G.R. No.

L-3704 December 12, 1907

LA
COMPAIA
vs.
FRANCISCO MUOZ, ET AL., defendants-appellees.

MARITIMA, plaintiff-appellant,

Rosado, Sanz and Opisso, for appellant.

Haussermann, Cohn and Williams, for appellees.

WILLARD, J.:
The plaintiff brought this action in the Court of First Instance of Manila against the partnership of Franciso
Muoz & Sons, and against Francisco Muoz de Bustillo, Emilio Muoz de Bustillo, and Rafael Naval to
recover the sum of P26,828.30, with interest and costs. Judgment was rendered in the court below acquitting
Emilio Muoz de Bustillo and Rafael Naval of the complaint, and in favor of the plaintiff and against the
defendant partnership, Francisco Muoz & Sons, and Francisco Muoz de Bustillo form the sum of P26,828.30
with interest at the rate of 8 per cent per annum from the 31st day of March, 1905, and costs. From this
judgment the plaintiff appealed.
On the 31st day of March, 1905, the defendants Francisco Muoz, Emilio Muoz, and Rafael Naval formed on
ordinary general mercantile partnership under the name of Francisco Muoz & Sons for the purpose of carrying
on the mercantile business in the Province of Albay which had formerly been carried on by Francisco Muoz.
Francisco Muoz was a capitalist partner and Emilio Muoz and Rafael Naval were industrial partners.
It is said in the decision of the court below that in the articles of partnership it was called an ordinary, general
mercantile partnership, but that from the article it does not appear to be such a partnership. In the brief of the
appellees it is also claimed that it is not an ordinary, general commercial partnership. We see nothing in the
case to support either the statement of the court below in its decision or the claim of the appellees in their brief.
In the articles of partnership signed by the partners it is expressly stated that they have agreed to form, and do
form, an ordinary, general mercantile partnership. The object of the partnership, as stated in the fourth
paragraph of the articles, is a purely mercantile one and all the requirements of the Code of Commerce in
reference to such partnership were complied with. The articles of partnership were recorded in the mercantile
registry in the Province of Albay. If it should be held that the contract made in this case did not create an
ordinary, general mercantile partnership we do not see how one could be created.
The claim of the appellees that Emilio Muoz contributed nothing to the partnership, either in property, money,
or industry, can not be sustained. He contributed as much as did the other industrial partner, Rafael Naval, the
difference between the two being that Rafael Naval was entitled by the articles of agreement to a fixed salary of
P2,500 as long as he was in charge of the branch office established at Ligao. If he had left that branch office
soon after the partnership was organized, he would have been in the same condition then that Emilio Muoz
was from the beginning. Such a change would have deprived him of the salary P2,500, but would not have
affected in any way the partnership nor have produced the effect of relieving him from liability as a partner. The
argument of the appellees seems to be that, because no yearly or monthly salary was assigned to Emilio
Muoz, he contributed nothing to the partnership and received nothing from it. By the articles themselves he
was to receive at the end of five years one-eighth of the profits. It can not be said, therefore, that he received
nothing from the partnership. The fact that the receipt of this money was postponed for five years is not
important. If the contention of the appellees were sound, it would result that, where the articles of partnership

provided for a distribution of profits at the end of each year, but did not assign any specific salary to an
industrial partner during that time, he would not be a member of the partnership. Industrial partners, by signing
the articles, agree to contribute their work to the partnership and article 138 of the Code of Commerce prohibits
them from engaging in other work except by the express consent of the partnership. With reference to civil
partnerships, section 1683 of the Civil Code relates to the same manner.
It is also said in the brief of the appellees that Emilio Muoz was entirely excluded from the management of the
business. It rather should be said that he excluded himself from such management, for he signed the articles of
partnership by the terms of which the management was expressly conferred by him and the others upon the
persons therein named. That partners in their articles can do this, admits of no doubt. Article 125 of the Code of
Commerce requires them to state the partners to whom the management is intrusted. This right is recognized
also in article 132. In the case of Reyes vs. The Compania Maritima (3 Phil. Rep., 519) the articles of
association provided that the directors for the first eight years should be certain persons named therein. This
court not only held that such provision was valid but also held that those directors could not be removed from
office during the eight years, even by a majority vote of all the stockholders of the company.
Emilio Muoz was, therefore, a general partner, and the important question in the case is whether, as such
general partner, he is liable to third persons for the obligations contracted by the partnership, or whether he
relieved from such liability, either because he is an industrial partner or because he was so relieved by the
express terms of the articles of partnership.
Paragraph 12 of the articles of partnership is as follows:
Twelfth. All profits arising from mercantile transactions carried on, as well as such as may be obtained
from the sale of property and other assets which constitute the corporate capital, shall be distributed,
on completion of the term of five years agreed to for the continuation of the partnership, in the
following manner: Three-fourths thereof for the capitalist partner Francisco Muoz de Bustillo and oneeighth thereof for the industrial partner Emilio Muoz de Bustillo y Carpiso, and the remaining oneeighth thereof for the partner Rafael Naval y Garcia. If, in lieu of profits, losses should result in the
winding up of the partnership, the same shall be for the sole and exclusive account of the capitalist
partner Francisco Muoz de Bustillo, without either of the two industrial partners participating in such
losses.
Articles 140 and 141 of the Code of Commerce are as follows:
ART. 140. Should there not have been stated in the articles of copartnership the portion of the profits to
be received by each partner, said profits shall be divided pro rata, in accordance with the interest each
one has on the copartnership, partners who have not contributed any capital, but giving their services,
receiving in the distribution the same amount as the partner who contributed the smallest capital.
ART. 141. Losses shall be charged in the same proportion among the partners who have contributed
capital, without including those who have not, unless by special agreement the latter have been
constituted as participants therein.
A comparison of these articles with the twelfth paragraph above quoted will show that the latter is simply a
statement of the rule laid down in the former. The article do not, therefore, change the rights of the industrial
partners as they are declared by the code, and the question may be reduced to the very simple one namely, Is
an industrial partner in an ordinary, general mercantile partnership liable to third persons for the debts and
obligations contracted by the partnership?

In limited partnership the Code of Commerce recognizes a difference between general and special partners,
but in a general partnership there is no such distinction-- all the members are general partners. The fact that
some may be industrial and some capitalist partners does not make the members of either of these classes
alone such general partners. There is nothing in the code which says that the industrial partners shall be the
only general partners, nor is there anything which says that the capitalist partners shall be the only general
partners.
Article 127 of the Code of Commerce is as follows:
All the members of the general copartnership, be they or be they not managing partners of the same,
are liable personally and in solidum with all their property for the results of the transactions made in the
name and for the account of the partnership, under the signature of the latter, and by a person
authorized to make use thereof.
Do the words "all the partners" found in this article include industrial partners? The same expression is found in
other articles of the code. In article 129 it is said that, if the management of the partnership has not been limited
by special act to one of the partners, all shall have the right to participate in the management. Does this mean
that the capitalist partners are the only ones who have that right, or does it include also industrial partners?
Article 132 provides that, when in the articles of partnership the management has been intrusted to a particular
person, he can not be deprived of such management, but that in certain cases the remaining partners may
appoint a comanager. Does the phrase "remaining partners" include industrial partners, or is it limited to
capitalist partners, and do industrial partners have no right to participate in the selection of the comanager?
Article 133 provides that all the partners shall have the right to examine the books of the partnership. Under this
article are the capitalist partners the only ones who have such right? Article 135 provides that the partners can
not use the firm name in their private business. Does this limitation apply only to capitalist partners or does it
extend also to industrial partners? Article 222 provides that a general partnership shall be dissolve by the death
of one of the general partners unless it is otherwise provided in the articles. Would such a partnership continue
if all the industrial partners should die? Article 229 provides that upon a dissolution of a general partnership it
shall be liquidated by the former managers, but, if all the partners do not agree to this, a general meeting shall
be called, which shall determine to whom the settlement of the affairs shall be intrusted. Does this phrase "all
the partners" include industrial partners, or are the capitalist partners the only ones who have a voice in the
selection of a manager during a period of liquidation? Article 237 provides that the private property of the
general partners shall not be taken in payment of the obligations of the partnership until its property has been
exhausted. Does the phrase "the general partners" include industrial partners?
In all of these articles the industrial partners must be included. It can not have been intended that, in such a
partnership as the one in question, where there were two industrial and only one capitalist partner, the industrial
partners should have no voice in the management of the business when the articles of partnership were silent
on that subject; that when the manager appointed mismanages the business the industrial partners should
have no right to appoint a comanager; that they should have no right to examine the books; that they might use
the firm name in their private business; or that they have no voice in the liquidation of the business after
dissolution. To give a person who contributed no more than, say, P500, these rights and to take them away
from a person who contributed his services, worth, perhaps, infinitely more than P500, would be discriminate
unfairly against industrial partners.
If the phrase "all the partners" as found in the articles other than article 127 includes industrial partners, then
article 127 must include them and they are liable by the terms thereof for the debts of the firm.
But it is said that article 141 expressly declares to the contrary. It is to be noticed in the first place that this
article does not say that they shall not be liable for losses. Article 140 declares how the profits shall be
divided amongthe partners. This article simply declares how the losses shall be divided among the partners.

The use of the words se imputaran is significant. The verb means abonar una partida a alguno en su cuenta o
deducirla de su debito. Article 141 says nothing about third persons and nothing about the obligations of the
partnership.
While in this section the word "losses" stand's alone, yet in other articles of the code, where it is clearly
intended to impose the liability to third persons, it is not considered sufficient, but the word "obligations" is
added. Thus article 148, in speaking of the liability of limited partners, uses the phrase las obligaciones y
perdidas. There is the same use of the two same words in article 153, relating to anonymous partnership. In
article 237 the word "obligations" is used and not the word "losses."
The claim of the appellees is that this article 141 fixes the liability of the industrial partners to third persons for
the obligations of the company. If it does, then it also fixes the liability of the capitalist partners to the same
persons for the same obligations. If this article says that industrial partners are not liable for the debts of the
concern, it also says that the capitalist partners shall be only liable for such debts in proportion to the amount of
the money which they have contributed to the partnership; that is to say, that if there are only two capitalist
partners, one of whom has contributed two-thirds of the capital and the other one-third, the latter is liable to a
creditor of the company for only one-third of the debt and the former for only two-thirds. It is apparent that,
when given this construction, article 141 is directly in conflict with article 127. It is not disputed by the appellees
that by the terms of article 127 each one of the capitalist partners is liable for all of the debts, regardless of the
amount of his contribution, but the construction which they put upon article 141 makes such capitalist partners
liable for only a proportionate part of the debts.
There is no injustice in imposing this liability upon the industrial partners. They have a voice in the management
of the business, if no manager has been named in the articles; they share in the profits and as to third persons
it is no more than right that they should share in the obligations. It is admitted that if in this case there had been
a capitalist partner who had contributed only P100 he would be liable for this entire debt of P26,000.
Our construction of the article is that it relates exclusively to the settlement of the partnership affairs among the
partners themselves and has nothing to do with the liability of the partners to third persons; that each one of the
industrial partners is liable to third persons for the debts of the firm; that if he has paid such debts out of his
private property during the life of the partnership, when its affairs are settled he is entitled to credit for the
amount so paid, and if it results that there is not enough property in the partnership to pay him, then the
capitalist partners must pay him. In this particular case that view is strengthened by the provisions of article 12,
above quoted. There it is stated that if, when the affairs of the partnership are liquidated that is, at the end of
five years it turns out that there had been losses instead of gains, then the capitalist partner, Francisco
Muoz, shall pay such losses that is, pay them to the industrial partners if they have been compelled to
disburse their own money in payment of the debts of the partnership.
While this is a commercial partnership and must be governed therefore by the rules of the Code of Commerce,
yet an examination of the provisions of the Civil Code in reference to partnerships may throw some light upon
the question here to be resolved. Articles 1689 and 1691 contain, in substance, the provisions of articles 140
and 141 of the Code of Commerce. It is to be noticed that these articles are found in section 1 of Chapter II
[Title VIII] of Book IV. That section treats of the obligations of the partners between themselves. The liability of
the partners as to third persons is treated in a distinct section, namely, section 2, comprising articles from 1697
to 1699.
If industrial partners in commercial partnerships are not responsible to third persons for the debts of the firm,
then industrial partners in civil partnerships are not. Waiving the question as to whether there can be a
commercial partnership composed entirely of industrial partners, it seems clear that there can be such civil
partnership, for article 1678 of the Civil Code provides as follows:

A particular partnership has for its object specified things only, their use of profits, or a specified
undertaking, or the exercise of a profession or art.
It might very easily happen, therefor, that a civil partnership could be composed entirely of industrial partners. If
it were, according to the claim of the appellees, there would be no personal responsibility whatever for the
debts of the partnership. Creditors could rely only upon the property which the partnership had, which in the
case of a partnership organized for the practice of any art or profession would be practically nothing. In the
case of Agustin vs. Inocencio, 1 just decided by this court, it was alleged in the complaint, and admitted by
the answer
That is partnership has been formed without articles of association or capital other than the personal
work of each one of the partners, whose profits are to be equally divided among themselves.
Article 1675 of the Civil Code is as follows:
General partnership of profits include all that the partners may acquire by their by their industry or work
during the continuation of the partnership.
Personal or real property which each of the partners may possess at the time of the celebration of the
agreement shall continue to be their private property, the usufruct only passing to the partnership.
It might very well happen in partnership of this kind that no one of the partners would have any private property
and that if they did the usufruct thereof would be inconsiderable.
Having in mind these different cases which may arise in the practice, that construction of the law should be
avoided which would enable two persons, each with a large amount of private property, to form and carry on a
partnership and, upon the bankruptcy of the latter, to say to its creditors that they contributed no capital to the
company but only their services, and that their private property is not, therefore, liable for its debts.
But little light is thrown upon this question by the authorities. No judgment of the supreme court of Spain has
been called to our attention, and we have been able to find none which refers in any way to this question.
There is, therefore, no authority from the tribunal for saying that an industrial partner is not liable to third
persons for the debts of the partnership.
In a work published by Lorenzo Benito in 1889 (Lecciones de derecho mercantil) it is said that industrial
partners are not liable for debts. The author, at page 127, divides general partnership into ordinary and
irregular. The irregular partnership are those which include one or more industrial partners. It may be said in
passing that his views can not apply to this case because the articles of partnership directly state that it is an
ordinary partnership and do not state that it is an irregular one. But his view of the law seems to be derived
from something other than the Code of Commerce now in force. He says:
. . . but it has not been very fortunate in sketching the characters of a regular collective partnership
(since it says nothing conclusive in reference to the irregular partnership) . . . . (p. 127.)
And again:
This article would not need to be commented upon were it not because the writer entirely overlooked
the fact that there might exist industrial partners who did not contribute with capital in money, credits,
or goods, which partners generally participate in the profits but not in the losses, and whose position
must also be determined in the articles of copartnership. (p. 128.)

And again:

lawphil.net

The only defect that can be pointed out in this article is the fact that it has been forgotten that in
collective partnerships there are industrial partners who, not being jointly liable for the obligations of
the copartnership, should not include their names in that of the firm. (p. 129.)
As a logical result of his theory he says that an industrial partner has no right to participate in the administration
of the partnership and that his name can not appear in the firm name. In this last respect his view is opposed to
that of Manresa, who says (Commentaries on the Spanish Civil Code, vol. 11, p. 330):
It only remains to us to state that a partner who contributes his industry to the concern can also confer
upon it the name or the corporate name under which such industry should be carried on. In this case,
so long as the copartnership lasts, it can enjoy the credit, reputation, and name or corporate name
under which such industry is carried on; but upon dissolution thereof the aforesaid name or corporate
name pertains to the partner who contributed the same, and he alone is entitled to use it, because
such a name or style is an accessory to the work of industrial partner, and upon recovering his work or
his industry he also recovers his name or the style under which he exercised his activity. It has thus
been decided by the French court of cassation in a decision dated June 6, 1859.
In speaking of limited partnerships Benito says (p. 144) that here are found two kinds of partners, one with
unlimited responsibility and the other with limited responsibility, but adopting his view as to industrial partners, it
should be said that there are three kinds of partners, one with unlimited responsibility, another with limited
responsibility, and the third, the industrial partner, with no responsibility at all. In Estasen's recent publication on
mercantile partnerships (Tratado de las Sociedades Mercantiles) he quotes from the work of Benito, but we do
not understand that he commits himself to the doctrines therein laid down. In fact, in his former
treatise, Instituciones de Derecho Mercantil (vol. 3, pp. 1-99), we find nothing which recognizes the existence of
these irregular general partnerships, or the exemption from the liability to third persons of the industrial
partners. He says in his latter work (p. 186) that according to Dr. Benito the irregular general partner originated
from the desire of the partnership to associate with itself some old clerk or employee as a reward for his
services and the interest which he had shown in the affairs of the partnership, giving him in place of a fixed
salary a proportionate part of the profits of the business. Article 269 of the Code of Commerce of 1829 relates
to this subject and apparently provides that such partners shall not be liable for debts. If this article was the
basis for Dr. Benito's view, it can be so no longer, for it does not appear in the present code. We held in the
case of Fortis vs. Gutirrez Hermanos (6 Phil. Rep., 100) that a mere agreement of that kind does not make the
employee a partner.
An examination of the works of Manresa and Sanchez Roman on the Civil Code, and of Blanco's Mercantile
Law, will shows that no one of these mentions in any way the irregular general partnership spoken of by Dr.
Benito, nor is there anything found in any one of these commentaries which in any way indicates that an
industrial partner is not liable to third persons for the debts of the partnership. An examination of the French law
will also show that no distinction of that kind is therein anywhere made and nothing can be found therein which
indicates that the industrial partners are not liable for the debts of the partnership. (Fuzier-Herman, Repertoire
de Droit Francais, vol. 34, pp. 256, 361, 510, and 512.)
Our conclusion is upon this branch of the case that neither on principle nor on authority can the industrial
partner be relieved from liability to third persons for the debts of the partnership.
It is apparently claimed by the appellee in his brief that one action can not be maintained against the
partnership and the individual partners, this claim being based upon the provisions of article 237 of the Code of
Commerce which provides that the private property of the partners shall not be taken until the partnership

property has been exhausted. But this article furnishes to argument in support of the appellee's claim. An action
can be maintained against the partnership and partners, but the judgment should recognize the rights of the
individual partners which are secured by said article 237.
lawphil.net

The judgment of the court below is reversed and judgment is ordered against all of the defendants for the sum
of P26,828.30, with interest thereon at the rate of 8 per cent per annum since the 31st day of March, 1905, and
for the cost of this action. Execution of such judgment shall not issue against the private property of the
defendants Francisco Muoz, Emilio Muoz, or Rafael Naval until the property of the defendant Francisco
Muoz & Sons is exhausted. No costs will be allowed to their party in this court. So ordered.
G.R. No. L-19342 May 25, 1972
LORENZO T. OA and HEIRS OF JULIA BUALES, namely: RODOLFO B. OA, MARIANO B. OA, LUZ
B.
OA,
VIRGINIA
B.
OA
and
LORENZO
B.
OA,
JR., petitioners,
vs.
THE COMMISSIONER OF INTERNAL REVENUE, respondent.
Orlando Velasco for petitioners.
Office of the Solicitor General Arturo A. Alafriz, Assistant Solicitor General Felicisimo R. Rosete, and Special
Attorney Purificacion Ureta for respondent.

BARREDO, J.:p
Petition for review of the decision of the Court of Tax Appeals in CTA Case No. 617, similarly entitled as above,
holding that petitioners have constituted an unregistered partnership and are, therefore, subject to the payment
of the deficiency corporate income taxes assessed against them by respondent Commissioner of Internal
Revenue for the years 1955 and 1956 in the total sum of P21,891.00, plus 5% surcharge and 1% monthly
interest from December 15, 1958, subject to the provisions of Section 51 (e) (2) of the Internal Revenue Code,
as amended by Section 8 of Republic Act No. 2343 and the costs of the suit, 1 as well as the resolution of said

court denying petitioners' motion for reconsideration of said decision.

The facts are stated in the decision of the Tax Court as follows:
Julia Buales died on March 23, 1944, leaving as heirs her surviving spouse, Lorenzo T. Oa
and her five children. In 1948, Civil Case No. 4519 was instituted in the Court of First Instance
of Manila for the settlement of her estate. Later, Lorenzo T. Oa the surviving spouse was
appointed administrator of the estate of said deceased (Exhibit 3, pp. 34-41, BIR rec.). On
April 14, 1949, the administrator submitted the project of partition, which was approved by the
Court on May 16, 1949 (See Exhibit K). Because three of the heirs, namely Luz, Virginia and
Lorenzo, Jr., all surnamed Oa, were still minors when the project of partition was approved,
Lorenzo T. Oa, their father and administrator of the estate, filed a petition in Civil Case No.
9637 of the Court of First Instance of Manila for appointment as guardian of said minors. On
November 14, 1949, the Court appointed him guardian of the persons and property of the
aforenamed minors (See p. 3, BIR rec.).
The project of partition (Exhibit K; see also pp. 77-70, BIR rec.) shows that the heirs have
undivided one-half (1/2) interest in ten parcels of land with a total assessed value of

P87,860.00, six houses with a total assessed value of P17,590.00 and an undetermined
amount to be collected from the War Damage Commission. Later, they received from said
Commission the amount of P50,000.00, more or less. This amount was not divided among
them but was used in the rehabilitation of properties owned by them in common (t.s.n., p. 46).
Of the ten parcels of land aforementioned, two were acquired after the death of the decedent
with money borrowed from the Philippine Trust Company in the amount of P72,173.00 (t.s.n.,
p. 24; Exhibit 3, pp. 31-34 BIR rec.).
The project of partition also shows that the estate shares equally with Lorenzo T. Oa, the
administrator thereof, in the obligation of P94,973.00, consisting of loans contracted by the
latter with the approval of the Court (see p. 3 of Exhibit K; or see p. 74, BIR rec.).
Although the project of partition was approved by the Court on May 16, 1949, no attempt was
made to divide the properties therein listed. Instead, the properties remained under the
management of Lorenzo T. Oa who used said properties in business by leasing or selling
them and investing the income derived therefrom and the proceeds from the sales thereof in
real properties and securities. As a result, petitioners' properties and investments gradually
increased from P105,450.00 in 1949 to P480,005.20 in 1956 as can be gleaned from the
following year-end balances:
From said investments and properties petitioners derived such incomes as profits from installment sales of
subdivided lots, profits from sales of stocks, dividends, rentals and interests (see p. 3 of Exhibit 3; p. 32, BIR
rec.; t.s.n., pp. 37-38). The said incomes are recorded in the books of account kept by Lorenzo T. Oa where
the corresponding shares of the petitioners in the net income for the year are also known. Every year,
petitioners returned for income tax purposes their shares in the net income derived from said properties and
securities and/or from transactions involving them (Exhibit 3,supra; t.s.n., pp. 25-26). However, petitioners did
not actually receive their shares in the yearly income. (t.s.n., pp. 25-26, 40, 98, 100). The income was always
left in the hands of Lorenzo T. Oa who, as heretofore pointed out, invested them in real properties and
securities. (See Exhibit 3, t.s.n., pp. 50, 102-104).
On the basis of the foregoing facts, respondent (Commissioner of Internal Revenue) decided that petitioners
formed an unregistered partnership and therefore, subject to the corporate income tax, pursuant to Section 24,
in relation to Section 84(b), of the Tax Code. Accordingly, he assessed against the petitioners the amounts of
P8,092.00 and P13,899.00 as corporate income taxes for 1955 and 1956, respectively. (See Exhibit 5,
amended by Exhibit 17, pp. 50 and 86, BIR rec.). Petitioners protested against the assessment and asked for
reconsideration of the ruling of respondent that they have formed an unregistered partnership. Finding no merit
in petitioners' request, respondent denied it (See Exhibit 17, p. 86, BIR rec.). (See pp. 1-4, Memorandum for
Respondent, June 12, 1961).
Upon further consideration of the case, the 25% surcharge was eliminated in line with the
ruling of the Supreme Court in Collector v. Batangas Transportation Co., G.R. No. L-9692,
Jan. 6, 1958, so that the questioned assessment refers solely to the income tax proper for the
years 1955 and 1956 and the "Compromise for non-filing," the latter item obviously referring to
the compromise in lieu of the criminal liability for failure of petitioners to file the corporate
income tax returns for said years. (See Exh. 17, page 86, BIR records). (Pp. 1-3, Annex C to
Petition)
Petitioners have assigned the following as alleged errors of the Tax Court:
I.

THE COURT OF TAX APPEALS ERRED IN HOLDING THAT THE PETITIONERS FORMED
AN UNREGISTERED PARTNERSHIP;
II.
THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE PETITIONERS
WERE CO-OWNERS OF THE PROPERTIES INHERITED AND (THE) PROFITS DERIVED
FROM TRANSACTIONS THEREFROM (sic);
III.
THE COURT OF TAX APPEALS ERRED IN HOLDING THAT PETITIONERS WERE LIABLE
FOR CORPORATE INCOME TAXES FOR 1955 AND 1956 AS AN UNREGISTERED
PARTNERSHIP;
IV.
ON THE ASSUMPTION THAT THE PETITIONERS CONSTITUTED AN UNREGISTERED
PARTNERSHIP, THE COURT OF TAX APPEALS ERRED IN NOT HOLDING THAT THE
PETITIONERS WERE AN UNREGISTERED PARTNERSHIP TO THE EXTENT ONLY THAT
THEY INVESTED THE PROFITS FROM THE PROPERTIES OWNED IN COMMON AND
THE LOANS RECEIVED USING THE INHERITED PROPERTIES AS COLLATERALS;
V.
ON THE ASSUMPTION THAT THERE WAS AN UNREGISTERED PARTNERSHIP, THE
COURT OF TAX APPEALS ERRED IN NOT DEDUCTING THE VARIOUS AMOUNTS PAID
BY THE PETITIONERS AS INDIVIDUAL INCOME TAX ON THEIR RESPECTIVE SHARES
OF THE PROFITS ACCRUING FROM THE PROPERTIES OWNED IN COMMON, FROM
THE DEFICIENCY TAX OF THE UNREGISTERED PARTNERSHIP.
In other words, petitioners pose for our resolution the following questions: (1) Under the facts found by the
Court of Tax Appeals, should petitioners be considered as co-owners of the properties inherited by them from
the deceased Julia Buales and the profits derived from transactions involving the same, or, must they be
deemed to have formed an unregistered partnership subject to tax under Sections 24 and 84(b) of the National
Internal Revenue Code? (2) Assuming they have formed an unregistered partnership, should this not be only in
the sense that they invested as a common fund the profits earned by the properties owned by them in common
and the loans granted to them upon the security of the said properties, with the result that as far as their
respective shares in the inheritance are concerned, the total income thereof should be considered as that of coowners and not of the unregistered partnership? And (3) assuming again that they are taxable as an
unregistered partnership, should not the various amounts already paid by them for the same years 1955 and
1956 as individual income taxes on their respective shares of the profits accruing from the properties they
owned in common be deducted from the deficiency corporate taxes, herein involved, assessed against such
unregistered partnership by the respondent Commissioner?
Pondering on these questions, the first thing that has struck the Court is that whereas petitioners' predecessor
in interest died way back on March 23, 1944 and the project of partition of her estate was judicially approved as
early as May 16, 1949, and presumably petitioners have been holding their respective shares in their
inheritance since those dates admittedly under the administration or management of the head of the family, the
widower and father Lorenzo T. Oa, the assessment in question refers to the later years 1955 and 1956. We

believe this point to be important because, apparently, at the start, or in the years 1944 to 1954, the respondent
Commissioner of Internal Revenue did treat petitioners as co-owners, not liable to corporate tax, and it was
only from 1955 that he considered them as having formed an unregistered partnership. At least, there is
nothing in the record indicating that an earlier assessment had already been made. Such being the case, and
We see no reason how it could be otherwise, it is easily understandable why petitioners' position that they are
co-owners and not unregistered co-partners, for the purposes of the impugned assessment, cannot be upheld.
Truth to tell, petitioners should find comfort in the fact that they were not similarly assessed earlier by the
Bureau of Internal Revenue.
The Tax Court found that instead of actually distributing the estate of the deceased among themselves
pursuant to the project of partition approved in 1949, "the properties remained under the management of
Lorenzo T. Oa who used said properties in business by leasing or selling them and investing the income
derived therefrom and the proceed from the sales thereof in real properties and securities," as a result of which
said properties and investments steadily increased yearly from P87,860.00 in "land account" and P17,590.00 in
"building account" in 1949 to P175,028.68 in "investment account," P135.714.68 in "land account" and
P169,262.52 in "building account" in 1956. And all these became possible because, admittedly, petitioners
never actually received any share of the income or profits from Lorenzo T. Oa and instead, they allowed him
to continue using said shares as part of the common fund for their ventures, even as they paid the
corresponding income taxes on the basis of their respective shares of the profits of their common business as
reported by the said Lorenzo T. Oa.
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limit 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. Oa, 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. In these circumstances, it is Our considered view that from the moment petitioners allowed not only
the incomes from their respective shares of the inheritance but even the inherited properties themselves to be
used by Lorenzo T. Oa as a common fund in undertaking several transactions or in business, with the
intention of deriving profit to be shared by them proportionally, such act was tantamonut to actually contributing
such incomes to a common fund and, in effect, they thereby formed an unregistered partnership within the
purview of the above-mentioned provisions of the Tax Code.
It is but logical that in cases of inheritance, there should be a period when the heirs can be considered as coowners rather than unregistered co-partners within the contemplation of our corporate tax laws aforementioned.
Before the partition and distribution of the estate of the deceased, all the income thereof does belong
commonly to all the heirs, obviously, without them becoming thereby unregistered co-partners, but it does not
necessarily follow that such status as co-owners continues until the inheritance is actually and physically
distributed among the heirs, for it is easily conceivable that after knowing their respective shares in the
partition, they might decide to continue holding said shares under the common management of the
administrator or executor or of anyone chosen by them and engage in business on that basis. Withal, if this
were to be allowed, it would be the easiest thing for heirs in any inheritance to circumvent and render
meaningless Sections 24 and 84(b) of the National Internal Revenue Code.
It is true that in Evangelista vs. Collector, 102 Phil. 140, it was stated, among the reasons for holding the
appellants therein to be unregistered co-partners for tax purposes, that their common fund "was not something
they found already in existence" and that "it was not a property inherited by them pro indiviso," but it is certainly
far fetched to argue therefrom, as petitioners are doing here, that ergo, in all instances where an inheritance is
not actually divided, there can be no unregistered co-partnership. As already indicated, for tax purposes, the
co-ownership of inherited properties is automatically converted into an unregistered partnership the moment
the said common properties and/or the incomes derived therefrom are used as a common fund with intent to

produce profits for the heirs in proportion to their respective shares in the inheritance as determined in a project
partition either duly executed in an extrajudicial settlement or approved by the court in the corresponding
testate or intestate proceeding. The reason for this is simple. From the moment of such partition, the heirs are
entitled already to their respective definite shares of the estate and the incomes thereof, for each of them to
manage and dispose of as exclusively his own without the intervention of the other heirs, and, accordingly he
becomes liable individually for all taxes in connection therewith. If after such partition, he allows his share to be
held in common with his co-heirs under a single management to be used with the intent of making profit
thereby in proportion to his share, there can be no doubt that, even if no document or instrument were
executed for the purpose, for tax purposes, at least, an unregistered partnership is formed. This is exactly what
happened to petitioners in this case.
In this connection, petitioners' reliance on Article 1769, paragraph (3), of the Civil Code, providing that: "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," and, for that
matter, on any other provision of said code on partnerships is unavailing. In Evangelista, supra, this Court
clearly differentiated the concept of partnerships under the Civil Code from that of unregistered partnerships
which are considered as "corporations" under Sections 24 and 84(b) of the National Internal Revenue Code.
Mr. Justice Roberto Concepcion, now Chief Justice, elucidated on this point thus:
To begin with, the tax in question is one imposed upon "corporations", which, strictly speaking,
are distinct and different from "partnerships". When our Internal Revenue Code includes
"partnerships" among the entities subject to the tax on "corporations", said Code must allude,
therefore, to organizations which are not necessarily "partnerships", in the technical sense of
the term. Thus, for instance, section 24 of said Code exempts from the aforementioned tax
"duly registered general partnerships," which constitute precisely one of the most typical forms
of partnerships in this jurisdiction. Likewise, as defined in section 84(b) of said Code, "the term
corporation includes partnerships, no matter how created or organized." This qualifying
expression clearly indicates that a joint venture need not be undertaken in any of the standard
forms, or in confirmity with the usual requirements of the law on partnerships, in order that one
could be deemed constituted for purposes of the tax on corporation. Again, pursuant to said
section 84(b),the term "corporation" includes, among others, "joint accounts,(cuentas en
participacion)" and "associations", none of which has a legal personality of its own,
independent of that of its members. Accordingly, the lawmaker could not have regarded that
personality as a condition essential to the existence of the partnerships therein referred to. In
fact, as above stated, "duly registered general co-partnerships" which are possessed of the
aforementioned personality have been expressly excluded by law (sections 24 and 84[b])
from the connotation of the term "corporation." ....
xxx xxx xxx
Similarly, the American Law
... provides its own concept of a partnership. Under the term "partnership" it
includes not only a partnership as known in common law but, as well, a
syndicate, group, pool, joint venture, or other unincorporated organization
which carries on any business, financial operation, or venture, and which is
not, within the meaning of the Code, a trust, estate, or a corporation. ... . (7A
Merten's Law of Federal Income Taxation, p. 789; emphasis ours.)
The term "partnership" includes a syndicate, group, pool, joint venture or
other unincorporated organization, through or by means of which any

business, financial operation, or venture is carried on. ... . (8 Merten's Law of

Federal Income Taxation, p. 562 Note 63; emphasis ours.)
For purposes of the tax on corporations, our National Internal Revenue Code includes these
partnerships with the exception only of duly registered general copartnerships within the
purview of the term "corporation." It is, therefore, clear to our mind that petitioners herein
constitute a partnership, insofar as said Code is concerned, and are subject to the income tax
for corporations.
We reiterated this view, thru Mr. Justice Fernando, in Reyes vs. Commissioner of Internal Revenue, G. R. Nos.
L-24020-21, July 29, 1968, 24 SCRA 198, wherein the Court ruled against a theory of co-ownership pursued by
appellants therein.
As regards the second question raised by petitioners about the segregation, for the purposes of the corporate
taxes in question, of their inherited properties from those acquired by them subsequently, We consider as
justified the following ratiocination of the Tax Court in denying their motion for reconsideration:
In connection with the second ground, it is alleged that, if there was an unregistered
partnership, the holding should be limited to the business engaged in apart from the
properties inherited by petitioners. In other words, the taxable income of the partnership
should be limited to the income derived from the acquisition and sale of real properties and
corporate securities and should not include the income derived from the inherited properties. It
is admitted that the inherited properties and the income derived therefrom were used in the
business of buying and selling other real properties and corporate securities. Accordingly, the
partnership income must include not only the income derived from the purchase and sale of
other properties but also the income of the inherited properties.
Besides, as already observed earlier, the income derived from inherited properties may be considered as
individual income of the respective heirs only so long as the inheritance or estate is not distributed or, at least,
partitioned, but the moment their respective known shares are used as part of the common assets of the heirs
to be used in making profits, it is but proper that the income of such shares should be considered as the part of
the taxable income of an unregistered partnership. This, We hold, is the clear intent of the law.
Likewise, the third question of petitioners appears to have been adequately resolved by the Tax Court in the
aforementioned resolution denying petitioners' motion for reconsideration of the decision of said court.
Pertinently, the court ruled this wise:
In support of the third ground, counsel for petitioners alleges:
Even if we were to yield to the decision of this Honorable Court that the
herein petitioners have formed an unregistered partnership and, therefore,
have to be taxed as such, it might be recalled that the petitioners in their
individual income tax returns reported their shares of the profits of the
unregistered partnership. We think it only fair and equitable that the various
amounts paid by the individual petitioners as income tax on their respective
shares of the unregistered partnership should be deducted from the
deficiency income tax found by this Honorable Court against the
unregistered partnership. (page 7, Memorandum for the Petitioner in Support
of Their Motion for Reconsideration, Oct. 28, 1961.)

In other words, it is the position of petitioners that the taxable income of the partnership must
be reduced by the amounts of income tax paid by each petitioner on his share of partnership
profits. This is not correct; rather, it should be the other way around. The partnership profits
distributable to the partners (petitioners herein) should be reduced by the amounts of income
tax assessed against the partnership. Consequently, each of the petitioners in his individual
capacity overpaid his income tax for the years in question, but the income tax due from the
partnership has been correctly assessed. Since the individual income tax liabilities of
petitioners are not in issue in this proceeding, it is not proper for the Court to pass upon the
same.
Petitioners insist that it was error for the Tax Court to so rule that whatever excess they might have paid as
individual income tax cannot be credited as part payment of the taxes herein in question. It is argued that to
sanction the view of the Tax Court is to oblige petitioners to pay double income tax on the same income, and,
worse, considering the time that has lapsed since they paid their individual income taxes, they may already be
barred by prescription from recovering their overpayments in a separate action. We do not agree. As We see it,
the case of petitioners as regards the point under discussion is simply that of a taxpayer who has paid the
wrong tax, assuming that the failure to pay the corporate taxes in question was not deliberate. Of course, such
taxpayer has the right to be reimbursed what he has erroneously paid, but the law is very clear that the claim
and action for such reimbursement are subject to the bar of prescription. And since the period for the recovery
of the excess income taxes in the case of herein petitioners has already lapsed, it would not seem right to
virtually disregard prescription merely upon the ground that the reason for the delay is precisely because the
taxpayers failed to make the proper return and payment of the corporate taxes legally due from them. In
principle, it is but proper not to allow any relaxation of the tax laws in favor of persons who are not exactly
above suspicion in their conduct vis-a-vis their tax obligation to the State.
IN VIEW OF ALL THE FOREGOING, the judgment of the Court of Tax Appeals appealed from is affirm with
costs against petitioners.
G.R. No. L-45624

April 25, 1939

GEORGE
vs.
HILL & CERON, ET AL., respondents-appellees.
George
E.
Roy
and
De
Espeleta, Quijano and Liwag for appellee Hill.

LITTON, petitioner-appellant,

Reich

for
Guzman

for

appellant.
appellees.

CONCEPCION, J.:
This is a petition to review on certiorari the decision of the Court of Appeals in a case originating from the Court
of First Instance of Manila wherein the herein petitioner George Litton was the plaintiff and the respondents Hill
& Ceron, Robert Hill, Carlos Ceron and Visayan Surety & Insurance Corporation were defendants.
The facts are as follows: On February 14, 1934, the plaintiff sold and delivered to Carlos Ceron, who is one of
the managing partners of Hill & Ceron, a certain number of mining claims, and by virtue of said transaction, the
defendant Carlos Ceron delivered to the plaintiff a document reading as follows:
Feb. 14, 1934

Received from Mr. George Litton share certificates Nos. 4428, 4429 and 6699 for 5,000, 5,000 and
7,000 shares respectively total 17,000 shares of Big Wedge Mining Company, which we have sold
at P0.11 (eleven centavos) per share or P1,870.00 less 1/2 per cent brokerage.
HILL

&

CERON

By: (Sgd.) CARLOS CERON

Ceron paid to the plaintiff the sum or P1,150 leaving an unpaid balance of P720, and unable to collect this sum
either from Hill & Ceron or from its surety Visayan Surety & Insurance Corporation, Litton filed a complaint in
the Court of First Instance of Manila against the said defendants for the recovery of the said balance. The
court, after trial, ordered Carlos Ceron personally to pay the amount claimed and absolved the partnership Hill
& Ceron, Robert Hill and the Visayan Surety & Insurance Corporation. On appeal to the Court of Appeals, the
latter affirmed the decision of the court on May 29, 1937, having reached the conclusion that Ceron did not
intend to represent and did not act for the firm Hill & Ceron in the transaction involved in this litigation.
Accepting, as we cannot but accept, the conclusion arrived at by the Court of Appeals as to the question of fact
just mentioned, namely, that Ceron individually entered into the transaction with the plaintiff, but in view,
however, of certain undisputed facts and of certain regulations and provisions of the Code of Commerce, we
reach the conclusion that the transaction made by Ceron with the plaintiff should be understood in law as
effected by Hill & Ceron and binding upon it.
In the first place, it is an admitted fact by Robert Hill when he testified at the trial that he and Ceron, during the
partnership, had the same power to buy and sell; that in said partnership Hill as well as Ceron made the
transaction as partners in equal parts; that on the date of the transaction, February 14, 1934, the partnership
between Hill and Ceron was in existence. After this date, or on February 19th, Hill & Ceron sold shares of the
Big Wedge; and when the transaction was entered into with Litton, it was neither published in the newspapers
nor stated in the commercial registry that the partnership Hill & Ceron had been dissolved.
Hill testified that a few days before February 14th he had a conversation with the plaintiff in the course of which
he advised the latter not to deliver shares for sale or on commission to Ceron because the partnership was
about to be dissolved; but what importance can be attached to said advice if the partnership was not in fact
dissolved on February 14th, the date when the transaction with Ceron took place?
Under article 226 of the Code of Commerce, the dissolution of a commercial association shall not cause any
prejudice to third parties until it has been recorded in the commercial registry. (See also Cardell vs. Maeru, 14
Phil., 368.) The Supreme Court of Spain held that the dissolution of a partnership by the will of the partners
which is not registered in the commercial registry, does not prejudice third persons. (Opinion of March 23,
1885.)
Aside from the aforecited legal provisions, the order of the Bureau of Commerce of December 7, 1933,
prohibits brokers from buying and selling shares on their own account. Said order reads:
The stock and/or bond broker is, therefore, merely an agent or an intermediary, and as such, shall not
be allowed. . . .
(c) To buy or to sell shares of stock or bonds on his own account for purposes of speculation and/or for
manipulating the market, irrespective of whether the purchase or sale is made from or to a private
individual, broker or brokerage firm.

In its decision the Court of Appeals states:

But there is a stronger objection to the plaintiff's attempt to make the firm responsible to him. According
to the articles of copartnership of 'Hill & Ceron,' filed in the Bureau of Commerce.
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, shall jointly open a current account or any other kind of account in any bank or banks,
shall jointly sign all checks for the withdrawal of funds and shall jointly or singly sign, in the latter case,
with the consent of the other partner. . . .
Under this stipulation, a written contract of the firm can only be signed by one of the partners if the
other partner consented. Without the consent of one partner, the other cannot bind the firm by a written
contract. Now, assuming for the moment that Ceron attempted to represent the firm in this contract
with the plaintiff (the plaintiff conceded that the firm name was not mentioned at that time), the latter
has failed to prove that Hill had consented to such contract.
It follows from the sixth paragraph of the articles of partnership of Hill &n 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 inquires 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.
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 transactions. (Mills vs. Riggle, 112 Pac.,
617.)
The presumption is sufficient to permit third persons to hold the firm liable on transactions entered into
by one of members of the firm acting apparently in its behalf and within the scope of his authority. (Le
Roy vs.Johnson, 7 U. S. [Law. ed.], 391.)
The second paragraph of the articles of partnership of Hill & Ceron reads in part:
Second: That the purpose or object for which this copartnership is organized is to engage in the
business of brokerage in general, such as stock and bond brokers, real brokers, investment security
brokers, shipping brokers, and other activities pertaining to the business of brokers in general.
The kind of business in which the partnership Hill & Ceron is to engage being thus determined, none of the two
partners, under article 130 of the Code of Commerce, may legally engage in the business of brokerage in
general as stock brokers, security brokers and other activities pertaining to the business of the partnership.
Ceron, therefore, could not have entered into the contract of sale of shares with Litton as a private individual,
but as a managing partner of Hill & Ceron.
The respondent argues in its brief that even admitting that one of the partners could not, in his individual
capacity, engage in a transaction similar to that in which the partnership is engaged without binding the latter,
nevertheless there is no law which prohibits a partner in the stock brokerage business for engaging in other
transactions different from those of the partnership, as it happens in the present case, because the transaction

made by Ceron is a mere personal loan, and this argument, so it is said, is corroborated by the Court of
Appeals. We do not find this alleged corroboration because the only finding of fact made by the Court of
Appeals is to the effect that the transaction made by Ceron with the plaintiff was in his individual capacity.
The appealed decision is reversed and the defendants are ordered to pay to the plaintiff, jointly and severally,
the sum of P720, with legal interest, from the date of the filing of the complaint, minus the commission of onehalf per cent (%) from the original price of P1,870, with the costs to the respondents. So ordered.
RESOLUTION
July 13, 1939
CONCEPCION, J.:
A motion has been presented in this case by Robert Hill, one of the defendants sentenced in our decision to
pay to the plaintiff the amount claimed in his complaint. It is asked that we reconsider our decision, the said
defendant insisting that the appellant had not established that Carlos Ceron, another of the defendants, had the
consent of his copartner, the movant, to enter with the appellant into the contract whose breach gave rise to the
complaint. It is argued that, it being stipulated in the articles of partnership that Hill and Ceron, only partners of
the firm Hill & Ceron, would, as managers, have the management of the business of the partnership, and that
either may contract and sign for the partnership with the consent of the other; the parties of partnership having
been, so it is said, recorded in the commercial registry, the appellant could not ignore the fact that the consent
of the movant was necessary for the validity of the contract which he had with the other partner and defendant,
Ceron, and there being no evidence that said consent had been obtained, the complaint to compel compliance
with the said contract had to be, as it must be in fact, a procedural failure.
Although this question has already been considered and settled in our decision, we nevertheless take
cognizance of the motion in order to enlarge upon our views on the matter.
The stipulation in the articles of partnership that any of the two managing partners may contract and sign in the
name of the partnership with the consent of the other, undoubtedly creates an obligation between the two
partners, which consists in asking the other's consent before contracting for the partnership. This obligation of
course is not imposed upon a third person who contracts with the partnership. Neither is it necessary for the
third person to ascertain if the managing partner with whom he contracts has previously obtained the consent
of the other. A third person may and has a right to presume that the partner with whom he contracts has, in the
ordinary and natural course of business, the consent of his copartner; for otherwise he would not enter into the
contract. The third person would naturally not presume that the partner with whom he enters into the
transaction is violating the articles of partnership but, on the contrary, is acting in accordance therewith. And
this finds support in the legal presumption that the ordinary course of business has been followed (No. 18,
section 334, Code of Civil Procedure), and that the law has been obeyed (No. 31, section 334). This last
presumption is equally applicable to contracts which have the force of law between the parties.
Wherefore, unless the contrary is shown, namely, that one of the partners did not consent to his copartner
entering into a contract with a third person, and that the latter with knowledge thereof entered into said contract,
the aforesaid presumption with all its force and legal effects should be taken into account.
There is nothing in the case at bar which destroys this presumption; the only thing appearing in he findings of
fact of the Court of Appeals is that the plaintiff "has failed to prove that Hill had consented to such contract".
According to this, it seems that the Court of Appeals is of the opinion that the two partners should give their
consent to the contract and that the plaintiff should prove it. The clause of the articles of partnership should not

be thus understood, for it means that one of the two partners should have the consent of the other to contract
for the partnership, which is different; because it is possible that one of the partners may not see any prospect
in a transaction, but he may nevertheless consent to the realization thereof by his copartner in reliance upon
his skill and ability or otherwise. And here we have to hold once again that it is not the plaintiff who, under the
articles of partnership, should obtain and prove the consent of Hill, but the latter's partner, Ceron, should he file
a complaint against the partnership for compliance with the contract; but in the present case, it is a third
person, the plaintiff, who asks for it. While the said presumption stands, the plaintiff has nothing to prove.
Passing now to another aspect of the case, had Ceron in any way stated to the appellant at the time of the
execution of the contract, or if it could be inferred by his conduct, that he had the consent of Hill, and should it
turn out later that he did not have such consent, this alone would not annul the contract judging from the
provisions of article 130 of the Code of Commerce reading as follows:
No new obligation shall be contracted against the will of one of the managing partners, should he have
expressly stated it; but if, however, it should be contracted it shall not be annulled for this reason, and
shall have its effects without prejudice to the liability of the partner or partners who contracted it to
reimburse the firm for any loss occasioned by reason thereof. (Emphasis supplied.)
Under the aforequoted provisions, when, not only without the consent but against the will of any of the
managing partners, a contract is entered into with a third person who acts in good faith, and the transaction is
of the kind of business in which the partnership is engaged, as in the present case, said contract shall not be
annulled, without prejudice to the liability of the guilty partner.
The reason or purpose behind these legal provisions is no other than to protect a third person who contracts
with one of the managing partners of the partnership, thus avoiding fraud and deceit to which he may easily fall
a victim without this protection which the Code of Commerce wisely provides.
If we are to interpret the articles of partnership in question by holding that it is the obligation of the third person
to inquire whether the managing copartner of the one with whom he contracts has given his consent to said
contract, which is practically casting upon him the obligation to get such consent, this interpretation would, in
similar cases, operate to hinder effectively the transactions, a thing not desirable and contrary to the nature of
business which requires promptness and dispatch one the basis of good faith and honesty which are always
presumed.
In view of the foregoing, and sustaining the other views expressed in the decision, the motion is denied. So
ordered.
G.R. No. L-12164

May 22, 1959

BENITO
LIWANAG
and
MARIA
LIWANAG
REYES, petitioners-appellants,
vs.
WORKMEN'S COMPENSATION COMMISSION, ET AL., respondents-appellees.
J.
de
Estanislao R. Bayot for appellees.

Guia

for

appellants.

ENDENCIA, J.:
Appellants Benito Liwanag and Maria Liwanag Reyes are co-owners of Liwanag Auto Supply, a commercial
guard who while in line of duty, was skilled by criminal hands. His widow Ciriaca Vda. de Balderama and minor

children Genara, Carlos and Leogardo, all surnamed Balderama, in due time filed a claim for compensation
with the Workmen's Compensation Commission, which was granted in an award worded as follows:
WHEREFORE, the order of the referee under consideration should be, as it is hereby, affirmed and
respondents Benito Liwanag and Maria Liwanag Reyes, ordered.
1. To pay jointly and severally the amount of three thousand Four Hundred Ninety Four and 40/100
(P3,494.40) Pesos to the claimants in lump sum; and
To pay to the Workmen's Compensation Funds the sum of P4.00 (including P5.00 for this review) as
fees, pursuant to Section 55 of the Act.
In appealing the case to this Tribunal, appellants do not question the right of appellees to compensation nor the
amount awarded. They only claim that, under the Workmen's Compensation Act, the compensation is divisible,
hence the commission erred in ordering appellants to pay jointly and severally the amount awarded. They
argue that there is nothing in the compensation Act which provides that the obligation of an employer arising
from compensable injury or death of an employee should be solidary obligation, the same should have been
specifically provided, and that, in absence of such clear provision, the responsibility of appellants should not be
solidary but merely joint.
At first blush appellants' contention would seem to be well, for ordinarily, the liability of the partners in a
partnership is not solidary; but the law governing the liability of partners is not applicable to the case at bar
wherein a claim for compensation by dependents of an employee who died in line of duty is involved. And
although the Workmen's Compensation Act does not contain any provision expressly declaring solidary
obligation of business partners like the herein appellants, there are other provisions of law from which it could
be gathered that their liability must be solidary. Arts. 1711 and 1712 of the new Civil Code provide:
ART. 1711. Owners of enterprises and other employers are obliged to pay compensation for the death
of or injuries to their laborers, workmen, mechanics or other employees, even though the event may
have been purely accidental or entirely due to a fortuitous cause, if the death or personal injury arose
out of and in the course of the employment. . . . .
ART. 1712. If the death or injury is due to the negligence of a fellow-worker, the latter and the employer
shall be solidarily liable for compensation. . . . .
And section 2 of the Workmen's Compensation Act, as amended reads in part as follows:
. . . The right to compensation as provided in this Act shall not be defeated or impaired on the ground
that the death, injury or disease was due to the negligence of a fellow servant or employee, without
prejudice to the right of the employer to proceed against the negligence party.
The provisions of the new Civil Code above quoted taken together with those of Section 2 of the Workmen's
Compensation Act, reasonably indicate that in compensation cases, the liability of business partners, like
appellants, should be solidary; otherwise, the right of the employee may be defeated, or at least crippled. If the
responsibility of appellants were to be merely joint and solidary, and one of them happens to be insolvent, the
amount awarded to the appellees would only be partially satisfied, which is evidently contrary to the intent and
purposes of the Act. In the previous cases we have already held that the Workmen's Compensation Act should
be construed fairly, reasonably and liberally in favor of and for the benefit of the employee and his dependents;
that all doubts as to the right of compensation resolved in his favor; and that it should be interpreted to promote
its purpose. Accordingly, the present controversy should be decided in favor of the appellees.

Moreover, Art. 1207 of the new Civil Code provides:

. . . . There is solidary liability only when the obligation expressly so states, or when the law or the
nature of the obligation requires solidarity.
Since the Workmen's Compensation Act was enacted to give full protection to the employee, reason demands
that the nature of the obligation of the employers to pay compensation to the heirs of their employee who died
in line of duty, should be solidary; otherwise, the purpose of the law could not be attained.
Wherefore, finding no error in the award appealed from, the same is hereby affirmed, with costs against
appellants.