressly by law, is the
way Bautista had summarized the ruling in the American case
of Millard v. Newmark & Co.,266 N.Y.S.2d 254 (1966), thus: In
broad terms, it may be stated that a limited partner has such rights
and only such rights as the law and his contract afford. (BAUTISTA,
at p. 425)
(1) Right to Limited Liability
The essence of the doctrine of limited liability is that limited
partners who are entitled thereto shall not be bound by the
obligations of the partnership (Art. 1843) beyond what they
contributed or legally bound to contribute to the partnerships
common fund.
The essence of the medium of limited partnership is to allow a
group of investors-the limited partners-to be able to participate in
the profits and losses of the partnership venture without having to
be liable to partnership creditors for the separate properties, or
more properly speaking, beyond the value of their contributions in

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the partnership venture. Thus, Article 1843, as it defines a limited

partnership provides that [t]he limited partners as such shall not be
bound by the obligations of the partnership.
The grant of the limited liability status to limited partners comes at
a price, in that: (a) they cannot have their surnames form part of
the partnership name (Art. 1846); (b) they cannot participate in the
control of the partnership business (Art. 1848); and (c) therefore
they are prohibited from contributing service or industry into the
partnership (Art. 1845). If a limited partner violates any of these
restrictions, he becomes unlimitedly liable as in the case of general
partners.
It should be noted that the feature of limited liability is poised
primarily in relationship to the creditors of the partnership venture
in that they have a right to expect that all partners are unlimited
liable for partnership debts, unless they are so indicated in the
Certificate as being limited partners who assume the role of mere
passive investors; and that partnership creditors have a right to
expect that a partner who participates in partnership affair is a
general partner, and cannot claim the rights to limited liability.
Since it is a limitation on the cause of action that partnership
creditors would ordinarily have against the partners, then matters
relating to the application or non-application of the principle of
limited liability can be raised only by partnership creditors. It is a
matter that is not within the right of partners to raise.
The operative norm of this doctrine is best exemplified in two
American decisions: limited partners by definition of law and by the
terms of the certificate of limited partnership have no right to
participate or interfere in the affairs of the partnership business
enterprise, and if they do so, Donroy, Ltd. v. United States, 196
F.Supp. 54, 57 (1961), holds that general partners can seek
dissolution of the partnership (since the actuations of the limited
partners would tantanmount to a breach of the contract of
partnership); but although the partnership creditors can now hold
the limited partners who interefere in partnership affairs as
unlimited liable, nontheless,Weil v. Diversified Properties, 319 Supp.
778 (1970), holds that the general partners cannot, on account of

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such intereference, seek to enlarge the liability of the limited

partners by having ghem declared as general partners with
obligations to account.
(2) Right to Return of Contributions
Article 1844(1)(h) provides that one of the provisions that should be
found in the Certificate of Limited Partnership is [t]he time, if
agreed upon, when the contribution of each limited partner is to be
returned. Does that mean that when there is no agreement or
provision in the Certificate on this matter, limited partners, like
general partners, do not have a right to demand return of
contributions during the life of the partnership? The answer is in the
negative, since the nexus of a limited partners relationship in the
partnership arrangement is his contribution and the profits that he
is entitled by reason of such contribution, then the ability of the
limited partner, as really a mere passive investor, must
commercially be linked to his ability to be able to liquidate his
investment within a reasonable time that cannot be linked to the
entire going concern life of the partnership business venture.
Article 1856 provides that where there are several limited partners
the entire members may agree that one or more of the limited
partners shall have a priority over other limited partners as to the
return of their contributions, as to their compensation by way of
income, or as to any other matter, but that [i]f such an agreement
is made it shall be stated in the certificate of limited partnership,
and in the absence of such a statement all the limited partners shall
stand upon equal footing.
It seems clear that priority in return of contributions or share in
income to the limited partners must not only be agreed upon by all
the partners, but must find itself expressed in the Certificate of
Limited Partnership, either as originally indicated or by way of
amendment thereto. In the absence of such provision in the
Certificate, there is no priority between and among the limited
partners, and they shall be treated to be at equal footing. Return of
contributions of the limited partners, therefore, is not necessarily
associated with the dissolution of the partnership.

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Under Article 1857, a limited partner shall not receive from a

general partner or out of partnership property any part of his
contribution until:
(a) All liabilities of the partnership, except liabilities to general
partners and to limited partners on account of their contributions,
have been paid, or there remains property of the partnership
sufficient to pay them;
(b) The consent of all members is had, unless the return of the
contribution may be rightfully demanded under the law;
(c) The certificate is cancelled or so amended as to set forth the
withdrawal or reduction.
On the other hand, when all liabilities to third party creditors have
been paid or there will remain enough assets to cover them, a
limited partner may rightfully demand the return of his contribution:
(a) On the dissolution of the partnership; or
(b) When the date specified in the certificate for its return has
arrived; or
(c) After he has given six months notice in writing to all other
members, if no time is specified in the certificate, either for the
return of the contribution or for the dissolution of the partnership.
Article 1857 also provides that [i]n the absence of any statement in
the certificate to the contrary or the consent of all members, a
limited partner, irrespective of the nature of his contribution, has
only the right to demand and receive cash in return for his
contributions.
When the partnership creditors preference is respected (either
because they will first be all paid, or assets would be provided for
their settlement), do limited partners have the right to demand for
the return of their contributions even when it is only in cash, even
when no such right is provided for in the Certificate of Limited
Partnership or outside of dissolution scenario? The answers seems

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to be in the affirmative because of the separate ground for return

provided under Article 1857 [a]fter he has given six months notice
in writing to all other members, if no time is specified in the
certificate, . . . for the return of the contribution, and this may
seem even when the demand for return does not obtain the
unanimous vote of the other partners.
It is true that one of the conditions for the valid return of a limited
partners contribution is that there has to be the proper amendment
of the Certificate of Limited Partnership, which under the specific
provisions governing the same can only be done with the written
consent of all the partners. Nonetheless, the ackwnowledgment of
the right of limited partners to have the return of their contribution
upon compliance with the 6-month notice rule, would mean that in
the event the other partners oppose such a return and they refuse
to sign on the amendment to the Certificate of Limited Partnership,
nonetheless, it would authorize the withdrawing limited partner to
seek court order for the proper amendment thereof.
What needs to be emphasized is that the law recognized that limited
partners are mere passive investors in the partnership venture, and
in the end they must have a way of offing-out of the venture either
by the ability to assign their equity interests or to demand properly
the return thereof.
(3) Right to Profit or Compensation by Way of Income
Under Article 1856, a limited partner may receive from the partner
the share of the profits or the compensation by way of income
stipulated for in the certificate, provided that after such payment,
whether from the partner property or property of a general partner,
the partnership assets are in excess of all liabilities of the
partnership, except liabilities to limited partners on account of their
contributions and to general partners. Even in a limited partnership,
the law recognizes the priority standing of partnership creditors to
those of the limited and general partners in terms of payment from
the partnership property.

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It must be understood that the meaning of compensation by way of

income, should not mean that the limited partner is entitlted to be
employed or to participate in the management of or in the
operations of the partnership, for which he can be paid
compensation. For even when a limited partner is hired as an
employee of the firm, this may be treated as participating in the
partnership affairs as to make them unlimitedly liable for
partnership debts and obligations. The term compensation by way
of income, means any arrangement by which the distribution of
profits is termed compensation or salary done on a regular or
periodic basis as may be agreed upon in the Certificate of Limited
Partnership, and paid to the partner by reason of his simply being a
partner, and not by virtue of the services or industry he renders to
the firm.
(4) Right to Assign Limited Partners Interest
Under Article 1859, a limited partners interest in the limited
partnership is assignable, and like in an ordinary partnership, the
assignee steps into the shoes of the assigning limited partner only
when admitted by the other members: A substituted limited
partner is a person admitted to all the rights of a limited partner
who had died or has assigned his interest in a partnership. The
article also provides that An assignee shall have the right to
become a substituted limited partner if all the members consent
thereto or if the assignor, being thereunto empowered by the
certificate, gives the assignee that right. But in the end Article
1859 provides expressly that there is a need to amend the
certificate, thus: An assignee becomes a substituted limited partner
when the certificate is appropriately amended.
Article 1859 provides that the substituted limited partner has all the
rights and powers, and is subject to all the restrictions and liabilities
of his assignor, except those liabilities which he was ignorant of at
the time he became a limited partner and which could not be
ascertained from the certificate.
The article also provides that the substitution of the assignee as a
limited partner does not release the assignor from liability to the

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partnership for false statement in the certificate under Article 1847,

and for his contributions liabilities under Article 1858.
Finally, Article 1859 provides that an assignee who does not become
a substituted limited partner, has no right to require any
information or account of the partnership transactions or to inspect
the partnership books; he is only entitled to receive the share of the
profits or other compensation by way of income, or the return of his
contributions, to which his assignor would otherwise be entitled.
On the other hand, under Article 1849, after the formation of a
limited partnership, additional limited partners may be admitted
only upon filing an amendment to the original certificate in
accordance with the procedure of amendments provided under
Article 1865. Since Article 1849 does not provide a particular
procedure or voting threshold by which additional limited partners
may be admitted into the partnership, then the requirements would
have to track the procedure mandated under Article 1865 on the
amendment of the Certificate of Limited Partnership, which provides
that the amending certificate Be signed and sworn to by all
members, and an amendment substituting a limited partner or
adding a limited or general partner shall be signed also by the
member to be substituted or added, and when a limited partner is
to be substituted, the amendment shall also be signed by the
assigning limited partner. If existing limited partners are more of
passive investors in the partnership venture, why would their
consent be essential in a decision by the general partners to admit
additional limited partners, whenever that power is not expressly
provided for in the Certificate of Limited Partnership?
The first reason is that the institution of any limited partner
(whether original or additional) requires a formal indication in the
Certificate, otherwise such partners are not deemed to be limited
partners, and they will be treated as general partners.
Consequently, the admission of a new limited partner is really
equivalent to an amendment or novation of the original or existing
limited partnership agreement, which under the principle of
mutuality in Contract Law, cannot be done without the consent of all
contracting parties, including the limited partners. This point

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emphasizes the legal truism that limited partners must be treated in

two levels of legal relationship in the partnership arrangement: as
passive investors in the partnership venture, and as parties to the
contract of limited partnership.
Secondly, the admission of a new limited partner into the
partnership venture must necessarily eat up on the proportional
share of the existing limited partners in the partnership profits, and
therefore like the principle governing pre-emptive rights of
stockholders under Corporate Law, limited partners must give their
consent to the admission of a new limited partner which would have
the effect of diluting their proportional right to the partnership
profits.
Finally, the admission of a new limited partner into the partnership
also dilutes the proportional share that each of the existing limited
partners are to have in the distribution of the net assets of the
partnership upon dissolution and winding-up.
If the equity holdings of limited partners in the partnership are
impersonal in nature, because they do not entitle the limited
partners to participate in the management of the partnership
affairs, much less to act as agents of one another, the partnership
or the general partners, then it becomes a little difficult
understanding why the substitution by a limited partner of another
person in his place cannot happen as a matter of commercial right,
without having to obtain the consent of all the other partners.
Perhaps the free-transferability of the equity units of limited
partners should be instituted as a better feature of the institution of
limited partners in our jurisdiction.
We can understand the rationale for the need to formally amend the
Certificate of Limited Partnership whenever a limited partner is
substituted by another person as compliance with the solemn nature
of the limited partners position vis-a-vis to formally bind the public
to the fact that they are only limitedly liable. However, the same
solemnity and notice to the public can be achieved simply by
registering with the SEC the sale or assignment by a limited partner
of his equity to another person. Requiring the formal amendment of

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the Certificate of Limited Partnership unnecessary involves the

participation of all the other partners (by their written consent or
ratification), which makes the process entirely cumbersome and
needlessly costly, when such consent can be presumed to have
been part of the original perfection of the contract of partnership
among the parties, and, more importantly, the process of sale and
substitution cannot amount to a diminution or prejudice of the
rights of any of the other partners, whether general or limited, since
limited partners, whoever they may be, practically have no right or
power except as it pertains to their proprietary interest in the
partnership. In short, the entire rationale of delectus personae is
completely irrelevant to limited partners among themselves, and
even in their contractual relationship with the general partners.
(5) Heirs of Deceased General Partner Succeed Generally as
Limited Partners
Although there is no direct statutory provision that governs this
particular situation, the position has been taken that when the heir
of the general partner succeeds to his equity in the limited
partnership pursuant to an express provision in the Certificate of
Limited Partnership, the presumption is that he succeeds only to his
investments, and thereby becomes only a limited partner, unless
the succeeding heir expressly manifest that he is succeeding as a
general partner, (DE LEONS, at pp. 298 and 300-301) because he
would normally prefer to avoid any liability in excess of the value of
the estate inherited so as not to jeopardize his personal assets.
(DE LEONS, at p. 319) The decision in Goquiolay v. Sycip, 9 SCRA
663 (1963), seems to support such position, thus
Besides, as we pointed out in our main decision, the heir ordinarily
(and we did not say necessarily) becomes a limited partner for his
own protection, because he would normally prefer to avoid any
liability in excess of the value of the estate inherited so as not to
jeopardize hid personal assets. But this statutory limitation of
responsibility being designed to protect the heir, the latter may
disregard it and instead elect to become a collective or general
partner, with all the rights and privileges of one, and answering for
the debts of the firm not only with the inheritance but also with the

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heirs personal fortune. This choice pertains exclusively to the heir,

and does not require the assent of the surviving partner. (Ibid)
We do not agree with such position.
The institution of limited partnership is solemn or formal under our
Partnership Law, and no person becomes a limited partner, whether
by the power of assignment provided under the Certificate, or by
the power of substitution, unless the Certificate is formally amended
to so name the assignee or the substitute, as a limited partnership.
Consequently, in a general partnership, when the articles of
partnership provide expressly that a deceased partner shall be
substituted by his heirs, the heirs do not become partners, unless
formally accepted into the partnership arrangement under the
doctrine of privity or relativity applicable to partnerships as
embodying contractual relationship. Only when the succeeding heirs
confirms that he takes more than just the equity rights of the
deceased partner and actually steps into the shoes of the deceased
partner thus he even become a partner, and in that case a general
partner. In order for him to come in as a limited partnership, there
is a need to formally adopt a Certificate of Limited Partnership as
provided by Article 1844.
On the other hand, in a limited partnership scenario, where the
Certificate of Limited Partnership provides for substitution of a
general partner by his heir in the event of death, it is hard to see
how the automatic application of such provision would thereby
make the heir a partner at all, whether limited or general partner.
Since partnership relationship is essentially contractual in nature
where consent is the essence to make one a partner, then an heir
succeeds only to the equity rights of the deceased general partner
and unless he formally consents to become a partner, then he does
not become one, whether general or limited partner. In addition, if
such consent is obtained, whether expressly or impliedly, from such
heir, in the absence of expressly choosing to become a limited
partner, the general rule should be that he becomes a general
partner by his acceptance into the partnership. To become a limited
partner, by succeeding a general partner, requires not only

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indication that one chooses to join only as a limited partner, but

actually requires compliance with the formalities covering the
amendment of the Certificate of Limited Partnership, without which
one becomes a general partner subject to unlimited liability.
This position is bolstered by Article 1859 which provides that even
when there is a specific provision in the Certificate allowing a limited
partner to substitute another person in his stead, such substitution
does not become valid (i.e., the substituted partner does not
become a limited partner), unless there is a formal amendment to
the Certificate. When such solemnities are required when a limited
partner is substituted in his stead, it is hard to see why when a
general partner dies and is substituted by an heir; the ipso jure
effect is for the substitute to be a limited partner.
(6) Limited Right as to Partnership Affairs
Article 1851 provides that a limited partner shall have the same
rights as a general partner only to:
(a) have the partnership books kept at the principal place of
business; and to inspect and copy them at reasonable hours;
(b) have on demand true and full information of all things affecting
the partnership, and a formal account of partnership affairs
whenever circumstances render it just and reasonable;
Under Article 1854, a limited partner may loan money to, and
transact other business with, the partnership without adverse
consequences to his standing as a limited partner and his right to
demand only limited liability exposure. When he is not also a
general partner, a limited partner may receive on account of
resulting claims against the partnership with general creditors apro
rata share of the assets. Nonetheless, in all these cases, a limited
partner shall not:
(a) receive or hold as collateral security any partnership property;
or

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(b) receive from a general partner or the partnership any

payment, conveyance, or release from liability, if at the time the
assets of the partnership are not sufficient to discharge partnership
liabilities to persons as general or limited partners.
The violation of any of the immediately foregoing prohibitions shall
constitute fraud on the creditors of the partnership.
(7) Right to Dissolve the Limited Partnership
Under Article 1857, a limited partner may have the partnership
dissolved and its affairs wound up when:
(a) he rightfully but unsuccessfully demands the return of his
contribution; or
(b) The other liabilities of the partnership have not been paid, or
the partnership property is insufficient for their payment, and the
limited partner would otherwise be entitled to the return of his
contributions.
c. Obligations of Limited Partners
(1) On Original Contributions to the Partnership
Aside from the prohibition against giving service as contribution to
the limited partnership (Art. 1845), a limited partner is liable to the
partnership for the difference between his contribution as having
been made and for any unpaid contribution which he agreed in the
certificate to make in the future at the time and on the conditions
stated therein (Art. 1858).
(2) On Additional Contributions
Under Article 1844(1)(g), a limited partner may be obliged during
the life of the partnership to give additional contribution if such
obligation is provided for in the Certificate of Limited Partnership.
The default rule therefore is that in the absence of a provision in the
Certificate, limited partners cannot be compelled to give additional
contribution to the partnership.

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Do the provisions of Article 1791, which obliges a partner to sell his

interest to the other partners in the event such selling partner
refuses to contribute additional share to the capital to save the
partnership from the imminent loss of its business? The authors
position is that the provisions of Article 1791 cannot apply to limited
partners for their suppletory application to limited partners would
ran contrary the basic principle that limited partners are assured, so
long as their remain within their passive role of investors, be made
to assume greater risk or additional loss arising from the operations
of the partnership business, beyond what they have contractually
committed to contribute.
(3) On Returned Contributions
Article 1858 provides that [w]hen a contributor has rightfully
received the return in whole or in part of the capital of his
contribution; he is nevertheless liable to the partnership for any
sum, not in excess of such return with interest, necessary to
discharge its liabilities to all creditors who extended credit or whose
claims arose before such return.
(4) Liable as Trustee of the Partnership
Under Article 1858, aside from the fact that a limited partner is
liable to the partnership for his unpaid contributions when it has
become due under the terms of the certificate, he would become
liable as a trustee for the partnership for:
(a) specific property stated in the certificate as contributed by him,
which was not been delivered or wrongfully returned to him;
(b) money or other property wrongfully paid or conveyed to him on
account of his contribution.
The foregoing liabilities of a limited partner can be waived or
compromised only by the consent of all members, and provided it
shall not affect the right of a creditor of the partnership who
extended credit or whose claim arose after the filing and before a

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cancellation or amendment of the certificate, to enforce such

liabilities.
d. Fiduciary Duties of Limited Partners
Are limited partners, being merely passive investors into the
partnership business enterprise, bound by any fiduciary obligations
and duties to the limited partnership and to the other partners?
There is no doubt that general partners owe fiduciary duties not
only to one another under the principle of mutual agency, and to
the limited partners on the consideration that general partners act
as agents (i.e., trustees) for the limited partners. On the other
hand, by definition, limited partners do not, and cannot participate
in the management of the partnership affairs, and therefore do not
act as agents for one another, for the general partners, nor for the
limited partnership itself. Not assuming the position of agents in the
partnership arrangement, limited partners are not bound by
fiduciary obligations.
Therefore, it has been posited by writers, such as the De Leons,
that while a capitalist general partner cannot engage in competitive
business with the partnership business, a limited partner is not
prohibited from engaging in such competitive business, thus: In
the absence of statutory restrictions, a limited partnership may
carry on any business which could be carried on by a general
partnership. (DE LEONS, at p. 301).
The SEC has ruled that limited partners that are foreign
corporations are not deemed to be doing business in the Philippines
(SEC Opinion, 06 August 1998), which supports the position that
limited partners are not deemed to participate in management of
the business enterprise, nor do they constitute mutual agents to
one another or are they deemed agents representing the limited
partnership.
e. General Lack Standing for Partnership Suits
Under Article 1866, a contributor, unless he is a general partner
(which means that contributor covers a limited partner), is not a

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proper party to proceedings by or against a partnership, except

where the object is to enforce a limited partners right against or
liability to the partnership.

3. Dissolution and Winding up of Limited Partnership

a. Causes of Dissolution
Under Article 1860, the retirement, death, insolvency, insanity or
civil interdiction of a general partner dissolves the partnership, but
not that in the case of a limited partner. But even in those cases the
partnership is not dissolved if the business is continued by the
remaining general partners:
(a) under a right so to do stated in the certificate; or
(b) with the consent of all members.
Under Article 1861, in case of death of a limited partner, his
executor or administrator shall have all the rights of a limited
partner for the purpose of settling his estate, and such power as the
deceased had to constitute his assignee a substituted limited
partner. In turn, the estate of the deceased limited partner shall be
liable for all his liabilities as a limited partner.
Under Article 1862, on due application by any creditor of a limited
partner, and without prejudice to other existing remedies, the
courts may charge the interest of the indebted limited partner with
payment of the unsatisfied amount of such claim, and may appoint
a receiver, and make all other orders, directions, and inquiries
which the circumstances of the case may require. Such interest may
be redeemed with the separate property of any general partner, but
may not be redeemed with partnership property. Why is this so?
It should also be noted that upon the declaration of insanity of the
general partner, it would constitute a cause for the dissolution of
the limited partnership. This is in contrast to the rule for non-limited
partnerships, particular under Article 1831 which provides that the

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insanity of a partner becomes only a basis by which to go to court

for a judicial declaration of dissolution of the partnership. Why is the
rule different when it comes to a limited partnership?
b. Settling of Accounts
Under Article 1863, in settling accounts after dissolution, the
liabilities of the partnership shall be entitled to payment in the
following order:
(a) Those to creditors, in the order of priority as provided by law,
except those to limited partners on account of their contributions,
and to general partners;
(b) Those to limited partners in respect to their share of the profits
and other compensation by way of income on their contributions;
(c) Those to limited partners in respect to the capital of their
contributions;
(d) Those to general partners other than for capital and profits;
(e) Those to general partners in respect to profits;
(f) Those to general partners in respect to capital.
Article 1863 specifically provides that [s]ubject to any statement in
the certificate or to subsequent agreement, limited partners share in
the partnership assets in respect to their claims for capital, and in
respect to their claims for profits or for compensation by way of
income on their contribution respectively, in proportion to the
respective amounts of such claims.
Note should be taken that the order of priority in the distribution of
the assets of the limited partnership in the event of dissolution and
winding-up provides priority to the claims of partners as to their
share in the profits and compensation by way of income, over their
claims in respect to capital. This actually is the reverse order in
the general rules on distribution of partnership assets upon
dissolution under Article 1839(2), which in its ranking of the

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liabilities of the partnership in order of payment, give preference

ranking to (c) Those owning to partners in respect of capital, than
to (d) Those owing to partners in respect of profits. Why the
difference in preference when it comes to dissolution of a limited
partnership?
The difference in liquidation priority among partners in a limited
partnership shows that the primary reason for the institution of a
class of limited partners is that of investment, rather than
management, of the partnership business enterprise. Whereas, the
ability to participate in profits is also a main focus in non-limited
partnership set-up, nonetheless, the partners come together as a
group of contractually bound sole proprietors, where the right to
manage and participate in the affairs of the partnership business
enterprise is the main focus. In a limited partnership scenario, in
order to be entitled to the feature of limited liability, the limited
partners do not participate in the management of the affairs of the
business enterprise; they come in only as passive investors; and
therefore, the main nexus of the relationship between the general
partners on one hand, and the limited partners on the other hand,
mainly focuses on the profits that would be earned from the capital
contribution of the limited partners.
The return of capital itself is not the priority, for indeed under the
limited liability rule, the capital contribution is intended to be the
main source of claim of partnership creditors as against the limited
partners. That is perhaps the main reason why upon dissolution and
winding-up of a limited partnership, after having paid all claims of
partnership creditors, the priority for the remaining assets of the
limited partnership would have to go to [t]hose to limited partners
in respect to their share of the profits and other compensation by
way of income on their contributions, before [t]hose to limited
partners in respect to the capital of their contributions.
oOo