1

PARTNERSHIP NOTES Professors Hector S. de Leon and Hector M. de Leon, Jr. write that “As
By: Atty. Cesar Villanueva 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
1 – HISTORICAL BACKGROUND ON PHILIPPINE
were generally for single transactions or undertakings.” (DE LEON,
PARTNERSHIP LAW
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”).
I. HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW They also write that “Following the Babylonian period, we find clear-cut
references to partnerships in Jewish law . . . however, it must be
1. Historical Background and Sources of Philippine Law on remembered that the ancient Jews were a pastoral people, and, therefore,
Partnership the partnership as a business organization under Jewish law was
concerned with the holding of title to land by two or more persons.” (DE
a. Notion of Partnership Is of Ancient Origins LEONS, at p. 2)

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 b. Civil and Common Law Bases of Partnership Laws
for it in their laws—among the Babylonians from the time of Hammurabi,
among the Babylonian Jews as early as the fourth century, and among The De Leons trace the origins of the modern-day partnership through the
the Romans almost from the time they laid the foundation of their English commercials courts which eventually was integrated by then Chief
monumental legal system.” (BAUTISTA, ESTEBAN B., TREATISE ON Justice Lord Mansfield into the common law system and that it “was not
PHILIPPINE PARTNERSHIP LAW, Rex Book Store, 1995 Ed., at p. 1, until the latter years of the 18th century that the law of partnership as we
hereinafter referred to as “BAUTISTA”; citing 12 ENCYCLOPEDIA OF know it today began to assume both form and substance.” (DE LEONS, at
SOCIAL SCIENCE 3 [1948]). He also wrote that “in medieval times, the p. 3)
device was prominent among the merchant princes in the Italian cities; it
also thrived in thirteenth century England where it was regulated by They write that eventually in the United States, in 1914 the Uniform
guilds merchant.” (BAUTISTA, at p. 1, citing 4 COLLIERS ENCYCLOPEDIA Partnerships Act was endorsed by the National Conference of
257 [1952] and 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 4 [1948]) 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
 2
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 time-consuming
negotiations and contract drafting. The essential characteristics of
partnership as governed by law (under modern settings, they would be:
juridical personality, mutual agency, delectus personae and unlimited
 3
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
tobusiness transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties were
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
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
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
4
(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
leased in Prautch v. Hernandez, 1 Phil. 705 (1903), that a commercial or
mercantile partnership had for its object the pursuit of industry or
commerce, and was then treated like a merchant that must necessarily be
governed by the Code of Commerce and had to comply with the
registration requirements thereof to lawfully come into existence.
In a commercial partnership, both the partnership and the separate
partners thereof may be joined in one action, but the private property of
the partners could be taken in payment of the partnership debts only after
existence of the common property of the partnership had been exhausted. (La
Compañia Maritima v. Muñoz, 9 Phil. 326 [1907]).
The commercial partnership under the Code of Commerce tended to be a
more solemn affair, and when it failed to register its articles of
partnership in the mercantile registry, it did not become a juridical person
nor did it have any personality distinct from the personality of the
individuals who composed it (Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil.
benefit of 498 [1906]; Bourns v. Carman, 7 Phil. 117 [1906]; Ang Seng Quen v. Te
Chico, 7 Phil. 541 [1907]); and therefore could not also maintain an
action in its name Prautch, etc. v. Hernandez, 1 Phil. 705 [1903]).
 5
In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), which
involved a commercial partnership, but the requirements of the Code of
Commerce for the execution of public document and registration in the
mercantile registry (Art. 119, Code of Commerce) were not complied with,
the Supreme Court held that the “alleged partnership never had any legal
existence nor has it acquired any juridical personality in the acts and
contracted executed and made by it,” (Ibid, at pp. 500-501) and what
was applied was Article 119 of the Code of Commerce which made liable
for the debts incurred by such “partnership de facto” the “persons in
charge of the management of the association . . . together with persons
not members of the association with whom they may have transaction
business in the name of the same.” (Ibid, at p. 500.) Thus, the legal
consequence of failing to comply with the registration requirements under
the Code of Commerce was to make the acting partners personally and
primarily liable for all partnership debts. The doctrine is similar to the
agency doctrine that an agent who enters into a transaction on behalf of a
non-existing principal becomes personally liable for the obligations
incurred thereby.
In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the civil
partnership was engaged in the laundry business and governed by the
provisions of the Civil Code, it was held that the partnership existed as a
separate juridical person even when no formal partnership agreement was
entered into and registered, and thereby the obligations of the partners
for partnership debts were held to be pro-rata.
Nonetheless, the registration requirements under the Code of Commerce
were never interpreted to undermine the obligatory force of contracts
entered into in the name of the commercial partners. Thus, it was held
in Prautch, etc. v. Jones, 8 Phil. 1 (1907), and affirmed in Ang Seng Quen
v. Te Chico, 12 Phil. 547 (1909), that while an unregistered commercial
partnership and association has no juridical personality, and as such
cannot maintain an action in the partnership name, nevertheless, the
individual members may sue jointly as individuals, and persons dealing
with them in their joint capacity will not be permitted to deny their right
to do so.
It was held in De los Reyes v. Lukban, 35 Phil. 757 (1916), and affirmed
in Philippine National Bank v. Lo, 50 Phil. 802 (1927), that under the Code
of Commerce, where the partners’ liability for a partnership debt was only
secondary or subsidiary, their right of excussion was deemed already
satisfied where at the time the judgment was executed against the
partnership they were unable to show that there were still partnership
assets, or when a writ of execution against the partnership had been
returned not fully satisfied.
There was under the old set-up the debate of whether a partnership can
choose which set of laws should govern it; or whether a group of co-
venturers can choose by the expediency of registration under the old Civil
Code or under the Code of Commerce, of whether to organize a civil or a
commercial partnership. In Prautch, et. v. Hernandez, 1 Phil. 705 (1903),
it was held –
If that section includes commercial partnerships then such a partnership
can be organized under it selecting from the Code of Commerce such of
its provisions as are favorable to the partners and rejecting such as are
not, and even including in its articles of agreement the right to do things
which by that Code are expressly prohibited. Such a construction would
allow a commercial partnership to use or dispense with the Code of
Commerce as best suited its own ends. (Ibid, at pp. 707-708)
 6
. . . Is a commercial partnership distinguished from a civil one by the codes, Civil and Commercial, have adopted a complete system for the
object to which it is devoted or by the machinery with which it is organization, control, continuance, liabilities, dissolutions, and juristic
organized? We think that the former distinction is the true one. The Code personalities of associations organized under each. . . It is our opinion
of Commerce of 1829 distinctly provided that those partnership were that associations organized under the different codes are governed by the
mercantile which had for their object an operation of commerce. (Art. provisions of the respective code. (Ibid, at pp. 10-11)
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
b. Significance of Knowing the Historical Distinctions
were well known when the Civil Code was adopted. The author of that
Between Civil and Commercial Partnerships
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
What may be considered as a good development in our present Law on
form, which would have repealed the said provisions of the Code of
Partnerships is the removal of the distinctions between civil and
Commerce, but did say instead that a civil partnership may be organized
commercial partnerships, and which are now governed by a common set
in any form.
of laws, i.e., the relevant provisions of the New Civil Code. The main
drawback of such a development is that even commercial partnerships
Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2
(and admittedly there may not be quite a number operating due to the
(1904), what the Supreme Court held critical was proper application of
availability of the corporate medium), would find themselves governed by
Article 1670 of the old Civil Code which provided that civil partnerships,
non-commercial doctrines, such as the non-central role of the institution
on account of the objects to which they are devoted, may adopt all the
of registration. And in fact, many issues have arisen under our current
forms recognized by the Commercial Code, and thereby held that –
Law on Partnerships arising from having adopted in the New Civil Code
It will be seen from this provision that whether or not partnerships shall provisions from the Code of Commerce on registration requirements.
adopt the forms provided for by the Civil or Commercial Codes is left
In addition, the “civil-coding” of some of the provisions of the Code of
entirely to their discretion. And furthermore, that such civil partnerships
Commerce which were copied into the New Civil Code, should provide a
shall only be governed by the forms and provisions of the Commercial
better understanding of the legal consequences of current provisions of
Code when they expressly adopt them, and then only in so far as they
the Philippine Law on Partnerships, and a better constructions of the
(rules of the Commercial Code) do not conflict with the provisions of the
effects they have on the commercial field, by providing a comparison with
Civil Code. In this provision the legislature expressly indicates that there
the old jurisprudential rulings for commercial partnerships under the
may exist two classes of commercial associations, depending not upon the
provisions of the Code of Commerce.
business in which they are engaged but upon the particular form adopted
in their organization. . . We are inclined to the belief that the respective
—oOo—
 7
2 – THREE LEVELS OF EXISTENCE OF PARTNERSHIPS
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 multi-leveled
contractual relations among various parties; and
(c) As a business enterprise, or a business venture, or what is termed in
other disciplines as ”a going concern.”
Knowing the three levels at which the Law on Partnerships treats the
partnership arrangement is important in determining the legal significance
of the various provisions of the New Civil Code regulating partnerships, as
well as a manner of appreciating the doctrinal value of such provisions.
1. Illustrative Interplay of the Tri-Level Existence of the
Partnership
It would be important to illustrate the legal interplay between the three
(3) levels of partnership existence, and the legal doctrines that result
from such interplay. For this purpose we will use the decision of the
Supreme Court in Yu v. NLRC, 224 SCRA 75 (1993).
In that decision, the facts indicated that a limited partnership was duly
registered with the firm name of “Jade Mountain Products Company
Limited” (“Jade Mountain”), with the partnership business consisting of
exploiting a marble deposit found on land situated in Bulacan, but with
the partnership having its main office in Makati, Metropolitan Manila.
Benjamin Yu was for many years the Assistant General Manager of the
partnership business, but only half of his contracted salary was paid under
the agreement that the rest would be paid when the partnership is able to
source more funding. Majority of the partners eventually sold their equity
(about 82%) and the business to a new set of investors who retained the
business enterprise under the original name of Jade Mountain, but moved
the head office to Mandaluyong. When Benjamin Yu learned later of the
new address he proceeded to Mandaluyong but was told that the new
partnership did not wish to retain his services. He then sought to recover
from the new partnership his salary claims which accrued with the original
partnership.
Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid
salaries accruing from November 1984 to October 1988, moral and
exemplary damages and attorney’s 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 latter’s membership.
 8
The Court defined the inextricable link of the contract of partnership In the ordinary course of events, the legal personality of the expiring
between the original partners and the juridical personality that arose from partnership persists for the limited purpose of winding up and closing of
the nexus of that contract, and that when the contract was rescinded with the affairs of the partnership. In the case at bar, it is important to
the withdrawal of the majority of the partners, then the partnership was underscore the fact that the business of the old partnership was simply
dissolved and its separate juridical personality ceased to exists to cover continued by the new partners, without the old partnership undergoing
the new set of partners, thus: the procedures relating to dissolution and winding up of its business
affairs. In other words, the new partnership simply took over the business
Two (2) main issues are thus posed for our consideration in the case at enterprise owned by the preceding partnership, and continued using the
bar: old name of Jade Mountain Products Company Limited, without winding
up the business affairs of the old partnership, paying off its debts,
(1) whether the partnership which had hired petitioner Yu as Assistant
liquidating and distributing its net assets, and then re-assembling the said
General Manager had been extinguished and replaced by a new
assets or most of them and opening a new business enterprise. There
partnership composed of Willy Co and Emmanuel Zapanta; and
were, no doubt, powerful tax considerations which underlay such an
informal approach to business on the part of the retiring and the incoming
(2) if indeed a new partnership had come into existence, whether
partners. It is not, however, necessary to inquire into such matters.
petitioner Yu could nonetheless assert his rights under his employment
contract as against the new partnership.
What is important for present purposes is that, under the above described
situation, not only the retiring partners (Rhodora Bendal, et al.) but also
In respect of the first issue, we agree with the result reached by the
the new partnership itself which continued the business of the old,
NLRC, that is, that the legal effect of the changes in the membership of
dissolved, one, are liable for the debts of the preceding partnership.
the partnership was the dissolution of the old partnership which had hired
In Singson, et al. v. Isabela Saw Mill, et al., the Court held that under
petitioner in 1984 and the emergence of a new firm composed of Willy Co
facts very similar to those in the case at bar, a withdrawing partner
and Emmanuel Zapanta in 1987. (Ibid, at p. 80.)
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
The Court held that the applicable rule would be Article 1828 of the Civil
obtaining in the case at bar, is established in Article 1840 of the Civil
Code which defines “dissolution of a partnership [as] the change in the
Code. . .(Ibid, at pp. 81-82)
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.”
Yu therefore recognized the applicability of the successor liability arising
Nonetheless, the determination of the right of Mr. Yu to recover from the
from business enterprise transfer (i.e., that the creditors of the business
new partnership which constituted its own separate juridical personality
enterprise have a right to recover payment of their claims against the
was based on the fact that it continued the old business enterprise of the
transferee of the business enterprise), and recognized that the business
dissolved partnership, thus:

enterprise transfer doctrine is governed in details under Article 1840 of
the Civil Code.
Yu also recognized one of the principles in business enterprise transfers,
that the new owners of the business enterprise do have a right to choose
who would be employed in their newly acquired business, and they cannot
be compelled to maintain the employment contracts of the managers and
employees existing with the transferor, thus:
It is at the same time also evident to the Court that the new partnership
was entitled to appoint and hire a new general or assistant general
manager to run the affairs of the business enterprise taken over. An
assistant general manager belongs to the most senior ranks
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 Yu’s 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
month’s pay for each year of service that he had rendered to the old
partnership, a fraction of at least six (6) months being considered as a
whole year. (Ibid, at p. 83-84.)
Another illustrative case is the decision in United States v. Clarin, 17 Phil.
84 (1910), where a partner filed estafa charges against his co-partners
for the latter’s failure to deliver to him his half of the profits from the
9
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
of money brought in by him, it would have to answer to the charge of
estafa, for which would be sufficient to argue that the partnership had
received money under the obligation to return it. The complaint for estafa
is dismissed without prejudice to the institution of a civil action. (Ibid, at
p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 [1952]).
The ruling in Clarin should be distinguished from that in People v. de la
Cruz, (G.R. No. 21732 [1957], 03 September 1924, cited in People v.
Campos, (CA) 54 O.G. 681 [1957]) where the industrial partner was held
liable for estafa for appropriating money that has been given to him by
the capitalist partner for a particular transaction. The doctrine was
reiterated in Liwanag v. Court of Appeals, 281 SCRA 255 (1997), “Thus,
even assuming that a contract of partnership was indeed entered into by
and between the parties, we have ruled that when money or property
have been received by a partner for a specific purpose (such as that
obtaining in the instant case) and he later misappropriated it, such
partner is guilty of estafa.”
 10
Perhaps the interplay of the various levels of existence of the partnership
arrangement is best exemplified by the decision of the Supreme Court
in Rojas v. Maglana, 192 SCRA 110 (1990). In that case, a partnership
was constituted between Rojas and Maglana to operate timber forest
products concession, and articles of co-partnership were duly executed
and registered with the SEC using the firm name “Eastcoast Development
Enterprises”. Later, the partners took in an industrial partner, whereby
they executed an “Additional Agreement” which essentially adopted the
registered articles but covering the acceptance of an industrial partner,
which agreement was not duly registered with the SEC, and the
partnership operated under the original registered firm name. Shortly
thereafter, the original partners bought out the interest, share and
participation of the industrial partner in the firm, and the partnership was
continued without the benefit of any written agreement or reconstitution
of their written articles of co-partnership.
When Rojas entered into a separate management contract with another
logging enterprise and withdrew his equipment from the partnership,
Maglana made a formal demand against Rojas for the payment of his
promised contribution to the partnership and compliance with his
obligation to perform the duties of logging superintendent as provided
expressly in the registered articles of co-partnership. When Rojas
responded that he would not be able to comply with his promised
contribution and will not work as logging superintendent for the
partnership, Maglana gave notice of the dissolution of the partnership. In
the suit that ensued between the partners, one of the issues that had to
be resolved by the Court was the nature of the partnership and the legal
relationship of Rojas and Maglana after the retirement of the industrial
partner from the second partnership.
On this issue, the trial court ruled that the second partnership superseded
the first partnership, so that when the second partnership was dissolved
by the withdrawal of the industrial partner, there being no written
contract of co-partnership when it was continued by the two original
partners, there was no reconstitution of the original partnership, and
consequently the partnership that was continued between Rojas and
Maglana was a de facto partnership at will. In overruling the court a quo,
the Court held –
. . . [I]t appears evident that it was not the intention of the partners to
dissolve the first partnership, upon the constitution of the second one,
which they unmistakable called an “Additional Agreement” . . . Except for
the fact that they took in one industrial partner, gave him an equal share
in the profits and fixed the term of the second partnership to thirty (30)
years, everything else was the same. Thus, they adopted the same name,
. . . they pursued the same purposes and the capital contributions of
Rojas and Maglana as stipulated in both partnership call for the same
amounts. Just as important is the fact that all subsequent renewal of
Timber License No. 35-36 were secured in favor of the First Partnership,
the original licensee. . . To all intents and purpose therefore, the First
Articles of Partnership were only amended, in the form of Supplementary
Articles of Co-Partnership . . . which was never registered . . . Otherwise
stated, even during the existence of the second partnership, all business
transactions were carried out under the duly registered articles. (Ibid, at
pp. 117-118)
The Court then proceeded to hold that —
On the other hand, there is no dispute that the second partnership was
dissolved by common consent. Said dissolution did not affect the first
partnership which continued to exist “as shown by the subsequent acts of
 11
the original partners carrying one with the original partnership business
and confirming the obligations constituted under the original articles of
partnership. The conclusion of the Court was thus: “Under the
circumstances, the relationship of Rojas and Maglana after the withdrawal
of [the industrial partner] can neither be considered as a de facto
partnership, nor a partnership at will, for as stressed, there is an existing
partnership, duly registered.” (Ibid, at p. 118)

Rojas therefore affirms two important aspects in Partnership Law:Firstly,

that registration of the contract of partnership with the SEC has the legal
effect of binding the partners (and perhaps even third parties dealing with
the partnership), as to the contractual obligations, the rights and duties of
the partners, and which has effective force even as the partnership
undergoes changes within its constitution by the acceptance into and
withdrawal of partners into the venture. Secondly, the underlying
business enterprise, the manner of its operation, has much legal influence
of determining the contractual intents of the partners in the determination
of inter-partnership rights and obligations.

—oOo—
 12
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)
_____
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
 13
1770 also embodies the principle that the provisions of law are deemed
incorporated into every contract, even a contract of partnership as it
provides that “A partnership must have a lawful object or purpose.”
The primary doctrine that first and foremost the partnership must find its
nexus in a contractual relationship is exemplified in the decision inLyons
v. Rosentock, 56 Phil. 632 (1932). In that case, Lyons and Elser were
already partners in particular real estate undertakings. Subsequently,
Lyons became interested in purchasing for the venture the San Juan
estate, and moved forward towards negotiating its acquisition and
communicating to Elser in the United States to join him in the venture.
Elser wrote back clearly indicating that he was not joining Lyons in the
San Juan estate venture. The Court held that the fact that Lyons had used
as security for the acquisition of the San Juan estate one of the
partnership properties in anticipation that Elser would accept the
partnership arrangement, but which Elser definitive refused and the
partnership property was substituted by Lyons separate property to
secure the venture, did not make Lyons a partner in the San Juan estate
venture, since there was never any meeting of minds to constitute such
partnership. Lyons demonstrate that before there can be a partnership
enterprise, it is necessary that there must having been a meeting of
minds to constitute a contract of partnership.
1. Characteristics of the Partnership Contract
a. Nominate and Principal
The contract of partnership is a nominate contract, not only because it
has been given a specific name under the New Civil Code, but it is a
principal contract and can exists on its own upon the essential elements
coming together at perfection; and that once created there is a set of
rules (Law on Partnerships of the New Civil Code) that govern such
contract, and the parties to such contract cannot refuse generally to be
governed by such provisions. Thus, Article 45 of the Civil Code provides
that “Partnerships and associations for private interest or purpose are
governed by the provisions of this Code concerning partnerships.”
To illustrate the nominate and principal nature of the contract of
partnership, Fernandez v. Dela Rosa, 1 Phil. 671 (1903), held that –
The essential points upon which the minds of the parties must meet in a
contract of partnership are, therefore, (1) mutual contribution to a
common stock, and (2) a joint interest in the profits. If the contract
contains these two elements the partnership relation results, and the law
itself fixes the incidents of this relation if the parties fail to do so.” In
resolving the motion for reconsideration on in original decision, the Court
even held that “It is of no importance that the parties have failed to reach
an agreement with respect to the minor details of contract. These details
pertain to the accidental and not to the essential part of the
contract. (Ibid, at p. 680. Also Fue Leung v. IAC, 169 SCRA 746 [1989]).
b. Consensual
A contract of partnership is essentially consensual, it is perfected upon
meeting of the minds of the parties of the subject matter to undertake a
business venture, and the consideration, which is the obligation to
contribute of money, property or service to a common fund. Whether the
business enterprise is actually constituted or set-up, or whether or not the
contributions have been made into the partnership coffers, do not detract
from the coming into existence of a valid partnership contract. And failure
 14
to comply with the undertaking to deliver the promised contribution does
not make a contract of partnership void, but merely gives a ground for its
dissolution.
Thus, in the early decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903),
the Court held that “The execution of a written agreement was not
necessary in order to give efficacy to the verbal contract of partnership as
a civil contract, the contributions of the partners not having been in the
form of immovables or rights in immovables.” (Ibid, at p. 677). This
feature of consensuality of a contract of partnership is now embodied in
Article 1772 which provides that “A partnership may be constituted in any
form except where immovable property or real rights are contributed
thereto, in which case a public instrument shall be necessary.”
Although Articles 1772 and 1773 provide for public instrument and
registration when the capital contribution is more than P3,000.00, and
that of an inventory attached to the public instrument whenever
immovable property is contributed, nonetheless jurisprudence even
discount the nullity of the resulting contract of partnership, as will be
discussed hereunder.
In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court
held that when members of the family leased out a parcel of land to
SHELL Company, and used the advance rentals paid them to allow one of
their members to capitalize the dealership with SHELL, then a partnership
has been constituted among them:
There is no doubt that the parties hereto formed a partnership when they
bound themselves to contribute money to a common fund with the
intention of dividing the profits among themselves. The sole dealership by
the petitioner and the issuance of all government permits and licenses in
the name of petitioner was in compliance with the [policy that a
dealership can only be granted to one person] of SHELL and the
understanding of the parties of having only one dealer of the SHELL
products. (Ibid, at p. 837.)
In essence, Estanislao demonstrates that it is the true meeting of the
minds of the parties (in this case, to pursue a common venture as a
family group) that shall govern the rights and obligations of the
contracting parties, and not the evidence of a purported agreement (in
this case the dealership agreement being registered only in the name of a
brother).
In contrast, in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), the parties
executed a “partnership agreement,” to conduct and carry on the
business of operating a theatre for the exhibition of motion and talking
pictures; nonetheless, the Court held that the real intention of the parties
was to effect a sub-lease of the property and the partnership agreement
was resorted to in order to avoid the provision in the main lease
agreement prohibiting a sublease of the premises. The Court took into
consideration the following actuations of the supposed Yulo partner to
show that there as never a real agreement to form a partnership, thus:
In the first place, plaintiff did not furnish the supposed P20,000 capital. In
the second place, she did not furnish any help or intervention in the
management of the theatre. In the third place, it does not appear that
she has ever demanded from defendant any accounting of the expenses
and earnings of the business. Were she really a partner, her first concern
should have been to find out how the business was progressing, whether
the expenses were legitimate, whether the earnings were correct, etc.
She was absolutely silent with respect to any of the acts that a partner
should have done; all that she did was to receive her share of P3,000 a

month, which can not be interpreted in any manner than a payment for
the use of the premises which she had leased from the owners. Clearly,
plaintiff had always acted in accordance with the original letter of
defendant of June 17, 1945 (Exh. “A”), which shows that both parties
considered this offer as the real contract between them. (Ibid, at p. 117.)
Yulo demonstrates the principle that a contract of partnership
consensual in nature and is constituted by the real meeting of the minds;
such that even when formal articles of partnership are drawn-up between
the parties, when it fact the evidence shows that they never intended to
enter into a partnership, the article of partnership cannot create a
partnership when in fact there has never been a meeting of minds to
constitute one.
In contrast, we view the decision in Woodhouse v. Halili, 93 Phil. 526
(1953), as a little dubious when it distinguishes between the obligation to
enter into a contract of partnership, from that of executing the certificate
of partnership itself. In Woodhouse, the plaintiff and the defendant had
come to an agreement to enter into a partnership business to bottle and
distribute an American brand softdrinks in the Philippines; and that
defendant, who would primarily finance the business, agreed to grant
plaintiff the right to receive 30% of the profits under his obligation to
secure the bottling franchise for the venture. When the venture was
eventually set-up, the defendant had refused to finalize the articles of
partnership when he learned during the negotiations in the United States
that plaintiff did not have for himself the bottling franchise he promised
he had secured. The plaintiff brought action to have the articles of
partnership executed and to receive his 30% share in the earnings.
Prescinding from the language of the original agreement executed
between the parties that the very language of the agreement that the
parties intended that the execution of the agreement to form a
15
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
is obligation to do, not to give. The law recognizes the individual’s freedom
or liberty to do an act he has promised to do, or not to do it, as he
pleases. It falls within what Spanish commentators call a very personal
act (acto personalisimo), of which courts may not compel compliance, as
it is considered an act of violence, to do so. (Ibid, at p. 539.)
We disagree with the afore-quoted ruling of the Court in that it fails to
appreciate the consensual nature of a contract of partnership, and that
the moment the parties come to an agreement which basically embodies
the formation of a common fund with the intention of dividing the profits,
as was the case between the parties in Woodhouse, a contract of
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
 16
that since a contract of partnership is consensual, an oral contract of
partnership is as good as a written one. Where no immovable property or
real rights are involved, what matters is that the parties have complied
with the requisites of a partnership. The fact that there appears to be no
record in the Securities and Exchange Commission of a public instrument
embodying the partnership agreement pursuant to Article 1772 of the
Civil Code did not cause the nullification of the partnership. . . (Ibid, at
pp. 30-31.)
Tocao held that so long as the two essential elements of a partnership are
present, then the fact that the business was operated under the name of
a registered sole proprietorship was of no moment, especially when the
registration of the business name with the Bureau of Domestic Trade was
only for purpose of being able to secure such business name. (Ibid, at p.
36.)
c. Onerous and Bilateral
The onerous and bilateral characteristics of the contract of partnership are
demonstrated by the fact that the existence of a partnership requires an
agreement for the creation of a common fund from the contributions of
the partners, which may either be in money, property or industry. Under
Article 1786, a partner becomes by its very constitution, “a debtor of the
partnership for whatever he may have promised to contribute thereto.” All
partners are bound to contribute to the common fund, or to the
partnership, including even the industrial partner who is bound to
contribute his service.
d. Preparatory and Progressive
A contract of partnership is not entered into for the sake of merely
creating a contractual relationship between and among the partners, but
primarily to pursue a business enterprise (i.e., creation of a common fund
with intent to share profits and losses). Consequently, falling within the
contractual meeting of the minds of the parties is that the inter-
partnership relationship continues to evolve as the underlying business
enterprise itself evolves and progresses. In other words, the contract of
partnership is simply the base upon which other contracts and various
other transactions are to be pursued with the public, and for which the
partners shall continually adjust their working relationships. The operation
of the underlying business enterprise also determines the nature and
value of the equity of the partners. Thus, when the nexus of the contract
of partnership (the common fund and intention to divide the profits and
losses) have been constituted, other contractual relationships are
expected to flow therefrom as a matter of course.
An early illustration of the preparatory and progressive nature of the
contract of partnership can be found in the decision in Fernandez v. De la
Rosa, 1 Phil. 671 (1903), where once the elements of contribution to a
common fund and understanding of sharing of profits had been clearly
established between the parties, a contract of partnership arose and all
the incidents arising therefrom automatically engendered even if the
parties have not yet decided upon the details of their relationship, thus —
. . . We have already stated in the opinion what are the essential
requisites of a contract of partnership . . . Considering as a whole the
probatory facts which appears from the record, we have reached the
conclusion that plaintiff and the defendant agreed to the essential parts of
that contract, and did in fact constitute a partnership, with the funds of
 17
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.
Art. 1767. By the contract of partnership two or more
The disagreements subsequently arising between them, when
persons bind themselves to contribute money, property, or
endeavoring to fix these conditions, should not and cannot produce the
industry to a common fund, with the intention of dividing the
effect of destroying that which has been done, to the prejudice of one of
profits among themselves.
the partners, nor could it divest his rights under the partnership which
had accrued by the actual contribution of capital which followed the
Two or more persons may also form a partnership for the
agreement to enter into a partnership, together with the transactions
exercise of a profession. (1665a).
effected with partnership funds. The law has foreseen the possibility of
the constitution of a partnership without an express stipulation by the
Art. 1770. A partnership must have a lawful object or
partners upon those conditions, and has established rules which may
purpose, and must be established for the common benefit or
serve as a basis for the distribution of profits and losses among the
interest of the partners.
partners. . . We consider that the partnership entered into by the plaintiff
and the defendant falls within the provision of this article. (Ibid, at pp. When an unlawful partnership is dissolved by a judicial
680-681.) decree, the profits shall be confiscated in favor of the State,
without prejudice to the provisions of the Penal Code governing
—oOo—
the confiscation of the instruments and effects of a crime. (1666a)

4 – ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP Art. 1771. A partnership may be constituted in any form,
except where immovable property or real rights are contributed
[Updated: 12 October 2009] 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).

_____

IV. ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP

 18
The Law on Partnership under the New Civil Code begins with its definition
under Article 1776 as “contract of partnership,” emphasizing that first and
foremost the nexus of the legal relationship is contractual in nature. As in
any other contract, the essential elements for a contract of partnership to
be valid would be as follows:
(a) CONSENT: The meeting of minds between two or more persons to
form a partnership (i.e., to pursue jointly a business enterprise, or to
jointly exercise a profession);
(b) SUBJECT MATTER: The “creation of a common fund” or more
specifically, to undertake a business venture with the “intention of
dividing the profits among themselves”, or in the case of a professional
partnership, to exercise together a common profession; and
(c) CONSIDERATION: The contribution of cash, property or service to
the business venture.
1. Element of CONSENT
______
Art. 1769. In determining whether a partnership exists,
these rules shall apply:
(1) Except as provided by Article 1825, pesons who are not
partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself
establish a partnership, whether such co-owners or co-possessors
do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish
a partnership, whether or not the persons sharing them have a
joint or common right or interest in any property from which the
returns are derived;
(4) The receipt by a person of a share of the profits of a
business is prima facie evidence that he is a partner in the
business, but no such inference shall be drawn if such profits were
received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a
deceased partner;
(d) As interest on a loan, though the amount of payment
vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a
business or other property by installments or otherwise. (n)
_____
 19
a. Consent to Pursue a Business Jointly Is the Nexus of the
Partnership Relationship
c. Admission of New Partner into an Existing Partnership
The agreement of two or more persons to “bind themselves” to jointly
pursue a business venture constitutes the very nexus by which the Since consent is the nexus of all partnership relationships, the principle is
contract of partnership arises under Article 1767 of the Civil Code. Under exemplified under Article 1804 of the Civil Code which provides even in an
Article 1769 of the Civil Code, “in determining whether a partnership already existing partnership, that no person shall be admitted into a
exists,” the first and foremost rule is that “persons who are not partners partnership, or become a party to the partnership arrangement without
as to each other are not partners as to third persons.” In other words, the the consent of all the partners.
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 2. SUBJECT MATTER: Pursuit of a Business Enterprise

fact alone that they are associated together in situation where there is co-
Essentially, the consent or meeting of the minds of the parties in a
ownership or profits earned therefrom. Thus, under Article 1769(2), “Co-
contract of partnership must be upon a particular type of “subject
ownership or co-possession does not of itself establish a partnership,
matter”, which essentially is the pursuit of a ”business enterprise”:
whether such co-owners or co-possessors do or do not share any profits
made by the use of the property.” The essence of every partnership
(a) an agreement to contribute to a common fund; and
arrangement is the consent of each of the partners to be associated in a
business venture. (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
b. Legal Capacity to Contract
“equity” position of the partners vis-a-vis the business enterprise, as
differentiated from partnership suppliers and creditors, and company
Parties to a contract of partnership must have legal capacity to contract.
employees, who bear no proprietary interest with the business enterprise
Under Article 1782, persons who are prohibited from giving each other
they deal with.
any donation or advantage cannot enter into a universal partnership.
Under Article 87 of the Family Code, a married woman may enter into a
Article 1769 of the Civil Code, in providing for the rules “In determining
contract of partnership even without her husband’s consent, but the latter
whether a partnership exists,” states under paragraph (4) that “The
may object under certain conditions.
 20
receipt by a person of a share of the profits in the business is prima
facie evidence that he is a partner in the business.” In contrast, the same
article provides, “The sharing of gross returns does not of itself establish a
partnership, whether or not the persons sharing them have a joint or
common right or interest in any property from which the returns are
derived.”
It is fairly implied under Article 1767, as it defines a contract of
partnership, that the essence of the agreement among the partners is to
become equity-holders in a business enterprise, because their consent
must be the creation of a common fund “with the intention of dividing the
profits among themselves.” The essence of an equity holder is to take the
profits from the business, and consequently, to absorb also the losses
sustained thereby. Therefore, when a person is entitled to share in the
“gross returns” of the business venture, he is not an equity holder, and if
it is operated under the medium of a partnership, such person is not a
partner in the venture.
In Santos v. Reyes, 368 SCRA 261 (2001), the fact that in their “Articles
of Agreement,” the parties agreed to divide the profits of a lending
business “in a 70-15-15 manner, with the petitioner getting the lion’s
share . . . proved the establishment of a partnership,” (Ibid, at p. 269.)
even when the other parties to the agreement were given separate
compensations as bookkeeper and creditor investigator.
In Tocao v. Court of Appeals, 365 SCRA 463 (2001), the Court held that a
creditor of a business enterprise cannot seek recovery of his claim against
the partnership from a person who is without any right to participate in
the profits and who cannot be deemed as a partner in the business
enterprise, since the essence of partnership is that the partners share in
the profits and losses.
In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court held
that –
“Being a contract of partnership, each partner must share in the profits
and losses of the venture. That is the essence of a partnership. And even
with an assurance made by one of the partners that they would earn a
huge amount of profits, in the absence of fraud, the other partners cannot
claim a right to recover the highly speculative profits. It is a rare business
venture guaranteed to give 100% profits.” (Ibid, at p. 95)
The Court also held that any stipulation on the payment of a high
commission to one of the partners must be understood have been based
on an anticipation of large profits being made from the venture; and since
the venture sustained losses, then there is no basis to demand for the
payment of the commissions.
Nonetheless, even when a person is entitled to share in the “profits” of
the business venture, when the legal basis upon such right is based by
some other contractual relationship not borne out of equity or proprietary
interests, such as payment of the principal and/or interest on a loan or a
debt, wages of an employee, rents to a landlord, annuity to a widow or
representative of a deceased partner, or as consideration for the sale of
the goodwill of a business or other property by installments. In other
words, the contractual agreement to share in the profits and losses of a
business venture must always be based upon the assumption of equity
interest in the business enterprise upon which the contract of partnership
shall arise.
a. Co-ownership or Co-Possession Do Not Necessarily Constitute a
Partnership
 21
In Navarro v. Court of Appeals, 222 SCRA 675 (1993), the Court held that intention to lease them out, and which they in fact leased to various
mere co-ownership or co-possession of property does not necessarily tenants and derived rentals therefrom, there was a partnership formed.
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
b. Receipt By a Person of a Share of the Net Profit
partnership.

Under Article 1769(4), the receipt by a person of a share of the net profits
In Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436
of a business is prima facie evidence that he is a partner in the business.
(1985), four brothers and sisters acquired lots with the original purpose to
However, in the following cases, where there is legal and contractual basis
divide the lots among themselves for residential purposes; when later
for the receipt of the profits other than as equity holder, there is no
they found it not feasible to build their residences thereon because of the
partnership constituted, thus:
high cost of construction, they decided to resell the properties to dissolve
the co-ownership. The Court ruled that no partnership was constituted
(a) As installment payments of debt and/or interests thereof;
among the siblings, since the original intention was merely to collectively
purchase the lots and eventually to partition them among themselves to
(b) As wages of an employee;
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 (c) As rentals paid to a landlord;
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 (d) As annuity to a widow or representative of deceased partner;
have been any partnership, but merely a co-ownership, since there was
utter lack of intent to form a partnership or joint venture. (e) As consideration of sale of goodwill or other property.

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
Thus, in Pastor v. Gaspar, 2 Phil. 592 (1903), the Court held that there
building and had it administered by an administrator, and divided equally
was no new partnership formed when a loan was obtained to purchase
the net income, there was a partnership formed because profit was the
lorchas needed to expand the shipping business of an existing shipping
original intention for the common fund.
partnership venture under the condition that the lender would receive part
Likewise in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 of the profits of the business in lieu of interests.
(1957), where three sisters bought four pieces of real property with every
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
 22
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 inSardane v.
Court of Appeals, 167 SCRA 524 (1988).
In Bastida v. Menzi & Co., 58 Phil. 188 (1933), the Court held that despite
the agreement that Bastida was to receive 35% of the profit from the
business of mixing and distributing fertilizer registered in the name of
Menzi & Co., there was never any contract of partnership constituted
between them based on the following key elements: (a) there was never
any common fund created between the parties, since the entire business
as well as the expenses and disbursements for operating it were entirely
for the account of Menzi & Co.; (b) there was no provision in the
agreement for reimbursing Menzi & Co. in case there should be no profits
at the end of the year; and (c) the fertilizer business was just one of the
many lines of business of Menzi & Co., and there were no separate books
and no separate bank accounts kept for that particular line of business.
The arrangement was deemed to be one of employment, with Bastida
contributing his services to manage the particular line of business of
Menzi & Co.
Tocao v. Court of Appeals, 342 SCRA 20 (2001), held that “while it is true
that the receipt of a percentage of net profits constitutes only prima
facie evidence that the recipient is a partner in the business, the evidence
in the case at bar controverts an employer-employee relationship between
the parties. In the first place, private respondent had a voice in the
management of the affairs of the cookware distributorship, including
selection of people who would constitute the administrative staff and the
sales force.” (Ibid, at pp. 33-34).
c. Meeting of Minds on the Establishing a Common Fund Is the
Essence of a Partnership Contract
All the foregoing examples indicate that what brings about a contract of
partnership is essentially an agreement to constitute a common fund with
the intention of dividing the profits and losses; outside of these essential
elements, a contract of partnership cannot subsist.
The importance of consent, vis-a-vis the elements of common fund and
intention to divide the profits among themselves, is best illustrated inYulo
v. Yang Chiao Seng, 106 Phil. 111 (1959), where in fact the parties had
executed formal articles of partnership, and yet the Court found that the
real intention of the parties was really to constitute a relation of sublease
between the parties over a commercial land where one party (the lessee)
was prohibited under her main contract of 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 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
 23
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 latter’s policy
of “one station, one dealer,” and that in fact the registered dealer had
accounted for the operations to the other members of the family. When
later on he stopped accounting for the operations, and refused to
acknowledge the existence of a partnership over the gasoline station, the
Court held –
Moreover other evidence in the record shows that there was in fact such
partnership agreement between the parties. . . Petitioner submitted to
private respondents periodic accounting of the business. . . gave a written
authority to private 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
circumstances surrounding the case, we are fully satisfied that their
purpose was to engage in real estate transactions for monetary gain and
then divide the same among themselves, because:
1. Said common fund was not something they found already in existence.
It was not a property inherited by them pro indiviso. They created it
purposely. What is more they jointly borrowed a substantial portion
thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series
of transactions. . . . The number of lots (24) acquired and transactions
undertaken, as well as the brief interregnum between each, particularly
the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the
aforementioned common fund or even of the property acquired by
petitioners in February, 1943. In other words, one cannot but perceive a
character of habituality peculiar to business transactions engaged in for
purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other
personal uses, of petitioners herein. The properties were
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.
24
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,
facts and and to indorse and deposit notes and checks. Thus, the affairs relative to
said properties have been handled as if the same belonged to a
corporation or business enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or,
to be exact, over fifteen (15) years, since the first property was acquired,
and over twelve (12) years, since Simeon Evangelista became the
manager.
6. Petitioners have not testified or introduced any evidence, either on
their purpose in creating the set up already adverted to, or on the causes
for its continued existence. They did not even try to offer an explanation
therefore. (Ibid, at pp. 144-146.)
In other words, the essence of the contract of partnership is that the
partners “contract or bind themselves under a contractual arrangement”
to be joint owners and managers of a business enterprise, which is
highlighted by the right to receive the net profits and share the losses
therein. Article 1770 of the Civil Code provides that for a partnership
contract to be valid it “must be established for the common benefit or
interest of the partners,” which clearly indicates the equity or
leased 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.
 25
The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA 74 purchased with equal funds to be contributed by the parties, and it was
(1972), is illustrative of this principle. In Ona, in the project partition the clear intention to divide the property between the two of them after
agreed upon by the heirs the agreed to keep the properties of the estate acquisition, there could not have been formed a partnership.
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
d. Proof of the Existence of the Business Enterprise May Support
the Tax Code, the Court held –
the Existence of a Partnership Even After Dissolution
It is thus incontrovertible that petitioners did not, contrary to their
There have been cases where the existence of the business enterprise
contention, merely limited themselves to holding the properties inherited
became the basis by which the courts would conclude that indeed a
by them. Indeed, it is admitted that during the material years herein
contract of partnership had been entered into by the parties.
involved, some of the said properties were sold at considerable profit and
that with said profit, petitioners engaged, thru Lorenzo T. Ona, in the
In Idos v. Court of Appeals,] 296 SCRA 194 (1998), in determining
purchase and sale of corporate securities. It is likewise admitted that all
whether the partnership enterprise continued to exist and has not been
the profits from these ventures were divided among petitioners
terminated, the Court ruled that “The best evidence of the existence of
proportionately in accordance with their respective shares in the
the partnership, which was not yet terminated (though in the winding up
inheritance. . . the moment petitioners allowed not only the incomes from
stage), were the unsold goods and uncollected receivables, which were
their respective shares of the inheritance but even the inherited
presented to the trial court. Since the partnership has not been
properties themselves to be used by Lorenzo T. Ona as a common fund in
terminated, the petitioner and private complainant remained as co-
undertaking several transactions or in business, with the intent ion of
partners.” (Ibid, at p. 206.)
deriving profits to be shared by them proportionally, such act was
tantamount to actually contributing such incomes to a common fund and,
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), citing the ruling
in effect, they thereby formed an unregistered partnership. (Ibid, at p.
inIdos, the Court held that the fact that the claiming party “had been
81.)
unceremoniously booted out of the partnership . . . she still received her
overriding commission (Ibid, at p. 36) . . . The winding up of partnership
Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939), where
affairs has not yet been undertaken by the partnership. This is manifest in
fifteen people contributed money to buy a sweepstakes ticket with the
petitioners’ claim for stocks that had been entrusted to private respondent
intention to divide the prize which they may win, and in fact the ticket
in the pursuit of the partnership business.” (Ibid, at p. 38.)
won third prize, the Court ruled that they had formed a partnership which
was subject to tax as a corporate taxpayer. Likewise, inGallemet v.
Tabilaran, 20 Phil. 241 (1911), the Court held that when land is
 26
e. Doctrine of “Attributes of Proprietorship” as a Means to Prove
or Disprove the Existence of a Partnership
There are a number of decisions that use the hazy doctrine of “attributes
of proprietorship” as one of the indications of the existence of a contract
of partnership or a partnership venture.
We take the decision in Tocao v. Court of Appeals, 342 SCRA 20 (2000),
where the main issue was whether there existed a contract of partnership
between three parties, namely Tocao, Bello and Anay, in the face of the
assertions of both Tocao and Bello that there was no partnership
agreement entered into considering that: (a) there was no written
agreement embodying the alleged partnership agreement, and that in fact
the business was registered with the government authorities as a single
proprietorship in the style of “Geminesse Enteprise” in the name of Tocao;
(b) Bello asserts that he never gave any contribution to the venture, but
merely guaranteed its credit standing; and (c) Anay never contributed
anything to the business, and she was receiving overriding commission
and participation in profits directly as a result of her handling the
marketing of the products, and not as a partner to the venture.
In brushing aside the assertions of no contract of partnership, the Court,
apart from holding that a contract of partnership need not be in writing to
be valid and enforceable, held that all three parties had by the evidence
adduced exercised rights of proprietorship on the business venture as to
show without doubt the existence of a partnership, thus:
Petitioners [Tocao and Belo] admit that private respondent [Anay] had
the expertise to engage in the business of distributorship of cookware.
Private respondent contributed such expertise to the partnership and
hence, under the law, she was the industrial or managing partner. It was
through her reputation with the West Bend Company that the partnership
was able to pen the business of distributorship of that company’s
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 Belo’s denial that he financed the
partnership rings hollow in the face of the established fact that he
presided over meeting regarding matters affecting the operation of the
business. Moreover, his having authorized in writing . . . that private
respondent should receive thirty-seven (37%) of the proceeds of her
personal sales, could not be interpreted otherwise than that he had a
proprietary interest in the business. His claim that he was merely a
guarantor is belied by that personal act of proprietorship in the
business . . . (Ibid, at p. 32;underscoring supplied)
The business venture operated under Geminesse Enterprise did not result
in an employer-employee relationship between petitioners and private
respondent. While it is true that the receipt of a percentage of net profits
constitutes only prima facie evidence that the recipient is a partners in the
business, the evidence in the case at bar controverts an employer-
employee relationship between the parties. In the first place, private
respondent had a void in the management of the affairs of the cookware
distributorship, including selection of people who would constitute the
administrative staff and the sales force. . . (Ibid, at pp. 33-
34; underscoring supplied)
 27
The exercise of the prerogatives of a proprietor should be viewed as
merely collaborative evidence of the partnership relationship between the
parties in a business venture; in the end the existence of the contract of
partnership must be located in the actual meeting of minds to constitute a
common fund and to divide the profits thereof among themselves. The
reason why exercising the prerogatives of proprietorship or participating
in the management of the business enterprise cannot on their own be
weighty evidence to prove the existence of a partnership agreement is
because, it is logical for a business enterprise, whether it is operated as a
partnership or a single proprietorship, to actually appoint a manager or
other agents, authorized to exercise acts of management, without being
owners or partners of the business venture.
In any event, the application of the suppletory doctrine of “attributes of
proprietorship” in jurisprudence is a recognition that a partnership
arrangement is in essence a contractual aggregation of sole proprietors,
who come together to form a common venture, each acting very much a
proprietor of the business venture, while at the same time as agents to
one another.
The recent decision in Sy v. Court of Appeals, 398 SCRA 301 (2003),
succinctly summarizes the badges that would normally accompany a
partnership relationship, thus:
Article 1767 of the Civil Code states that in a contract of partnership two
or more persons bind themselves to contribute money, property or
industry to a common fund, with the intention of diving the profits among
themselves. Not one of these circumstances is present in this case [which
sought to make the truck driver of the company of many years to be
characterized as an industrial partner]. No written agreement exists to
prove the partnership between the parties. Private respondent did not
contribute money, property or industry for the purpose of engaging inthe
supposed business. There is no proof that he was receiving a share in the
profits as a matter of course, curing the period when the trucking
business was under operation. Neither is there any proof that he had
actively participated in the management, administration and adoption of
policies of the business. (Ibid, at p. 308.)
In contrast, we should consider the decision in Heirs of Tan Eng Kee v.
Court of Appeals, 341 SCRA 740 (2000), where a partnership was insisted
to have been constituted yet no direct evidence of the contribution to a
common fund or sharing of profits had been adduced during trial. The
Court held –
Besides, it is indeed odd, if not unnatural, that despite the forty years the
partnership was allegedly in existence, Tan Eng Kee never asked for an
accounting. The essence of a partnership is that the partners share in the
profits and losses. Each has the right to demand an accounting as long as
the partnership exists. We have allowed a scenario wherein “[i] excellent
relations exists among the partners at the start of the business and all the
partners are more interested in seeing the firm grow rather than get
immediate returns, a deferment of sharing in the profits is perfectly
plausible.” [Fue Lung v. IAC, 169 SCRA 764, 755 (1989)]. But in the
situation in the case at bar, the deferment, if any, had gone too long to
be plausible. A person is presumed to take ordinary care of his concerns. .
. A demand for periodic accounting is evidence of a partnership. (Ibid, at
pp. 755-756, citing Estanislao, Jr. v. Court of Appeals , 160 SCRA 830,
837 [1988]).
 28
f. When Subject Matter (the Business Venture) Is Unlawful or deemed dissolved when the Government did finally issue a fishpond
Against Public Policy permit to one of the partners.

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:
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).

Our Code does not state whether, upon the dissolution of the unlawful The essence of the element of cause or consideration in every contract of
partnership, the amounts contributed are to be returned to the partners, partnership is emphasized in:
because it only deals with the disposition of the profits; but the fact that
(a) Article 1786, which declares every partner to be a debtor of the
said contributions are not included in the disposal prescribed for said
partnership for whatever he may have promised to contribute;
profits, shows that in consequence of said exclusion, the general rules of
law must be followed, and hence, the partners must be reimbursed the
(b) Article 1787, which makes a partner liable for interest and damages
amount of their respective contributions. Any other solution would be
for failing to contribute the sum of money he was bound to pay under
immoral, and the law will not consent to the latter remaining in the
the articles of partnership;
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.
(c) Article 1789, which prohibits an industrial partner from engaging in
495, quoting from MANRESA, COMMENTARIES ON THE SPANISH CIVIL
business for himself, since he bound himself to contribute service to
CODE, Vol. XI, pp. 262-264.)
the partnership;

In Deluao v. Casteel, 26 SCRA 475 (1968), the Court held that a contract
(d) Article 1790, which presumes an obligation to contribute equal shares
of partnership that sought to divide between the two partners-applicants
among the partners when there is no stipulation as to manner and
the fishpond in contravention of the prohibitory provisions of law was
amount of contribution; and
 29
(e) Article 1830(4), which decrees the dissolution of a partnership when
the specific thing, which a partner had promised to contribute to the
partnership, perishes before the delivery.
City of Manila v. Cumbe, 13 Phil. 677 (1909), held that “credit”, such as a
promissory note or other evidence of obligation, or even a mere goodwill,
may be validly contributed into the partnership. In other words, if service
is a valid contribution to the common fund, then more so when it comes
to intangible things, rights and chooses in action.
4. Other Essential Elements of Partnership
Although American jurisprudence would consider two other elements to be
essential for the contract of partnership to exist, namely:
(a) the purpose of a purpose must be to engage in some business
enterprise; and
(b) the element of joint control (BAUTISTA, at p. 4);
the same are also present in Philippine Partnership Law.
As discussed above, the subject matter of every contract of partnership
must be the agreement to jointly pursue a business enterprise. Thus,
in Fernandez v. De la Rosa, 1 Phil. 671 (1903), it was held that “a joint
interest in the profits” would constitute one of the “essential points upon
which the minds of the parties must meet in a contract of partnership.”
(Ibid, at pp. 675-676) The element of “joint control” is embodied in the
provisions of law that provides for mutual agency in a partnership
arrangement. (Art. 1810(3) provides that one of the property rights of a
partner is “His right to participate in the management.” Art. 1818 of the
Civil Code provides that “Every partner is an agent of the partnership for
the purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership of which he is
a member binds the partnership.”
In Council of Red Men v. Veterans Army, 7 Phil. 685 (1907), Article 3 of
the constitution of the Veteran Army of the Philippines provides as
follows: “The constitution of the association provided for the following
purpose: ‘The object of this association shall be to perpetuate the spirit of
patriotism and fraternity those men who upheld the Stars and Stripes in
the Philippine Islands during the Spanish war and the Philippine
insurrection, and to promote the welfare of its members in every just and
honorable way; to assist the sick and afflicted and to bury the dead, to
maintain among its members in time of peace the same union and
harmony with which they served their country in times of war and
insurrection.’” (Ibid, at p. 686.) The Court had raised the point that: “It
seems to be the opinion of the commentators that where the society is
not constituted for the purpose of gain, it does not fall within this article
of the Civil Code. Such an organization is fully covered by the Law of
Associations of 1887, but that law was never extended to the Philippine
Islands.” (Ibid, at p. 687.) Nonetheless,Council of Red Men applied the
then old Civil Code rule on civil partnership.
The only form of partnership where “business consideration” or the
“gaining of profits” is not the primary consideration for the common fund
would be the authorized professional partnerships; but even in such cases
the Court has considered that a profession is pursued as part of the
livelihood undertaking of the partners. (In the Matter of the Petition for
 30
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—
 31
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)
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.”
 32
2. Underlying Business Ends of the Partnership Juridical Person
The importance of the grant of separate juridical personality to the
partnership is to make it an efficient means by which several persons can
collectively pursue business. Thus, under Article 46 of the Civil Code it is
provided that “Juridical persons may acquire and possess property of all
kinds, as well as incur obligations and bring civil or criminal actions, in
conformity with the laws and regulations of their organization.”
In the Law on Partnerships, the business purpose of the partnership
juridical person is best exemplified by Article 1774 of the Civil Code which
provides that “Any immovable property or an interest therein may be
acquired in the partnership name,” to avoid the cumbersome need of
having all the names of the partners listed in the title to the property.
Consequently, the article provides that title to real property acquired in
the partnership name may be conveyed only in the partnership name.
Although a partnership is treated as a “person” before the law, such
juridical personality does not occupy the same level as the “person” of an
individual. The “person” of an individual is considered sacrosanct under
modern societal doctrine; the State and civil society are organized
towards protecting that person and engendering its safety and well-being.
On the other hand, the “person” of a partnership is a legislative grant by
the State or a fiction created by the law, not for the benefit of the juridical
person, but precisely only as a means or medium by which individuals in
society may achieve certain ends, and often they are business or
commercial ends.
That a partnership is really a creature of the law as a means by which
society may pursue certain business or commercial ends means therefore
that it is regulated under the Law on Partnerships for the benefit of those
who employ it as their medium (the partners) and those who are
authorized to deal with said medium (the creditors, the clients and
customers). This philosophical understanding of the essence and purpose
of the partnership “juridical person” is best exemplified by the provisions
of Article 1775 of the Civil Code which denies juridical personality to
“Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own
name with third persons.” In other words, if an aggregation of individuals
is not meant to undertake a business or commercial venture that is
supposed to deal with the public at large, then it is not intended to be a
medium of doing business, and there is not purpose of granting it a
separate juridical personality.
a. The Case for “Secret Associations”
Art. 1775. Associations and societies, whose articles are
kept secret among the members, and wherein any one of the
members may contract in his own name with third persons, shall
have no juridical personality, and shall be governed by the
provisions relating to co-ownership. (1669)
Under Article 1775 of the New Civil Code, “Associations and societies,
whose articles are kept secret among the members, and wherein any one
of the members may contract in his own name with third persons, shall
have no juridical personality, and shall be govenred by the provisions
relating to co-ownership. (1669). Bautista discussed the rationale and
effects of Article 1775 as follows:
 33
Not every contract intended to create a partnership produces a juridical
personality. The Code [Article 1775] withholds the attribute of juridical
personality to “associations and societies whose articles are kept secret
among the members, and wherein any one of the members may contract
in his own name with third persons.” And applies to such associations or
societies only the rules governing co-ownership. The phrase “kept secret
among the members,” according to Manresa, does not mean that the
articles are known to all the members but withheld from third persons. It
contemplates a situation where the articles, which allow any one of the
members to contract in his own name with third persons, are known to
some members only and kept secret from the rest. In other words, the
secrecy is not directed to third persons but to some of the partners.
This rule is intended to preserve the equality which must exist among the
partners and to prevent any of them from defrauding the partnership or
the other members. This being the case it does not prohibit secret
stipulations which are not designed to produce this result. It would not,
for instance, have the effect of rendering invalid a separate agreement
between two members of a partnership pursuant to which one guarantees
the other against loss of his capital contribution or assures him of profit.
Neither can the rule be invoked as against third persons by the partners
entering into the secret stipulations, in consonance with the general
principle that a party should not be allowed to take advantage of a nullity
which he himself has caused.” (BAUTISTA, at pp. 58-59, citing 11
Manresa 289 to 291)
b. Jurisprudential Application of the Doctrine of Separate
Juridical Personality of the Partnership
In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the contention
that since the defendant sued was a partnership that summons must be
served upon each of the partners, the Court held –
[I]t has been the universal practice in the Philippine Islands since
American occupation, and was the practice prior to that time, to treat
companies of the class to which the plaintiff belongs as legal or juridical
entities and to permit them to sue and be sued in the name of the
company, the summons being served solely on the managing agent or
other official of the company by the section of the Code of Civil
Procedure.” (Ibid, at p. 448)
The decision in Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil.
916 (1923), demonstrates how the separate juridical personality accorded
to a partnership arrangement makes certain rules on insolvency work
differently as compared to American jurisprudence on the same matter.
In Campos Rueda a petition for involuntary insolvency was filed by the
creditors of the limited partnership for an act of insolvency provided under
the Insolvency Act (i.e., having failed to its obligations with three
creditors for more than thirty days). The trial court denied the petition on
the ground that it was not proven, nor alleged, that the partners of the
firm were insolvent at the time the application was filed; and that as said
partners are personally and solidary liable for the consequences of the
transactions of the partnership, it cannot be adjudged insolvent so long as
the partners are not alleged and proven to be insolvent. In ruling that the
denial of the petition for insolvency was in error, the Court held –
Unlike the common law, the Philippine statutes consider a limited
partnership as a juridical entity for all intents and purposes, which
personality is recognized in all its acts and contracts (art. 116, Code of
Commerce). This being so and the juridical personality of a limited
 34
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 3. Application of the Doctrine of Piercing the Veil of Separate
instant case, the limited partnership of Campos Rueda & Co. failed to pay Juridical Fiction
its obligations with three creditors for a period of more than thirty days,
The “doctrine of piercing the veil of corporate fiction” finds relevance in
which failure constitutes, under our Insolvency Law, one of the acts of
Corporate Law because it is the means by which to by-pass the effects of
bankruptcy upon which an adjudication of involuntary insolvency can be
the doctrine of “limited liability,” and through piercing acting stockholders
predicted, this partnership must suffer the consequences of such failure,
and/or officers may be held personally liable for corporate debts.
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
In spite of the partnership being accorded also a separate juridical
adjudged insolvent in an involuntary insolvency proceeding unless all of
partnership, the piercing doctrine has less application in Partnership Law
its members are insolvent, while others have maintained a contrary view.
because the partners are unlimitedly liable (i.e., personally liable with
But it must be borne in mind that under the American common law,
their separate properties) for partnership debts. And yet, the doctrine
partnership have no juridical personality independent from that of its
found application to partnerships in Commissioner of Internal Revenue v.
members; and if now they have such personality for the purposes of the
Suter, 27 SCRA 152 (1969), where the Court addressed the legal position
insolvency law. (Ibid, at pp. 918-919.)
of the Tax Commissioner seeking to make the individual partners liable for
income tax for the income earned by the limited partnership, thus:
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
It being a basic tenet of the Spanish and Philippine law that the
dismissal of a pending suit against the partnership, as a partnership
partnership has a juridical personality of its own, distinct and separate
possesses a personality distinct from any of the partners.
from that of its partners (unlike American and English law that does not
recognize such separate juridical personality). The bypassing of the
In Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366
existence of the limited partnership as a taxpayer can only be done by
(1988), the Court held that a partnership may sue and be sued in its
ignoring or disregarding clear statutory mandates and basic principles of
name or by its duly authorized representative, and when it has a
our law. The limited partnership’s separate individuality makes it
designated managing partner, he may execute all acts of administration
impossible to equate its income with that of the component
including the right to sue debtors of the partnership.
members. . . (Ibid, at pp. 158-157.)

x x x.
 35
. . . In the cited cases, the corporations were already subject to tax when
the fiction of their corporate personality was pierced; in the present case,
to do so would exempt the limited partnership from income taxation but
would throw the tax burden upon the partners-spouses in their individual
capacities. The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a
disregard of their corporate personalities for tax purposes. This is not true
in the present case. Here, the limited partnership is not a mere business
conduit of the partner- spouses; it was organized for legitimate business
purposes; it conducted its own dealings with its customers prior to
appellee’s marriage; and had been filing its own income tax returns as
such independent entity. . . . As far as the records show, the partners did
not enter into matrimony and thereafter buy the interests of the
remaining partner with the premeditated scheme or design to use the
partnership as a business conduit to dodge the tax laws. Regularity, not
otherwise, is presumed. (at p. 159.)
In other words, Suter holds that when the facts show that the juridical
personality of the partnership is but a means to evade the law or a sham,
then the courts will pierce the veil of its separate juridical personality to
treat the partners as directly liable or accountable for the consequences of
the acts or contracts done in the partnership name.
The piercing doctrine also found recognition, albeit by way of obiter,
inAguila, Jr. v. Court of Appeals, 319 SCRA 246 (1999), but only in the
limited area of determining standing in a suit brought against claims
pertaining to the partnership. In Aguila, Jr. the complaint was filed
against the partners and officers to enforce essentially a partnership
obligation. In ruling that the judgment rendered by the trial court
(affirmed by the Court of Appeals) against the individual defendants was
void, the Court held –
Under Art. 1768 of the Civil Code, a partnership ‘has a juridical
personality separate and distinct from that of each of the partners.’ The
partners cannot be held liable for the obligations of the partnership unless
it is shown that the legal fiction of a different juridical personality is being
used for fraudulent, unfair, or illegal purposes. In this case, private
respondent has not shown that A.C. Aguila & Sons, Co., as a separate
juridical entity, is being used for fraudulent, unfair or illegal purposes.
Moreover, the title to the subject property is in the name of A.C. Aguila &
Sons, Co. and the Memorandum of Agreement was executed between
private respondent with the consent of her late husband, and A.C. Aguila
& Sons, Co., represented by petitioner. Hence, it is the partnership, not
its officers, or agents, which should be impleaded in any litigation
involving property registered in its name. A violation of this rule will result
to dismissal of the complaint. We cannot understand why both the
Regional Trial Court and the Court of Appeals sidestepped this issue when
it was squarely raised before them by petitioner. (At p. *)
4. Entitlement to Constitutional Rights and Guarantees
The more interesting topic under the “juridical personality” doctrine
pertaining to partnerships is whether they are entitled to the
constitutional rights of due process, equal protection, unreasonable
searches and seizures and the right against self-incrimination.
It is well established in Philippine Corporate Law, that corporations as
“persons before the law” are entitled to the constitutional guarantee to
due process and equal protection, (Smith, Bell & Co. v. Natividad, 40 Phil.
136 [1919]; Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 [1971]) the
rights against unreasonable searches and seizure; (Stonehill v. Diokno, 20
 36
SCRA 383 [1967]) but not to the right against self-incrimination.
(Bataan Shipyard and Engineering Co., Inc.. v. PCGG, 150 SCRA 181
[1987]).
In Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919), discusses the
rationale why corporations would be entitled to constitutional guarantees
accorded to individuals, thus:
The guarantees of the Fourteenth Amendment and so of the first
paragraph of the Philippine Bill of Rights, are universal in their application
to all persons within the territorial jurisdiction, without regard to any
differences of race, color, or nationality. The word ‘person’ includes
aliens . . . Private corporations, likewise, are ‘persons’ within the scope of
the guaranties in so far as their property is concerned. . . (Ibid, at p.
144) The Smith, Bell & Co. rationale has equal application to partnerships
which are accorded as separate persons under the Partnership Law. The
better rationale applicable to partnership would be the ruling in Bache &
Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 (1971), where the Court held that a
corporation is entitled to immunity against unreasonable searches and
seizures because “A corporation is, after all, but an association of
individuals under an assumed name and with a distinct legal entity. In
organizing itself as a collective body it waives no constitutional immunities
appropriate for such body. Its property cannot be taken without
compensation. It can only be proceeded against by due process of law,
and is protected, under the 14th Amendment, against unlawful
discrimination.” (Ibid, at p. 837, quoting from Hale v. Henkel, 201 U.S.
43, 50 L.Ed. 652).
In fact, in the partnership setting there is closer identity between the
partners and the partnership in the sense that the partners not only own
the partnership and its affairs and they directly manage the affairs of the
partnership, but more so that the separate juridical personality is closely
identified with the personality of the partners under delectus
personae considerations.
On the other hand, the Court’s ruling on why corporations are not entitled
to the rights against self-incrimination, has less vigor to the partnership
setting. Consider the decision in Bataan Shipyard & Engineering Co., Inc.
v. PCGG, 150 SCRA 181 (1987), where the Court held that the right
against self-incrimination has no application to corporations, extensively
quoted in Bataan Shipyard from Wilson v. United States, (55 L.Ed. 771,
780) thus:
* * * The corporation is a creature of the state. It is presumed to be
incorporated for the benefit of the public. It receives certain special
privileges and franchises, and holds them subject to the laws of the state
and the limitations of its charter. Its power are limited by law. It can
make no contract not authorized by its charter. Its right to act as a
corporation are only preserved to it so long as it obeys the laws of its
creation. There is a reserve right in the legislature to investigate its
contracts and find out whether it has exceeded its powers. It would be a
strange anomaly to hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the exercise of sovereignty,
inquire how these franchises had been employed, and whether they had
been abused, and demand the production of the corporate books and
papers for that purpose. The defense amounts to this, that an officer of
the corporation which is charged with a criminal violation of the statute
may plead the criminality of such corporation as a refusal to produce its
books. To state this proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions unless protected by an
immunity statute, it does not follow that a corporation, vested with
special privileges, and franchise may refuse to show its hand when
 37
charged with an abuse of such privileges. . . (150 SCRA 181, 234-
235, quoting from Wilson v. United States, 55 Law Ed. 771, 780.)
Every corporation is a direct creature of the law and receives an individual
franchise from the State. But a partnership, although is deemed to be a
juridical person by grant of the State, becomes a juridical person through
a private contract of partnership between and among the partners,
without needing to register its existence with the State or any of its
organs. More importantly, the partnership “person” is a fiction of law
given more for the convenience of the partners, and thus can be dissolved
by the will of the partners or by the happening of an event that would
constitute the termination of the contractual relationship, whereas, no
corporation can be dissolved without the consent of the State, and only
after due notice and hearing. Likewise, the other features of the
partnership, mainly mutual agency, delectus personae and unlimited
liability on the part of the partners, that places a close identity between
the persons of the partners and that of the partnership. This is unlike in
corporate setting, where the stockholders do not own corporate
properties, have no participation in management of corporate affairs, and
enjoy personal immunity from the debts and liabilities of the corporation,
and where basically the corporation “is its own person,” and acts through
a professional group of managers and agents called the Board of
Directors.
While therefore it is understandable that a corporation, that has no heart,
feels pain, and has no soul that can be damned, cannot be expected to be
entitled to the constitutional right against self-incrimination, it is quite
different in the case of the partnership, since its person is merely an
extension of the group of partners, who having come together in
business, and acting still for such business enterprise, could not be
presumed to have waived their individual rights against self-incrimination.
As the author has observed in his writing on Philippine Corporate Law,
when it comes to the constitutional right against self-incrimination, the
Court would rely upon old American doctrine which views the corporation
as a mere creature of the law and with separate juridical personality apart
from its stockholders or members. In the partnership setting, the
difference in the Court’s stance may lie in the fact that the right against
self-incrimination does not really result in physical intrusion into the
premises of the partnership, because it would require only that the
partnership, through its agents, produce records and books before the
courts. The denial of the right against self-incrimination from corporations
and partnerships does not really invite state authorities into the premises
or physical privacy of the stockholders, members or partners who
compose the juridical entity; but would deny acting individuals the right to
abuse the medium of separate juridical personality as a means to do folly.
On the other hand, to deny the due process rights or right against
unreasonable searches and seizures to corporations and partnerships
would actually be to invite state authorities to physically intrude into
business premises, and therefore also intrude into the personal and
business privacy of the stockholders, members or partners who compose
the juridical person. Perhaps that is the basis for the difference in stance
by the Court between two sets of constitutional rights with respect to
corporations, and also in the case of partnerships. Another view is that
the constitutional guarantees of due process, equal protection clause and
against unreasonable searches and seizures are all meant to curb the
abuse that the State and its representatives may employ upon the
citizenry, including the modes upon which they conduct their lives and
businesses. On the other hand, the constitutional protection against self-
incrimination is not meant to prevent an actual State abuse but to avoid
pressuring the individual from having to tell a lie. “The main purpose of
the provision . . . is to prohibit compulsory oral examination of prisoners
 38
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—
 39
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 partnership’s business
enterprise, as distinguished from the legal effects and consequences of
the contract of partnership among the partners and the partnership
juridical person, gives rise to legal relationships, rights and obligations,
and doctrines, that can only be accounted for from that level.
For example, the right of the partners to specific partnership property and
to share in the profits and losses, as well as the right to manage, are legal
matters that necessarily refer to the partnership business enterprise.
This understanding of the business enterprise of a partnership is
applicable even to a professional partnership. Our Supreme Court has
defined the term ”profession” as “a group of men pursuing a learned art
as a common calling in the spirit of public service–no less a public service
because it may incidentally be a means of livelihood.” (In the Matter of
the Petition for Authority to Continue Use of Firm Name Sycip, Salazar,
et. al. Ozaeta, Romulo, etc., 92 SCRA 1 (1979).)
The recognition of the inherent relationship between and among the
partners to be bound by the results of operations 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
 40
sustaining substantial losses, which consequently decreased the capital of
the partnership. Both the trial and the appellate courts in fact recognized
the decrease of the partnership assets to almost nil, but the latter failed
to recognize the consequent corresponding decrease of the capital. (Ibid,
at p. 153.)
x x x.
Because of the above-mentioned transactions, the partnership capital was
actually reduced. When petitioners and respondents ventured into
business together, they should have prepared for the fact that their
investment would either grow or shrink. In the present case, the
investment of respondents substantially dwindled. The original amount of
P250,000 which they had invested could no longer be returned to them,
because one third of the partnership properties at the time of dissolution
did not amount to that much.
It is a long established doctrine that the law does not relieve parties from
the effects of unwise, foolish or disastrous contracts they have entered
into with all the required formalities and with full awareness of what they
were doing. Courts have no power to relieve them from obligations they
have voluntarily assumed, simply because their contracts turn out to be
disastrous deals or unwise investments. (Ibid, at p. 154.)
fund”, which essentially represents the “business enterprise” to be
pursued, to thereby assume the position of being “owners” or “equity
holders,” and thereby to be entitled to the profits made from the pursuit
of the business enterprise, and logically to assume the risks connected
with it, including absorbing the losses sustained. This critical position of
“equity holders” of partners is confirmed under Article 1770 Civil Code
which requires that a partnership “must be established for the common
benefit or interest of the partners,” which aptly describes their positions
as owners of the partnership business enterprise.
The importance of being aware that the partnership would eventually
constitute a business enterprise is important in applying certain doctrines
of succession of liability that apply peculiarly to business enterprise.
Likewise, the rules on dissolution and liquidation clearly appreciate the
difference between the contract relationship and juridical person
constituting the partnership, from the underlying business enterprise that
may remain operating even when the firs two levels are legally dissolved
or extinguished.
—oOo—

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
 41
7 – ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP
[Updated: 12 October 2009]
_____
Art. 1767. By the contract of partnership two or more persons
binds themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
Two or more persons may also form a partnership for the exercise
of a profession.
Art. 1768. The partnership has a juridical personality separate and
distinct from that of each of the partners, even in case of failure to
comply with the requirements of Article 1712, first paragraph (n)
_____
1. Attributes of the Partnership
Every partnership existing under the Law on Partnerships of the Civil Code
is endowed with the following essential attributes:
(a) Informal/Consensual and Weak Juridical Personality;
(b) Mutual agency;
(c) Delectus personae;
(d) Partners Burdened with Unlimited Liability
(except for limited partners in a limited partnership).
An understanding of each of the partnership attributes provides a better
appreciation of the multifarious 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 partnership’s separate juridical personality arises in the
privacy of the perfection of the contract of partnership: Article 1768
provides that the “partnership has a juridical personality separate and
distinct from that of each of the partnership,” which under Article 1784
“begins from the moment of the execution of the contract, unless it is
 42
otherwise stipulated.” So informal or casual is the attitude of the law on
the partnership’s juridical personality that under Article 1785, such
juridical personality can be extended beyond the original fixed term or
particular undertaking by the mere “continuation of the business by the
partners or such of them as habitually acted therein during the term,
without any settlement or liquidation of the partnership affairs.”
What is the reason for the legal attitude of being rather “informal” on the
juridical personality of the partnership? It seems from the provisions of
the Law on Partnerships of the Civil Code that the “separate juridical
personality” granted to the partnership contractual relationship between
and among the partners, and the underlying partnership business
enterprise, is not the centerpiece of the Partnership Law, but merely an
“add on” to allow the business venture to be run more efficiently by the
owners thereof (the partners), and to make dealings by it with the public
easier and pursued with more efficiency. After all, in common law
traditions the partnership has survived and thrived in a setting that does
not accord it a juridical personality. In other words, the civil law tradition
of providing a partnership with a juridical personality separate and distinct
from the partners—or properly speaking, to clothe the business enterprise
with a juridical person by which it can better deal with the public—is
meant to add to the commercial efficiency of the partnership both as a
medium of association and as a medium of doing business.
The default rule of according by operation of law a juridical personality to
a partnership arrangement, makes it a cheaper medium of doing
business. Therefore, if the manner by which to achieve juridical
personality be made more rigorous and formal, then it makes the
partnership medium a more expensive proposition, and therefore
unattractive especially for businessmen and merchants who embark
on modest ventures.
a. Exceptions to Informal or Consensual Nature of Juridical
Personality
The only time in the Civil Code when the contract of partnership (and
therefore likewise with the partnership juridical person) must assume a
“solemn” or “formal” character covers three expressed instances:
(a) Under Article 1772, that every contract of partnership having a
capital of P3,000 or more shall appear in a public instrument, which must
be recorded with the Securities and Exchange Commission (SEC).
(b) Under Articles 1771 and 1773, where immovable property or real
rights are contributed to the partnership:
(i) in which case a public instrument shall be necessary; and
(ii) the contract of partnership is void, if an inventory of said property
is not made, signed by the parties and attached to the public instrument;
(c) Under Articles 1843 and 1844, which requires particular provisions
describing limited partners in the articles of limited partnership, and which
must be formally registered with the SEC.
When the capital contributions not involving real property are in excess of
P3,000, and there is failure to comply with the requirement for public
instrument and recording with the SEC, Article 1772 does not expressly
state what happens to the legal status of the contract of partnership. In
fact, Article 1772 provides that “Failure to comply with the requirements
of the preceding paragraph shall not affect the liability of the partnership
and the members thereof to third persons.” What then is the purpose of
the law in imposing solemn requirements for partnerships with capital
 43
contributions of P3,000, if failure to comply therewith does not present
any dire legal consequences?
On the other hand, the law is clear that when what is contributed to the
partnership is immovable property, and there is failure to provide for an
inventory thereof to be attached to the public instrument to be registered
with the SEC, the resulting partnership is “void.” The exception when it
comes to real property contributions is the public policy contained in our
Civil Code and in other special laws, that considers real property as
constituting a cornerstone in our economic life, and that dealings
therewith must be formal and public, which would afford to the public a
reliable means to determine the status of ownership and the existing liens
of real property.
The only other exception to the informal or consensual nature of the
partnership juridical personality would be the mandatory registration
requirements for the valid constitution of the limited partnership. Again,
this is in line with the principle that limited liability to the owners of a
business enterprise is unusual, and if it is to exist to bind the public, it
must be pursued and reflected in a formal manner.
As shown in the decision in MacDonald v. National City Bank of New York,
99 Phil. 156 (1956), even under the Code of Commerce where
registration was essential for the coming into existence of a commercial
partnership, nonetheless in a proper case of estoppel, the courts treated
such unregistered commercial partnership as a de factopartnership with a
personality of its own in order to protect the rights of third persons.
3. Weak Juridical Personality
On the other hand, the juridical personality of the partnership is “weak”
because it can be put asunder without need of formal dissolution process,
and by the will of any of the partners or all of them, or even by chance.
To illustrate, under Article 1830 of the Civil Code, the partnership may be
dissolved by:
(a) Express will of any partner, either acting in good faith or even when
not in good faith and in contravention of the agreement;
(b) Express will of all the partners;
(c) Expulsion of any partner;
(d) Any event which makes the partnership business unlawful;
(e) Loss before delivery of the property promised to be contributed by
the partner;
(f) Death, insolvency, or civil interdiction of any partner;
(g) By court decree, when a partner has been declared insane or
incapacitated, or guilty of conduct prejudicial to the partnership business
or in breach of the agreement, or when the partnership business can only
be carried at a loss.
The complaint has often been heard in business and legal fora that one of
the disadvantages of the partnership medium is that it have a weak
juridical personality. I believe that such an observation is misplaced and
fails to appreciate the fact that it makes no sense for the Law on
Partnerships to infuse a medium that it seeks to invite businessmen and
the public to use and employ with a flaw or disadvantage. In other words,
 44
there is a purpose why the law infuses the partnership juridical
personality with the characteristic of “weakness”. Understood properly the
weakness of the partnership juridical personality is a clear advantage for
the partnership as a medium of association and as a medium of doing
business.
What is the reason by the law endows the partnership juridical personality
with such weakness? The separate juridical personality is employed only
to allow the partners and the partnership venture to attain their
objectives, and it is either brushed aside or set aside when it begins to
obstruct such objectives. The value of the separate juridical personality of
the partnership cannot override a value of greater importance in the Law
of Partnerships best exemplified by the aphorism, that above all, the
partnership is a contractual and personal relationship among the partners
who associate together to be able to pursue a business venture
collectively. In other words, everything is personal in a partnership set-
up, and this is best exemplified by the attributes of “mutual agency” and
“delectus personae”.
4. Mutual Agency
The default rule under Article 1803(1) of the Civil Code is that each of the
partners is an agent of the partnership and all of the other partners in the
pursuit of partnership affairs, thus: “When the manner of management
has not been agreed upon . . . All the partners shall be considered agents
and whatever any one of them may do alone shall bind the partnership.”
Article 1818 of the Civil Code provides that “Every partner is an agent of
the partnership for the purpose of its business, and the act of every
partner, including the execution in the partnership name of any
instrument, for apparently carrying on in the usual way the business of
the partnership of which he is a member binds the partnership.”
The principle of mutual agency lies at the heart of the partnership
arrangement because it defines the prerogative of every partner to
participate in the management of the partnership business. It is one of
the more important manifestation of the position of the partners as
“owners” or “equity holders” of the partnership business enterprise. It
also brings into focus the reality that the partnership arrangement is of
the most personal of nature, that the parties thereto are not only
investors but exercise the prerogatives of ownership and control into the
partnership business.
Properly appreciated, a partnership is simply a conglomeration of two or
more sole proprietorships, where the original sole proprietor continues to
manage his business and also the business of the other proprietors in the
association. Consequently, as a sole proprietor is liable with his other
assets for the liabilities incurred by his business, then in the same
manner, the partners will also be liable personally and for other non-
contributed assets for the liabilities incurred by their combined business
enterprises.
5. Delectus Personae
Bautista refered to delectus personae as follows: “. . . For, in accordance
with the principle of delectus personae (selection of persons), one selects
his partners on the basis of their personal qualifications and qualities,
such as solvency, ability, honesty, and trustworthiness, among others. It
is for this reason that there is mutual representation among the partners
so that the act of one is considered the act and responsibility of the others
as well.” (BAUTISTA, at p. 95)
 45
The best way to define the concept of delectus personae is that the
contract of partnership creates the most personal relationship between
and among the partners which when broken, also breaks the bond of the
partnership. The doctrine emphasizes the personal-contractual
relationship between and among the partners as being more important
than the property rights and the business enterprise created in the
partnership. Thus, Article 1770 of the Civil Code provides that “[a]
partnership . . . must be established for the common benefit or interest of
the partners.”
The doctrine of delectus personae can be viewed in two ways:
Firstly, it is the embodiment of the principle of relativity or privity in
contracts: a partnership arrangement being primarily a contractual
relationship, then the privity that is created by its perfection is between
and among the partners thereto at the point of perfection; and that such
privity cannot be extended beyond the partners without the consent of all
the other parties to the contract of partnership.
To illustrate the point, although Article 1810 of the Civil Code recognizes
that “interest in the partnership” is a property right of a partner,
nevertheless under Article 1804, although a partner may associate
another person with him in his share, “the associate shall not be admitted
into the partnership without the consent of all the other partners, even if
the partner having an associate should be a manager.”
The privity created by the contract of partnership is of the group of
partners who consent, that the moment one partner is gone the privity is
broken and the partnership contract is terminated. In other words, if five
parties come together into a partnership agreement, the privity retains its
integrity among the five, and not just between two or three or four of the
members. Thus, under Article 1830, the partnership is dissolved by the
expulsion, death, insolvency, civil interdiction of any of the partners.
Secondly, that the relationship established in a contract of partnership is
of the most fiduciary character, or of the most confidential manner, that
once that thrust or confidence is lost, the contract is deemed breached or
at least at an end. This is fortified by the fact that the partners are mutual
agents to one another, and essentially the relationship between and
among them is of fiduciary character, and the character of every agency
relation is that it is essentially revocable. Consequently, when the articles
of partnership provide for a definite term of existence, under Article 1830,
a partnership can be dissolved in midstream “By the express will of any
partner, who must act in good faith.” Even the separate juridical
personality of the partnership enterprise cannot save the partnership from
being dissolved under the rule that the termination of the contract of
partnership terminates the separate juridical personality as well.
The features of mutual agency and delectus personae define the rights
and liabilities of the partners in a partnership arrangement, and constitute
the underlying reason why partners are personally liable for partnership
debts beyond their contributions and to the extent of their separate
properties.
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), Justice Vitug wrote
one of the best piece of doctrinal description the nature and
essence of the doctrine of delectus personae in every partnership, thus –
The birth and life of a partnership at will is predicated on the mutual
desire and consent of the partners. The right to choose with whom a
person wishes to associate himself is the very foundation and essence of
that partnership. Its continued existence is, in turn, dependent on the
 46
constancy of that mutual resolve, along with each partner’s capability to
give it, and the absence of a cause for dissolution provided by the law
itself. Verily, any one of the partners may, at his sole pleasure, dictate a
dissolution of the partnership at will. He must, however, act in good faith,
not that the attendance of bad faith can prevent the dissolution of the
partnership but that it can result in a liability for damages. (Ibid, at pp.
535-536)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held “An
unjustified dissolution by a partner can subject him to action for damages
because by the mutual agency that arises in a partnership, the doctrine
of delectus personae allows the partners to have the power, although not
necessarily the right to dissolve the partnership.” (Ibid, at p. 37)
6. Partners Subject to Unlimited Liability
Both Articles 44 and 1768 of the Civil Code recognize that a partnership is
granted with “a juridical personality, separate and distinct from that of
each . . . . partner or member,” and that Article 46 recognizes the legal
capacity of the partnership therefore to enter into contracts, own and
possess properties, thus: “Juridical persons may acquire and possess
property of all kinds, as well as incur obligations and bring civil or criminal
actions, in conformity with the laws and regulations of their
organizations.”
The ordinary principle of “relativity” under the Law on Contracts that
“Contracts take effect only between the parties, their assigns and heirs”
(Article 1311, New Civil Code), should mean that that when a juridical
person enters into a contract and assumes an obligation by reason
thereof, its members or constituents, and its agents, do not ordinarily
become liable for the obligations assumed by their principal. And yet, in
defiance of the very essence of separate juridical personality of the
partnership, the general rule is that every partner is liable personally for
his other property not contributed to the partnership for partnership debts
and obligations.
Articles 1816 and 1817 of the Civil Code thus provide that “[a]ll partners,
including industrial ones, shall be liable pro rata with all their property
and after all the partnership assets have been exhausted . . . [and that]
[a]ny stipulation against [such] liability shall be void, except as among
the partners.” Why does the law make partners personally liable for
partnership debts contracted as a separate juridical person, and would
such unlimited liability still apply without express provision of law?
Even without any express provision of law and despite the separate
juridical personality of the partnership, unlimited liability would be the
rule for partners in a partnership setting for the basic reason that partners
essentially occupy the position of sole proprietors albeit associated with
other sole proprietors; the basic rule is that sole proprietors are always
unlimitedly liable for business debts and obligations even as to their
properties not used nor devoted for the business enterprise. The reason
why a sole proprietor is liable with his non-business assets for debts and
liabilities arising from a business venture is because he controls the
business enterprise, and all profits go to him which he can devote into
non-business matters, and thereby he must also absorb the losses from
the business. Therefore if his business goes bankrupt, he cannot insist
that his business creditors are limited only to the business assets for the
satisfaction of their claims, and as all benefits and profits can be
channeled to his personal non-business affairs, then his non-business
properties must also be held liable for the satisfaction of those claims; to
rule otherwise would mean that the owner benefits fully on the profits,
but lets his creditors absorb the losses from the business. It is a
 47
commercial law truism that it is the owner or equity holders of the
business enterprise, and not the creditors, who must stand ready to
absorb the losses of the enterprise.

In a partnership setting, the partners are still collective owners of the

business enterprise, as by the principle of mutual agency they all have the
power of management of the partnership affairs, and all profits and gains
are to their entire benefit and account. Thus, Article 1770 of the Civil
Code provides that every “partnership must be established for the
common benefit or interest of the partners,” and in turn Article 1799
provides that “[a]ny stipulation which excludes one or more partners from
any share in the profits or losses is void.” Therefore, despite the separate
juridical personality of the partnership enterprise, the partnership is still
wholly owned, managed and controlled by the partners as collective sole
proprietors of the business enterprise, and consequently, they must bear
the full brunt of the reverses of the business. Since the partners benefit
fully and personally from the partnership’s profitable operations, they
must thereby stand liable personally for the debts and obligations
contracted even in the partnership name. Otherwise (i.e., to provide for
limited liability as to allow creditors recourse only to the partnership
assets), would be tantamount to letting the partnership creditors take the
risks and consequences of the losses of the partnership enterprise when
they draw no advantage from its profits.

—oOo—
 48
pursuance of the firm business, binds not only himself as a principal but,
8 – PARTNERSHIP DISTINGUISHED FROM OTHER as their agent as well, also the partnership and his co-partners;”
BUSINESS MEDIA (Ibid) and

[Updated: 12 October 2009] (d) A “joint adventure has no firm name, while a partnership
is required to operate under a firm name.” (Ibid)

To the writer, the foregoing distinctions only affirms the fact that a joint
1. Distinguished from “Joint Venture” 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
Bautista, although confirming that a joint venture “is an association of two
creation of a common fund and undertaking to divide profits; that in fact
or more persons to carry out a single business enterprise for profit . . .
it is a particular partnership for a specific undertaking fully recognized
[and] embodies several of the essential elements or characteristics of a
under Article 1783 covering “a specific undertaking,” and Article 1830 that
partnership and bears such a close resemblance to it that the rights and
recognizes the dissolution of a partnership “By the termination of the . . .
liabilities of joint adventures are largely governed by rules applied to
particular undertaking specified in the agreement.” The position that in a
partnership,” (BAUTISTA, at pp. 41-42) nevertheless would distinguish a
joint venture the co-venturers do not become mutual agents is a
partnership and a joint venture in the following manner:
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
(a) “a joint venture is ordinarily limited to a single transaction [and] not
does not make it void as a contract or a partnership, so also with a joint
intended to pursue a continuous business;” whereas a
venture.
partnership, “though it may exist for a single transaction, usually
contemplates the undertaking of a general and continuous business of a
In any event, the distinction between a joint venture as a business
particular kind which necessarily involves a series of transactions;” (Ibid,
medium not falling within the ambit of Partnership Law, or as not
at p. 42.)
constituting a species of partnerships, has really become mute since
inKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), it was
(b) in a joint venture, “the property used remains the undivided property
held:
of its contributor, whereas in a partnership the same, as a rule,
becomes the property of the business entity and hence of all the
Joint venture is defined as an association of persons or companies jointly
partners;” (Ibid)
undertaking some commercial enterprise; generally all contribute assets
and share risks. It requires a community of interest in the performance of
(c) In a joint venture, none of the co-venturers “can bind the joint
the subject matter, a right to direct and govern the policy in connection
adventure or his co-adventurers, while a partner, when acting in
 49
therewith, and duty, which may be altered by agreement to share both in
profit and losses. The acts of working together in a joint project.
(Ibid, citing BLACK’S LAW DICTIONARY, Sixth ed., at p. 839.)
In Torres v. Court of Appeals, 320 SCRA 428 (1999), the Court took no
exception to defining the terms, rights and obligations of the parties to a
“Joint Venture Agreement” covering the development of a subdivision
project under provisions of the Civil Code governing partnerships. The
Chapter on Joint Ventures provides for a more thorough discussion of the
joint venture as a medium of doing business under Philippine setting.
2. Distinguished from Co-Ownership
Although the Law on Partnerships recognizes that partners have co-
ownership interest in the partnership properties (Article 1811, Civil Code),
nonetheless a co-ownership constitutes merely a property relation
whereby two or more persons own pro-indiviso a property, but the
relationship does not seek the business or mercantile pursuit of the
property relationship. In other words, a co-ownership situation comes
about other than by a contractual intent to pursue a business venture in
common, and consequently, no separate juridical personality arises from
a purely co-ownership relationship.
Without the contractual intent to pursue a business venture through a
common fund, the fact that co-owners happen to share in the profits that
may be produced by the property owned in common, there is still no
partnership arrangement. Thus, Article 1769 of the Civil Code provides
that “In determing whether a partnership exists . . . Co-ownership or co-
possession does not of itself establish a partnership, whether such co-
owners or co-possessors do or do not share any profits made by the use
of the property.”
3. Distinguished from Joint Account (Sociedad de Cuentas en
Participacion)
A joint account is governed under Article 239 of the Code of Commerce,
and still referred to as a corporate taxpayer under the National Internal
Revenue Code. But its use is a rarity in our jurisdiction because it does
not lend itself to commercial or business efficiency, as shown by the
discussion of its features in Bourns v. Carman, 7 Phil. 117 (1906), thus –
. . . A partnership constituted in such manner, the existence of which was
only known to those who had an interest in the same, there being no
mutual agreement between the partners, and without a corporate name
indicating to the public in some way that there were other people beside
the one who ostensibly managed and conducted the business, is exactly
the accidental partnership of cuentas en participacion defined in Article
239 of the Code of Commerce.
Those who contract with the person under whose name the business of
such partnership of cuentas en participacion is conducted, shall have only
a right of action against such person and not against the other persons
interested, and the latter, on the other hand, shall have no right of action
against the third person who contracted with the manager unless such
manager formally transfers his right to them. (Art. 242 of the Code of
Commerce) . . . (at pp. 119-120).
4. Distinguished from Agency
In a pure agency agreement, the agent is merely a legal extension of the
personality of the principal and thereby under the complete control of the
principal.
 50
The partnership relationship among the partners makes them mutual
agents of one another, and thereby the control that a principal has over
his agent does not pertain between and among the partners. Likewise,
unlike in a pure agency relationship where the agent who acts within the
scope of his authority does not bind himself to the contract or transaction
he enters into, in a partnership situation, the partner binds not only the
other partners and the partnership, but also himself in the pursuit of the
partnership enterprise.
In Binglangawa v. Constantino, 109 Phil. 168 (1960), the Court held that
just because a duly appointed agent has made personal advances for the
expenses of the business venture that he had been designated to
administer, does not make him a partner of his principal.
In United States v. Muhn, 6 Phil. 164 (1906), it was held that the agent
cannot escape the criminal liabilities of the crime of estafa for conversion
of the funds given to him by his principal by claiming that he had become
a partner when the books of accounts kept for the business showed that
the amount was charged to him since the same was “merely a method of
keeping an account of the business, so that the parties would know how
much money had been invested and what the condition thereof was at
any particular time.” (Ibid, at p. 166)
5. Distinguished from the Business Trust
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)

As compared to a partnership, a business trust is constituted by deed of Generally, every partner is an agent of the partnership, (Articles 1803(1),
trust which is easier and less expensive to constitute for it is not bounded 1818, and 1819, Civil Code), and by his sole act, he can bind the
by any legal requirements like the registration requirements for partnership (Articles 1822 and 1823, Civil Code), whereas in a
partnerships where the real property or more than P3,000 worth of corporation, only the Board of Directors or its duly authorized agents can
property is contributed to the partnership. 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 transferor’s 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
Partnership?
51
corporation but did not materialize because of certain registration
deficiencies.
If the parties have in fact pursued the incorporation process, by executing
and filing with the SEC the articles of incorporation, then there should be
no resulting partnership in the event that the incorporation process does
not bear fruition, based on the following grounds:
Firstly, both corporate and partnership relationships are fundamentally
contractual relationship created by the co-venturers who consent to come
together under said relationships. If the parties had intended to create an
association in the form of a corporation, a partnership cannot be created
a in its stead since such is not within their intent, and therefore does not
constitute a part of their consent to the contractual relationship.

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
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
partnership under Article 1767 is the coming “together” or what is known
in Partnership Law as “delectus personae” and not just the joint venture.
The essence of partnership is the personal relationship, i.e., that each
would-be partner goes into the venture precisely because he wants the
other co-venturers, and no other person, to be with him in the venture. A
venturer who seeks to enter into a corporate relationship perhaps does
not even care about the personality of the other co-venturers, and fully
aware that he himself and others have the ability to transfer their
investments to outsiders.
Nonetheless, there indications of a contrary view to the above. Under
Section 21 of the Corporation Code, when parties act and pretend to be a
corporation, when in fact none exist, the law would impute to them a
juridical personality to validate the contract under the corporation by
estoppel doctrine; however, it would treat the parties as partners since it
expressly makes them liable as “general partners.”
Under such contrary view, the main issue would be the priority between
the personal creditors of the “partners” in a corporation by estoppel
doctrine, and the “corporate” creditors of the corporation by estoppel, as
to the assets invested into the venture. The author would presume that it
would have to be the corporate creditors that would have priority over the
“corporate” assets as this seems to be the moving spirit of the corporation
by estoppel doctrine.
52
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).
of
Quoting from American jurisprudence, the Supreme Court in Pioneer
Insurance held that “there has been the position that as among
themselves the rights of the stockholders in a defectively incorporated
association should be governed by the supposed charter and the laws of
the state relating thereto and not by the rules governing partners
(Quoting from CORPUS JURIS SECUNDUM which cited Cannon v. Brush
Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), nevertheless it has
been held that “ordinarily persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name occupy
the position of partners inter se (Ibid, citing Lynch v. Perryman, 119 P.
229, 29 Okl. 615, Ann. Cas. 1913 A. 1065), and their rights as members
of the company to the property acquired by the company will be
recognized.” (Ibid, citing Smith v. Schoodoc Pond Packing Co., 84 A,
268m 109 Me. 555; Whipple v. Parker, 29 Mich 369).
Notwithstanding the foregoing, the Court took the position that such
partnership relationship does not exist, “for ordinarily persons cannot be
made to assume the relation of partners, as between themselves, when
their purpose is that no partnership shall exist . . . and it should be
implied only when necessary to do justice between the parties; thus, one
who takes no part except to subscribe for stock in a proposed corporation
which is never legally formed does not become a partner with other
subscribers who engage in business under the name of the pretended
corporation, so as to be liable as such in an action for settlement of the
alleged partnership and contributions. . . A partnership relation between
 53
certain stockholders and other stockholders, who were also directors, will
not be implied in the absence of an agreement, so as to make the former
liable to contribute for payment of debts illegally contracted by the latter.
(Ibid, at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p.
464). Nor will it make the investor to a would-be corporation liable for
losses sustained from its operations under a partnership inter se theory.”
(Ibid, at p. 685). The key elements in resolving the issue seem to have
been in Pioneer Insurance those of intent and participation in business
activities.
The doctrinal pronouncement in Pioneer Insurance can be summarized as
follows: When parties come together intending to form a corporation, but
no corporation is formed due to some legal cause, then:
(a) Parties who had intended to participate or actually participated in the
business affairs of the proposed corporation would be considered as
partners under ade facto partnership, and would be liable as such in an
action for settlement of partnership obligations;
- Whereas, -
(b) Parties who took no part except to subscribe to shares of stock in
a proposed corporation, do not become partners with other
subscribers who engaged in business under the name of the pretended
corporation, and are not liable for action for settlement of the alleged
partnership contribution.
The doctrinal pronouncements in Pioneer Insurance are consistent with
the distinctions between an investor in partnership venture, where there
is a clear intent to participate in the management of the partnership
business and for which limited liability is not afforded by law; and an
investor in a corporation, where under the principal ofcentralized
management, there is no intent to participate in the corporate operations,
and for which limited liability is afforded by law.
On the other hand, where the parties to a venture merely use a business
name that pretends there is a corporation, when in fact they was no
intention among the co-venturers to formally incorporate a juridical
entity, then there can be no doubt that what was really the meeting of
minds among them was a partnership, for in essence they agreed to set
up a common fund (i.e., pursue a business venture), with clear indication
to divide the profits among themselves. This is exactly the situation
covered in the decision in Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., 317 SCRA 728 (1999), where the liabilities of the parties
were adjudged under the corporation by estoppel doctrine. (See more
detailed discussions in Chapter 5).
In Lim Tong Lim, the Court found that three co-venturers agreed “to
engage in a fishing business, which they started by buying boats worth
P3.35 million, financed by a loan . . . In their Compromise Agreement,
they subsequently revealed their intention to pay the loan with the
proceeds of the sale of the boats, and to divide equally among themselves
the excess or loss. . . These boats, the purchase and the repair of which
were financed with borrowed money, fell under the term ‘common fund’
under Article 1767. The contribution to such fund need not be cash or
fixed assets; it could be an intangible like credit or industry. That the
parties agreed that any loss or profit from the sale and operation of the
boats would be divided equally among them also shows that they had
indeed formed a partnership.” (Ibid, at p. 739)
The only complication in Lim Tong Lim was that the transaction upon
which the personal liabilities of the co-venturers was being pursued, was
entered into on behalf of “Ocean Quest Fishing Corporation,” although no
 54
such corporation existed nor was there any attempt to incorporate such
entity. Consequently, both the unlimited liability principle under
Partnership Law and the corporation by estoppel doctrine in Corporate
Law were applied to determine the personal liability of each of the
partners in the business venture, which resulted in legal incongruency.
In a partnership, as a legal consequence of the application of the doctrine
of mutual agency, every partner shall be personally liable for partnership
debts and liabilities, even when the underlying transaction was effected
by another partner, or even when a partner does not participate at all in
the affairs of the partnership. On the other hand, under the corporation
by estoppel doctrine now embodied in Section 21 of the Corporation Code,
it is only the active or managing officers who assume the liability of a
general partner, thus: “All persons who assume to act as a corporation
knowing it to be without authority to do so shall be liable as general
partners, for all debts, liabilities and damages incurred or arising as a
result thereof;” and that consequently, passive stockholders are not
deemed to be personally liable for debts incurred on behalf of the
ostensible corporation.
This was in fact the defense raised by the petitioner in Lim Tong Lim,
where he held that since he did not participate actively in the business
venture, then under the principles of corporation by estoppel doctrine, he
cannot be made personally liable for the debts incurred in pursuing the
business venture. Instead of holding that the primary doctrine to apply
would be the rules of unlimited liability since there was duly constituted a
valid partnership, the Court instead humored the argument and went on
to also apply the corporation by estoppel doctrine with a jurisprudential
twist when it held —
The doctrine of corporation by estoppel may apply to the alleged
corporation and to a third party. . . . a third party who, knowing an
association to be unincorporated, nonetheless treated it as a corporation
and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case,
all those who benefited from the transaction made by the ostensible
corporation, despite knowledge of its legal defects, may be held liable for
contracts they impliedly assented to or took advantage of. (Ibid, at p.
743)
The result is that by mixing principles in Partnership Law and Corporate
Law in Lim Tong Lim, the corporation by estoppel doctrine has grown out
of the confines of Section 21 of the Corporation Code, as to make liable as
general partners, not only those parties to acted for the ostensible
corporation, but also all passive parties who knowing there is no such
corporation sat back and benefited from the venture.
6. Cooperative
A cooperative is a duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve lawful
common social or economic end, making equitable contributions to the
capital required and accepting a fair share of the risks and benefits of the
undertaking in accordance with universally accepted cooperative
principles. (Article 3, Cooperative Development Authority Act [R.A.
6938]).
A cooperative, like an ordinary corporation and a partnership, has a
juridical personality separate and distinct from its members, and has
limited liability feature. (Articles. 12 and 30, R.A. 6938)
 55
The Tax Code defines a cooperative as an association conducted by the social and economic organization to ensure that the tenant-farmers will
members thereof with the money collected from among themselves and enjoy on a lasting basis the benefits of agrarian reforms. (Corpuz v.
solely for their own protection and not for profit. (Republic v. Sunlife Grospe, 333 SCRA 425 [2000]).
Assurance Company of Canada, 473 SCRA 129 [2005]).
—oOo—
Unlike ordinary corporations, cooperatives are governed by principles of
democratic control where the members in primary cooperatives shall have
equal voting rights on a one-member-one-vote principle (Articles. 4(2),
R.A. 6938); where the Board of Directors manages the affairs of the
cooperative, but it is the general assembly of full membership that
exercises all the rights and performs all of the obligations of the
cooperative (Articles 5(3) and 34, R.A. 6938); and are under the
supervision and control of the Cooperative Development of Authority, and
not the SEC.

Unlike a partnership which should be organized for profit, and a non-stock

corporation which can be organized for any eleemosynary purpose and no
part of the net income is to be distributed to the officers and members
thereof, the primary objective of every cooperative is self-help: “to
provide goods and services to its members and thus enable them to attain
increased income and savings, investments, productivity, and purchasing
power and promote among them equitable distribution of net surplus
through maximum utilization of economies of scale, cost-sharing and risk-
sharing without conducting the affairs of the cooperative for
eleemosynary or charitable purposes.” (Article 7, R.A. 6938)

The Law on Cooperatives declares it a policy of the State to foster the

creation and growth of cooperatives as a practical vehicle for promoting
self-reliance and harnessing people power towards the attainment of
economic development and social justice. (Article 2, R.A. 6938). In one
case, the Court held that cooperatives are established to provide a strong
 56
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 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.
 57
1. As to Object: Universal
Partnership versusParticular Partnership
When it comes to the object or purpose, or the nature of the business
enterprise to be pursued, under Article 1776, a partnership is either
auniversal partnership or a particular partnership.
A universal partnership is one where the contract of partnership
encompasses expressly or impliedly either all the present properties of
the partners or just covering all of the profits. (Article 1777, Civil Code)
In a universal partnership of all present property is one where “the
partners contribute all the property which actually belongs to them to a
common fund, with the intention of dividing the same among themselves,
as well as all the profits they may acquire therewith.” (Article 1778, Civil
Code). This means that “the property which belonged to each of the
partners at the time of the constitution of the partnership, becomes the
common property of all the partners, as well as all the profits which they
may acquire therewith.” (Article 1779, Civil Code). The Civil Code further
clarifies that “A stipulation for the common enjoyment of any other profits
may also be made; but the property which the partners may acquire
subsequently by inheritance, legacy, or donation cannot be included in
such stipulations, except the fruits thereof.” (Article 1779, Civil Code).
In a universal partnership of profits “all that the partners may acquire by
their industry or work during the existence of the partnership,” as well as
the usufruct of all “[m]ovable or immovable property which each of the
partner may possess at the time of the celebration of the contract” of
partnership, shall all pertain to the partnership. (Article 1780, Civil Code).
The default rule under Article 1781 of the Civil Code is that when the
“Articles of universal partnership [are] entered into without specification
of its nature, [it will] only constitute a universal partnership of
profits.” The real question that must be asked is when is a partnership
agreement deemed to be even a “universal partnership” for the default
rule under Article 1781 to apply?
Under Article 1782, “Persons who are prohibited from giving each other
any donation or advantage cannot enter into universal partnership.”
On the other hand, Article 1783 of the Civil Code defines a “particular
partnership [to be one that] has for its object determinate things, their
use or fruits, or a specific undertaking, or the exercise of a profession or
vocation” There is no doubt then that every professional partnership and
joint venture arrangement would constitute particular partnerships.
What is the practical and legal importance of distinguishing between
universal and particular partnerships? So far, statutorily the only critical
usefulness of the distinction is that persons who are disqualified from
donating to one another (like spouses under Article 187 of the Family
Code), cannot enter into a universal partnership of any sort. Is it
therefore fair to conclude that spouses can validly enter into a particular
partnership between each other, when actually their property relations
are governed already by a legal property regime?
In Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969), the
Court held that the prohibition under now Article 1782 does not apply
when the partners entered into a limited partnership, the man being the
general partner and the woman being the limited partner, and a year later
the two get married.
On the more general question of what are the practical and legal
significance of knowing the difference between universal and particular
partnership, may best be exemplified in the decision in Lyons v.
 58
Rosentock, 56 Phil. 632 (1932). In that case, the two partners have been
together in two previous real estate projects. While one partner was
abroad, the other partner seized upon a potentially lucrative piece of
property (the San Juan estate) and although he had tried his best to
convince his partner abroad to commit to be part of the new venture, the
latter declined. In any event, when the property was purchased by the
local partner he had temporarily used a partnership property in the
previous venture to secure the loan drawn by the local partner in his own
name, but later released it and had his own property mortgaged when it
was clear that the partner abroad did not change his mind about not
joining the venture. In any event, the San Juan estate project proved
very successful, and after the local partner died, the partner abroad
sought to recover one-half of the profits of the venture on the ground that
he was a partner therein, in spite of his previous refusal to be part of it,
and mainly because partnership property was used as security for the
loan obtained by the local partner to finance his acquisition of the estate.
In resolving that the partner abroad was not entitled to any profits
derived from the San Juan estate project, because he was never a partner
thereto, Lyons resolution revolved around the principle that the two
partners never were part of a universal partnership, but that they were at
best partners in particular partnerships for the previous projects entered
into before the San Juan estate project, thus –
In the purely legal aspect of the case, the position of the appellant is, in
our opinion, untenable. . . . Of course, if an actual relation of partnership
had existed in the money used, the case might be different; and much
emphasis is laid in the appellant’s brief upon the relation of partnership
which, it is claimed, existed. But there was clearly no general relation of
partnership between the parties; and the most that can be said is that
Elser and Lyons had been coparticipants in various transactions in real
estate. No objection can be made to the use of the word partnership as a
term descriptive of the relation in those particular transactions, but it
must be remembered that it was in each case a particular partnership,
under article 1678 of the Civil Code. It is clear that Elser, in buying the
San Juan Estate, was not acting for any partnership composed into a
proposition which would make Lyons a participant in this deal contrary to
his express determination. (Ibid, at pp. 641-642)
The other conclusion we can draw from Lyons is that a universal
partnership is never presumed, not even from various transactions or
ventures concluded between the partners. The default rule therefore
should be that unless the parties so stipulate in their articles of
partnership that they are entering into a universal partnership, it would
be presumed that they have existing between them merely a particular
partnership.
Apart from the foregoing, the concept and medium of universal
partnership serves no reasonable commercial purpose, for legally it can
only come about when it is so expressly stipulated in contract of
partnership, and practically, it is difficult to see how two or more persons
not bounded by marriage, faith or vocation (which makes the partnership
a particular one), would commit to one another all that they have and all
the fruits of what they do, to one another.
The other important question that may be asked is “By definition under
Article 1776 that there can be a valid partnership for the practice of a
profession, why would Article 1783, in defining a particular partnership,
include the ‘exercise of a vocation’ which may not include one that seeks
to provide a livelihood for the so-called partners, such as religious or civic
vocation?”
 59
2. As to Duration:
When it comes to the partnership term or life, the law distinguishes
between a partnership with fixed term, partnership for a particular
undertaking, and partnership at will.
Both partnerships with fixed term or for a particular undertaking are
automatically dissolved upon the expiration of the stipulated term or the
achievement of the particular undertaking stipulated in the contract of
partnership; whereas, in a partnership at will, the partnership has an
indefinite term and it would be dissolved only when an act or cause of
dissolution happens or arises. Nonetheless, under Article 1785 of the Civil
Code, when a partnership for a fix term or particular undertaking is
continued after it has terminated without any express agreement,
partnership then become one at will and “the rights and duties of the
partners remain the same as they were at such termination, so far as is
consistent with a partnership at will.” The article also provides that “A
continuation of the business by the partners or such of them as habitually
acted therein during the term, without any settlement or liquidation of the
partnership affairs, is prima facie evidence of a continuation of the
partnership.”
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), the Court described
the characteristics of a partnership at will in the following manner, thus:
The birth and life of a partnership at will is predicated on the mutual
desire and consent of the partners. The right to choose with whom a
person wishes to associate himself is the very foundation and essence of
that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partner’s capability to
give it, and the absence of a cause for dissolution provided by law itself.
Verily, any one of the partners may, at his sole pleasure, dictate a
dissolution of the partnership at will. He must, however, act in good faith,
not that the attendance of bad faith can prevent the dissolution of the
partnership but that it can result in a liability for damages. (Ibid, at pp.
535-536)
Nonetheless, by way of obiter, Ortega also described the ability of every
partner even in a partnership with fixed term or for a particular
undertaking, to be able to dissolve the partnership upon the application of
the principles of mutual agency and delectus personae, thus –
In passing, neither would the presence of a period for its specific duration
or the statement of a particular 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
 60
the original partners accept an industrial partner but do not register a new
partnership, and thereafter the industrial partner retires from the
business, and the original partners continue under the same set-up as the
original partnership, then although the second partnership was dissolved
with the withdrawal of the industrial partner, there resulted a reversion
back into the original partnership under the terms of the registered
articles of partnership. There is not constituted a new partnership at will.
3. As to Extent of Partners’ Liabilities
When it comes to the kinds of liabilities that the partners may be exposed
to for partnership debts and obligations, the Civil Code distinguishes
between a general partnership, where all the partners are unlimitedly
liable; and a limited partnership, where there is one or more general
partner who are unlimitedly liable, with one or more limited partners, who
are liable for partnership debts only to the extent of their stipulated
contributions under the articles of partnership.
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear
Industries, Inc., 317 SCRA 728 (1999), Justice Vitug summarized the
nature of the liabilities of general partners, thus:
. . . The liability of general partners (in a general partnership as so
opposed to a limited partnership) is laid down in Article 1816 which posits
that all partners shall be liable pro rata beyond the partnership assets for
all the contracts which may have been entered into in its name, under its
signature, and by a person authorized to act for the partnership. This rule
is to be construed along with other provisions of the Civil Code which
postulate that the partners can be held soidarily liable with the
partnership specifically in these instances–(1) where, by any wrongful act
or omission of any partner acting in the ordinary course of the business of
the partnership or with the authority of his co-partners, loss or injury is
caused to any person, not being a partner in the partnership, or any
penalty is incurred, the partnership is liable therefor to the same extent
as the partner so acting or omitting to act; (2) where one partner acting
within the scope of his apparent authority receives money or property of a
third person and the money or property so received is misapplied by any
partner while it is in the custody of the partnership–consistently with the
rules on the nature of civil liability in delicts and quasi-delicts. (Ibid, at
pp. 746-747).
4. Other Kinds of Partners
Other than the general and limited partners that have been previously
discussed, there are two kinds of partners when it comes to the nature of
their contributions: capitalist partner and industrial partner.
A capitalist partner contributes money and/or property to the partnership,
while an industrial partner contributes only his industry or his service. The
law does not specify the kind of industry that a partner may contribute
into the partnership. (Evangelista & Co. v. Abad Santos, 51 SCRA 416
[1973]).
The importance of such distinction is essentially on the nature of the
obligations and liabilities that they must assume:
(a) The capitalist partner is liable for the losses sustained by the business
and any stipulation to the contrary would be void (Articles 1791,
1797, and 1799, Civil Code); whereas, the industrial partner is not liable
for losses of the partnership venture (Article 1797, Civil Code);
(b) The capitalist partner may not engage on in business which are
competing with that of the partnership business (Article 1808, Civil
 61
Code); whereas, the industrial partner cannot engage in any other —oOo—
business at all during his tenure as industrial partner (Article 1789, Civil
Code); and

(c) Whereas a capitalist partner is bound to make additional contributions

to the partnership in case of an imminent loss of the business of the
partnership, the industrial partner has no such obligation. (Article
1791, Civil Code)

Partnership Law also distinguishes between the liabilities assumed by

an original partner who is with the partnership at the time of its
constitution, and subsequent or incoming partners, who come during
the life of a pre-existing partnership. In the case of an incoming partner,
his liability with respect to the partnership obligations which were incurred
prior to his admission into the partnership shall be satisfied only out of
partnership property, unless it is otherwise stipulated. (Articles 1826 and
1840, Civil Code).

Partnership Law also refers to the managing partner who has been
given the management of the partnership enterprise (Articles 1800 and
1801, Civil Code); the liquidating partner, who takes charge of the
liquidation and winding-up of partnership affairs (Article 1836, Civil
Code); a retiring partner, who ceases to be part of the partnership
which is continued after dissolution, as compared with the partners who
remain with the venture as continuing partners (Articles 1837, 1839,
1840 and 1841, Civil Code); and the partner by estoppel, who is not a
formal partner in an existing partnership, but by his act he has led third-
parties dealing with the partnership to believe he is a partner, and
thereby becomes liable as a regular partner as so such relying creditors
(Article 1815, Civil Code).
 62
The prohibition is founded on the theory that a contract of universal
10 – SPECIAL ISSUES OF WHO MAY QUALIFY TO partnership is for all purposes a donation. Its purpose, therefore, is to
BECOME PARTNERS prevent persons disqualified from making donations each other from
doing indirectly what the law prohibits them from doing directly.
[Updated: 12 October 2009] (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
1. May Spouses Validly Enter into a Partnership Relation?
pretty well implied that spouses, whatever the regime of property
relations prevails in their marriage, are disqualified from entering into any
a. Spouses Cannot Enter into a Universal Partnership
sort of universal partnership; and consequently, spouses may validly
The main statutory provision invoked when it comes to the issue of become partners to one another in a particular partnership, which would
whether spouses can enter between themselves into a partnership include a professional partnership, and both general and limited
agreement is Article 1782 of the Civil Code which provides that “Persons partnerships. The critical question must be asked:Can spouses just
who are prohibited from giving each other any donation or advantage between themselves or with third parties validly enter into a contract of
cannot enter into universal partnership.” It has thus been opined that partnership for gain provided the resulting partnership is not a universal
since under Article 133 of the Civil Code “Every donation between the partnership?
spouses during the marriage shall be void,” then spouses are prohibited
If one refers only to the provision of Article 1782, the answer would be in
from entering into a universal partnership, but not necessarily a particular
the affirmative. In Commissioner of Internal Revenue v. Suter, 27 SCRA
or limited partnership. Article 133 of the Civil Code has now been replaced
152 (1969), which currently is the only decision to deal with the issue, the
by Article 87 of the Family Code, which reads:
Supreme Court affirmed this particular view, relying only on the
Art. 87. Every donation or grant of gratuitous advantage, direct or provisions of Article 1677 of the old Civil Code (now Article 1782), that
indirect, between the spouses, during the marriage should be void, except since the prohibition for spouses covers expressly only universal
moderate gifts which the spouse may give each other on the occasion of partnerships, then they can validly be partners in a limited partnership,
any family rejoicing. The prohibition shall also apply to persons living with the husband being the general partner and the wife being the limited
together as husband and wife without a valid marriage. partner.

Bautista discussed the rationale of Article 1782 in this manner: On this particular issue, Bautista limited his comment to the effect that
the provisions of Article 1782 disqualifies “spouses, with respect to any
 63
contract of universal partnership made between them during the
marriage,” and other than reporting the relevant portions of the decision
in Suter, he did not comment on whether spouses can validly enter into
other forms of partnership for gains. Tolentino does not comment on the
provisions of Article 1782, although his discussion on the matter under his
old work under the Code of Commerce was quoted in Suter.
To the writer, it seems that in addressing the issue raised, it would be
error to base the resolution only on of Article 1782 of the Civil Code.
Certainly Article 1782 constitutes an important statutory provision to
resolve that issue, but there are other statutory provisions more
primordial in addressing the issue.
Suter, which was decided under the terms of the old Civil Code and the
Code of Commerce, is quite peculiar in its facts because the contract of
partnership started out where there was no legal obstacle with the parties
entering into a duly registered limited partnership: Suter as the general
partner, with Spirig and Carlson, as limited partners. Eventually, Suter
and Spirig were married, and bought out the interest of Carlson. Under
the provisions of the Tax Code, the Commissioner of Internal Revenue
then sought to recover income taxes individually against Suter for
partnership income under the theory that the separate juridical
personality of the partnership by which it was taxed separately as a
corporate taxpayer, was extinguished with the marriage of Suter and
Spirig, who ended up as the only partners in the venture. The Court held:
“The theory of the petitioner, Commissioner of Internal Revenue, is that
the marriage of Suter and Spirig and their subsequent acquisition of the
interests of remaining partner Carlson in the partnership dissolved the
limited partnership, and if they did not, the fiction of juridical personality
of the partnership should be disregarded for income tax purposes because
the spouses have exclusive ownership and control of the business.” (27
SCRA 152, at p. 156).
The Court found no merit in the position of the Commissioner, and quoted
from the commentaries of Tolentino, thus:
A husband and a wife may not enter into a contract of general
copartnership, because under the Civil Code, which applies in the absence
of express provision in the Code of Commerce, persons prohibited from
making donations to each other are prohibited from entering into
universal partnerships. (2 Echaverri, 196) It follows that the marriage of
partners necessarily brings about the dissolution of a pre-existing
partnership (1 Guy de Montella 58). (Ibid, at p. 157, quoted from
Tolentino, Commentaries and Jurisprudence on Commercial Laws of the
Philippines, Vol. 1, 4th ed., at p. 58).
Thus, the Court held that the partnership at issue “was not a universal
partnership, but a particular one. . . since the contributions of the
partners were fixed sums of money, . . . and neither one of them was an
industrial partner. It follows that [it] . . . was not a partnership that [the]
spouses were forbidden to enter under Article 1677 of the Civil Code of
1889 [now Article 1782].” In essence, Suter holds that spouses are not
disqualified from becoming partners in a limited partnership, provided one
of them (or at least both of them) is a limited partner.
b. Spouses Are Not Qualified to Enter into Other Forms of
Partnership for Gain
It is the writer’s position that apart from a professional partnership,
spouses cannot enter into any form of partnership, be it universal or
particular, general or limited partnership, as a separate property
 64
arrangement apart from the property regime prevailing in their marriage,
for the reasons discussed below.
Firstly, apart from a universal partnership, every form of partnership,
including a limited partnership, effectively makes partners “donors” to one
another of their contributions in the partnership. Although a partnership
would have a personality separate and distinct from each of the partners,
so that it can hold contributed property in its name, nonetheless, partners
are expressly granted by Partnership Law co-ownership interest in the
partnership property as to then have a direct co-ownership interest
therein. (Articles 1810 and 1811, Civil Code). Effectively, even in a
limited partnership, such as the Suter situation, the contribution of the
limited partner wife belonged to the partnership which would then be
under the control and management of the general partner husband. A
partnership arrangement between spouses would thereby be an indirect
violation of the provisions of Article 87 of the Family Code which provides
that “Every donation or grant of gratuitous advantage, direct or indirect,
between the spouses during the marriage shall be void.”
Although it can be argued that contributions to a partnership are not in
the nature of “donations” or “gratuitous advantage,” because a contract of
partnership is essentially an onerous and commutative contract, whereby
the contributions comes with a cost (e.g., becoming unlimitedly liable for
partnership obligations), nevertheless, such contributions would then
violate the provisions of Article 1490 of the Civil Code, which prohibits
sales or any other form of onerous dispositions, between spouses not
governed by the complete separation of property regime .
Secondly, there is clear implication under the Family Code, that the
property regime that must govern spouses must be in accordance with
the provisions of said Code, and cannot be the subject of regular
partnership rules under the Partnership Law of the New Civil Code.
(1) Spouses Governed by the Absolute Community of Property
Regime
To begin with, the Family Code sets the absolute community of property
regime as the default rule for marriages, and consequently, it cannot exist
consistently with another set of rules governing partnerships for gains
under the Partnership Law of the Civil Code. Although Article 1782
provides that –
Persons who are prohibited from giving each other any donation or
advantages cannot enter into a universal partnership,” which beyond
doubt should include spouses, yet under Article 75 of the Family Code, “In
the absence of marriage settlements, or when the regime agreed upon is
void, the system of absolute community of property as established in this
Code shall govern,” and which under Article 88 of the Family Code, “shall
commence at the precise moment that the marriage is celebrated [and
that any] stipulation, express or implied, for the commencement of the
community regime at any other time shall be void.
The absolute community of property regime actually establishes a sort of
“universal partnership” between the spouses, in that it includes “all
property owned by the spouses at the time of the celebration of the
marriage or acquired thereafter.” (Article 91, Family Code). Can spouses
governed by the absolute community of property regime, vary the effects
between them on certain community property, by contributing them into
a particular partnership for gain? The answer ought to be in the negative,
and such partnership agreement would be void, since under Article 89 of
the Family Code “No waiver of rights, interest, shares and effects of the
 65
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 particular partnership for
gain, even when they contribute thereto their separate properties,
because that would in effect constitute donations to one another as
discussed below, and would undermine the rules of the Family Code on
how such separate properties should answer for the charges on family
affairs.
(3) Spouses Governed by the Complete Separation of Property
Regime
May spouses governed by the complete separation of property regime
validly enter into a contract of particular partnership? The answer ought
to be in the negative, for the contribution of any of their separate
properties into the partnership for gain would amount to donation, and
under Article 87 of the Family Code, which prohibits any form of donation
or gratuitous advantage between spouses during marriage, makes no
distinction, much less an exception, for spouses governed by the
complete separation of property regime.
c. Contract of Partnership May Offend Against the Provisions of
the Family Code
A contract of partnership between spouses entered into during marriage
would be void because it would contravene the rules under Articles 76 and
77 of the Family Code that prohibit “any modification in the marriage
settlements” after the “celebration of the marriage,” and which provide
that “The marriage settlement and any modification thereof shall be in
writing, signed by the parties and executed before the celebration of the
marriage.”
 66
In essence, the Partnership Law under the New Civil Code, which should
be considered general provisions, cannot overcome the more specific
provisions on the Law on Marriages under the Family Code, which govern
specifically the property regime that should prevail between spouses. The
provisions of Partnership Law are geared towards providing for the a
contractual relationship that seeks to undertake a business venture;
whereas, the Family Code provisions governing the property regime
prevailing between spouses have considerations that transcend profit
motives, and seek to strengthen the institutions of marriage and the
family. Consequently, a contract of partnership between spouses should
be held void in that it seeks to overcome or undermine the mandatory
provisions of the Family Code.
There are several areas where there arises real conflict between doctrines
under Partnership Law and those under the Family Code.
(1) Issue on Control and Binding Effects of Acts of Partners
We take the area of control and binding effect of the acts of partners
against other partners and the partnership itself. Under Partnership Law,
every partner is an agent of the partnership and for the other partners
when it comes to transactions that pertain to partnership affairs; thus, the
act of one partner binds the other partners and the partnership property
(Articles 1803[1] and 1818, Civil Code). On the other, the general rule
under the Family Code, when it comes to absolute community of property
regime (Article 96, Family Code) and conjugal partnership of gains
(Article 124, Family Code), is that both spouses are co-administrators of
the conjugal properties; and any contract, especially an act of disposition
or encumbrance of the community or the conjugal property, done by one
without the consent of the other partner, would be void. (Guiang v. Court
of Appeals, 291 SCRA 372 [1998]; Cirelos v. Hernandez, 490 SCRA 625
[2006]; Bautista v. Silva, 502 SCRA 334 [2006]). Take the case of
allowing the spouses to enter into a particular partnership, and they both
contribute community or conjugal properties thereto, would the rules
under Partnership Law therefore allow one spouse, without the consent of
the other spouse, to dispose of such property pursuant to partnership
affairs?
Article 145, Family Code provides that “Each spouse shall own, dispose of,
possess, administer and enjoy his or her own separate estate, without
need of the consent of the other. To each spouse shall belong all earnings
from his or her profession, business or industry and all fruits, natural,
industrial or civil, due or received during the marriage from his or her
separate property.” Under a complete separation of property regime,
spouses separately manage and control their separate properties. Can
spouses who are governed by the regime of separation of property,
thereby partially overcome the governing provisions of the Family Code,
by being allowed to validly enter into a particular partnership agreement?
(2) Charges to Partnership Properties
We should look also into the areas of charges against the partnership
properties and the effects of dissolution. Under Partnership Law,
partnership properties would be chargeable against any claim or contract
entered into pursuant to partnership affairs. On the other hand, under
both the absolute community of property regime and the conjugal
partnership of gains, there are specific listings of what should first be
chargeable against the community property (Articles 94 and 95, Family
Code), or the conjugal property (Articles 121 to 123, Family Code), like
support and debts contracted for the benefit of the marriage. Under a
regime of separate property, both spouses shall bear the family expenses
in proportion to their income, or, in case of insufficiency or default
 67
thereof, to the current market value of their separate properties (Article
146, Family Code).
When community, conjugal or separate property is allowed to be
contributed into the partnership for gain, the rules of first preference of
partnership creditors to partnership property would undermine the claims
of personal creditors of spouses, as well as the ability of marriage
properties to properly provide for the family support and upkeep. In
addition, contributions by spouses of marriage property into a partnership
for gain would certainly allow a means by which spouses may defraud
their marriage creditors, by making certain marriage properties subject to
greater claims outside of marriage affairs.
d. Professional Partnerships
May spouses by themselves, or together with other professionals, enter
validly into a contract of professional partnership, which by definition of
Article 1783 of the Civil Code is always a particular partnership? The
answer seems to be in the affirmative. The reason is that a professional
partnership essentially covering the contribution of service by the
spouses, does not primarily bind actual community or conjugal properties,
and therefore thus not operate in violation of the property rules governing
marriage property regimes.
More importantly, professional partnership are not really pursued for
profit, but more for civic or vocational ends and therefore do not address
proprietary ends; but rather, the exercise of a profession, even in the
partnership medium, has more to do with the expression of ideals held by
an individual or towards achieving a fruitful life in the mundane world.
This fact is recognized even under the Family Code, where Article 73
provides that “Either spouse may exercise any legitimate profession,
occupation, business or activity without the consent of the other.
2. May Corporations Validly Qualify to Become Partners?
The prevailing rule in the United States is that –
“Unless it is expressly authorized by statute or charter, a corporation
cannot ordinarily enter into partnerships with other corporations or with
individuals, for, in entering into a partnership, the identity of the
corporation is lost or merged with that of another and the direction of the
affairs is placed in other hands than those provided by law of its
creation. . . A corporation can act only through its duly authorized officers
and agents and is not bound by the acts of anyone else, while in a
partnership each member binds the firm when acting within the scope of
the partnership.” (FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520).
The doctrine is grounded on the theory that the stockholders of a
corporation are entitled, in the absence of any notice to the contrary in
the articles of incorporation, to assume that their directors will conduct
the corporate business without sharing that duty and responsibility with
others. (BAUTISTA, at p. 9).
a. Jurisprudential Rule
Tuason v. Bolanos, 95 Phil. 106 (1954), recognized at that time in
Philippine jurisdiction the doctrine in Anglo-American jurisprudence that
“a corporation has no power to enter into a partnership.” (Ibid, at p. 109).
Nevertheless, Tuason ruled that a corporation may validly enter into a
joint venture agreement, “where the nature of that venture is in line with
the business authorized by its charter.” (Ibid, quoting from Wyoming-
 68
Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletcher Cyc. of evaluate all the consequences and likely liabilities to which the corporation
Corp., Sec. 1082). would be held liable for.

A joint venture is essentially a partnership arrangement, although of a b. SEC Rules

special type, since it pertains to a particular project or undertaking
(BAUTISTA, supra, at p. 50). In Torres v. Court of Appeals, 278 SCRA
793, the Supreme Court held unequivocally that a joint venture
agreement for the development and sale of a subdivision project would
constitute a partnership pursuant to the elements thereof under Article
1767 of the Civil Code that defines when a partnership exists).
AlthoughTuason does not elaborate on why a corporation may become a
co-venturer or partner in a joint venture arrangement, it would seem that
the policy behind the prohibition on why a corporation cannot be made a
partner do not apply in a joint venture arrangement. Being for a particular
project or undertaking, when the Board of Directors of a corporation
evaluate the risks and responsibilities involved, they can more or less
exercise their own business judgment is determining the extent by which
the corporation would be involved in the project and the likely liabilities to
be incurred. Unlike in an ordinarily partnership arrangement which may
expose the corporation to any and various liabilities and risks which
cannot be evaluated and anticipated by the Board, the situation therefore
in a joint venture arrangement, allows the Board to fully bind the
corporation to matters essentially within the Board’s business appreciation
and anticipation.
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
It is clear therefore that what makes a project or undertaking a “joint
the partners shall manage the partnership, and the articles of
venture” to authorize a corporation to be a co-venturer therein is not the
partnership must stipulate that all the partners shall be jointly and
name or nomenclature given to the undertaking, but the very nature and
severally liable for all the obligations of the partnership. (Ibid)
essence of the undertaking that limits it to a particular project which
allows the Board of Directors of the participating corporation to properly
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
 69
would still have contravened the doctrine of making the corporation
unlimitedly liable for the acts of the other partners who are not its
authorized officers or agents. This interpretation of the second condition
was confirmed by the SEC in 1994, to mean that a partnership of
corporations should be organized as a “general partnership” wherein all
the partners are “general partners so that all corporate partners shall take
part in the management and thus be jointly and severally liable with the
other partners.” (SEC Opinion, dated 23 February 1994, XXVII SEC
Quarterly Bulletin 18 (No. 3, Sept. 1994).
The rationale given by the SEC for the second condition was that if the
corporation is allowed to be a limited partner only, there is no assurance
that the corporate partner shall participate in management of the
partnership which may create a situation wherein the corporation may not
be bound by the acts of the partnership in the event that, as a limited
partner, the corporation chooses not to participate in the management.
(Ibid).
However, in 1995, the SEC reversed such interpretation and practically
dropped the second requirement, when it admitted the following
reasoning for allowing a corporation to invest in a limited partnership,
thus:
1. Just as a corporate investor has the power to make passive
investments in other corporations by purchasing stock, a corporate
investor should also be allowed to make passive investments in
partnerships as a limited partner, who would then not be bound beyond
the amount of its investment by the acts of the other partners who are
not its duly appointed and authorized agents and officers. Hence, the very
reason why as a general rule, a corporation cannot enter into a contract
of partnership, as stated in the 1966 SEC opinion, would no longer be
present, as the corporation, which is merely a limited partner, will now be
protected from the unlimited liability of the other partners who are not
agents or officers of the corporation;
2. Section 42 of the Corporation Code which permits a corporation to
invest its funds in another corporation or business, does not require that
the investing corporation be involved in the management of the investee
corporation with a view to protect its investment therein. By entering into
a contract of limited partnership, a corporation would continue to manage
its own corporate affairs while validly abstaining from participation in the
management of the entity in which it has invested. Accordingly, as there
is generally no threat that a corporate limited partner would be solidarily
liable with the partnership, there would be no reason for requiring a
corporate partner to actually manage the partnership, if it makes the
business decision no to do so and opts to become a limited partner; and
3. The SEC policy that a corporation cannot enter into a limited
partnership, is an offshoot of the outdated view in the U.S., that, as a
general rule, corporations could not form a partnership; that corporations
cannot become limited partners, is based on an assumption which is no
longer current. Jurisprudence and common commercial practice in the
U.S., indicate that corporations are not barred from acting as limited
partners. Current American laws support the position that a corporation
can enter into a contract of limited partnership. For example, the Revised
Uniform Limited Partnership Act of 1976 (as amended in 1985),
specifically confirms, that corporations may act as limited partners.
Almost all states in the U.S. have adopted limited partnership laws which
provide, in the same manner as the Revised Uniform Limited Partnership
Act, that corporations may act as limited partners. This indicates that
many other jurisdictions simply follow the broad language of the Revised
Model Business Corporations Act which suggests that corporations may
 70
act as limited partners and in no event prohibits that activity. These
statutes reaffirm what is indicated by the commercial practice in the U.S.,
that corporations can act as limited partners. The proliferation of statutes
reversing the doctrine forbidding corporations to become partners is proof
of the unsoundness of and dissatisfaction with such doctrine. (SEC
Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8-9 (No. 1, June
1996).

In that opinion, the SEC conceded on the points raised by confirming that
“inasmuch as there is no existing Philippine law that expressly prohibits a
corporation from becoming a limited partner in a partnership, the
Commission is inclined to adopt your view on the matter,” (Ibid) provided
that the power to enter into a partnership is provided for in the
corporation’s charter. The SEC went on to say:

“We agree with your statements that a reconsideration of the present

policy of the Commission on the matter is timely in order to permit the
Philippine commercial environment to maintain its pace in terms of legal
infrastructure with similar developments in the international arena with a
view to encouraging and facilitating greater domestic and foreign
investments in Philippine business enterprise.” (Ibid)

—oOo—
 71
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)
systems, infrastructures and institutions that are manifest and made
known to them, and in line with the characteristic of uniformity of
commercial transactions. But as will be shown hereunder, the forms and
registration requirement for partnerships under the Civil Code are meant
more to regulate the relationship of the partners among themselves and
with the partnership, but do not really bear into the rights of creditors
who deal with the business enterprise. For indeed, Article 1772 of the Civil
Code provides that “Failure to comply with the [formal] requirements [of
public instrument and SEC registration] shall not affect the liability of the
partnership and the members thereof to third persons.”
1. When Capital Contributions Total P3,000.00 or More
_____

_____ Art. 1772. Every contract of partnership having a capital of Three

thousand pesos or more, in money or property, shall appear in a
Since the contract of partnership is essentially consensual in character, public instrument, which must be recorded in the Office of the
there is generally no form required, much less a need for the actual Securities and Exchange Commission.
delivery of the promised contributions, to perfect it, and thereby lead to
the arising of a separate juridical personality. Article 1771 of the Civil Failure to comply with the requirements of the preceding
Code provides that “A partnership may be constituted in any form, except paragraph shall not affect the liability of the partnership and the
where immovable property or real rights are contributed thereto, in which members thereof to third persons (n)
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
Under modern day setting, most partnerships would be formed or
in the Office of the Securities and Exchange Commission.”
constituted having contributed capital of more then P3,000.00, for it is
Public documents and other forms of registration are features of doubtful whether two or more persons would come together in pursuit of
commercial law system, for indeed the public must deal on the basis of business with a capital of less than P3,000.00. This means that the twin
 72
requirements under Article 1772 of the Civil Code of having the contract
of partnership in a public document and registered with the SEC apply
almost universally to all modern-day partnerships. But even then, the
twin requirements may have no legal or commercial significance based on
the following grounds:
(a) The law does not declare the partnership void when the twin
requirements are not met, nor is non-compliance meted any adverse legal
consequence; and
(b) The law expressly provides that “Failure to comply with
the requirements . . . shall not affect the liability of the partnership and
the members thereof to third persons.”
In a situation where a partnership is constituted not having complied with
the twin requirements of Article 1772 is not declared void as among the
partners, and the claims of its creditors are unaffected, why should any
partner worry about non-compliance with the twin requirements of public
document and SEC registration?
In Angeles v. Secretary of Justice, 465 SCRA 106 (2005), the Supreme
Court held that the “mere failure to register the contract of partnership
with the SEC does not invalidate a contract that has the essential
requisites of a partnership. The purpose of registration of the contract of
partnership is to give notice to third parties. Failure to register the
contract of partnership does not affect the liability of the partnership and
of the partners to third persons. Neither does such failure to register
affect the partnership’s juridical personality. A partnership may exist even
if the partners do not use the words ‘partner’ or ‘partnership.’” (Ibid, at p.
115).
According to the Code Commission, the business purpose of the
requirements under Articles 1771 and 1772 is to prevent evasion of tax
liabilities by big partnership and to safeguard the public by enabling it to
determine more accurately the membership and capital of partnerships
before dealing with them. (Memorandum of Code Commission, Lawyers’
Journal, October 1955, p. 518, cited in Bautista, at pp. 71-72).
Under current tax rules, which essentially taxes the partnership
separately as corporate taxpayer, formal registration requirements with
the BIR on matters as getting a taxpayer identification number (TIN), to
be registered as withholding agent, etc., would require submission of the
registered articles of partnership. But then if the motivation is to go below
the government radar, and to operate within the underground economy
as a means of avoiding tax and administrative burdens, then non-
registration with the SEC and other government agencies would be the
likely scheme to be followed. And yet if there are no deleterious
consequences provided by the Law on Partnerships in not complying the
formalities under Article 1771, why would they be complied with?
In any event, since Articles 1771 and 1772 do not expressly declare that
failure to comply with the public document requirement render the
contract of partnership void, then the general rule is that such failure
does not render the contract void, but only affects the manner of its
registration and affords to the parties affected the remedy of demanding
that it be executed in a public instrument. (Dauden-Hernaez v. De los
Angeles, 27 SCRA 1276 [1969]; Fule v. Court of Appeals, 286 SCRA 698
[1998]; Dalion v. Court of Appeals, 182 SCRA 872 [1990]).
It must be pointed out however, that the decision in Rojas v. Maglana,
192 SCRA 110 (1990), points to the “legal usefulness” of complying with
 73
the twin requirements mandated under Articles 1771 and 1772 of the Civil
Code.
In that case, Maglana and Rojas executed their Articles of Co-Partnership,
calling their company the “Eastcoast Development Enterprises (EDE),”
with the purpose to “apply or secure timber and/or minor forests products
licenses and concessions over public and/or private forest lands and to
operate, develop and promote such forests rights and concessions.”
The articles were duly registered with the the SEC, indicating therein an
indefinite period for the venture, and providing that the profits would be
divided “share and share alike.”
When the venture was not getting off the ground, they invited
Pahamatong as industrial partner, and they executed a “Supplemental
Articles of Co-partnership” adopting the original name of the company,
but this time providing for a period of thirty (30) years for the life of the
venture, and providing for equal distribution of profits among the three
partners. The new articles were not registered with the SEC. Although the
firm began to operate with profits, eventually Pahamatong withdrew from
the arrangement and his equity was bought back by Maglana and Rojas,
who then proceeded to operate the firm under the same original name,
and with the verbal agreements that the profits would be distributed
80%-20% in favor of Maglana.
When Rojas abandoned the enterprise to set-up a competing venture in
another logging concession, he withdrew some of his equipment
contributed to EDE to be used in his new venture. Maglana notified Rojas
of his (Maglana’s) 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
Maglana’s termination thereof when the second articles of partnership
provided for a period of 30 years; and the basis of the distribution of
profits and losses from the EDE venture, whether it would be the “share
and share alike” under the first articles of partnership, on the basis of
capital contributions based on the second articles of partnership, or on the
verbal agreement of 80%-20% in favor of Magalana.
The Court placed much weight on the original articles of incorporation
executed by Maglana and Rojas, which was duly registered with the SEC,
and held that when the second articles of co-partnership was executed
(but not registered), there was every intention to abide by the original
partnership arrangement existing under the registered articles, since it
covered the same venture and used the same firm name, thus —
After a careful study of the records as against the conflicting claims of
Rojas and Maglana, it appears evident that it was not the intention of the
partners to dissolve the first partnership, upon the constitution of the
second one, which they unmistakably called an “Additional Agreement” . .
. Except for the fact that they took in one industrial partner; gave him
an equal share in the profits and fixed the term of the second partnership
to thirty (30) years, everything else was the same.
Thus, they adopted the same name, EASTCOAST DEVELOPMENT
ENTERPRISES, they pursued the same purposes and the capital
 74
contributions of Rojas and Maglana as stipulated in both partnerships call
for the same amounts. Just as important is the fact that all subsequent
renewals of Timber License No. 35-36 were secured in favor of the First
Partnership, the original licensee. To all intents and purposes therefore,
the First Articles of Partnership were only amended, in the form of
Supplementary Articles of Co-Partnership . . . which was never registered
. . . . Otherwise stated, even during the existence of the second
partnership, all business transactions were carried out under the duly
registered articles. As found by the trial court, it is an admitted fact that
even up to now, there are still subsisting obligations and contracts of the
latter . . . . No rights and obligations accrued in the name of the second
partnership except in favor of Pahamotang which was fully paid by the
duly registered partnership. . . . (at pp. 117-118;underscoring supplied).
The Court declared the partnership to be one at will, under the terms of
the registered articles of co-partnership, and ruled that the sharing
scheme between Maglana and Rojas on the profits and loses of the
venture would have to comply with that stipulated in the registered
articles of co-partnership: “And in whatever way he may view the
situation, the conclusion is inevitable that Rojas and Maglana shall be
guided in the liquidation of the partnership by the provisions of its duly
registered Articles of Co-Partnership; that is, all profits and losses of the
partnership shall be divided “share and share alike” between the partners.
(at p. 119) x x x Consequently, except as to the legal relationship of the
partners after the withdrawal of Pahamatong which is unquestionably a
continuation of the duly registered partnership and the sharing of profits
and losses which should be on the basis of share and share alike as
provided for in the duly registered Articles of Co-Partnership, no plausible
reason could be found to disturb the findings and conclusions of the trial
court.” (at p. 119; underscoring supplied).
In Rojas, the Court refers to a partnership arrangement that is not
covered by duly registered articles of co-partnership as a “de
factopartnership;” the implication is that when a partnership has complied
with the formalities and registration required under Articles 1771 and
1772, it would properly be termed as a “de jure partnership.” The lesson
that can be drawn from Rojas is that compliance with the formal
requirements mandated under the Law on Partnerships indeed has a very
useful legal purpose: the duly registered articles of co-partnership shall
serve to bind the partners as to their contractual intent, and the default
rules provided for under the Law on Partnerships in the Civil Code cannot
apply to overcome the provisions of the articles of co-partnership that is
duly registered with the SEC, except by another instrument that seeks to
amend or modify the same and duly registered also with the SEC.
2. When Immovable Property Contributed
_____
Art. 1771. A partnership may be constituted in any form, except
where immovable property or real rights are contributed thereto,
in which case a public instrument shall be necessary. (1667a)
Art. 1773. A contract of partnership is void, whenever immovable
property is contributed thereto, if an inventory of said property is
not made, signed by the parties, and attached to the public
instrument. (1668a)
_____
a. Importance of Immovable Property in the Partnership Scheme
 75
The importance that the law places upon immovable properties which
constitute part of the assets of the partnership is not only shown by the
formal requirements mandated under Article 1773 of the Civil Code, which
requires the execution of the inventory covering such properties to be
attached to the public instrument (i.e., the articles of incorporation) that
should be registered with the SEC, but also by what seems to be a
superfluous Article 1774 of the Civil Code which reiterates the obvious
legal capacity of a partnership to own properties as a juridical person,
where it provides that “Any immovable property or an interest therein
may be acquired in the partnership name. Title so acquired can be
conveyed only in the partnership name.”
Then also, we have the long provisions of Article 1819 of the Civil Code,
which detail all the scenarios under which real property owned by the
partnership may be legally dealt with, under various circumstances where
title is not registered in the name of the partnership.
b. When Immovable Property Deemed Contributed
Agad v. Mabato, 23 SCRA 1223 (1968), reminds us that it is not the
purpose clause of the articles of partnership or the designated business to
be engaged in, that determine whether there should be deemed
contributed immovable properties to the venture to trigger the application
of Article 1773 of the Civil Code. The Court held in Agad that since the
articles of partnership indicated that the partners were going to contribute
cash into the venture, then the fact that the partnership was expressly
organized “to operate fishpond,” did not necessarily mean that either a
fishpond or a real right to any fishpond was contributed into the venture.
The ruling would also support the position that just because the
partnership venture owns or operates immovables does not mean it
comes into the operation of Article 1773, as when such immovables were
not contributed by the partners but were purchased during the operations
of the partnership business.
c. Rationale Behind the Formal Requirements under Article 1773
It is when immovable property is contributed into the capital of the
partnership that the twin requirements of public document and SEC
registration come into play together with the requirement of an inventory
to be prepared, because under Article 1773 it is provided that “A contract
of partnership is void, whenever immovable property is contributed
thereto, if an inventory of said property is not made, signed by the
parties, and attached to the public instrument.”
Does the declaration of nullity of the partnership under Article 1773 for
failure to comply with the formalities therein refer to the intra-partnership
relations of the partners among themselves and the partnership, or to the
extra-partnership relationship with the creditors, or to both? The decision
in Torres v. Court of Appeals, 320 SCRA 428 (1999), should be instructive
in answering these issues.
In Torres, a “Joint Venture Agreement” was executed among the co-
venturers covering the terms for the development of a subdivision
project, the contributions of the co-venturers and the manner of
distribution of the profits. Specifically, the agreement required from the
capitalist partners to contribute the parcels of land upon which the project
was to be developed. No articles of partnership was registered with the
SEC, much less was the requisite inventory mandated under Article 1773
of the Civil Code executed and attached to the public document. In ruling
against the contention of the capitalist partners that the partnership was
void, the Court held –
 76
. . . First, Article 1773 was intended primarily to protect third persons.
Thus, the eminent Arturo M. Tolentino states that under the aforecited
provision which is a complement of Article 1771, “the execution of a
public instrument would be useless if there is no inventory of the property
contributed, because without its designation and description in the
Registry of Property, and their contribution cannot prejudice third
persons. This will result in fraud to those who contract with the
partnership in the belief [in] the efficacy of the guaranty in which the
immovables may consist. Thus, the contract is declared void by law when
such inventory is made. The case at bar does not involve third parties
who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis
for their claim that respondent should pay them 60 percent of the value of
the property. They cannot in one breath deny the contract and in another
recognize it, depending on what momentarily suits their purpose. Parties
cannot adopt inconsistent positions in regard to a contract and courts not
tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from
considering the Joint Venture Agreement an ordinary contract from which
the parties’ rights and obligations to each other may be inferred and
enforced. (Ibid, at p. 438).
It is clear from Torres that the formalities mandated under Article 1773
are meant for the protection of the partnership creditors, and that the
declaration that the “partnership is void” does not affect the intra-
partnership relationship between and among the partners and between
the partners and the partnership itself. Thus, Torres held that the “alleged
nullity of the partnership will not prevent courts from considering the Joint
Venture Agreement [or any contract of partnership] an ordinary contract
from which the parties’ rights and obligations may be inferred and
enforced.” Therefore, from the intra-partnership point of view, there are
dire consequences that befall the partners and the partnership for failing
to comply with the formalities mandated under Article 1773 of the Civil
Code.
If we follow therefore the Torres reasoning that the formalities mandated
under Article 1773 are meant to protect partnership creditors, and every
third person who deals with the partnership, I do not see how the
imposition of the rule “partnership is void,” could be beneficial or
protective of the rights of partnership creditors, for the following reasons:
Firstly, the declaration of nullity of the partnership cannot be ascribed to
the extra-partnership relationship between the partners and partnership
on one hand, and the partnership creditors on the other hand, for to do
so would adversely affect the contractual rights and standing of the
creditors vis-a-vis the partners on their unlimited liability rule and the
partnership, which must be deemed to exist to protect the integrity of the
contracts entered in its name.
Secondly, declaring the partnership void means that all contributed and
earned assets of the partnership pertain to the partners directly as co-
owners, since no contract of partnership exist between them (it is void
and inexistent), and no partnership person has arisen with a juridical
personality separate and distinct from each of the partners. Not only does
this scenario affect the integrity of the contracts entered into directly with
the partnership, but it also means that the contributed and earned
partnership assets pertain directly to the persons of the partners and
priority as to them pertains to their separate creditors and not to the
partnership creditors.
 77
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 author’s position, as a result of resolving this issue in class
discussions, is that contrary to the Torres ruling, the formalities under
Article 1773 should be understood as to create adverse consequences for
the partners who refuse to comply with the requirements vis-a-vis their
relationship with partnership creditors. When the partners fail to comply
with the formalities under Article 1773, it ought to mean that they cannot
avail of any advantage that the partnership medium affords them. The
primary advantage that the partners have under ade jure partnership
setting is that their personal liability to partnership creditors for assets
that have not been contributed to the firm is only joint and subsidiary,
since they have the benefit of excussion.
Consequently, when partners do not comply with the formalities under
Article 1773, the “partnership is void” in the sense that the partners were
deemed to be acting for themselves when they entered into partnership
contracts and transactions; and that, similar to the principle in Agency
Law that makes the agent primarily liable for contracts entered into in
behalf of an inexistent principal, then partners can be held directly liable
by partnership creditors for all contracts entered into, and all obligations
assumed, in the name of a partnership which is declared void.
The landscape has become more complicated with the recent ruling
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 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
 78
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 petitioner’s contribution, if any, to the supposed
partnership. (at p. 585; italics supplied)
It is clear from the afore-quoted passage that Litonjua considers are
binding and effective to purely intra-partnership issues the mandatory
provisions of Article 1771 and 1773 of the Civil Code that requires that
even when there is no issue that the meeting of the minds involves the
formation of a partnership (i.e., the typewritten note “doubtless referring
to a partnership involving more than P3,000.00 in money or property”)
then the requirement that it contract be cast in a public instrument and
registered with the SEC were deemed to be essential to sustain a claim
that a contract of partnership exist between the parties, otherwise the
purported contract is deemed to beunenforceable.
The doctrine that failure to comply with the public instrument and SEC-
registration requirements under Article 1772 of the Civil Code renders the
contract of partnership as unenforceable can be deduced from the
following portion of the Litonjua decision which relied on provision of the
Statute of Frauds, thus:
It is at once apparent that what respondent Eduardo imposed upon
himself under the above passage, if he indeed wrote Annex “A-1,” is a
promise which is not to be performed within one year from “contract”
execution on June 22, 1973. Accordingly, the agreemend embodied in
Annex “A-1” is covered by the Statute of Frauds and ergounenforceable
for non-compliance therewith. By force of the statute of frauds, an
agreement that by its terms is not to be performed within a year from the
making thereof shall be unenforceable by action, unless the same, or
some note or memorandum thereof, be in writing and subscribed by the
party charged. Corollarily, no action can be proved unless the requirement
exacted by the statute of frauds is complied with. (at p. 590)
Unfortunately, the Court failed to consider the fact that even under the
Statute of Frauds, the “unenforceability” of covered contracts is lifted the
moment there is partial or full execution of the terms of the contract.
Thus, in the future it can be anticipated that the rule of partial execution,
(i.e., the actual contribution made to the partnership, the pursuit of the
business enterprise, etc.), would make mitigate against the deleterious
effect of non-compliance with the public instrument and SEC-registration
requirement under Article 1771 and 1772 of the Civil Code.
In any event, what rendered the purported contract of partnership void
in Litonjua was that since the note indicated that there would be
contributed real property to the partnership, then there was failure to
comply with the requirements laid down in Article 1773 of the Civil Code,
for the rendering of the proper inventory and attaching it to the public
instrument registered with the SEC, thus:
Lest it be overlooked, the contract-validating inventory requirement under
Article 1773 of the Civil Code applies as long [as] real property or real
rights are initially brought into the partnership. In short, it is really of no
moment which of the partners, or, in this case, who between petitioner
and his brother Eduardo, contributed immovables. In context, the more
important consideration is that real property was contributed, in which
case an inventory of the contributed property duly signed by the parties
should be attached to the public instrument, else there is legally no
partnership to speak of. (at p. 586).
Litonjua therefore gives the “dire consequences” faced by partners who
do not comply with the formal requirements mandated under Articles
 79
1771 to 1773 of the Civil Code. It would have been better ifLitonjua had between the Litonjua sibling even on the basis of the arrangement
expressly set aside its rulings in Torres and Angeles, so that its doctrine purported, since it lacked the essential element of “contributing to a
would have been the clear guide to legal practitioners. For the author, it common fund.” Thus, the rulings on the failure to comply with the
must be stated that the rulings in Torres and Angeleswhich have their provisions of Article 1771 to 1773 of the Civil Code ought to be considered
basis from jurisprudence under the old Civil Code and the Code of as obiter dictum.
Commerce, will continue to prevail; and that the Litonjuadoctrine of
rendering the contract of partnership void for failure to comply with the c. Historical Background of Article 1773
requirements under Article 1773 of the Civil Code, applicable only to
Ruling under the provisions of the Code of Commerce and the old Civil
situations where the claimant that a contract of partnership has been duly
Code which prescribed formalities for the formation of a partnership
constituted relies only upon a note or instrument, and does not have
where real property is contributed, the Court held in Borja v. Addison, 44
other evidence to prove that indeed a contract of partnership has been
Phil. 895 (1922), that “knowledge of the existence of the new partnership
constituted, such as his exercise with the tolerance of the other partners,
or community of property must, at least, be brought home to third
of acts of ownership, demanding for an accounting, participation in the
persons dealing with the surviving husband in regard to community real
profit, etc. Indeed, in Litonjua the best evidence presented by the
property in order to bind them by the community agreement.” (at p. 907)
younger brother to prove a contract of partnership has been constituted
Consequently, third parties without knowledge of the existence of the
was the unsigned typewritten note, and he failed to prove the essential
partnership who deal with the property still registered in the name of one
elements of the contract of partnership, as observed by the Court, thus:
of the partners have a right to expect full effectivity of such transaction
Lest it be overlooked, petitioner is the intended beneficiary of the P1 on the property, in spite of the protestation of the other partners and
Million or 10% equity of the family businesses supposedly promised by perhaps even the partnership creditors.
Eduardo to give in the near future. Any suggestion that the stated amount
d. Registration Requirements under Article 1773 Should Be
or the equity component of the promise was intended to go to a common
Considered in Connection with the Priority Rules Set for Claims of
fund would be to read something not written in Annex “A-1.” Thus, even
Partnership Creditors and the Separate Debtors of the Partners
this angle alone argues against the very idea of a partnership, the
creation of which requires two or more contracting minds mutually
Failure to comply with the inventory and public documents requirements
agreeing to contribute money, property or industry to a common fund
may, however, adversely affect the rights of the partners, the partnership
with the intention of dividing the profits between or among themselves.”
and the partnership creditors, when it comes to the binding effect of
(at pp. 590-591; italics supplied).
transactions relating to real estate and other immovables where the
controlling doctrine is that such transactions do not bind the public unless
Perhaps the afore-quoted passage is the best way to appreciate the
they are found in a public document, and duly registered.
decision in Litonjua, that in the end no contract of partnership arose
 80
Thus, in Secuya v. Vda. de Selma, 326 SCRA 244 (2000), the Court held
that while the sale of land appearing in a private deed is binding between
the parties, it cannot be considered binding on third persons if it is not
embodied in a public instrument and recorded in the Registry of Deeds.
When it comes to contributions of real estate to a partnership, especially
when it covers registered land, then the peremptory provisions of the
Property Registration Decree (Pres. Decree No. 1459) will prevail as to
who has a better claim, right or lien on the property, since “registration in
good faith and for value,” is the operative rule under the Torrens system.
The proper registration of real property contributed into the partnership
would have much to do with the priority rules set under the Law on
Partnerships between claims of partnership creditors and those of the
separate creditors of the each of the partners.
Under Article 1839(8), “When partnership property and the individual
properties of the partners are in possession of a court for distribution,
partnership creditors shall have priority on partnership property and
separate creditors on individual property, saving the rights of lien or
secured creditors.”
Again, under Article 1839(9), “Where a partner has become insolvent or
his estate is insolvent, the claims against his separate property shall rank
in the following order:
“(a) Those owing to separate creditors;
“(b) Those owing to partnership creditors;
“(c) Those owing to partners by way of contribution. (n)”
Since Torres specifically held that the rules of inventory, public instrument
and SEC registration under Articles 1772 and 1773 of the Civil Code are
meant to protect partnership creditors, and as to them the partnership
contract is void, if it is necessary to protect their interests, what happens
then to real property contributions that have not complied with the
statutory formalities, would first priority towards them pertain to the
separate creditors of the contributing partner?
3. The Partnership Name
Article 1815 of the Civil Code provides that –
________
Art. 1815. Every partnership shall operate under a firm name,
which may or may not include the name of one or more of the
partners.
Those who, not being members of the partnership, include their
names in the firm name, shall be subject to the liability of a
partner. (n)
________
The language of Article 1815 of the Civil Code shows unmistakably that its
not an obligation of the partners to include their names in the partnership
name; but that if an individual includes his name in the firm name, then
he becomes bound to third parties who rely thereon to the same liabilities
as the partners in the partnership.
Article 1815 is the first article under the section which reads “Obligations
of the Partners with Regard to Third Persons,” which indicates clearly the
 81
essence of having a firm name: that since a partnership is given a
separate juridical personality which allows it to deal with legal capacity
and enter into contracts with the public, then it must adopt a firm name
by which it can be identified as the party to a contract.
a. Historical Basis of Article 1815
Although the codal provision indicates that it is a new [“(n)”] provision in
the Civil Code, according to Tolentino, Article 1815 was taken from Article
126 of the Code of Commerce (TOLENTINO, at p. 353). Yet the principle
on partnership name under Article 126 was quite different, for it actually
required that the partnership name should be registered containing all the
names of the partners. (Article 126, Code of Commerce).
In Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923), the
Court held that the object of Article 126 in requiring a general partnership
to transact business under the name of all its members, of several of
them, or of one only, was to protect the public from imposition and fraud;
and that Article 126 was for the protection of the creditors rather than of
the partners themselves. Jo Chung Cang held that the legal requirement
as to firm name must be construed as rendering contracts made in
violation thereof unlawful and unenforceable only as between the partners
and at the instance of the violating party, but not in the sense of
depriving innocent parties of their rights who may have dealt with the
offenders in ignorance of the latter having violated the law; and that
contracts entered into by commercial associations defectively organized
are valid when voluntarily executed by the parties, and the only question
was whether or not they complied with the agreement. It essence Jo
Chung Cang ruled that partners cannot avoid the consequences of a
partnership contract entered into by invoking in their defense the anomaly
in the firm name which they themselves adopted. The ruling was
reiterated in Philippine National Bank v. Lo, 50 Phil. 802 (1927).
The earlier decision in Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498
(1906), held that failure to register a commercial partnership would mean
that there is no partnership constituted and that the rule applicable to
protect parties who have dealt in good faith with the enterprise was the
application of Article 120 of the Code of Commerce, that the right of
action would be against the person in charge of the management of the
association.
Jo Chung Cang refused to apply the ruling in Hung-Man-Yoc because
there was actual registration of the partnership, and consequently
decreed that a general partnership had been constituted as to make the
partners thereof solidarily liable for partnership debt in the event the
partnership itself becomes insolvent. Although failure to comply with the
mandatory registration provisions of the Code of Commerce did not affect
the cause of action of creditors to enforce their contracts against the
partnership, did it mean then that as a consequence, if it were the
partners and partnership seeking to enforce such contracts, they would be
barred from doing so as a consequence of their failure to comply with the
registration requirements under the law? No categorical ruling was made
on this issue in Jo Chung Cang although it did quote a ruling from the
Supreme Court of Michigan on the common law rule:
As this acts involves purely business transactions, and affects only money
interests, we think it should be construed as rendering contracts made in
violation of it unlawful and unenforceable at the instance of the offending
party only, but not as designed to take away the rights of innocent parties
who may have dealt with the offenders in ignorance of their having
violated the statute. (Ibid, at pp. 154-155, citing Cashing v. Pliter 168
 82
Mich 386; Ann. Cas. [1913-C], 67 [1912]; underscoring supplied by
author)
To prevent such members of a commercial partnership from recovering on
the contracts entered into on the ground that there was no valid
registration or that it did not comply with the rule on firm name would
constitute unjust enrichment. Eventually, the Court applied in Compañia
Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the principles of
corporation by estoppel doctrine (Section 21, Corporation Code), even as
to unregistered partnerships, thus:
Persons who assume to form a corporation or business association, and
exercise corporate functions, and enter into business relations with third
persons, are estopped from denying that they constitute a corporation. So
also are the third persons who deal with such a de facto association or
corporation, recognizing it as such and thereby incurring liabilities,
estopped, when an action is brought on such obligations, from denying
the juristic personality of such corporations or associations. (Ibid, at p.
12).
xxx.
Where a shareholder of an association is called upon to respond to a
liability as such, and where a party has contracted with a corporation and
is sued upon the contract, neither is permitted to deny the existence or
the legal validity of such corporation. To hold otherwise would be contrary
to the plainest principles of reason and good faith. Parties must take the
consequences of the position they assume. (Ibid, at p. 13).
The question in the Jo Chung Cang, PNB and Compania Agricola rulings
was that if the provisions of Article 126 of the Code of Commerce were
mandatory in the sense that they were addressed to the partners and
partnership more for the protection of partnership creditors, and non-
compliance therewith could not prejudice creditors, then what would be
their usefulness if no adverse consequence visits the partners and the
partnership whenever they are not complied with?
There is no doubt that there were serious difficulties with enforcing the
mandatory provisions on registration and firm name for commercial
partnerships under the Code of Commerce. The present rule under Article
1815 of the Civil Code which essentially allows the partners and the
partnership to adopt any firm name they fancy is a more market-friendly
rule since:
(a) one who opts to have his name included in the firm name runs to
risk of being made liable for partnership debts;
(b) the articles of partnership, when registered provides anyway for the
listing of the partners of the partnership enterprise; and
(c) more importantly, the arising of the separate juridical personality of
the partnership comes with the perfection of the contract of partnership,
and not with registration thereof.
4. Registration Given Little Use in Partnership Law
The essence of what constitutes a partnership contract is split into two
levels in Philippine Partnership Law:
(a) As between and among the partners, it is the point of
perfection, when two or more parties have come to a meeting of minds
to constitute a common fund and the distribution of profits and losses
among themselves; and
 83
(b) In relation to third parties who deal with a business clear injunction of the statutory provisions and the laying down of the
enterprise, when a representation has been made that they are consequences of failure to comply with the requisites forms of public
dealing with a partnership, or are dealing with a partner to document and inventory of the contributed immovable, the Court has
a partnership enterprise. always ruled that such requirements are meant for the protection of third
parties who deal with the partnership, and consequently, when no third
a. Intra-Partnership Relationship 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
Within the intra-partnership relationship, the main doctrine that applies is
any advantage or so avoid the liability consequences of being a partner in
that unless there is a meeting of minds as to the elements of common
a partnership.
fund and distribution of profits, then there can be no contract of
partnership between the parties involved. On the other hand, once there In the same manner, under Article 1772 of the Civil Code, “Every contract
is such a meeting of minds, the partnership contract arises, and needs no of partnership having a capital of three thousand pesos or more, in money
particular form in order to be valid, binding and enforceable. Thus, Article or property, shall appear in a public instrument, which must be recorded
1784 provides that “A partnership begins from the moment of the in the Office of the Securities and Exchange Commission.” Not only does
execution of the contract, unless it is otherwise stipulated.” The Article 1772 declare the clearly non-lethal consequence of failure to
partnership agreement may be proved by competent evidence, whether comply with the public instrument and SEC registration requirements:
written or oral, or from the acts and actuations of the parties. So strong is “Failure to comply with the requirements of the preceding paragraph shall
the “consensual” nature of the contract of partnership that the failure to not affect the liability of the partnership and the members thereof to third
comply with the formal requirement of inventory of immovable persons,” but the Court has consistently declared that the purpose of
contributed, public instrument and registration with the SEC, brings no Article 1772 is merely to allow a partner in an oral partnership to have a
deleterious effect on the partnership itself, and between and among the cause of action to have the partnership constituted in a manner that
partners. We shall illustrate this point. allows its terms and conditions be made known to the public through a
public instrument and registration with the SEC.
Under Article 1771 of the Civil Code, although it recognizes the general
principal that “A partnership may be constituted in any form,” yet it Failure to comply with the requirements under Article 1772 may also be
provides expressly that “where immovable property or real rights are basis for the SEC to refuse to give supportive aid to partners who have
contributed thereto, in which case a public instrument shall be not registered their agreement with the SEC.
necessary.” This is followed up in Article 1773 which provides that “A
contract of partnership is void, whenever immovable property is b. Dealings with Third Parties
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
 84
There are basically two areas that are important to consider when it
comes to partnership dealings with third parties:
(a) The validity and enforceability of contracts entered into with
a purported partner of an existing partnership or with
purported partnership that has not been legally constituted; and
(b) The standing of partnership creditors to enforce partnership liability
personally against the partners.
The general principle in Partnership Law is that a member of the public
who deals in good faith with a purported partner or purported partnership
in the ordinary course of business of such partnership, has a right to
expect that his contract can be enforced, and intra-partnership and
technical issues pertaining to the partnership or on the distribution of
power and authority between the partners cannot generally be raised
against such third party to undermine the enforceability of his contractual
dealings with the corporation.
Various statutory provisions in the Partnership Law of the Civil Code,
support this doctrine of reliance by third parties dealing in good faith with
the purported partner or purported partnership, thus:
(a) Under Article 1815, “Those who, not being members of the
partnership, include their names in the firm name, shall be subject to the
liability of partner.”
(b) Under Article 1818, “Every partner is an agent of the partnership for
the purpose of its business, and the act of every partner, including the
execution in the partnership name of any instrument, for apparently
carrying on in the usual way the business of the partnership . . . binds the
partnership, unless the partner so acting has in fact no authority to act for
the partnership in the particular manner, and the person with whom he is
dealing with has knowledge of the fact that he has no such authority;”
(c) Under Article 1834, partnership creditors who extend credit to the
partnership even after there has been dissolution can can claim payment
thereof against all the partners, when such creditors have “no
knowledge or notice of the dissolution.”
In fact, even when a partnership has been duly registered with the SEC,
the doctrine of the Supreme Court seems clear that third parties who deal
with the partnership are not bound by the terms of the registered articles
of partnership, and unless they have actual knowledge thereof, they have
a right to rely upon what is the normal right and authority of every
partner to generally bind the partnership and the other partners.
Thus, Litton v. Hill & Ceron, 67 Phil. 509 (1939), laid down the rule that –
Third persons . . . are not bound in entering into a contract with any of
the two partners, to ascertain whether or not this partner with whom the
transaction is made has the consent of the other partner. The public need
not make inquiries as to the agreements had between the partners. Its
knowledge is enough that it is contracting with the partnership which is
represented by one of the managing partners. (Ibid, at p. 513).
This ruling was reiterated in Goquiolay v. Sycip, 108 Phil. 947 (1960),
which held that the statutory rule on how management power is
distributed or exercised within the partnership, and the consequences of
failure to comply with such statutory rule is “an obligation that is imposed
by law on the partners among themselves, that does not necessarily
affect the validity of the acts of a partner, while acting within the scope of
the ordinary course of business of the partnership, as regards third
persons without notice. The latter may rightfully assume that the
 85
contracting partner was duly authorized to contract for and in behalf of
the firm and that, furthermore, he would not ordinarily act to the
prejudice of his co-partners. The regular course of business procedure
does not require that each time a third person contracts with one of the
managing partners, he should inquire as to the latter’s authority to do so,
or that he should first ascertaining whether or not the other partners has
given their consent thereto.” (Ibid, at p. 957).
The reason why the general rule in Agency Law that one dealing with an
agent must ascertain the extent of the power of the agent does not
normally apply with the same effect in Partnership Law was also explained
in Goquiolay in the following manner: “It is argued that the authority
given by Goquiolay to the widow Kong Chai Pin was only to manage the
property, and that it did not include the power to alienate . . . What this
argument overlooks is that the widow was not a mere agent, because she
had become a partner upon her husband’s death, as expressly provided
by the articles of co-partnership.” (Ibid, at p. 965). Being therefore a
partner, the general rule of Partnership Law, every partner had the power
to dispose of partnership property even of its real estate, which is in the
normal course of the partnership business of dealing with real property:
“where the avowed purpose of the partnership is to buy and sell real
estate (as in the present case), the immovables thus acquired by the firm
form part of the its stock-in-trade, and the sale thereof is in pursuance of
partnership purposes, hence within the ordinary powers of the partner.”
(Ibid, at p. 969).
c. What Is the Value of the Statutory Requirements on Form and
Registration?
If non-compliance with the formal and registration requirements under
Partnership Law of the Civil Code does not render the partnership void,
nor does it undermine the enforceability of contracts entered into in the
partnership name, and does not generally impose legal consequences on
the partners for non-compliance, then what is the usefulness of such
statutory provisions?
The answer had been addressed early in our jurisdiction in Thunga Chui v.
Que Bentec, 2 Phil. 561 (1903), which applied Article 1279 of the old Civil
Code, now found as Article 1357 of the new Civil Code, which reads:
If the law requires a document or other special form, as in the acts and
contracts enumerated in the following articles, the contracting parties
may compel each other to observe that form, once the contract has been
perfected. This right may be exercised simultaneously with the action
upon the contract.
In Thunga Chui, the Court held –
Article 1279 [now Article 1356] does not impose an obligation, but
confers a privilege upon both contracting parties, and the fact that
plaintiff has not made use of same does not bar his action. x x x . Article
1279 [now Article 1356], far from making the enforceability of the
contract dependent upon any special extrinsic form, recognizes its
enforceability by the mere act of granting to the contracting parties an
adequate remedy whereby to compel the execution of a public writing, or
any other special form, whenever such form is necessary in order that the
contract may produce the effect which is desired, according to whatever
may be its object. (Ibid, at pp. 563-564).
Not only is the general rule under Partnership Law jurisprudence that
partnership creditors do not have an obligation to verify the authority of a
purported partner acting in the ordinary course of partnership business,
nor to review the registration papers of the partnership, the rule is that
 86
any important changes in partnership relationship must be brought to the
knowledge of the partnership creditors in order to be binding on the
latter.

Thus, in Singson v. Isabela Sawmill, 88 SCRA 623 (1979), the Court held
that the failure of a partner to have published her withdrawal from the
partnership, and her agreeing to have the remaining partners proceed
with running the partnership business instead of insisting on the
liquidation of the partnership, will not relieve such withdrawing partner
from her liability to the partnership creditors. The Court held that even if
the withdrawing partner acted in good faith, this cannot overcome the
position of partnership creditors who also acted in good faith, without
knowledge of her withdrawal from the partnership. In
particular, Singson ruled that when the partnership executes a chattel
mortgage over its properties in favor of a withdrawing partner, and the
withdrawal was not published to bind the partnership creditors, and in fact
the partnership itself was not dissolved but allowed to be operated as a
going concern by the remaining partners, the partnership creditors have
standing to seek the annulment of the chattel mortgage for having been
entered into adverse to their interests.

—oOo—
 87
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 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. Partner’s Right to Manage the Partnership
a. General Rule on Partnership Management
Article 1818 of the Civil Code provides that “Every partner is an agent of
the partnership for the purpose of its 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
 88
partnership in the usual way does not bind the partnership unless
authorized by the other partners.”
Embodied clearly with the language of Article 1818 is the “doctrine of
apparent authority” which allows a third party dealing with a juridical
entity to rely upon the validity and enforceable of contracts entered into
with an officer or representative who has been by practice endowed with
apparent authority to act for the juridical person. In every partnership,
there is a presumption of apparent authority for every partner to act for
and thereby bind the partnership in all that is “apparently for the carrying
on of the business of the partnership in the usual way.” Thus, the
Court held in Munasque v. Court of Appeals, 139 SCRA 533 (1985), that a
presumption exists that each partner is an authorized agent for the firm
and that he has authority to bind it in carrying on the partnership
transaction.
We should therefore consider the old ruling in Council of Red Men v.
Veterans Army, 7 Phil. 685 (1907), where the Court interpreted the
original provision of Article 1803 of the Civil Code (then Article 1695 of
the old Civil Code), that allowed one partner to act to bind the
partnership, to apply only when there has been no provision at all in the
articles of partnership on the exercise of power or management, thus:
One partner, therefore, is empowered to contract in the name of the
partnership only when the articles of partnership make no provision for
the management of the partnership business. In the case at bar we think
that the articles of the Veteran Army of the Philippines do so provide. It is
true that an express disposition to that effect is not found therein, but we
think one may be fairly deduced from the contents of those articles. They
declare what the duties of the several officers are. In these various
provisions there is nothing said about the power of making contracts, and
that faculty is not expressly given to any officer. We think that it was,
therefore, reserved to the department as a whole; that is, that in any
case not covered expressly by the rules prescribing the duties of the
officers, the department were present. It is hardly conceivable that the
members who formed this organization should have had the intention of
giving to any one of the sixteen or more persons who composed the
department the power to make any contract relating to the society which
that particular officer saw fit to make, or that a contract when so made
without consultation with, or knowledge of the other members of the
department should bind it. We therefore, hold that no contract, such as
the one in question, is binding on the Veteran Army of the Philippines
unless it was authorized at a meeting of the department. No evidence was
offered to show that the department had never taken any such action. In
fact, the proof shows that the transaction in question was entirely
between Apache Tribe, No. 1, and the Lawton Post, and there is nothing
to show that any member of the department ever knew anything about it,
or had anything to do with it. The liability of the Lawton Post is not
presented in this appeal. (7 Phil. 685, at pp. 688-689).
We are of the strong position that the doctrine in Council of Red
Men,rendered at a time when our legal jurisdiction was still deciding the
proper formulation of the doctrines in Philippine Partnership Law, no
longer applies.
Firstly, the prevailing doctrine now embodied in Articles 1803[1] and 1818
of the Civil Code is that every partner has the apparent authority to act
for and in behalf of the partnership in carrying on the ordinary or usual
business of the partnership.
Secondly, the ruling in Council of Red Men was based on the principal that
the special rules of management of partnership affairs provided for in the
 89
articles of partnership is binding on the public, or at least on every person
dealing with the partnership. This is not the rule under Philippine
Partnership Law which characterizes the contract of partnership and the
arising of the partnership juridical person, as being merely consensual
with no specific formalities being required in general. Thus, even when
the articles of partnership has been formally executed and registered with
the SEC, the same is not considered to be a public document binding on
the public. Therefore, notwithstanding what specific provisions may be
found in the articles of partnership on the management of the partnership
business, the same is binding inter se among the partners, but does not
prejudice the rights of a third party who deals in good faith with the
partners without actual knowledge of the content of the articles of
partnership.
Although special management arrangements may be made among
partners, and even when so formalized within the terms of the articles of
partnership, generally such special arrangements do not bind or prejudice
third parties who deal with the partnership business without knowledge of
such special arrangement, and who are not mandated to seek formal
authority and that in fact are deemed to have a right to expect, unless
otherwise indicated, that their dealings with the managing partner should
bind the partnership.
This situation is best exemplified in the decision in Litton v. Hill & Ceron,
67 Phil. 509 (1935), where an obligation in a sum of money was sought to
be recovered from the partnership Hill & Ceron in whose name it was
entered into by one of the managing partners, when in fact the articles of
partnership provided expressly that: “Sixth. That the management of the
business affairs of the copartnership shall be entrusted to both copartners
who shall jointly administer the business affairs, transactions and
activities of the copartnership.” In ruling that the act of just one of the
managing partners should properly make the partnership liable for the
payment of the debt, the Court held –
It follows from the sixth paragraph of the articles partnership of Hill &
Ceron above quoted that the management of the business of the
partnership has been entrusted to both partners thereof, but we dissent
from the view of the Court of Appeals that for one of the partners to bind
the partnership the consent of the other is necessary. Third persons, like
the plaintiff, are not bound in entering into a contract with any of the two
partners, to ascertain whether or not this partner with whom the
transaction is made has the consent of the other partner. The public need
not make inquiries as to the agreements had between the partners. Its
knowledge is enough that it is contracting with the partnership which is
represented by one of the managing partners. (Ibid, at p. 513).
Litton held that there is a general presumption that each individual
partner is an authorized agent for the firm and that he has authority to
bind the firm in carrying on the partnership transaction, and that the
presumption is sufficient to permit third persons to hold the firm liable on
transactions entered into by one of the members of the firm acting
apparently in its behalf and within the scope of his authority. This was
especially true under the circumstances in Litton where the transaction
which gave rise to the partnership obligation was in the ordinary course of
the partnership’s business.
Litton also supports the legal position that even with the registrations of
the article of partnership with the SEC, the same does not constitute a
public document that binds those who deal with the partnership
enterprise. In other words, even a registered articles of partnership
constitutes first and foremost a intra-partnership document that is binding
upon the partners, and a third party acting in good faith without actual
 90
knowledge of the contents thereof is not bound by the terms of the
articles of partnerships.
In Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941), the Court held that in
a transaction covering the purchase and delivery of merchandise within
the ordinary course of the partnership business effected by the industrial
partner without the consent of the capitalist partner, the provisions in the
articles of partnership that the industrial partner “shall manage, operate
and direct the affairs, businesses and activities of the partnership,”
constitute sufficient authority to make such transaction binding against
the partnership, as against another provision of the articles by which the
industrial partner is authorized “To make, sign, seal, execute and deliver
contracts . . upon terms and conditions acceptable to him duly approved
in writing by the capitalist partner,” which must cover only the execution
of formal contracts in writing and not necessarily to routine transactions
such as ordinary purchases and sale of merchandise.
In addition, Aznar applied the “doctrine of apparent authority” and the
“estoppel doctrine” when it held that “The evidence also shows that
previous purchases made by [the industrial partner] in the name of the
Aznar & Company from the same plaintiff were honored and paid for by
the said firm, and we may well also assume that the goods herein in
question which were delivered to defendant firm were made use of by the
latter. It is, therefore, but just that the firm answer for their value.” (at p.
*).
In Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court even took into
consideration the provisions of Article 129 of the Code of Commerce to
the effect that “If the management of the general partnership has not
been limited by special agreement to any of the members, all shall have
the power to take part in the direction and management of the common
business, and the members present shall come to an agreement for all
contracts or obligations which may concern the association.” It laid down
the rule that is relevant under the current provisions of the Civil Code that
defines the necessity of concurrence of partners’ vote on any partnership
act or contract, thus:
but this obligation is one imposed by law on the partners among
themselves, that does not necessarily affect the validity of the acts of a
partner, while acting within the scope of the ordinary course of business
of the partnership, as regards third persons without notice. The latter may
rightfully assume that the contracting partner was duly authorized to
contract for and in behalf of the firm and that, furthermore, he would not
ordinarily act to the prejudice of his co- partners. The regular course of
business procedure does not require that each time a third person
contracts with one of the managing partners, he should inquire as to the
latter’s authority to do so, or that he should first ascertain whether or not
the other partners had given their consent thereto. In fact, Article 130 of
the same Code of Commerce provides that even if a new obligation was
contracted against the express will of one of the managing partners, “it
shall not be annulled for such reason, and it shall produce its effects
without prejudice to the responsibility of the member or members who
contracted it, for the damages they may have caused to the common
fund.” (Ibid, at p. 957)
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;
 91
(b) Article 1821, which provides that notice to any partner of any (a) Assigning of partnership property in trust for creditors or on
matter relating to partnership affairs, and the knowledge of partner acting the assignee’s promise to pay the debts of the partnership;
in the particular matter, acquired while a partner or then present to his
mind, and the knowledge of any other partner who reasonably could (b) Disposition of the goodwill of the business;
and should have communicated it to the acting partner, operate as notice
(c) Confession of a judgment;
or knowledge of the partnership (except in case of a fraud on
the partnership);
(d) Entering into a compromise concerning a partnership claim or
liability;
(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
(e) Submitting a partnership claim or liability to arbitration; or
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
(f) Renouncing a partnership claim.
the partnership liable therefore; and
The foregoing cases are considered to be not merely acts of
(d) Article 1823, which provides that the partnership is bound to make
administration, but rather acts of ownership which can only be effected by
good the loss caused by the misapplication by a partner acting within
the concurrence of all the partners who are collectively deemed to be the
the scope of his apparent authority of money or property belonging to,
“owners” of the partnership and its business enterprise.
or received by the partnership from, a third person.
One would consider therefore that when the transaction involves the sale,
In the cases of items (c) and (d) above-enumerated, Article 1824 of the
transfer or encumbrance of the entire partnership business enterprise, it
Civil Code provides expressly that “All partners are liable solidary with the
would constitute an act of strict ownership or an act of alteration, which
partnership for everything chargeable to the partnership.”
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
b. Transactions Not in the Ordinary Course of Partnership
case of Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court held that the
Business
sale of the partnership’s business enterprise can be considered to be
within the power of the managing partner, thus:
Article 1818 of the Civil Code enumerates what are
certainly not“apparently for the carrying on of the business of the
Appellants also question the validity of the sale covering the entire firm
partnership in the usual way,” and will not therefore be valid transactions
realty, on the ground that it, in effect, threw the partnership into
unless done by or approved by all the partners, thus:
dissolution, which requires consent of all the partners. This view is
untenable. That the partnership was left without the real property it
 92
originally had will not work its dissolution, since the firm was not
organized to exploit these precise lots but to engage in buying and selling
real estate, and “in general real estate agency and brokerage business”.
Incidentally, it is to be noted that the payment of the solidary obligation
of both the partnership and the late Tan Sin An, leaves open the question
of accounting and contribution between the co-debtors, that should be
ventilated separately. (Ibid, at p. 960).
Perhaps Goquiolay was decided at an earlier time in our jurisdiction when
the concept and doctrines pertaining to “business enterprise transfers”
were not yet developed, much less appreciated. On ruling on the motion
for reconsideration, the resolution of Goquiolay v. Sycip, 9 SCRA 663
(1969), returned on this point and clarified the applicable doctrine as
follows:
It is next urged that the widow, even as a partner, had no authority to
sell the real estate of the firm. This argument is lamentably superficial
because it fails to differentiate between real estate acquired and held as
stock-in-trade and real estate held merely as business site (Vivante’s
“taller o banco social”) for the partnership. Where the partnership
business is to deal in merchandise and goods, i.e., movable property, the
sale of its real property (immovables) is not within the ordinary powers of
a partner, because it is not in line with the normal business of the firm.
But where the express and avowed purpose of the partnership is to buy
and sell real estate (as in the present case), the immovables thus
acquired by the firm from part of its stock-in-trade, and the sale thereof is
in pursuance of partnership purposes, hence within the ordinary powers of
the partner. . . (Ibid, at pp. 671-672).
The foregoing discussions in Goquiolay certainly began to appreciate an
act or transaction in the ordinary course of business, which basically may
involve only a sale of assets, from an extraordinary act or contract, which
either disposes of the business enterprise or has the effect of preventing
the pursuit of the business enteprise.
c. Specific Modification on the Power of Management
It is a policy in Partnership Law for the partners to be allowed to expressly
contract around the default principle of “mutual agency” (i.e.,that the
partners are all managers of the partnership enterprise). Thus, under
Article 1800 of the Civil Code it is possible to appoint only one managing
partner in the articles of partnership, in which case the managing partner
“may execute all acts of administration despite the opposition of his
partners,” and his powers are irrevocable without just or lawful cause.
The same rule would apply when a partner is designated as managing
partner outside of the articles of incorporation, but in such case his
designation as managing partner is essentially revocable.
Thus, the Supreme Court has held that: a manager of a partnership can
execute acts of administration without need of consent of the partners,
including the power to purchase goods in the ordinary course of business
(Smith, Bell & Co. v. Aznar, 40 O.G. 1882 [1941]); to hire employees
(Garcia Ron v. La Compania de Minas de Batau, 12 Phil. 130 [1908]), as
well to dismiss employees (Martinez v. Cordoba & Conde, 5 Phil. 545
[1906]); to secure a loan to finish the construction of the boat of the
partnership (Agustia v. Mocencio, 9 Phil. 135 [1907]); to employ a
bookkeeper by his sole authority (Fortis v. Gutierrez Hermanos, 6 Phil.
100 [1906]); and to commence a suit in the name of the partnership
against partnership debtors (Tai Tong Chuache & Co. v. Insurance
Commission, 158 SCRA 366 (1988). Curiously though, the Court has also
held that the managing partner has no power to purchase “barge, a truck
and an adding machine” in the name of the partnership inasmuch as none
 93
of the properties were considered to be “supplies for partnership
business.” (Teague v. Martin, 53 Phil. 504 [1929]) The old ruling is
contrary to the doctrine of apparent authority in the usual or normal
pursuit of the business of the partnership embodied in Article 1818 of the
Civil Code, especially when it comes to the adding machine.
Under Article 1801 of the Civil Code, if two or more partners have bee
entrusted with the management of the partnership affairs without
specification of their respective duties, or without stipulation that one of
them shall not act without the consent of all the others, each one may
separately execute all acts of administration, but if any of them should
oppose the acts of the others, the decision of the majority shall prevail;
and in case of a tie, the matter shall be decided by the partner owning the
controlling interest.
On the other hand, under Article 1802, if it has been stipulated that none
of the managing partners shall act without the consent of the others, the
concurrence of all shall be necessary for the validity of the acts, and the
absence or disability of any one of them cannot be alleged, unless there is
imminent danger of grave or irreparable injury to the partnership.
It should be emphasized though that the provisions of Articles 1800 to
1802 should be considered to be intramural rules that govern the
relationship between and among the partners, and the breach of which
can bring about a cause of action against the breaching partners. The
rules provided therein do not bind nor apply to invalidate the contract and
transactions had with third parties acting in good faith and under the
doctrine of apparent authority provided under Article 1818.
d. Power of Alteration
The power of management of the partnership business, should be
distinguished from the power of ownership and control which is subject to
a higher level of requirements. Under Article 1803(2) of the Civil Code,
none of the partners may, without the consent of the others, make any
important alteration in the immovable property of the partnership, even if
it may be useful to the partnership. But if the refusal of consent by the
other partners is manifestly prejudicial to the interest of the partnership,
the court’s intervention may be sought.
e. Power Over Real Properties of the Partnership
Although Article 1774 of the Civil Code provides that immovable property
or an interest therein may be acquired in the partnership name, the
partnership title is not rendered void if the registration thereof is not in
the name of the partnership but in one or more, or all, of the partners’
names (or for that matter in the name of a third-party who holds it in
trust for the partnership).
Article 1819 of the Civil Code sets specific rules on how partners may bind
real properties pertaining to the partnership, depending on the manner by
which such title was registered, thus:
(1) Where Title Is in the Partnership Name:
(i) Any partner may convey title to such property by a conveyance
executed in the partnership name; the partnership may recover such
property only when the partner so conveying has no such power to
so convey, but not against a transferee in good faith and for value;
(ii) A partner who conveys the property but in his own name passes the
equitable interest of the partnership only when the partner so
 94
conveying acted with authority; otherwise, no title at all to the immovable (4) Where Title Is in the Name of All of the Partners:
property passes to the transferee.
(i) Conveyance executed by all the partners (in whose ever name so
The immediately preceding rule is consistent with the provision of Article conveyed) passes all their rights in such property. In this case the will
1774 which states that title to immovable property acquired in the of all the partners is the will of the partnership.
partnership name can be conveyed only in the partnership name.

2. Partner’s Right to Specific Partnership Property

(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
Although Article 1811 of the Civil Code defines or explains a partner’s
for the Partnership):
“right in specific partnership property” to mean that “A partner is [merely
a] co-owner with his partners of specific partnership property,” and
(i) A conveyance executed by a partner in the name of the partnership or
the enumeration of the “incidents of this co-ownership” would show that
in his own name only passes equitable interest of the partnership,
what is being defined is merely an implementation of the principle of
only when the partner conveying acted with authority;
mutual agency, thus:

(ii) A conveyance executed by a partner in the name of the partnership

(a) “A partner . . . has an equal right with his partners to possess
or in his own name does not even pass anything (not even equitable
specific partnership property for partnership purposes;”
interest of the partnership) when the partner so conveying acted
without authority;
(b) “A partner’s right in specific partnership property is not assignable
except in connection with the assignment of rights of all the partners
(3) Where Title Is in the Name of One or More But Not All the
in the same property;”
Partners:

(c) “A partner’s right in specific partnership property is not subject to

(i) When the records disclose partnership interests, the partners in
attachment or execution, except on a claim against the partnership;” and
whose name the title stands may convey title to such property; and
the partnership may recover only when the partners so conveying acted
(d) “A partner’s right in specific partnership property is not subject to
without authority, but not against a purchaser in good faith and for value;
legal support.”

(ii) When the records do not disclose the right of the partnership,
Unlike the proprietary right of an ordinary co-owner to “use the thing
the partners in whose name the title stands may convey title to
owned in common, provided he does so in accordance with the purpose
such property, and the partnership may recover against any
for which it is intended and in such a way as not to injure the interest of
transferee when the partners so conveying acted without authority;
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
Nonetheless, the purported co-ownership interest of partners
essentially for the furtherance of the partnership affairs, and emphasizes
the fact that in the partnership setting equity ownership is merged with
management prerogatives, equivalent to the recognition of the full-
ownership by the partners, as collective sole-proprietors so-to-speak, of
the partnership enterprise and its assets.
A better way of looking at the purported co-ownership rights of partners
to specific partnership property is to consider that the law constitute the
partners as trustees of the corporate properties, whereby they hold naked
title to the partnership properties, with full power to manage and control
the same for the benefit of the partnership venture, thus, “A partner . . .
has equal right with his partners to possess specific partnership property
for partnership purposes.”
Thus, in Catlan v. Gatchalian, 105 Phil. 1270 (1959), it was held that
when partnership real property had been mortgaged and foreclosed, the
redemptio by any of the partners, even when using his separate funds,
does not allow such redemption to be in his sole favor: “Under the general
principle of law, a partners is an agent of the partnership (Art. 1818, new
Civil Code). Furthermore, every partner becomes a trustee for his
95
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 partner’s right in specific partnership
Code. property is not assignable except in connection with the assignment of
is rights of all the partners in the same property.” Bautista had written that
the reasons why a partner’s right in partnership property is non-
assignable are as follows:
(a) it would effectively allow a third party (the assignee) to participate in
the affairs of the partnership, and would basically have a stranger become
a partner without the consent of all the other partners; and
(b) it would interfere with the rights of the other partners and the
partnership creditors to have all partnership properties applied directly to
the payment of partnership debts; and
(c) it would indirectly go against the principle that partner’s 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 partner’s 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
 96
which, because it is not considered an entity or a legal person, a a. Assignability of a Partner’s Equity Right
partnership cannot hold title and hence partnership property is deemed
held or owned in common by the partners for the benefit of the A partner’s equity interest in the partnership truly represents a
partnership,” (BAUTISTA, at pp. 147-148) as opposed to the civil law proprietary interest for his exclusive benefit as an owner of such
doctrine that affords the partnership a separate juridical personality, intangible right. Therefore, like any other property right, a partner’s
equity is generally transferable or assignable. Nonetheless under Article
1813 of the Civil Code, the transfer or assignment of a partner’s equity
3. Equity Rights of Partners
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,
Article 1812 of the Civil Code defines a “partner’s interest in the
thus:
partnership” essentially as his equity interest, thus: “his share of the
profits and surplus.” A partner’s interest in the partnership defines his
A conveyance by a partner of his whole interest in the partnership does
equity position as a co-proprietor of the partnership enterprise, which
not of itself dissolve the partnership, or, as against the other partners in
entitles him ipso facto to share in the profits and to share in the losses of
the absence of agreement, entitle the assignee, during the continuance of
the venture.
the partnership, to interfere in the management or administration of the
partnership business or affairs, or to require any information or account of
“Profits” represent the excess of receipts over expenses or the excess of
partnership transactions, or to inspect the partnership books.
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
In other words, under Article 1813, the only thing that can be conveyed
[1930]; Crawford v. Surety Insurance Co., 139 P. 481, 484 [1970]);
by a partner as an equity holder, is the sole right to receive profits and
whereas; “surplus” has been defined as the excess of assets over
surplus assets upon the dissolution of the partnership, thus: “i merely
liabilities. (Tupper v. Kroc, 492 P. 2d 1275 [1972]; Anderson v. U.S., 131
entitles the assignee to receive in accordance with his contract the profits
F.Supp. 501 (1955); Balaban v. Bank of Nevada, 477 P.2d 860 [1970]).
to which the assigning partners would otherwise be entitled.” The only
instance under said provision that the transferee or assignee may avail
Bautista wrote that “The interest of the partner in the partnership has
himself of the usual remedies is “in case of fraud in the management of
thus been otherwise described as the net balance remaining to him; after
the partnership.
all partnership debts or claims against it have been paid and the equities
and accounts between such partner and his copartners have been
Unlike in Corporate Law where the rule on equity is that they are
adjusted.” (BAUTISTA, at p. 176, citing Claude v. Claude, 228 P.2d 776
essentially transferable, in Partnership Law, equity interests of partners
[1951]; Preton v. State Industrial Accident Commission, 149 P.2d 275
are not essentially transferable. This statement is not even accurate
[1944]; Swirsky v. Horwich, 47 N.E.2d 452 [1943]; Cunningham v.
because if you look at the language of Article 1813 the proper rule would
Cunningham, 135 N.E. 21 [1922]).
 97
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 partner’s 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 partner’s equity rights in a partnership is the remedy given to a
partner’s separate creditors in lieu of the express prohibition of seeking an
attachment or levy upon the partnership assets and properties
themselves to cover the partner’s right to specific 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 partner’s 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 –
 98
. . . While, as we previously stated in our narration of facts, the Articles of one or more of the partners from any share in the profits or losses is void,
Copartnership and the power of attorney . . . conferred upon the [the sole but the partnership arrangement remains subsisting.
managing partner] the exclusive management of the business, such
power, premised as it is upon trust and confidence, was a mere personal Article 1797 of the Civil Code provides for the rules governing the
right that terminated upon [the sole managing partner’s] demise. The distribution of profits and losses in the partnership business, thus:
provision in the articles stating that “in the event of death of any one of
(a) Profits and losses shall be distributed in conformity with the
the partners within the 10-year term of the partnership, the deceased
agreement between the partners;
partner shall be represented by his heirs”, could not have referred to the
managerial right given to [the deceased husband]; more appropriately, it
(b) If only the share of each partner in the profits has been agreed upon,
related to the succession in the proprietary interest of each partner. (Ibid,
the share of each in the losses shall be in the same proportion;
at pp. 954-955).

(c) In the absence of any such agreement, the share of each partner
b. Right to Participate in Profits; the Obligation to Participate
in the profits and losses shall be in proportion to what he may have
in Losses
contributed, except that the industrial partner shall not be liable for
the losses; as to the profits, the industrial partner shall receive such share
The rights of an equity holder are essentially linked to the operations of
as may be just and equitable under the circumstances; and if
the business enterprise, and as he takes the risk connected with business
he contributed also capital, the shall also receive a share in the profits in
down-turn, then to him would also accrue the profits of the enterprise.
proportion to his capital.
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
Article 1798 of the Civil Code provides that if the partners have entrusted
necessarily mean that he is an equity holder, for he does not expose him
to a third person the designation of profits and losses, such designation
to the expenses and losses of the business, in contrast to one who shares
may be impugned only when it is manifestly inequitable; and in no case
in the net profits, who under Article 1769(4) is prima facie evidence that
may a partnership who has begun to execute the decision of third person,
he is a partner in the business, if such participation is not linked to some
or who has not impugned the same within three (3) months from the time
other clear contractual arrangement.
he had knowledge thereof, complain of such decision. The article also
provides that the designation of losses and profits cannot be entrusted to
Under Article 1767 of the Civil Code, the essence of a partnership
one of the partners.
arrangement is the existence of a common fund or a business enterprise,
and which under Article 1770 must be “established for the common
What happens when one or more of the partners are designated to
benefit or interest of the partners;” and which is the reason why under
distribute profits and losses? It would have to mean that the designation
Article 1799, a stipulation in the contract of partnership which excludes
and the exercise thereof would both be void.
 99
4. Other Rights of a Partner Under Article 1807 of the Civil Code, every partner may demand from
every other partner an accounting to the partnership for any benefit, and
a. Right to Inspect hold as trustee for it any profits derived by him without the consent of the
other partners from any transaction connected with the formation,
Article 1805 of the Civil Code expressly provides that every partner shall
conduct, or liquidation of the partnership or from any use by him of its
at any reasonable hour have access to and may inspect and copy the
property.
partnership books which shall be kept at the principal place of business of
the partnership. 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
In Corporate Law, the right of a stockholder or member to inspect and
from the partnership business or possession of its property, if the right
copy corporate records is considered to be a common law right, and a
exists under the terms of the partnership agreement, whenever
right of such importance that its enforcement can be by an
circumstances render it just and reasonable.
actionmandamus. The right to inspect is critical to safeguarding all other
rights of stockholders or members in the corporation. In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746 (1989), the
Court held that a partner’s right to accounting exists as long as the
The same principles are applicable to a partner’s right to inspect and to
partnership exists, and that prescription begins to run only upon the
demand true and full information on partnership matters.
dissolution of the partnership and final accounting is done.

b. Right to Demand True and Full Information

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
Article 1806 of the Civil Code provides that every partner or his legal
rehabilitate a mining plant have no right to demand accounting for the
representative may demand true and full information from other partners
profits of such undertaking when the partnership arrangement had been
of all things affecting the partnership.
terminated with the failure of the claiming partners to raise the promised
investments into the enterprise, and that the other two partners pursued
Consequently, in consonance with the fiduciary relationship existing
the venture on their own account and only after the partnership
between and among partners, every partner has the obligations to render
arrangement had terminated.
true and full information to other partners of all things affecting the
partnership.
In Lim Tanhu v. Ramolete, 66 SCRA 425 (1975), the Court held that a
partner’s right to accounting for properties of the partnership that are
c. Right to Demand Accounting
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
 100
the other partners, have been acquired from the use of partnership funds, 5. Obligations of the Partnership
thus:
a. Obligations to the Partners
“Accordingly, the defendants have no obligation to account to anyone for
such acquisitions in the absence of clear proof that they had violated the Partnership Law lays down specific provisions to govern the obligation of
trust of [one of the partners] during the existence of the partnership.” the partnership to the partners arising from the management of
(Ibid, at p. 477). partnership affairs, thus:

d. Right to Dissolve the Partnership (1) Amounts disbursed for and in Behalf of the Partnership

The near-absolute legal power of any partnership in a partnership to Article 1796 of the Civil Code provides that the partnership shall be
demand the dissolution of the partnership is in consonance with the responsible to every partner for the amounts he may have disbursed on
doctrine of delectus personae that establishes a fiduciary relationship behalf of the partnership and for the corresponding interest, from the
between and among the partners. time the expenses are made;

In Rojas v. Maglana, 192 SCRA 110 (1990), the Court confirmed the right (2) Contracts Entered into for and In Behalf of the Partnership
of a partner to “unilaterally dissolve the partnership,” by a notice of
Article 1797 of the Civil Code provides that the partnership shall also
dissolution, which in effect is a notice of withdrawal from the partnership,
answer to each partner for the obligations such partner may have
thus: “Under Article 1830(2) of the Civil Code, even if there is a specified
contracted in good faith in the interest of the partnership business, and
term, one partner can cause its dissolution by expressly withdrawing even
for the risks and consequence of its management.
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
(3) Keeping of the Books
withdrawing partner is liable for damages but in no case can he be
compelled to remain in the firm. With his withdrawal, the number of
Under Article 1805 of the Civil Code, the partnership books shall be kept,
members is decreased, hence, the dissolution.” (Ibid, at pp. 118-119).
subject to any agreement between the partners, at the principal place of
business of the partnerships, and every partner shall at any reasonable
The right of a partner to dissolve the partnership will be discussed in more
hour have access to and may inspect and copy any of them.
details on the chapter on Dissolution, Winding-up and Termination.

b. Obligations to Third Persons

 101
Partnership Law, particularly under Article 1768, accords to the (a) When “the partner so acting has in fact no authority to act for
partnership venture a separate juridical personality, primarily to allow a the partnership in the particular matter, and the person with whom
more feasible and efficient manner by which to deal with the public and to he is dealing has knowledge of the fact that he has no such
organize the venture into a enterprise that provides for a clear delineation authority” (Article 1818, Civil Code); and
of liability and a hierarchy of claims against its assets.
(b) “An act of a partner which is not apparently for the carrying on of
(1) Liability Arising from the Firm Name the business of the partnership in the usual way does not bind
the partnership unless authorized by the other partners” (Article 1818,
The name of a partnership venture becomes essential in its commercial Civil Code); and
dealings because it identifies the person of the partnership which is
deemed to be party bound in each of the contracts entered into. Thus, (c) “No act of a partner in contravention of a restriction on authority
under Article 1815 of the Civil Code, “Every partnership shall operate shall bind the partnership to persons having knowledge of the
under a firm name, which may or may not include the name of one or restriction” (Article 1818, Civil Code).
more of the partners.” The inclusion of the name of a person in the
partnership name becomes a conclusive presumption to the public who —oOo—
deals in good faith with the firm that he is a partner thereto.
Consequently, under said article, “[t]hose who, not being members of the
partnership, include their names in the firm name, shall be subject to the
liability of a partner.”

(2) Liability Arising from the Acts of the Agent

Since the corporate venture is accorded a separate juridical personality,

then the liability that it incurs with the public that it deals with can only
arise from the acts of the partnership’s authorized agent or agents, which
by default rule would be every partner (Article 1818, Civil Code).

The liability that the partnership must bear from the acts of the partners
pursuant to partnership business applies only to a third person who deals
in good faith with the partnership; Thus, a third person who knows of the
lack of authority of the partner acting in a partnership transactions
generally cannot claim against the partnership, thus:
 102
In Partnership Law, the rule is quite different in that Article 1786 of the
13 – DUTIES AND OBLIGATIONS OF PARTNERS Civil Code provides that “Every partner is a debtor of the partnership for
whatever he may have promised to contribute thereto.” The reason for
[Updated: 14 October 2009] 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
1. Obligation to Contribute to the Common Fund
the partners not contributed or promised to the partnership.

Since the agreement to contribute to a common fund is an essential

This is not to say that some of the elements of the trust fund doctrine do
element for a valid contract of partnership to arise, Philippine Partnership
not apply to the partnership setting, for they do, such as the rule that
Law provides for clear statutory provisions governing such obligations.
creditors have preference over partners against the partnership
properties. Thus, Article 1826 of the Civil Code provides that “The
In Corporate Law, equity obligations (i.e., the obligation to pay
creditors of the partnership shall be preferred to those of each partner as
subscriptions to capital stock) are not treated as debt obligations, and the
regards the partnership property.”
receivables arising therefrom are not considered as forming part of the
ordinary assets of the corporation. The rule takes it rationale from the
Why is it then necessary for Partnership Law to declare expressly that a
“trust fund doctrine,” that the assets of the corporation corresponding to
partner is a debtor of the partnership for whatever he may have promised
its capital stock are treated as a trust fund preserved for the protection of
to contribute thereto? The answer lies in the primary principle which
the claims of the corporate creditors who can, are under the corporate
Partnership Law seeks to promote, which is that the promise or obligation
“limited liability” rule, recover on their liabilities to the assets of the
to contribute to the common fund is of the essence of the contract of
corporation and the investments and promised investments of the
partnership and binds the partners to one another as the very privity of
stockholders. (Ong Yong v. Tiu, 401 SCRA 1 [2003]; NTC v. Court of
their relationship, and the breach of which would break the contractual
Appeals, 311 SCRA 508 [1999]; Commissioner of Internal Revenue v.
bond (delectus personae). The point is best illustrated by the following
Court of Appeals, 301 SCRA 152 [1999]; Boman Environmental Dev.
doctrines:
Corp. v. Court of Appeals, 167 SCRA 540 [1988]). Consequently, capital
contributions and obligations to contribute capital (i.e., subscription (a) Under Article 1788 of the Civil Code, when a partner fails to deliver his
contracts and subscription receivables) cannot be treated like ordinary promised contribution to the partnership, he becomes liable for interests
contracts and debts, and are not subject to rescission, set-off, or and damages from the time he should have complied with his obligation;
condonation, in order to ensure their collectibility for the benefit of the
corporate creditors.
 103
(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;”
in default thereof, the legal interest), but damages, including loss
opportunity, shown to have been sustained by the partnership by reason
of the failure of the partner to pay in his contribution.
b. When Promised Contribution Is Property—In General

(c) The remedies available to the partnership and the other partners with Whenever a partner has bound himself to contribute a specific or
respect to the failure or refusal to comply with contribution obligation determinate thing to the partnership, he thereby assumes the position of
takes the normal remedies of interest and damages, including being a seller of determinate property contributed into the partnership in
compensatory damages constituting his shares of the profits (Uy v. that he is liable for:
Puzon, 79 SCRA 598 [1977];Moran, Jr. v. Court of Appeals, 133 SCRA 88
(a) A breach of the warranty against eviction;
[1986]);

(b) The fruits thereof from the time he obliged himself to deliver the
(d) When a partner fails to comply with his obligation to deliver what he
determinate thing, and without need of demand.
promised to contribute to the partnership, and there is no desire to
dissolve the partnership, the remedy that is available to the other
In addition, Article 1795 of the Civil Code establishes the rules on who
partners cannot be rescission, but rather one for specific performance.
assumes “[t]he risk of specific and determinate things . . . contributed to
(Sancho v. Lizarraga, 55 Phil. 601 [1930]); and
the partnership,” thus:

(e) The property contributed by a partner becomes the property of the

(a) “If they are not fungible, so that only their use and fruits may be
partnership and cannot be disposed of without the consent of the other
for the common benefit, the risk shall be borne by the partner who
partners. Lozana v. Depakakibo, 107 Phil. 728 [1960]).
owns them;

a. When Promised Contribution Is a Sum of Money

(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
Under Article 1788 of the Civil Code it is provided that “A partner who has
risk shall be borne by the partnership.
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
(c) “In the absence of stipulation, the risk of things brought
time he should have complied with his obligation.”
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
The article therefore allows the partners and the partnership to recover
were appraised.”
from the defaulting partner not only interest due (at the rate stipulated or
 104
As to who bears the risk of loss of determinate things promised to be
contributed but prior to actual delivery to the partnership, the prevailing
view seems to be that it would be the partner who before actual delivery
retains ownership thereof. (BAUTISTA, at p. 91, citing Francisco,
Partnership at p. 150 [1958]) But in such case, under Article 1829(4),
“[w]hen a specific thing which a partner had promised to contribute to the
partnership, perishes before the delivery,” dissolves the partnership.
c. Contribution is Goods
Under Article 1787 of the Civil Code, “When the capital or a part thereof
which a partner is bound to contribute consists of goods, their appraisal
must be made in the manner prescribed in the contract of partnership,
and in the absence of stipulation, it shall be made by experts chosen by
the partners, and according to the current prices, the subsequent changes
thereof being for the account of the partnership.”
The requirements of the provision are made to ensure that the capital
account of a partner is properly credited with the correct value of a
property contributed.
d. Contribution is Real Property
Under Article 1773 of the Civil Code, a contract of partnership would be
void, whenever immovable property is contributed, if an inventory of said
property is not made, signed by the parties, and attached to the public
instrument mandated under Article 1771 of the Civil Code, which requires
in such case that the contract of partnership must be in a public
instrument, and which under Article 1772 of the Civil Code would have to
be filed with the Securities and Exchange Commission (SEC) because it
would almost always mean a capital of more than P3,000.00.
A more detailed discussion of the effects on the non-fulfillment with the
requirements mandated by law can be found on the chapter on
Formalities Required for Partnerships.
e. Contribution of Service or Industry; the Industrial Partner
There can be no doubt that once the contract of partnership is
constituted, the industrial partner is from then bound to devote his time
towards fulfilling the nature of the service he has contracted himself to
contribute. The difficulty arises from the fact that the obligation
essentially involves the personal obligation “to do”, and generally an
industrial partner who does not contribute the services promised cannot
be compelled to do so, otherwise specific performance on the matter
would violate the public policy against involuntary servitude. The other
difficulty that arises is that even non-industrial partners, being mutual
agents with one another and generally empowered to jointly manage the
partnership affairs, also contribute their services to the partnership for
which they do not also obtain, as in the case of the industrial partner, a
compensation therefor, unless otherwise stipulated.
The American case of Marsh’s’ Appeal, (69 Pa. St. 30, quoted in Bautista,
at pp. 92-94) discusses the points as follows:
. . . The only question in this case is whether a partner who neglects and
refuses, without reasonable cause, to perform the personal services which
he has stipulated to render the partnership, is liable to account to the firm
for the value of the services in the settlement of the partnership accounts.
. . . It is undoubtedly true, as a general rule, that partners are not
entitled to charge each other, or the firm of which they are members for
their services in the copartnership business, unless there is a special
agreement to that effect, or such agreement can be implied from the
 105
course of dealing between them. By the well-settled law of partnership,
every partner is bound to work to the extent of his ability for the benefit
of the whole, without regard to the services of his copartners, and without
comparison of value; for services to the firm cannot, from their very
nature, be estimated and equalized by compensation of differences. . .
. . . The plaintiffs are not seeking compensation for the services they
rendered the partnership. They are simply seeking to charge the
defendant with the loss occasioned the partnership by this refusal to
render the services which he agreed to perform. If the partnership has
suffered loss by his breach of the agreement, why should he not make
good the loss, and put the firm in the same condition it would have been
if he had not broken the agreement? . . . If, says Mr. Justice Story, the
partnership suffers any loss from the gross negligence, unskillfulness,
fraud, or wanton misconduct of any partner in the court of partnership
business, he will ordinarily be responsible over to the other partners for
all the losses and injuries, and damages sustained thereby, whether
directly or through their own liability to third persons. . . If this be the
law, why should not the defendant be answerable to the partnership for
breach of the agreement to perform the services stipulated?
It is clear therefore, that when an industrial partner has failed to render
the proper service he is obliged to render to the business of the firm, he
can be made liable for the damages sustained by the firm for such failure.
In addition, the breach by an industrial partner of his primary obligation
to render service to the partnership would have repercussion on his share
in the net profits of the company. Under Article 1797 of the Civil Code,
“As for profits, the industrial partner shall receive such share as may be
just and equitable under the circumstances.”
The fiduciary duties of an industrial partner are discussed more in detail
hereunder.
f. Obligation for “Additional Contribution”
Since the nexus of the obligation of a partner arises from the contract of
partnership, there is generally no obligation for any partner to contribute
beyond what was originally stipulated in the articles of partnership, unless
there is a stipulation providing for additional contributions. Even in the
case where additional contribution to capital becomes necessary “in case
of an imminent loss of the business of the partnership,” no partner can be
compelled to give additional contribution, but the legal consequence
under Article 1791, is that “any partner who refuses to contribute an
additional share to the capital, except an industrial partner, to save the
venture, shall be obliged to sell his interest to the other partners.” Even
such a penalty cannot be applied according to Article 1791 “if there is an
agreement to the contrary,” that is a stipulation in the contract of
partnership that even in case of necessity to the save the venture,
partners cannot be compelled to make additional contribution, in which
case the forfeiture of their interest cannot even be enforced.
g. Remedies When There is Default in Obligation to Contribute
Normally, the contract of partnership being one constituted of bilateral
(multilateral) obligations, the remedy to the other partners when one of
them fails to comply with his obligation to contribute, would either be
specific performance or rescission. Under the provisions of the old Civil
Code, the Court held in Sancho v. Lizarraga, 55 Phil. 601 (1931), that the
remedy of rescission of the contract of partnership which would mean the
return of the contribution of the complaining partner with interest and
damages proven, is not available because then Articles 1681 and 1682
 106
[now Articles 1786 and 1788] provided for specific remedies to the
contract of partnership, thus:
Owing to the defendant’s failure to pay to the partnership the whole
amount which he bound himself to pay, he became indebted to it for the
remainder, with interest and any damages occasioned thereby, but the
plaintiff did not thereby acquire the right to demand rescission of the
partnership contract according to article 1124 of the Code. This article
cannot be applied to the case in question, because it refers to the
resolution of obligations in general, whereas articles 1681 and 1682
specifically refer to the contract of partnership in particular. And it is a
well known principle that special provisions prevail over general
provisions. (Ibid, at pp. 603-604).
In Sancho the Court affirmed the decision of the lower court which
effectively denied the prayer for rescission, and instead directed the
dissolution of the partnership, the accounting and liquidation of its affairs.
In other words, the remedy of rescission, which seeks to extinguish the
contractual relationship and effect mutual restitution, is not allowed under
the contract of partnership. The proper remedies would be to seek a
collection of the promised contribution, with recovery of interests and
damages as provided for in Articles 1786 and 1788, or ask for dissolution
of the partnership under Article 1831.
It may be said that dissolution is a form of rescission unique to
partnerships (also for corporations, especially close corporations), which
only has a prospective effect of terminating the contractual relationship,
and thus not produce the retroactive effect of extinguishing the contract
as though it never existed and providing for mutual restitution.
This special type of remedies is indicative of the essential nature of the
contract of partnership as (for lack of a better term)
a preparatory orprogressive contract in that it is entered into to pursue a
transaction or series of transactions (i.e., to operate a business
enterprise) that changes the nature and content of the things that have
been contributed thereto, such that it becomes nearly impossible to
return the parties back to their original position.
The ruling is also consistent with the rule that once a partner gives a
contribution to the partnership, he loses direct ownership over said
property which is now owned by the partnership as a separate juridical
person, and that it is integrated into the partnership business enterprise,
which upon application of the trust fund doctrine, means that it shall be
the partnership creditors who shall first have priority over the partnership
assets before any partner can be entitled to recover from the net assets.
h. Personal Obligations for Partnership Debts; Doctrine of
Unlimited Liability
The “unlimited liability” feature in the partnership setting makes partners
personally liable for partnership debts, notwithstanding the separate
juridical entity of the partnership. However, such liabilities of partners are
better covered in the chapter on Dissolution, Winding Up and
Termination, because the triggering mechanism would in effect be only if
the partnership becomes insolvent. But this is not to mean that the
insolvency of the partnership necessarily would trigger its dissolution, for
it may happen that the partners continue to pursue the business venture
in the hope that there may still be a turn-around.
Under Article 1816 of the Civil Code provides that ”All partners, including
industrial ones, shall be liable pro rata with all their property and after all
 107
the partnership assets have been exhausted, for the contracts which may
be entered into in the name and for the account of the partnership.”
Article 1817 provides that “Any stipulation against the liability laid down
in [Article 1816] shall be void, except as among the partners.” Rightly
stated, it is the exhaustion of partnership assets to answer for partnership
liabilities that triggers the enforcement of the unlimited liability
mechanism as against partners and their separate assets. And the pro-
rata obligation of the partners does not mean that they become
personally liable proportionately in relation to their contributions in the
partnership, but actually means they are liable jointly.
The subsidiary and pro rata liability feature under the old Civil Code was
retained under the new Civil Code, which does not adopt the primary and
solidary liability feature for commercial partners under the Code of
Commerce.
2. Fiduciary Duties of Partners
The fiduciary duties of the partners among one another and to the
partnership subsists only while the partnership subsists; consequently the
termination of the partnership relation (as distinguished from mere
dissolution) also terminates the fiduciary obligations of the partners to
one another and to the partnership.
In Hanlon v. Haussermann, 40 Phil. 796 (1920), four contracting parties
agreed to a joint enterprise to rehabilitate a mining plant, where the
engagement of the three of them was limited to raising money within a
stated period by subscribing to or selling shares of the mining company.
One of the parties who had undertaken thus to raise money defaulted,
and under the express resolutory conditions of the contract the two other
parties were discharged. Subsequently, the two parties thus discharged,
who were at the same time stockholders and officials of the mining
company, procured a contract from the mining company by which they
proceeded to restore the mining plant upon their own account. The other
two members of the original enterprise sued to recover shares in the
mining company and dividends declared upon such shares on the ground
that they were earned pursuant to the joint enterprise to which they were
entitled to receive their shares. In denying the claims, the Court held –
After the termination of an agency, partnership, or joint adventure, each
of the parties is free to act in his own interest, provided he has done
nothing during the continuance of the relation to lay a foundation for an
undue advantage to himself. To act as agent for another does not
necessarily imply the creation of a permanent disability in the agent to act
for himself in regard to the same subject-matter; and certainly no case
has been called to our attention in which the equitable doctrine above
referred to has been so applied as to prevent an owner of property from
doing what he pleased with his own after such a contract [of partnership]
between the parties to this lawsuit had lapsed. (Ibid, at p. 818) .
Likewise, in Lim Tanhu v. Remolete, 66 SCRA 425 (1975), the Court held
that former partners have no obligation to account on how they acquired
properties in their names, when such acquisition were effected “long after
the partnership had been automatically dissolved as a result of the death
of Po Chuan [the primary managing partner]. Accordingly, defendants
have no obligation to account to anyone for such acquisitions in the
absence of clear proof that they had violated the trust of Po Chuan during
the existence of the partnership.” (Ibid, at p. 476)
a. Duty to Account
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Since the partners are mutual agents to one another and to the
partnership, then necessarily they are obliged by such fiduciary
relationship to render a full accounting on matters they undertake for the
partnership affairs, and are prohibited from obtaining secret benefits for
themselves therefrom. The duty is closely linked to the duty of loyalty.
Under Article 1806 of the Civil Code, partners shall render on demand
true and full information of all things affecting the partnerships to any
partner or the legal representative of any deceased partner or of any
partner under disability.
Under Article 1807 of the Civil Code , “Every partner must account to the
partnership for any benefit, and hold as trustee for it any profits derived
by him without the consent of the other partners from any transaction
connected with the formation, conduct, or liquidation of the partnership or
from any use by him of its property.”
Aside from the remedy of recovering the profits derived by a partner from
partnership affairs, the same may be a ground to seek judicial dissolution
of the partnership under Article 1831 of the Civil Code.
b. Duty of Diligence
Article 1794 of the Civil Code covers a partner’s duty of diligence to the
partnership affairs:
Every partner is responsible to the partnership for damages suffered by it
through his fault, and he cannot compensate them with the profits and
benefits which he may have earned for the partnership by his industry.
However, the courts may equitable lessen this responsibility if through the
partner’s extraordinary efforts in other activities of the partnership,
unusual profits have been realized.
Under Article 1800 of the Civil Code, a duly designated managing partner
who acts in bad faith, his particular exercise of power administration may
effectively be opposed by the other partners. When he acts without just
or lawful cause, then his power may be revoked, except of course when
he has been appointed the managing partner under the terms of the
articles of partnership.
c. Duty of Loyalty
Although the term is more properly associated to officers and directors of
corporations, partners, being managers of the partnership, and agents to
one another, owe both the partnership and one another the duly of
loyalty, which includes the avoiding of entering into transactions or
situations that present a conflict-of-interests. The duty of loyalty in the
partnership setting arises necessarily as a consequence of the mutual
agency relationship existing between and among the partners.
In the event a partner takes any amount from the partnership funds for
himself, he becomes a debtor of the partnership, as well for the interests
and damages, which liability under Article 1789 of the Civil Code “shall
begin from the time he converted the amount to his own use.”
An aspect of a partner’s 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
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partnership. The article provides for an exception to its application: “The
provisions of this article are understood to be without prejudice to the
right granted to the debtor by Article 1252 [on right of debtor to stipulate
the application of payment], but only if the personal credit of the partner
should be more onerous to him.”
Another aspect of a partner’s duty of loyalty is shown in Article 1793,
which provides that a partner who has received in whole or in part, his
share of a partnership credit, when the other partners have not collected
theirs, shall be obliged, if the debtor should thereafter become insolvent,
to bring to the partnership capital what he received even though he may
have given a receipt for his share only.
In Catalan v. Gatchalian, 105 Phil. 1270 (1959), the Court ruled that
when partnership real property had been mortgage and foreclosed, the
redemption by any of the partners, even when using his separate funds,
does not allow such redemption to be in his sole favor. The summary
reported reads in part as follows:
. . . Under the general principle of law, a partner is an agent of the
partnership (Art. 1818, new Civil Code). Furthermore, every partner
becomes a trustee for his copartner with regard to any benefits or profits
derived from his act as a partner (Article 1807, new Civil Code).
Consequently, when Catalan redeemed the properties in question he
became a trustee and held the same in trust for his copartner Gatchalian,
subject of course to his right to demand from the latter his contribution to
the amount of redemption. (Ibid, at p. 1271)
d. Specific Fiduciary Duties of Industrial Partner
Under Article 1789 of the Civil Code, an industrial partner is prohibited
from engaging in business for himself, unless the partnership expressly
permits him to do so. Since even capitalist partners are expected
(although not obliged) to contribute service to the partnership enterprise,
and when they do so they are not entitled to separate compensation
(unless otherwise stipulated), then in order to make the contribution of
service an industrial partner more meaningful and truly an obligation, it
must mean that is saddled with more burden or prohibitions. The
coverage of Article 1789 should mean also that:
(a) Since his main contribution to the partnership is his industry, then
an industrial partner owes to the venture and his fellow partners the
obligation to devote his industry towards the partnership business.
(b) Even if the partnership is engaged in a particular form of business,
an industrial partner cannot devote his industry to another type
of undertaking for profit even when it is in a different line of business not
in competition with that of the partnership.
If an industrial partner breaches this duty, Article 1789 provides that the
capitalist partners may either:
(a) exclude him from the firm; or
(b) avail themselves of the benefits which the industrial partner may have
obtained in violation of such duty, with a right to damages in either case.
It seems clear from jurisprudence that in order for an industrial to be held
liable for breach of duty under Article 1789, he must have engaged during
the term of the partnership into another business or an activity that is
essentially for profit.
In Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973), an article of
co-partnership was executed between three capitalist partners on one
 110
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 appellee’s testimony just quoted without gaining the
very definite impression that, even as she was and still is a Judge of the
City Court of Manila, she has rendered services for appellants without
which they would not have had the wherewithal to operate the business
for which appellant company was organized. . .
xxx.
It is not disputed that the prohibition against an industrial partner
engaging in business for himself seeks to prevent any conflict of interest
between the industrial partner and the partnership, and to insure faithful
compliance by said partner with his prestation. There is no pretense,
however, even on the part of appellants that appellee is engaged in any
business antagonistic to that of appellant company, since being a Judge of
one of the branches of the City Court of Manila can hardly be
characterized as a business. That appellee has faithfully complied with her
prestation with respect to appellants is clearly shown by the fact that it
was only after the filing of the complaint in this case and the answer
thereto that appellants exercised their right of exclusion under [Article
1789] . . . after around nine (9) years from June 7, 1955 . . .
That subsequent to the filing of defendants’ answer to the complaint, the
defendants reached an agreement whereby the herein plaintiff has been
excluded from, and deprived of, her alleged share, interest or
participation, as an alleged industrial partner, in the defendant
partnership and/or in its net profits or income, on the ground that plaintiff
has never contributed her industry to the partnership, and instead she
has been and still is a judge of the City Court (formerly Municipal Court)
of the City of Manila, devoting her time to the performance of her duties
as such judge and enjoying the privileges and emoluments appertaining
to the said office, aside from teaching in law school in Manila, without the
express consent of the herein defendants’ (Record On Appeal, pp. 24-25).
Having always known appellee as a City Judge even before she joined
appellant company on June 7, 1955 as an industrial partner, why did it
take appellants so many years before excluding her from said company as
per aforequoted allegations? And ‘how can they reconcile such exclusion
with their main theory that appellee has never been such a partner
because ‘The real agreement evidenced by Exhibit ‘A’ was to grant the
appellee a share of 30% of the net profits which the appellant partnership
 111
may realize from June 7, 1955, until the mortgage loan of P30,000.00 then ”he shall bring to the common funds any profits accruing to him from
obtained from the Rehabilitation Finance Corporation shall have been fully his transactions, and shall personally bear all the losses.”
paid. . .

3. Obligation of Subsequently Admitted Partners

The language of the decision in Evangelista & Co. leads to several
observations on the nature of the obligation of an industrial partner.
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
Firstly, unless otherwise stipulated, an industrial partner need not devote
arising before his admission as though he had been a partner when such
his entire working hours to the partnership affairs, and he is in fact not
obligations were incurred, except that this liability shall be satisfied only
prohibited from engaging in other activities which must be non-business
out of the partnership property, unless there is a stipulation to the
in character.
contrary.

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
This is the only aspect of “limited liability” in a general partnership
setting.
4. Obligations of Non-Partners
Under Partnership Law in the Civil Code, the only time when non-partners
become liable for the partner debts and obligation is when there is
estoppel, or when the public is made to believe that one person is a
partner of the partnership when in fact he is not, thus:
(a) Under Article 1815, those who, not being members of the
partnership, include their names in the firm name, shall be subject to the
liability of a partner;

Under Article 1808 of the Civil Code, “The capitalist partners cannot (b) Under Article 1825, when a person by word or conduct,
engage for their own account in any operation which is of the kind of represents himself, or consents to another representing him to anyone,
business in which the partnership is engaged, unless there is a stipulation as a partner in an existing partnership or with one or more persons
to the contrary.” If a capitalist partner breaches this duty of loyalty, not actual partners, he is liable to any such persons to whom
 112
such representation has been made, who has, on the faith of such
representation, given credit to the actual or apparent partnership;

(c) Under Article 1825, when such a person has made such
representation or consent to its being made in a public manner he is liable
to such person, whether the representation has or has not been made or
communicated to such person so giving credit by or with the knowledge of
the apparent partner making the representation or consenting to its being
made;

(d) Under Article 1825, when a person has been thus represented to be
a partner in an existing partnership, or with one or more persons
not actual partners, he is an agent of the persons consenting to
such representation to bind them to the same extent and in
the same manner as though he were a partner in fact; and

(e) Under Article 1825, when all the members of 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.

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