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PARTNERSHIP NOTES
By: Atty. Cesar Villanueva
1 – HISTORICAL BACKGROUND ON PHILIPPINE PARTNERSHIP LAW
I. HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW
1. Historical Background and Sources of Philippine Law on Partnership
a. Notion of Partnership Is of Ancient Origins
Prof. Esteban B. Bautista wrote that as a business device, the partnership “was well known
among the ancients and apparently occupied such an important place in their social and
economic life that they made provision for it in their laws—among the Babylonians from the
time of Hammurabi, among the Babylonian Jews as early as the fourth century, and among the
Romans almost from the time they laid the foundation of their monumental legal
system.” (BAUTISTA, ESTEBAN B., TREATISE ON PHILIPPINE PARTNERSHIP LAW, Rex Book
Store, 1995 Ed., at p. 1, hereinafter referred to as “BAUTISTA”; citing 12 ENCYCLOPEDIA OF
SOCIAL SCIENCE 3 [1948]). He also wrote that “in medieval times, the device was prominent
among the merchant princes in the Italian cities; it also thrived in thirteenth century England
where it was regulated by guilds merchant.” (BAUTISTA, at p. 1, citing 4 COLLIERS
ENCYCLOPEDIA 257 [1952] and 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 4 [1948])
Professors Hector S. de Leon and Hector M. de Leon, Jr. write that “As early as 2300 B.C.,
Hammurabi, the famous king of Babylon, in his compilation of the system of laws of that time,
provided for the regulation of the relation called partnership. Commercial partnerships of that
time were generally for single transactions or undertakings.” (DE LEON, HECTOR S., and DE
LEON, HECTOR M., JR., COMMENTS AND CASES ON PARTNERSHIP, AGENCY AND TRUST, Rex
Book Store, Inc., Manila, Philippines, 2005 ed. , at p. 2, hereinafter referred to as “DE LEONS”).
They also write that “Following the Babylonian period, we find clear-cut references to
partnerships in Jewish law . . . however, it must be remembered that the ancient Jews were a
pastoral people, and, therefore, the partnership as a business organization under Jewish law was
concerned with the holding of title to land by two or more persons.” (DE LEONS, at p. 2)
b. Civil and Common Law Bases of Partnership Laws
The De Leons trace the origins of the modern-day partnership through the English commercials
courts which eventually was integrated by then Chief Justice Lord Mansfield into the common
law system and that it “was not until the latter years of the 18th century that the law of
partnership as we know it today began to assume both form and substance.” (DE LEONS, at p. 3)
They write that eventually in the United States, in 1914 the Uniform Partnerships Act was
endorsed by the National Conference of Commissioners on Uniform State Laws, which had many
points of similarity with the English Partnership Act of 1890, and that “For this reason, the
practical operation of the Uniform Partnership Act has a background of application in the
workings of the English Act.” (DE LEONS, at p. 5)
Bautista suggested that “the modern world provisions on partnership of every legal system
providing for and regulating this type of business organization are based upon the Roman law, of
course with several important modifications;” . . . and that ”civil law countries or jurisdiction
regard the partnership as a legal entity, while the common law ones generally do
not.” (BAUTISTA, at p. 1, citing 17 ENCYCLOPEDIA BRITANNICA 420 [1969]). The De Leons
observe that “In fine, modern partnership law may be said to contain combination of principles
and concepts developed from three sources: the Roman Law, the law [on] merchant and equity,
and the common law courts.” (DE LEONS, at p. 5)
c. Particular Bases of Philippine Law on Partnerships
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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 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.
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2. Old Branches of Partnership Law
a. Distinguishing Between Civil and Commercial Partnerships
Before the New Civil Code, resolution of partnership issues depended on whether it covered a
civil partnership for which the provisions of the old Civil Code were made to apply, or
commercial partnership, and therefore covered by the Code of Commerce. There was even a
third type of partnerships, the industrial partnerships, which may have the characteristics of
commercial or civil partnerships, according to whether they have been established in accordance
with the requirements of the Code of Commerce or without regard to the latter. (Prautch, etc. v.
Hernandez, 1 Phil. 705, 709-710 [1903]).
The essence of a commercial partnership was that it was undertaken by merchants, and
essentially possessed of the characteristic of “habitualness” (or more properly referred to as
“pursued as a going concern”) to be governed under the provisions of the Code of Commerce.
Article 1 of the Code of Commerce provided that “For purposes of this Code, the following are
merchants: 1. Those who, having legal capacity to engage in commerce, habitually devote
themselves thereto. . .”
To illustrate, Evangelista v. Commissioner of Internal Revenue, 102 Phil. 140 (1957), held that
there would exists the elements of common fund and intention to divide the profits among the
members of the family who borrowed money as a group, when the facts showed that the
1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
2. They invested the same, not merely in one transaction, but in a series of transactions. x x x The
number of lots (24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the aforementioned common
fund or even of the property acquired . . . In other words, one cannot but perceive a character
of habituality peculiar tobusiness transactions engaged in for purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof. (Ibid, at p. 145).
Prior to the New Civil Code, the significant distinctions between civil partnerships from
commercial partnerships were as follows:
(a) Registration was essential for the coming into existence of commercial partnerships and
their acquisition of juridical personalities (Arts. 118-119, Code of Commerce; Hung-Man-Yoc v.
Kieng-Chiong Seng, 6 Phil. 498 [1906]); whereas, it was the perfection of a contract of
partnership which under the old Civil Code brought about the separate juridical personality of a
civil partnership;
(b) Commercial partners were solidarily liable for partnership debts, albeit in a subsidiary
manner, and therefore had the benefit of excussion (Viuda de Chan Diaco v. Peng, 53 Phil. 906
[1928]); while civil partners were primarily but only jointly (pro-rata) liable for partnership
debts (Co-Pitco v. Yulo, 8 Phil. 544 [1907]); and
(c) Commercial partnerships were deemed to be, and subject to Code of Commerce provisions
for, merchants.
As was aptly observed in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the distinction
between civil and commercial partnerships was critical under the old set-up because it
determined the applicable rules for registration, liability for the members, and the rights and
manner of dissolution.
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At the onset of Philippine jurisprudential development, it was recognized in Prautch v.
Hernandez, 1 Phil. 705 (1903), that a commercial or mercantile partnership had for its object the
pursuit of industry or commerce, and was then treated like a merchant that must necessarily be
governed by the Code of Commerce and had to comply with the registration requirements
thereof to lawfully come into existence.
In a commercial partnership, both the partnership and the separate partners thereof may be
joined in one action, but the private property of the partners could be taken in payment of the
partnership debts only after the common property of the partnership had been exhausted. (La
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. 498 [1906]; Bourns v. Carman, 7
Phil. 117 [1906]; Ang Seng Quen v. Te Chico, 7 Phil. 541 [1907]); and therefore could not also
maintain an action in its name Prautch, etc. v. Hernandez, 1 Phil. 705 [1903]).
In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), which involved a commercial
partnership, but the requirements of the Code of Commerce for the execution of public document
and registration in the mercantile registry (Art. 119, Code of Commerce) were not complied with,
the Supreme Court held that the “alleged partnership never had any legal existence nor has it
acquired any juridical personality in the acts and contracted executed and made by it,” (Ibid, at
pp. 500-501) and what was applied was Article 119 of the Code of Commerce which made liable
for the debts incurred by such “partnership de facto” the “persons in charge of the management
of the association . . . together with persons not members of the association with whom they may
have transaction business in the name of the same.” (Ibid, at p. 500.) Thus, the legal consequence
of failing to comply with the registration requirements under the Code of Commerce was to
make the acting partners personally and primarily liable for all partnership debts. The doctrine
is similar to the agency doctrine that an agent who enters into a transaction on behalf of a non-
existing principal becomes personally liable for the obligations incurred thereby.
In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the civil partnership was engaged
in the laundry business and governed by the provisions of the Civil Code, it was held that the
partnership existed as a separate juridical person even when no formal partnership agreement
was entered into and registered, and thereby the obligations of the partners for partnership
debts were held to be pro-rata.
Nonetheless, the registration requirements under the Code of Commerce were never interpreted
to undermine the obligatory force of contracts entered into in the name of the commercial
partners. Thus, it was held in Prautch, etc. v. Jones, 8 Phil. 1 (1907), and affirmed in Ang Seng
Quen v. Te Chico, 12 Phil. 547 (1909), that while an unregistered commercial partnership and
association has no juridical personality, and as such cannot maintain an action in the partnership
name, nevertheless, the individual members may sue jointly as individuals, and persons dealing
with them in their joint capacity will not be permitted to deny their right to do so.
It was held in De los Reyes v. Lukban, 35 Phil. 757 (1916), and affirmed in Philippine National
Bank v. Lo, 50 Phil. 802 (1927), that under the Code of Commerce, where the partners’ liability
for a partnership debt was only secondary or subsidiary, their right of excussion was deemed
already satisfied where at the time the judgment was executed against the partnership they were
unable to show that there were still partnership assets, or when a writ of execution against the
partnership had been returned not fully satisfied.
There was under the old set-up the debate of whether a partnership can choose which set of laws
should govern it; or whether a group of co-venturers can choose by the expediency of
registration under the old Civil Code or under the Code of Commerce, of whether to organize a
civil or a commercial partnership. In Prautch, et. v. Hernandez, 1 Phil. 705 (1903), it was held –
If that section includes commercial partnerships then such a partnership can be organized under
it selecting from the Code of Commerce such of its provisions as are favorable to the partners and
rejecting such as are not, and even including in its articles of agreement the right to do things
which by that Code are expressly prohibited. Such a construction would allow a commercial
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partnership to use or dispense with the Code of Commerce as best suited its own ends. (Ibid, at
pp. 707-708)
b. Significance of Knowing the Historical Distinctions Between Civil and Commercial
. . . Is a commercial partnership distinguished from a civil one by the object to which it is devoted Partnerships
or by the machinery with which it is organized? We think that the former distinction is the true
one. The Code of Commerce of 1829 distinctly provided that those partnership were mercantile What may be considered as a good development in our present Law on Partnerships is the
which had for their object an operation of commerce. (Art. 264.). x x x . The Code of Commerce removal of the distinctions between civil and commercial partnerships, and which are now
declares the manner in which commercial partnerships can be organized. Such organization can governed by a common set of laws, i.e., the relevant provisions of the New Civil Code. The main
be effected only in certain well-defined ways. The provisions of this Code were well known when drawback of such a development is that even commercial partnerships (and admittedly there
the Civil Code was adopted. The author of that Code when writing article 1667, having in mind may not be quite a number operating due to the availability of the corporate medium), would
the provisions of the Code of Commerce, did not say that a partnership may be organized in any find themselves governed by non-commercial doctrines, such as the non-central role of the
form, which would have repealed the said provisions of the Code of Commerce, but did say institution of registration. And in fact, many issues have arisen under our current Law on
instead that a civil partnership may be organized in any form. Partnerships arising from having adopted in the New Civil Code provisions from the Code of
Commerce on registration requirements.
Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), what the Supreme
Court held critical was proper application of Article 1670 of the old Civil Code which provided In addition, the “civil-coding” of some of the provisions of the Code of Commerce which were
that civil partnerships, on account of the objects to which they are devoted, may adopt all the copied into the New Civil Code, should provide a better understanding of the legal consequences
forms recognized by the Commercial Code, and thereby held that – of current provisions of the Philippine Law on Partnerships, and a better constructions of the
effects they have on the commercial field, by providing a comparison with the old jurisprudential
It will be seen from this provision that whether or not partnerships shall adopt the forms rulings for commercial partnerships under the provisions of the Code of Commerce.
provided for by the Civil or Commercial Codes is left entirely to their discretion. And
furthermore, that such civil partnerships shall only be governed by the forms and provisions of —oOo—
the Commercial Code when they expressly adopt them, and then only in so far as they (rules of
the Commercial Code) do not conflict with the provisions of the Civil Code. In this provision the
legislature expressly indicates that there may exist two classes of commercial associations,
depending not upon the business in which they are engaged but upon the particular form
adopted in their organization. . . We are inclined to the belief that the respective codes, Civil and
Commercial, have adopted a complete system for the organization, control, continuance,
liabilities, dissolutions, and juristic personalities of associations organized under each. . . It is our
opinion that associations organized under the different codes are governed by the provisions of
the respective code. (Ibid, at pp. 10-11)
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2 – THREE LEVELS OF EXISTENCE OF PARTNERSHIPS
[Updated: 23 August 2010]
III. THREE LEVELS OF EXISTENCE OF PARTNERSHIPS
The Law on Partnerships under the New Civil Code treats of the partnership in three “levels of
existence,” namely:
(a) As a contractual relationship between and among the partners;
(b) As a means or medium of doing business, through the structure of separate
juridical personality, or as the basis of creating 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.
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The Court defined the inextricable link of the contract of partnership between the original
partners and the juridical personality that arose from the nexus of that contract, and that when
the contract was rescinded with the withdrawal of the majority of the partners, then the
partnership was dissolved and its separate juridical personality ceased to exists to cover the new
set of partners, thus:
Two (2) main issues are thus posed for our consideration in the case at bar:
(1) whether the partnership which had hired petitioner Yu as Assistant General Manager had
been extinguished and replaced by a new partnership composed of Willy Co and Emmanuel
Zapanta; and
(2) if indeed a new partnership had come into existence, whether petitioner Yu could
nonetheless assert his rights under his employment contract as against the new partnership.
In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal
effect of the changes in the membership of the partnership was the dissolution of the old
partnership which had hired petitioner in 1984 and the emergence of a new firm composed of
Willy Co and Emmanuel Zapanta in 1987. (Ibid, at p. 80.)
The Court held that the applicable rule would be Article 1828 of the Civil Code which defines
“dissolution of a partnership [as] the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business.”
Nonetheless, the determination of the right of Mr. Yu to recover from the new partnership which
constituted its own separate juridical personality was based on the fact that it continued the old
business enterprise of the dissolved partnership, thus:
In the ordinary course of events, the legal personality of the expiring partnership persists for the
limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is
important to underscore the fact that the business of the old partnership was simply continued
by the new partners, without the old partnership undergoing the procedures relating to
dissolution and winding up of its business affairs. In other words, the new partnership simply
took over the business enterprise owned by the preceding partnership, and continued using the
old name of Jade Mountain Products Company Limited, without winding up the business affairs
of the old partnership, paying off its debts, liquidating and distributing its net assets, and then re-
assembling the said assets or most of them and opening a new business enterprise. There were,
no doubt, powerful tax considerations which underlay such an informal approach to business on
the part of the retiring and the incoming partners. It is not, however, necessary to inquire into
such matters.
What is important for present purposes is that, under the above described situation, not only the
retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the
business of the old, dissolved, one, are liable for the debts of the preceding partnership.
In Singson, et al. v. Isabela Saw Mill, et al., the Court held that under facts very similar to those in
the case at bar, a withdrawing partner remains liable to a third party creditor of the old
partnership. The liability of the new partnership, upon the other hand, in the set of
circumstances obtaining in the case at bar, is established in Article 1840 of the Civil Code. . .(Ibid,
at pp. 81-82)
Yu therefore recognized the applicability of the successor liability arising from business
enterprise transfer (i.e., that the creditors of the business enterprise have a right to recover
payment of their claims against the transferee of the business enterprise), and recognized that
the business enterprise transfer doctrine is governed in details under Article 1840 of the Civil
Code.
Yu also recognized one of the principles in business enterprise transfers, that the new owners of
the business enterprise do have a right to choose who would be employed in their newly
acquired business, and they cannot be compelled to maintain the employment contracts of the
managers and employees existing with the transferor, thus:
It is at the same time also evident to the Court that the new partnership was entitled to appoint
and hire a new general or assistant general manager to run the affairs of the business enterprise
taken over. An assistant general manager belongs to the most senior ranks of management and a
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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 partnership venture. In denying the applicability of the charges of
estafa the Court held –
The P172 having been received by the partnership, the business commenced and profits accrued,
the action that lies with the partner who furnished the capital for the recovery of his money is
not a criminal action for estafa, but a civil one arising from the partnership contract for a
liquidation of the partnership and a levy on its assets if there should be any. x x x [Estafa] . . . does
not include money received for a partnership; otherwise the result would be that, if the
partnership, instead of obtaining profits, suffered losses, as it could not be held liable civilly for
the share of the capitalist partner who reserved the ownership of the money brought in by him, it
would have to answer to the charge of estafa, for which would be sufficient to argue that the
partnership had received money under the obligation to return it. The complaint for estafa is
dismissed without prejudice to the institution of a civil action. (Ibid, at p. 86. See also People v.
Alegre, (CA) 48 O.G. 5341 [1952]).
The ruling in Clarin should be distinguished from that in People v. de la Cruz, (G.R. No. 21732
[1957], 03 September 1924, cited in People v. Campos, (CA) 54 O.G. 681 [1957]) where the
industrial partner was held liable for estafa for appropriating money that has been given to him
by the capitalist partner for a particular transaction. The doctrine was reiterated in Liwanag v.
Court of Appeals, 281 SCRA 255 (1997), “Thus, even assuming that a contract of partnership was
indeed entered into by and between the parties, we have ruled that when money or property
have been received by a partner for a specific purpose (such as that obtaining in the instant case)
and he later misappropriated it, such partner is guilty of estafa.”
Perhaps the interplay of the various levels of existence of the partnership arrangement is best
exemplified by the decision of the Supreme Court in Rojas v. Maglana, 192 SCRA 110 (1990). In
that case, a partnership was constituted between Rojas and Maglana to operate timber forest
products concession, and articles of co-partnership were duly executed and registered with the
SEC using the firm name “Eastcoast Development Enterprises”. Later, the partners took in an
industrial partner, whereby they executed an “Additional Agreement” which essentially adopted
the registered articles but covering the acceptance of an industrial partner, which agreement
was not duly registered with the SEC, and the partnership operated under the original registered
firm name. Shortly thereafter, the original partners bought out the interest, share and
participation of the industrial partner in the firm, and the partnership was continued without the
benefit of any written agreement or reconstitution of their written articles of co-partnership.
When Rojas entered into a separate management contract with another logging enterprise and
withdrew his equipment from the partnership, Maglana made a formal demand against Rojas for
the payment of his promised contribution to the partnership and compliance with his obligation
to perform the duties of logging superintendent as provided expressly in the registered articles
of co-partnership. When Rojas responded that he would not be able to comply with his promised
contribution and will not work as logging superintendent for the partnership, Maglana gave
notice of the dissolution of the partnership. In the suit that ensued between the partners, one of
the issues that had to be resolved by the Court was the nature of the partnership and the legal
relationship of Rojas and Maglana after the retirement of the industrial partner from the second
partnership.
On this issue, the trial court ruled that the second partnership superseded the first partnership,
so that when the second partnership was dissolved by the withdrawal of the industrial partner,
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there being no written contract of co-partnership when it was continued by the two original even third parties dealing with the partnership), as to the contractual obligations, the rights and
partners, there was no reconstitution of the original partnership, and consequently the duties of the partners, and which has effective force even as the partnership undergoes changes
partnership that was continued between Rojas and Maglana was a de facto partnership at will. In within its constitution by the acceptance into and withdrawal of partners into the
overruling the court a quo, the Court held – 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
. . . [I]t appears evident that it was not the intention of the partners to dissolve the first inter-partnership rights and obligations.
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 —oOo—
an equal share in the profits and fixed the term of the second partnership to thirty (30) years,
everything else was the same. Thus, they adopted the same name, . . . they pursued the same
purposes and the capital contributions of Rojas and Maglana as stipulated in both partnership
call for the same amounts. Just as important is the fact that all subsequent renewal of Timber
License No. 35-36 were secured in favor of the First Partnership, the original licensee. . . To all
intents and purpose therefore, the First Articles of Partnership were only amended, in the form
of Supplementary Articles of Co-Partnership . . . which was never registered . . . Otherwise stated,
even during the existence of the second partnership, all business transactions were carried out
under the duly registered articles. (Ibid, at pp. 117-118)

The Court then proceeded to hold that —

On the other hand, there is no dispute that the second partnership was dissolved by common
consent. Said dissolution did not affect the first partnership which continued to exist “as shown
by the subsequent acts of the original partners carrying one with the original partnership
business and confirming the obligations constituted under the original articles of partnership.
The conclusion of the Court was thus: “Under the circumstances, the relationship of Rojas and
Maglana after the withdrawal of [the industrial partner] can neither be considered as a de facto
partnership, nor a partnership at will, for as stressed, there is an existing partnership, duly
registered.” (Ibid, at p. 118)

Rojas therefore affirms two important aspects in Partnership Law:Firstly, that registration of the
contract of partnership with the SEC has the legal effect of binding the partners (and perhaps
 10
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 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
 11
the San Juan estate one of the partnership properties in anticipation that Elser would accept the
partnership arrangement, but which Elser definitive refused and the partnership property was
substituted by Lyons separate property to secure the venture, did not make Lyons a partner in
the San Juan estate venture, since there was never any meeting of minds to constitute such
partnership. Lyons demonstrate that before there can be a partnership enterprise, it is necessary
that there must having been a meeting of minds to constitute a contract of partnership.
1. Characteristics of the Partnership Contract
a. Nominate and Principal
The contract of partnership is a nominate contract, not only because it has been given a specific
name under the New Civil Code, but it is a principal contract and can exists on its own upon the
essential elements coming together at perfection; and that once created there is a set of rules
(Law on Partnerships of the New Civil Code) that govern such contract, and the parties to such
contract cannot refuse generally to be governed by such provisions. Thus, Article 45 of the Civil
Code provides that “Partnerships and associations for private interest or purpose are governed
by the provisions of this Code concerning partnerships.”
To illustrate the nominate and principal nature of the contract of partnership, Fernandez v. Dela
Rosa, 1 Phil. 671 (1903), held that –
The essential points upon which the minds of the parties must meet in a contract of partnership
are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits.
If the contract contains these two elements the partnership relation results, and the law itself
fixes the incidents of this relation if the parties fail to do so.” In resolving the motion for
reconsideration on in original decision, the Court even held that “It is of no importance that the
parties have failed to reach an agreement with respect to the minor details of contract. These
details pertain to the accidental and not to the essential part of the contract. (Ibid, at p. 680. Also
Fue Leung v. IAC, 169 SCRA 746 [1989]).
b. Consensual
A contract of partnership is essentially consensual, it is perfected upon meeting of the minds of
the parties of the subject matter to undertake a business venture, and the consideration, which is
the obligation to contribute of money, property or service to a common fund. Whether the
business enterprise is actually constituted or set-up, or whether or not the contributions have
been made into the partnership coffers, do not detract from the coming into existence of a valid
partnership contract. And failure to comply with the undertaking to deliver the promised
contribution does not make a contract of partnership void, but merely gives a ground for its
dissolution.
Thus, in the early decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), the Court held that “The
execution of a written agreement was not necessary in order to give efficacy to the verbal
contract of partnership as a civil contract, the contributions of the partners not having been in
the form of immovables or rights in immovables.” (Ibid, at p. 677). This feature of consensuality
of a contract of partnership is now embodied in Article 1772 which provides that “A partnership
may be constituted in any form except where immovable property or real rights are contributed
thereto, in which case a public instrument shall be necessary.”
Although Articles 1772 and 1773 provide for public instrument and registration when the capital
contribution is more than P3,000.00, and that of an inventory attached to the public instrument
whenever immovable property is contributed, nonetheless jurisprudence even discount the
nullity of the resulting contract of partnership, as will be discussed hereunder.
In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court held that when members of
the family leased out a parcel of land to SHELL Company, and used the advance rentals paid them
to allow one of their members to capitalize the dealership with SHELL, then a partnership has
been constituted among them:
 12
There is no doubt that the parties hereto formed a partnership when they bound themselves to
contribute money to a common fund with the intention of dividing the profits among themselves.
The sole dealership by the petitioner and the issuance of all government permits and licenses in
the name of petitioner was in compliance with the [policy that a dealership can only be granted
to one person] of SHELL and the understanding of the parties of having only one dealer of the
SHELL products. (Ibid, at p. 837.)
In essence, Estanislao demonstrates that it is the true meeting of the minds of the parties (in this
case, to pursue a common venture as a family group) that shall govern the rights and obligations
of the contracting parties, and not the evidence of a purported agreement (in this case the
dealership agreement being registered only in the name of a brother).
In contrast, in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), the parties executed a “partnership
agreement,” to conduct and carry on the business of operating a theatre for the exhibition of
motion and talking pictures; nonetheless, the Court held that the real intention of the parties was
to effect a sub-lease of the property and the partnership agreement was resorted to in order to
avoid the provision in the main lease agreement prohibiting a sublease of the premises. The
Court took into consideration the following actuations of the supposed Yulo partner to show that
there as never a real agreement to form a partnership, thus:
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she
did not furnish any help or intervention in the management of the theatre. In the third place, it
does not appear that she has ever demanded from defendant any accounting of the expenses and
earnings of the business. Were she really a partner, her first concern should have been to find out
how the business was progressing, whether the expenses were legitimate, whether the earnings
were correct, etc. She was absolutely silent with respect to any of the acts that a partner should
have done; all that she did was to receive her share of P3,000 a month, which can not be
interpreted in any manner than a payment for the use of the premises which she had leased from
the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant
of June 17, 1945 (Exh. “A”), which shows that both parties considered this offer as the real
contract between them. (Ibid, at p. 117.)
Yulo demonstrates the principle that a contract of partnership is consensual in nature and is
constituted by the real meeting of the minds; such that even when formal articles of partnership
are drawn-up between the parties, when it fact the evidence shows that they never intended to
enter into a partnership, the article of partnership cannot create a partnership when in fact there
has never been a meeting of minds to constitute one.
In contrast, we view the decision in Woodhouse v. Halili, 93 Phil. 526 (1953), as a little dubious
when it distinguishes between the obligation to enter into a contract of partnership, from that of
executing the certificate of partnership itself. In Woodhouse, the plaintiff and the defendant had
come to an agreement to enter into a partnership business to bottle and distribute an American
brand softdrinks in the Philippines; and that defendant, who would primarily finance the
business, agreed to grant plaintiff the right to receive 30% of the profits under his obligation to
secure the bottling franchise for the venture. When the venture was eventually set-up, the
defendant had refused to finalize the articles of partnership when he learned during the
negotiations in the United States that plaintiff did not have for himself the bottling franchise he
promised he had secured. The plaintiff brought action to have the articles of partnership
executed and to receive his 30% share in the earnings. Prescinding from the language of the
original agreement executed between the parties that the very language of the agreement that
the parties intended that the execution of the agreement to form a partnership was to be carried
out at a later date. They expressly agreed that they shall form a partnership,” (Ibid, at p. 539) the
Court held –
As the trial court correctly concluded, the defendant may not be compelled against his will to
carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the
defendant has an obligation to do, not to give. The law recognizes the 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
 13
basically embodies the formation of a common fund with the intention of dividing the profits, as
was the case between the parties in Woodhouse, a contract of partnership arises, and the
incidents thereof governed by Partnership Law, even in the absence of a formal certificate or
articles of co-partnership.
Only recently, Tocao v. Court of Appeals, 342 SCRA 20 (2000), summarized the prevailing
doctrine on the nature of the contract of partners, thus —
To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or
more persons bind themselves to contribute money, property or industry to a common fund; and
(2) intention on the part of the partners to divide the profits among themselves. It may be
constituted in any form; a public instrument is necessary only where immovable property or real
rights are contributed thereto. This implies that since a contract of partnership is consensual, an
oral contract of partnership is as good as a written one. Where no immovable property or real
rights are involved, what matters is that the parties have complied with the requisites of a
partnership. The fact that there appears to be no record in the Securities and Exchange
Commission of a public instrument embodying the partnership agreement pursuant to Article
1772 of the Civil Code did not cause the nullification of the partnership. . . (Ibid, at pp. 30-31.)
Tocao held that so long as the two essential elements of a partnership are present, then the fact
that the business was operated under the name of a registered sole proprietorship was of no
moment, especially when the registration of the business name with the Bureau of Domestic
Trade was only for purpose of being able to secure such business name. (Ibid, at p. 36.)
c. Onerous and Bilateral
The onerous and bilateral characteristics of the contract of partnership are demonstrated by the
fact that the existence of a partnership requires an agreement for the creation of a common fund
from the contributions of the partners, which may either be in money, property or industry.
Under Article 1786, a partner becomes by its very constitution, “a debtor of the partnership for
whatever he may have promised to contribute thereto.” All partners are bound to contribute to
the common fund, or to the partnership, including even the industrial partner who is bound to
contribute his service.
d. Preparatory and Progressive
A contract of partnership is not entered into for the sake of merely creating a contractual
relationship between and among the partners, but primarily to pursue a business enterprise
(i.e., creation of a common fund with intent to share profits and losses). Consequently, falling
within the contractual meeting of the minds of the parties is that the inter-partnership
relationship continues to evolve as the underlying business enterprise itself evolves and
progresses. In other words, the contract of partnership is simply the base upon which other
contracts and various other transactions are to be pursued with the public, and for which the
partners shall continually adjust their working relationships. The operation of the underlying
business enterprise also determines the nature and value of the equity of the partners. Thus,
when the nexus of the contract of partnership (the common fund and intention to divide the
profits and losses) have been constituted, other contractual relationships are expected to flow
therefrom as a matter of course.
An early illustration of the preparatory and progressive nature of the contract of partnership can
be found in the decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), where once the elements
of contribution to a common fund and understanding of sharing of profits had been clearly
established between the parties, a contract of partnership arose and all the incidents arising
therefrom automatically engendered even if the parties have not yet decided upon the details of
their relationship, thus —
. . . We have already stated in the opinion what are the essential requisites of a contract of
partnership . . . Considering as a whole the probatory facts which appears from the record, we
have reached the conclusion that plaintiff and the defendant agreed to the essential parts of that
contract, and did in fact constitute a partnership, with the funds of which were purchased the
 14
cascoes with which this litigation deals, although it is true that they did not take precaution to Art. 1767. By the contract of partnership two or more persons bind themselves to
precisely establish and determine from the beginning the conditions with respect to the contribute money, property, or industry to a common fund, with the intention of dividing
participation of each partner in the profits or losses of the partnership. The disagreements the profits among themselves.
subsequently arising between them, when endeavoring to fix these conditions, should not and
cannot produce the effect of destroying that which has been done, to the prejudice of one of the Two or more persons may also form a partnership for the exercise of a profession.
partners, nor could it divest his rights under the partnership which had accrued by the actual (1665a).
contribution of capital which followed the agreement to enter into a partnership, together with
Art. 1770. A partnership must have a lawful object or purpose, and must be
the transactions effected with partnership funds. The law has foreseen the possibility of the
established for the common benefit or interest of the partners.
constitution of a partnership without an express stipulation by the partners upon those
conditions, and has established rules which may serve as a basis for the distribution of profits
When an unlawful partnership is dissolved by a judicial decree, the profits shall be
and losses among the partners. . . We consider that the partnership entered into by the plaintiff
confiscated in favor of the State, without prejudice to the provisions of the Penal Code
and the defendant falls within the provision of this article. (Ibid, at pp. 680-681.)
governing the confiscation of the instruments and effects of a crime. (1666a)

—oOo—
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
4 – ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP
necessary. (1667a)

[Updated: 12 October 2009]

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

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:
 15
(a) CONSENT: The meeting of minds between two or more persons to form a partnership (i.e., to
pursue jointly a business enterprise, or to jointly exercise a profession);
(b) SUBJECT MATTER: The “creation of a common fund” or more specifically, to undertake a
business venture with the “intention of dividing the profits among themselves”, or in the case of a
professional partnership, to exercise together a common profession; and
(c) CONSIDERATION: The contribution of cash, property or service to the business venture.
1. Element of CONSENT
______
Art. 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, pesons who are not partners as to each other
are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether
such co-owners or co-possessors do or do not share any profits made by the use of the
property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any property
from which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is prima
facie evidence that he is a partner in the business, but no such inference shall be drawn if
such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the
business;
(e) As the consideration for the sale of a goodwill of a business or other property by
installments or otherwise. (n)
_____
a. Consent to Pursue a Business Jointly Is the Nexus of the Partnership Relationship
The agreement of two or more persons to “bind themselves” to jointly pursue a business venture
constitutes the very nexus by which the contract of partnership arises under Article 1767 of the
Civil Code. Under Article 1769 of the Civil Code, “in determining whether a partnership exists,”
the first and foremost rule is that “persons who are not partners as to each other are not
partners as to third persons.” In other words, the general rules is that no person can find himself
a partner in a partnership, even as to third parties, unless he previously consented to be in such
contractual relationship.
One does not become a partner, nor is a partnership constituted, but the fact alone that they are
associated together in situation where there is co-ownership or profits earned therefrom. Thus,
under Article 1769(2), “Co-ownership or co-possession does not of itself establish a partnership,
whether such co-owners or co-possessors do or do not share any profits made by the use of the
 16
property.” The essence of every partnership arrangement is the consent of each of the partners to
be associated in a business venture.
b. Legal Capacity to Contract
Parties to a contract of partnership must have legal capacity to contract. Under Article 1782,
persons who are prohibited from giving each other any donation or advantage cannot enter into
a universal partnership. Under Article 87 of the Family Code, a married woman may enter into a
contract of partnership even without her husband’s consent, but the latter may object under
certain conditions.
c. Admission of New Partner into an Existing Partnership
Since consent is the nexus of all partnership relationships, the principle is exemplified
under Article 1804 of the Civil Code which provides even in an already existing partnership,
that no person shall be admitted into a partnership, or become a party to the partnership
arrangement without the consent of all the partners.
2. SUBJECT MATTER: Pursuit of a Business Enterprise
Essentially, the consent or meeting of the minds of the parties in a contract of partnership must
be upon a particular type of “subject matter”, which essentially is the pursuit of a ”business
enterprise”:
(a) an agreement to contribute to a common fund; and
(b) with joint interest in the profits and losses thereof.
The agreement to share profits and losses from the business venture is the hallmark of a
partnership arrangement. It is also the essence of the “equity” position of the partners vis-a-vis
the business enterprise, as differentiated from partnership suppliers and creditors, and company
employees, who bear no proprietary interest with the business enterprise they deal with.
Article 1769 of the Civil Code, in providing for the rules “In determining whether a partnership
exists,” states under paragraph (4) that “The receipt by a person of a share of the profits in
the business is prima facie evidence that he is a partner in the business.” In contrast, the same
article provides, “The sharing of gross returns does not of itself establish a partnership, whether
or not the persons sharing them have a joint or common right or interest in any property from
which the returns are derived.”
It is fairly implied under Article 1767, as it defines a contract of partnership, that the essence of
the agreement among the partners is to become equity-holders in a business enterprise, because
their consent must be the creation of a common fund “with the intention of dividing the profits
among themselves.” The essence of an equity holder is to take the profits from the business, and
consequently, to absorb also the losses sustained thereby. Therefore, when a person is entitled to
share in the “gross returns” of the business venture, he is not an equity holder, and if it is
operated under the medium of a partnership, such person is not a partner in the venture.
In Santos v. Reyes, 368 SCRA 261 (2001), the fact that in their “Articles of Agreement,” the parties
agreed to divide the profits of a lending business “in a 70-15-15 manner, with the petitioner
getting the 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
 17
business enterprise, since the essence of partnership is that the partners share in the profits and
losses.
In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court held that –
“Being a contract of partnership, each partner must share in the profits and losses of the venture.
That is the essence of a partnership. And even with an assurance made by one of the partners
that they would earn a huge amount of profits, in the absence of fraud, the other partners cannot
claim a right to recover the highly speculative profits. It is a rare business venture guaranteed to
give 100% profits.” (Ibid, at p. 95)
The Court also held that any stipulation on the payment of a high commission to one of the
partners must be understood have been based on an anticipation of large profits being made
from the venture; and since the venture sustained losses, then there is no basis to demand for the
payment of the commissions.
Nonetheless, even when a person is entitled to share in the “profits” of the business venture,
when the legal basis upon such right is based by some other contractual relationship not borne
out of equity or proprietary interests, such as payment of the principal and/or interest on a loan
or a debt, wages of an employee, rents to a landlord, annuity to a widow or representative of
a deceased partner, or as consideration for the sale of the goodwill of a business or other
property by installments. In other words, the contractual agreement to share in the profits and
losses of a business venture must always be based upon the assumption of equity interest in the
business enterprise upon which the contract of partnership shall arise.
a. Co-ownership or Co-Possession Do Not Necessarily Constitute a Partnership
In Navarro v. Court of Appeals, 222 SCRA 675 (1993), the Court held that mere co-ownership or
co-possession of property does not necessarily constitute the co-owners or co-possessors
partners, regardless of whether or not they share any profits derived from the use of the
property, when no indication is shown that the parties had intended to enter into a partnership.
In Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436 (1985), four brothers and sisters
acquired lots with the original purpose to divide the lots among themselves for residential
purposes; when later they found it not feasible to build their residences thereon because of the
high cost of construction, they decided to resell the properties to dissolve the co-ownership. The
Court ruled that no partnership was constituted among the siblings, since the original intention
was merely to collectively purchase the lots and eventually to partition them among themselves
to build their residences; and that in fact they had no choice but to resell the same to dissolve the
co-ownership. Obillos found that the division of the profits was merely incidental to the
dissolution of the co-ownership which was in the nature of things a temporary state; and that
there could not have been any partnership, but merely a co-ownership, since there was utter lack
of intent to form a partnership or joint venture.
In contrast, in Reyes v. Commissioner of Internal Revenue, 24 SCRA 198 (1968), the Court found
that where father and son purchased a lot and building and had it administered by an
administrator, and divided equally the net income, there was a partnership formed because
profit was the original intention for the common fund.
Likewise in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957), where three sisters
bought four pieces of real property with every intention to lease them out, and which they in fact
leased to various tenants and derived rentals therefrom, there was a partnership formed.
b. Receipt By a Person of a Share of the Net Profit
Under Article 1769(4), the receipt by a person of a share of the net profits of a business is prima
facie evidence that he is a partner in the business. However, in the following cases, where there is
legal and contractual basis for the receipt of the profits other than as equity holder, there is no
partnership constituted, thus:
 18
(a) As installment payments of debt and/or interests thereof; The arrangement was deemed to be one of employment, with Bastida contributing his services to
manage the particular line of business of Menzi & Co.
(b) As wages of an employee;
Tocao v. Court of Appeals, 342 SCRA 20 (2001), held that “while it is true that the receipt of a
(c) As rentals paid to a landlord; 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
(d) As annuity to a widow or representative of deceased partner;
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
(e) As consideration of sale of goodwill or other property.
administrative staff and the sales force.” (Ibid, at pp. 33-34).

Thus, in Pastor v. Gaspar, 2 Phil. 592 (1903), the Court held that there was no new partnership
c. Meeting of Minds on the Establishing a Common Fund Is the Essence of a Partnership
formed when a loan was obtained to purchase lorchas needed to expand the shipping business of
Contract
an existing shipping partnership venture under the condition that the lender would receive part
of the profits of the business in lieu of interests.
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
In Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906), where the terms of the contract provided for
and losses; outside of these essential elements, a contract of partnership cannot subsist.
the salary of the bookkeeper to be 5% of net profits of the business, the same did not make the
bookkeeper a partner in the business, since it was merely a measure of his salary as an employee
The importance of consent, vis-a-vis the elements of common fund and intention to divide the
of the company. To the same effect is the ruling inSardane v. Court of Appeals, 167 SCRA 524
profits among themselves, is best illustrated inYulo v. Yang Chiao Seng, 106 Phil. 111 (1959),
(1988).
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
In Bastida v. Menzi & Co., 58 Phil. 188 (1933), the Court held that despite the agreement that
parties over a commercial land where one party (the lessee) was prohibited under her main
Bastida was to receive 35% of the profit from the business of mixing and distributing fertilizer
contract of lease from subleasing the property, and the other party (the sublessee) wanted to
registered in the name of Menzi & Co., there was never any contract of partnership constituted
operate a threater in said premises. The Court held –
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
The most important issue raised in the appeal is that contained in the fourth assignment of error,
for operating it were entirely for the account of Menzi & Co.; (b) there was no provision in the
to the effect that the lower court erred in holding that the written contracts, Exhs. “A”, “B”, and
agreement for reimbursing Menzi & Co. in case there should be no profits at the end of the year;
“C”, between plaintiff and defendant, are one of lease and not one of partnership. We have gone
and (c) the fertilizer business was just one of the many lines of business of Menzi & Co., and there
over the evidence and we fully agree with the conclusion of the trial court that the agreement
were no separate books and no separate bank accounts kept for that particular line of business.
was a sublease, not a partnership. The following are the requisites of partnership: (1) two or
 19
more persons who bind themselves to contribute money, property, or industry to a common
fund; (2) intention on the part of the partners to divide the profits among themselves. (Art. 1767,
Civil Code.)
In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she
did not furnish any help or intervention in the management of the theatre. In the third place, it
does not appear that she has ever demanded from defendant any accounting of the expenses and
earnings of the business. Were she really a partner, her first concern should have been to find out
how the business was progressing, whether the expenses were legitimate, whether the earnings
were correct, etc. She was absolutely silent with respect to any of the acts that a partner should
have done; all that she did was to receive her share of P3,000 a month, which can not be
interpreted in any manner than a payment for the use of the premises which she had leased from
the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant
of June 17, 1945 (Exh. “A”), which shows that both parties considered this offer as the real
contract between them.” (Ibid, at pp. 116-117)
In the more contemporary decision in Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988),
the Court affirmed the decision of the trial court “Ordering the defendant to execute a public
instrument embodying all the provisions of the partnership agreement entered into between
plaintiffs and defendant as provided for in Article 1771, Civil Code of the Philippines.” In that
case, the siblings in a family leased out to SHELL a family commercial lot for the establishment of
a gasoline station, and they invested the advanced rentals they received from SHELL to allow one
their brother to be the registered dealer of SHELL under the 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 facts and circumstances surrounding the case, we are fully satisfied that
their purpose was to engage in real estate transactions for monetary gain and then divide the
same among themselves, because:
1. Said common fund was not something they found already in existence. It was not a property
inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a
substantial portion thereof in order to establish said common fund.
 20
2. They invested the same, not merely in one transaction, but in a series of transactions. . . . The
number of lots (24) acquired and transactions undertaken, as well as the brief interregnum
between each, particularly the last three purchases, is strongly indicative of a pattern or common
design that was not limited to the conservation and preservation of the aforementioned common
fund or even of the property acquired by petitioners in February, 1943. In other words, one
cannot but perceive a character of habituality peculiar to business transactions engaged in for
purposes of gain.
3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of
petitioners herein. The properties were leased separately to several persons, who, from 1945 to
1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still
being so let, for petitioners do not even suggest that there has been any change in the utilization
thereof.
4. Since August, 1945, the properties have been under the management of one person, namely,
Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to
sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative
to said properties have been handled as if the same belonged to a corporation or business
enterprise operated for profit.
5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen
(15) years, since the first property was acquired, and over twelve (12) years, since Simeon
Evangelista became the manager.
6. Petitioners have not testified or introduced any evidence, either on their purpose in creating
the set up already adverted to, or on the causes for its continued existence. They did not even try
to offer an explanation therefore. (Ibid, at pp. 144-146.)
In other words, the essence of the contract of partnership is that the partners “contract or bind
themselves under a contractual arrangement” to be joint owners and managers of a business
enterprise, which is highlighted by the right to receive the net profits and share the losses
therein. Article 1770 of the Civil Code provides that for a partnership contract to be valid it “must
be established for the common benefit or interest of the partners,” which clearly indicates the
equity or proprietorship position of the partners. Consequently, if there is no clear meeting of the
minds to form a partnership venture, the fact that a person participates in the “gross receipts” of
a business enterprise or from a property arrangement does not make him a partner because he is
not made to bear the burdens of ownership, i.e.,to be liable for expenses and losses of the
business enterprise.
The decision in Ona v. Commissioner of Internal Revenue, 45 SCRA 74 (1972), is illustrative of this
principle. In Ona, in the project partition agreed upon by the heirs the agreed to keep the
properties of the estate together and to divide the profits in proportion to their stipulated
interests therein. In holding that there was thereupon constituted among the co-heirs an
unregistered partnership subject to corporate income tax under the Tax Code, the Court held –
It is thus incontrovertible that petitioners did not, contrary to their contention, merely limited
themselves to holding the properties inherited by them. Indeed, it is admitted that during the
material years herein involved, some of the said properties were sold at considerable profit and
that with said profit, petitioners engaged, thru Lorenzo T. Ona, in the purchase and sale of
corporate securities. It is likewise admitted that all the profits from these ventures were divided
among petitioners proportionately in accordance with their respective shares in the inheritance.
. . the moment petitioners allowed not only the incomes from their respective shares of the
inheritance but even the inherited properties themselves to be used by Lorenzo T. Ona as a
common fund in undertaking several transactions or in business, with the intent ion of deriving
profits to be shared by them proportionally, such act was tantamount to actually contributing
such incomes to a common fund and, in effect, they thereby formed an unregistered partnership.
(Ibid, at p. 81.)
Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939), where fifteen people contributed
money to buy a sweepstakes ticket with the intention to divide the prize which they may win,
and in fact the ticket won third prize, the Court ruled that they had formed a partnership which
was subject to tax as a corporate taxpayer. Likewise, inGallemet v. Tabilaran, 20 Phil. 241 (1911),
the Court held that when land is purchased with equal funds to be contributed by the parties, and
 21
it was the clear intention to divide the property between the two of them after acquisition, there There are a number of decisions that use the hazy doctrine of “attributes of proprietorship” as
could not have been formed a partnership. one of the indications of the existence of a contract of partnership or a partnership venture.

d. Proof of the Existence of the Business Enterprise May Support the Existence of a
Partnership Even After Dissolution
There have been cases where the existence of the business enterprise became the basis by which
the courts would conclude that indeed a contract of partnership had been entered into by the
parties.
In Idos v. Court of Appeals,] 296 SCRA 194 (1998), in determining whether the partnership
enterprise continued to exist and has not been terminated, the Court ruled that “The best
evidence of the existence of the partnership, which was not yet terminated (though in the
winding up stage), were the unsold goods and uncollected receivables, which were presented to
the trial court. Since the partnership has not been terminated, the petitioner and private
complainant remained as co-partners.” (Ibid, at p. 206.)
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:

In Tocao v. Court of Appeals, 342 SCRA 20 (2000), citing the ruling inIdos, the Court held that the
Petitioners [Tocao and Belo] admit that private respondent [Anay] had the expertise to engage in
fact that the claiming party “had been unceremoniously booted out of the partnership . . . she still
the business of distributorship of cookware. Private respondent contributed such expertise to
received her overriding commission (Ibid, at p. 36) . . . The winding up of partnership affairs has
the partnership and hence, under the law, she was the industrial or managing partner. It was
not yet been undertaken by the partnership. This is manifest in petitioners’ claim for stocks that
through her reputation with the West Bend Company that the partnership was able to pen the
had been entrusted to private respondent in the pursuit of the partnership business.” (Ibid, at p.
business of distributorship of that company’s cookware products; it was through the same
38.)
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)

e. Doctrine of “Attributes of Proprietorship” as a Means to Prove or Disprove the

By the set-up of the business, third persons were made to believe that a partnership had indeed
Existence of a Partnership
been forged between petitioners [Tacao and Belo] and private respondent [Anay] . . .
 22
On the other hand, petitioner Belo’s denial that he financed the partnership rings hollow in the
face of the established fact that he presided over meeting regarding matters affecting the
operation of the business. Moreover, his having authorized in writing . . . that private respondent
should receive thirty-seven (37%) of the proceeds of her personal sales, could not be interpreted
otherwise than that he had a proprietary interest in the business. His claim that he was merely a
guarantor is belied by that personal act of proprietorship in the business . . . (Ibid, at p.
32;underscoring supplied)
The business venture operated under Geminesse Enterprise did not result in an employer-
employee relationship between petitioners and private respondent. While it is true that the
receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a
partners in the business, the evidence in the case at bar controverts an employer-employee
relationship between the parties. In the first place, private respondent had a void in the
management of the affairs of the cookware distributorship, including selection of people who
would constitute the administrative staff and the sales force. . . (Ibid, at pp. 33-34; underscoring
supplied)
The exercise of the prerogatives of a proprietor should be viewed as merely collaborative
evidence of the partnership relationship between the parties in a business venture; in the end
the existence of the contract of partnership must be located in the actual meeting of minds to
constitute a common fund and to divide the profits thereof among themselves. The reason why
exercising the prerogatives of proprietorship or participating in the management of the business
enterprise cannot on their own be weighty evidence to prove the existence of a partnership
agreement is because, it is logical for a business enterprise, whether it is operated as a
partnership or a single proprietorship, to actually appoint a manager or other agents, authorized
to exercise acts of management, without being owners or partners of the business venture.
In any event, the application of the suppletory doctrine of “attributes of proprietorship” in
jurisprudence is a recognition that a partnership arrangement is in essence a contractual
aggregation of sole proprietors, who come together to form a common venture, each acting very
much a proprietor of the business venture, while at the same time as agents to one another.
The recent decision in Sy v. Court of Appeals, 398 SCRA 301 (2003), succinctly summarizes the
badges that would normally accompany a partnership relationship, thus:
Article 1767 of the Civil Code states that in a contract of partnership two or more persons bind
themselves to contribute money, property or industry to a common fund, with the intention of
diving the profits among themselves. Not one of these circumstances is present in this case
[which sought to make the truck driver of the company of many years to be characterized as an
industrial partner]. No written agreement exists to prove the partnership between the parties.
Private respondent did not contribute money, property or industry for the purpose of engaging
inthe supposed business. There is no proof 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]).
 23
f. When Subject Matter (the Business Venture) Is Unlawful or Against Public Policy
When the subject matter of a contract of partnership is unlawful, Article 1770 of the Civil Code
provides that the contract is void; and being void the purported partners have no right to
participate in any profits that may have been earned by the partnership enterprise. Thus, the
article provides that “the profits shall be confiscated in favor of the State.”
In Arbes v. Polistico, 53 Phil. 489 (1929), a partnership organized to engage in illegal gambling
was declared void by judicial order, and pursuant to the provisions of Article 1770, all the profits
earned were deemed confiscated in favor of the state. However, it decreed that the partners had
a right to recover their contributions, thus:
Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts
contributed are to be returned to the partners, because it only deals with the disposition of the
profits; but the fact that said contributions are not included in the disposal prescribed for said
profits, shows that in consequence of said exclusion, the general rules of law must be followed,
and hence, the partners must be reimbursed the amount of their respective contributions. Any
other solution would be immoral, and the law will not consent to the latter remaining in the
possession of the manager or administrator who has refused to return them, by denying to the
partners the action to demand them. (Ibid, at p. 495, quoting from MANRESA, COMMENTARIES
ON THE SPANISH CIVIL CODE, Vol. XI, pp. 262-264.)
In Deluao v. Casteel, 26 SCRA 475 (1968), the Court held that a contract of partnership that
sought to divide between the two partners-applicants the fishpond in contravention of the
prohibitory provisions of law was deemed dissolved when the Government did finally issue a
fishpond permit to one of the partners.
3. CAUSE or CONSIDERATION: Promised Contributions
In a contract of partnership, it is held that the cause or consideration for each partner is the
undertaking of the other or others to contribute money, property or industry to a common fund
(i.e., to the business venture). Being essentially a consensual is characteristic, a contract of
partnership is perfected by the agreement by the partners to make such contribution (i.e., by the
assumption of the obligation to contribute or to render service).
The essence of the element of cause or consideration in every contract of partnership is
emphasized in:
(a) Article 1786, which declares every partner to be a debtor of the partnership for whatever he
may have promised to contribute;
(b) Article 1787, which makes a partner liable for interest and damages for failing to contribute
the sum of money he was bound to pay under the articles of partnership;
(c) Article 1789, which prohibits an industrial partner from engaging in business for himself,
since he bound himself to contribute service to the partnership;
(d) Article 1790, which presumes an obligation to contribute equal shares among the partners
when there is no stipulation as to manner and amount of contribution; and
(e) Article 1830(4), which decrees the dissolution of a partnership when the specific thing, which
a partner had promised to contribute to the partnership, perishes before the delivery.
City of Manila v. Cumbe, 13 Phil. 677 (1909), held that “credit”, such as a promissory note or other
evidence of obligation, or even a mere goodwill, may be validly contributed into the partnership.
In other words, if service is a valid contribution to the common fund, then more so when it comes
to intangible things, rights and chooses in action.
4. Other Essential Elements of Partnership
 24
Although American jurisprudence would consider two other elements to be essential for the extended to the Philippine Islands.” (Ibid, at p. 687.) Nonetheless,Council of Red Men applied the
contract of partnership to exist, namely: then old Civil Code rule on civil partnership.

(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.
The only form of partnership where “business consideration” or the “gaining of profits” is not the
primary consideration for the common fund would be the authorized professional partnerships;
but even in such cases the Court has considered that a profession is pursued as part of the
livelihood undertaking of the partners. (In the Matter of the Petition for Authority to Continue Use
of Firm Name “Sycip, Salazar, et.al. Ozaeta, Romulo, etc.,” 92 SCRA 1 [1979].)

As discussed above, the subject matter of every contract of partnership must be the agreement to
The element of “joint control” is actually specified as the property rights of a partner under
jointly pursue a business enterprise. Thus, in Fernandez v. De la Rosa, 1 Phil. 671 (1903), it was
Article 1810 “to participate in the management”, as well as the confirmation of the attribute of
held that “a joint interest in the profits” would constitute one of the “essential points upon which
“mutual agency” under Article 1818 confirming that “Every partner is an agent of the partnership
the minds of the parties must meet in a contract of partnership.” (Ibid, at pp. 675-676) The
for the purposes of its business, and the act of every partner, including the execution in the
element of “joint control” is embodied in the provisions of law that provides for mutual agency in
partnership name of any instrument, for apparently carrying on in the usual way the business of
a partnership arrangement. (Art. 1810(3) provides that one of the property rights of a partner is
the partnership of which he is a member binds the partnership.”
“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 —oOo—
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
 25
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.”
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
 26
having all the names of the partners listed in the title to the property. Consequently, the article
provides that title to real property acquired in the partnership name may be conveyed only in
the partnership name.
Although a partnership is treated as a “person” before the law, such juridical personality does
not occupy the same level as the “person” of an individual. The “person” of an individual is
considered sacrosanct under modern societal doctrine; the State and civil society are organized
towards protecting that person and engendering its safety and well-being. On the other hand, the
“person” of a partnership is a legislative grant by the State or a fiction created by the law, not for
the benefit of the juridical person, but precisely only as a means or medium by which individuals
in society may achieve certain ends, and often they are business or commercial ends.
That a partnership is really a creature of the law as a means by which society may pursue certain
business or commercial ends means therefore that it is regulated under the Law on Partnerships
for the benefit of those who employ it as their medium (the partners) and those who are
authorized to deal with said medium (the creditors, the clients and customers). This
philosophical understanding of the essence and purpose of the partnership “juridical person” is
best exemplified by the provisions of Article 1775 of the Civil Code which denies juridical
personality to “Associations and societies, whose articles are kept secret among the members,
and wherein any one of the members may contract in his own name with third persons.” In other
words, if an aggregation of individuals is not meant to undertake a business or commercial
venture that is supposed to deal with the public at large, then it is not intended to be a medium of
doing business, and there is not purpose of granting it a separate juridical personality.
a. The Case for “Secret Associations”
Art. 1775. Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with third
persons, shall have no juridical personality, and shall be governed by the provisions
relating to co-ownership. (1669)
Under Article 1775 of the New Civil Code, “Associations and societies, whose articles are kept
secret among the members, and wherein any one of the members may contract in his own name
with third persons, shall have no juridical personality, and shall be govenred by the provisions
relating to co-ownership. (1669). Bautista discussed the rationale and effects of Article 1775 as
follows:
Not every contract intended to create a partnership produces a juridical personality. The Code
[Article 1775] withholds the attribute of juridical personality to “associations and societies
whose articles are kept secret among the members, and wherein any one of the members may
contract in his own name with third persons.” And applies to such associations or societies only
the rules governing co-ownership. The phrase “kept secret among the members,” according to
Manresa, does not mean that the articles are known to all the members but withheld from third
persons. It contemplates a situation where the articles, which allow any one of the members to
contract in his own name with third persons, are known to some members only and kept secret
from the rest. In other words, the secrecy is not directed to third persons but to some of the
partners.
This rule is intended to preserve the equality which must exist among the partners and to
prevent any of them from defrauding the partnership or the other members. This being the case
it does not prohibit secret stipulations which are not designed to produce this result. It would
not, for instance, have the effect of rendering invalid a separate agreement between two
members of a partnership pursuant to which one guarantees the other against loss of his capital
contribution or assures him of profit. Neither can the rule be invoked as against third persons by
the partners entering into the secret stipulations, in consonance with the general principle that a
party should not be allowed to take advantage of a nullity which he himself has caused.”
(BAUTISTA, at pp. 58-59, citing 11 Manresa 289 to 291)
 27
b. Jurisprudential Application of the Doctrine of Separate Juridical Personality of the Insolvency Law, one of the acts of bankruptcy upon which an adjudication of involuntary
Partnership insolvency can be predicted, this partnership must suffer the consequences of such failure, and
must be adjudged insolvent. We are not unmindful of the fact that some courts of the United
In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the contention that since the defendant States have held that a partnership may not be adjudged insolvent in an involuntary insolvency
sued was a partnership that summons must be served upon each of the partners, the Court held – proceeding unless all of its members are insolvent, while others have maintained a contrary
view. But it must be borne in mind that under the American common law, partnership have no
[I]t has been the universal practice in the Philippine Islands since American occupation, and was
juridical personality independent from that of its members; and if now they have such
the practice prior to that time, to treat companies of the class to which the plaintiff belongs as
personality for the purposes of the insolvency law. (Ibid, at pp. 918-919.)
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 In Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947), the Court held that the death of either
section of the Code of Civil Procedure.” (Ibid, at p. 448) of the two partners is not a ground for the dismissal of a pending suit against the partnership, as
a partnership possesses a personality distinct from any of the partners.
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 In Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988), the Court held that a
rules on insolvency work differently as compared to American jurisprudence on the same partnership may sue and be sued in its name or by its duly authorized representative, and when
matter. In Campos Rueda a petition for involuntary insolvency was filed by the creditors of the it has a designated managing partner, he may execute all acts of administration including the
limited partnership for an act of insolvency provided under the Insolvency Act (i.e., having failed right to sue debtors of the partnership.
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 –

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

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
The “doctrine of piercing the veil of corporate fiction” finds relevance in Corporate Law because
(art. 116, Code of Commerce). This being so and the juridical personality of a limited partnership
it is the means by which to by-pass the effects of the doctrine of “limited liability,” and through
being different from that of its members, it must, on general principle, answer for, and suffer, the
piercing acting stockholders and/or officers may be held personally liable for corporate debts.
consequence of its acts as such an entity capable of being the subject of rights and obligations. If,
as in the instant case, the limited partnership of Campos Rueda & Co. failed to pay its obligations
In spite of the partnership being accorded also a separate juridical partnership, the piercing
with three creditors for a period of more than thirty days, which failure constitutes, under our
doctrine has less application in Partnership Law because the partners are unlimitedly liable
 28
(i.e., personally liable with their separate properties) for partnership debts. And yet, the doctrine
found application to partnerships in Commissioner of Internal Revenue v. Suter, 27 SCRA 152
(1969), where the Court addressed the legal position of the Tax Commissioner seeking to make
the individual partners liable for income tax for the income earned by the limited partnership,
thus:
It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical
personality of its own, distinct and separate from that of its partners (unlike American and
English law that does not recognize such separate juridical personality). The bypassing of the
existence of the limited partnership as a taxpayer can only be done by ignoring or disregarding
clear statutory mandates and basic principles of our law. The limited partnership’s separate
individuality makes it impossible to equate its income with that of the component members. .
. (Ibid, at pp. 158-157.)
x x x.
. . . In the cited cases, the corporations were already subject to tax when the fiction of their
corporate personality was pierced; in the present case, to do so would exempt the limited
partnership from income taxation but would throw the tax burden upon the partners-spouses in
their individual capacities. The corporations, in the cases cited, merely served as business
conduits or alter egos of the stockholders, a factor that justified a disregard of their corporate
personalities for tax purposes. This is not true in the present case. Here, the limited partnership
is not a mere business conduit of the partner- spouses; it was organized for legitimate business
purposes; it conducted its own dealings with its customers prior to 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.
 29
It is well established in Philippine Corporate Law, that corporations as “persons before the law”
are entitled to the constitutional guarantee to due process and equal protection, (Smith, Bell & Co.
v. Natividad, 40 Phil. 136 [1919]; Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 [1971]) the rights
against unreasonable searches and seizure; (Stonehill v. Diokno, 20 SCRA 383 [1967]) but not to
the right against self-incrimination. (Bataan Shipyard and Engineering Co., Inc.. v. PCGG, 150 SCRA
181 [1987]).
In Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919), discusses the rationale why corporations
would be entitled to constitutional guarantees accorded to individuals, thus:
The guarantees of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill
of Rights, are universal in their application to all persons within the territorial jurisdiction,
without regard to any differences of race, color, or nationality. The word ‘person’ includes aliens .
. . Private corporations, likewise, are ‘persons’ within the scope of the guaranties in so far as their
property is concerned. . . (Ibid, at p. 144) The Smith, Bell & Co. rationale has equal application to
partnerships which are accorded as separate persons under the Partnership Law. The better
rationale applicable to partnership would be the ruling in Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA
823 (1971), where the Court held that a corporation is entitled to immunity against
unreasonable searches and seizures because “A corporation is, after all, but an association of
individuals under an assumed name and with a distinct legal entity. In organizing itself as a
collective body it waives no constitutional immunities appropriate for such body. Its property
cannot be taken without compensation. It can only be proceeded against by due process of law,
and is protected, under the 14th Amendment, against unlawful discrimination.” (Ibid, at p. 837,
quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652).
In fact, in the partnership setting there is closer identity between the partners and the
partnership in the sense that the partners not only own the partnership and its affairs and
they directly manage the affairs of the partnership, but more so that the separate juridical
personality is closely identified with the personality of the partners under delectus
personae considerations.
On the other hand, the 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
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.
 30
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.
Perhaps that is the basis for the difference in stance by the Court between two sets of
constitutional rights with respect to corporations, and also in the case of partnerships. Another
view is that the constitutional guarantees of due process, equal protection clause and against
unreasonable searches and seizures are all meant to curb the abuse that the State and its
representatives may employ upon the citizenry, including the modes upon which they conduct
their lives and businesses. On the other hand, the constitutional protection against self-
incrimination is not meant to prevent an actual State abuse but to avoid pressuring the
individual from having to tell a lie. “The main purpose of the provision . . . is to prohibit
compulsory oral examination of prisoners before the trial, or upon trial, for the purpose of
extorting unwilling confessions or declarations implicating them in the commission of a crime.”
(U.S. v. Tan Teng, 23 Phil. 145, 152 [1912]) A corporation owes full allegiance and subject to the
unrestricted jurisdiction of the courts of the State under which it has been organized. (Tayag v.
Benguet Consolidated, Inc., 26 SCRA 242, 248 [1968]) Likewise, it has no soul that can be damned
by a lie.

As the author has observed in his writing on Philippine Corporate Law, when it comes to the —oOo—
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.
 31
6 – PARTNERSHIP AS A BUSINESS ENTERPRISE 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
[Updated: 23 August 2010] (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
VI. PARTNERSHIP AS A BUSINESS ENTERPRISE
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.
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,
Generally, in the pursuit of a partnership business, its capital is either increased by profits
as “a going concern” — that is separately valued and accounted for from the individual value of
earned or decreased by losses sustained. It does not remain static and unaffected by the
the assets and properties constituting it and from the medium or means by which it is operated
changing fortunes of the business. In the present case, the financial statements presented before
(in the case of partnership, the juridical person created by express provision of law).
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
Recognition of the existence and operation of the partnership’s business enterprise, as
amortization of the goodwill (initially valued at P500,000) is not reflected either. Properly taking
distinguished from the legal effects and consequences of the contract of partnership among the
these non-cash items into account will show that the partnership was actually sustaining
partners and the partnership juridical person, gives rise to legal relationships, rights and
substantial losses, which consequently decreased the capital of the partnership. Both the trial
obligations, and doctrines, that can only be accounted for from that level.
and the appellate courts in fact recognized the decrease of the partnership assets to almost nil,

For example, the right of the partners to specific partnership property and to share in the profits but the latter failed to recognize the consequent corresponding decrease of the capital. (Ibid, at p.

and losses, as well as the right to manage, are legal matters that necessarily refer to the 153.)

partnership business enterprise.

x x x.

This understanding of the business enterprise of a partnership is applicable even to a

Because of the above-mentioned transactions, the partnership capital was actually reduced.
professional partnership. Our Supreme Court has defined the term ”profession” as “a group of
When petitioners and respondents ventured into business together, they should have prepared
men pursuing a learned art as a common calling in the spirit of public service–no less a public
for the fact that their investment would either grow or shrink. In the present case, the
 32
investment of respondents substantially dwindled. The original amount of P250,000 which they
had invested could no longer be returned to them, because one third of the partnership
properties at the time of dissolution did not amount to that much.

It is a long established doctrine that the law does not relieve parties from the effects of unwise,
foolish or disastrous contracts they have entered into with all the required formalities and with
full awareness of what they were doing. Courts have no power to relieve them from obligations
they have voluntarily assumed, simply because their contracts turn out to be disastrous deals or
unwise investments. (Ibid, at p. 154.)

In fact, it is only from the “partnership business enterprise” level that we can fully appreciate the
concept that essentially the partners are “owners” of the business, or that they take the position
of “equity” holders, as distinguished from creditors who advance money to the partnership as
“debt” holders. Thus, it is an essential element to the existence of the partnership under Article
1767 of the Civil Code, the obligation assumed by each partner “to contribute money, property or
industry to a common fund”, which essentially represents the “business enterprise” to be
pursued, to thereby assume the position of being “owners” or “equity holders,” and thereby to be
entitled to the profits made from the pursuit of the business enterprise, and logically to assume
the risks connected with it, including absorbing the losses sustained. This critical position of
“equity holders” of partners is confirmed under Article 1770 Civil Code which requires that a
partnership “must be established for the common benefit or interest of the partners,” which
aptly describes their positions as owners of the partnership business enterprise.

The importance of being aware that the partnership would eventually constitute a business
enterprise is important in applying certain doctrines of succession of liability that apply
peculiarly to business enterprise. Likewise, the rules on dissolution and liquidation clearly
appreciate the difference between the contract relationship and juridical person constituting the
partnership, from the underlying business enterprise that may remain operating even when the
firs two levels are legally dissolved or extinguished.

—oOo—
 33
7 – ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP
[Updated: 12 October 2009]
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

_____
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)
_____
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.”

1. Attributes of the Partnership

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
Every partnership existing under the Law on Partnerships of the Civil Code is endowed with the
juridical personality separate and distinct from that of each of the partnership,” which under
following essential attributes:
Article 1784 “begins from the moment of the execution of the contract, unless it is otherwise

(a) Informal/Consensual and Weak Juridical Personality; 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
(b) Mutual agency; 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
(c) Delectus personae; liquidation of the partnership affairs.”

(d) Partners Burdened with Unlimited Liability What is the reason for the legal attitude of being rather “informal” on the juridical personality of
(except for limited partners in a limited partnership). the partnership? It seems from the provisions of the Law on Partnerships of the Civil Code that
 34
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 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.
 35
As shown in the decision in MacDonald v. National City Bank of New York, 99 Phil. 156 (1956),
even under the Code of Commerce where registration was essential for the coming into existence
of a commercial partnership, nonetheless in a proper case of estoppel, the courts treated such
unregistered commercial partnership as a de factopartnership with a personality of its own in
order to protect the rights of third persons.
3. Weak Juridical Personality
On the other hand, the juridical personality of the partnership is “weak” because it can be put
asunder without need of formal dissolution process, and by the will of any of the partners or all
of them, or even by chance.
To illustrate, under Article 1830 of the Civil Code, the partnership may be dissolved by:
(a) Express will of any partner, either acting in good faith or even when not in good faith and in
contravention of the agreement;
(b) Express will of all the partners;
(c) Expulsion of any partner;
(d) Any event which makes the partnership business unlawful;
(e) Loss before delivery of the property promised to be contributed by the partner;
(f) Death, insolvency, or civil interdiction of any partner;
(g) By court decree, when a partner has been declared insane or incapacitated, or guilty of
conduct prejudicial to the partnership business or in breach of the agreement, or when
the partnership business can only be carried at a loss.
The complaint has often been heard in business and legal fora that one of the disadvantages of
the partnership medium is that it have a weak juridical personality. I believe that such an
observation is misplaced and fails to appreciate the fact that it makes no sense for the Law on
Partnerships to infuse a medium that it seeks to invite businessmen and the public to use and
employ with a flaw or disadvantage. In other words, there is a purpose why the law infuses the
partnership juridical personality with the characteristic of “weakness”. Understood properly the
weakness of the partnership juridical personality is a clear advantage for the partnership as a
medium of association and as a medium of doing business.
What is the reason by the law endows the partnership juridical personality with such
weakness? The separate juridical personality is employed only to allow the partners and the
partnership venture to attain their objectives, and it is either brushed aside or set aside when it
begins to obstruct such objectives. The value of the separate juridical personality of the
partnership cannot override a value of greater importance in the Law of Partnerships best
exemplified by the aphorism, that above all, the partnership is a contractual and personal
relationship among the partners who associate together to be able to pursue a business venture
collectively. In other words, everything is personal in a partnership set-up, and this is best
exemplified by the attributes of “mutual agency” and “delectus personae”.
4. Mutual Agency
The default rule under Article 1803(1) of the Civil Code is that each of the partners is an agent of
the partnership and all of the other partners in the pursuit of partnership affairs, thus: “When the
manner of management has not been agreed upon . . . All the partners shall be considered agents
and whatever any one of them may do alone shall bind the partnership.”
Article 1818 of the Civil Code provides that “Every partner is an agent of the partnership for the
purpose of its business, and the act of every partner, including the execution in the partnership
name of any instrument, for apparently carrying on in the usual way the business of the
partnership of which he is a member binds the partnership.”
The principle of mutual agency lies at the heart of the partnership arrangement because it
defines the prerogative of every partner to participate in the management of the partnership
business. It is one of the more important manifestation of the position of the partners as
 36
“owners” or “equity holders” of the partnership business enterprise. It also brings into focus the
reality that the partnership arrangement is of the most personal of nature, that the parties
thereto are not only investors but exercise the prerogatives of ownership and control into the
partnership business.
Properly appreciated, a partnership is simply a conglomeration of two or more sole
proprietorships, where the original sole proprietor continues to manage his business and also
the business of the other proprietors in the association. Consequently, as a sole proprietor is
liable with his other assets for the liabilities incurred by his business, then in the same manner,
the partners will also be liable personally and for other non-contributed assets for the liabilities
incurred by their combined business enterprises.
5. Delectus Personae
Bautista refered to delectus personae as follows: “. . . For, in accordance with the principle of
delectus personae (selection of persons), one selects his partners on the basis of their personal
qualifications and qualities, such as solvency, ability, honesty, and trustworthiness, among
others. It is for this reason that there is mutual representation among the partners so that the act
of one is considered the act and responsibility of the others as well.” (BAUTISTA, at p. 95)
The best way to define the concept of delectus personae is that the contract of partnership creates
the most personal relationship between and among the partners which when broken, also breaks
the bond of the partnership. The doctrine emphasizes the personal-contractual relationship
between and among the partners as being more important than the property rights and the
business enterprise created in the partnership. Thus, Article 1770 of the Civil Code provides that
“[a] partnership . . . must be established for the common benefit or interest of the partners.”
The doctrine of delectus personae can be viewed in two ways:
Firstly, it is the embodiment of the principle of relativity or privity in contracts: a partnership
arrangement being primarily a contractual relationship, then the privity that is created by its
perfection is between and among the partners thereto at the point of perfection; and that such
privity cannot be extended beyond the partners without the consent of all the other parties to
the contract of partnership.
To illustrate the point, although Article 1810 of the Civil Code recognizes that “interest in the
partnership” is a property right of a partner, nevertheless under Article 1804, although a partner
may associate another person with him in his share, “the associate shall not be admitted into the
partnership without the consent of all the other partners, even if the partner having an associate
should be a manager.”
The privity created by the contract of partnership is of the group of partners who consent, that
the moment one partner is gone the privity is broken and the partnership contract is terminated.
In other words, if five parties come together into a partnership agreement, the privity retains its
integrity among the five, and not just between two or three or four of the members. Thus, under
Article 1830, the partnership is dissolved by the expulsion, death, insolvency, civil interdiction of
any of the partners.
Secondly, that the relationship established in a contract of partnership is of the most fiduciary
character, or of the most confidential manner, that once that thrust or confidence is lost, the
contract is deemed breached or at least at an end. This is fortified by the fact that the partners
are mutual agents to one another, and essentially the relationship between and among them is of
fiduciary character, and the character of every agency relation is that it is essentially revocable.
Consequently, when the articles of partnership provide for a definite term of existence, under
Article 1830, a partnership can be dissolved in midstream “By the express will of any partner,
who must act in good faith.” Even the separate juridical personality of the partnership enterprise
cannot save the partnership from being dissolved under the rule that the termination of the
contract of partnership terminates the separate juridical personality as well.
The features of mutual agency and delectus personae define the rights and liabilities of the
partners in a partnership arrangement, and constitute the underlying reason why partners are
personally liable for partnership debts beyond their contributions and to the extent of their
separate properties.
 37
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), Justice Vitug wrote one of the best piece of
doctrinal description the nature and essence of the doctrine of delectus personae in every
partnership, thus –
The birth and life of a partnership at will is predicated on the mutual desire and consent of the
partners. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each 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 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
 38
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—
 39
8 – PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA
[Updated: 12 October 2009]
1. Distinguished from “Joint Venture”
Bautista, although confirming that a joint venture “is an association of two or more persons to
carry out a single business enterprise for profit . . . [and] embodies several of the essential
elements or characteristics of a partnership and bears such a close resemblance to it that the
rights and liabilities of joint adventures are largely governed by rules applied to partnership,”
(BAUTISTA, at pp. 41-42) nevertheless would distinguish a partnership and a joint venture in the
following manner:
(a) “a joint venture is ordinarily limited to a single transaction [and] not intended to pursue a
continuous business;” whereas a partnership, “though it may exist for a single transaction,
usually contemplates the undertaking of a general and continuous business of a particular kind
which necessarily involves a series of transactions;” (Ibid, at p. 42.)
(b) in a joint venture, “the property used remains the undivided property of its contributor,
whereas in a partnership the same, as a rule, becomes the property of the business entity and
hence of all the partners;” (Ibid)
(c) In a joint venture, none of the co-venturers “can bind the joint adventure or his co-
adventurers, while a partner, when acting in pursuance of the firm business, binds not
only himself as a principal but, as their agent as well, also the partnership and his co-partners;”
(Ibid) and
(d) A “joint adventure has no firm name, while a partnership is required to operate under a firm
name.” (Ibid)
To the writer, the foregoing distinctions only affirms the fact that a joint venture is a species of
the genus partnership as defined under Article 1767 of the Civil Code, since it contains the two
essential elements of the creation of a common fund and undertaking to divide profits; that in
fact it is a particular partnership for a specific undertaking fully recognized under Article 1783
covering “a specific undertaking,” and Article 1830 that recognizes the dissolution of a
partnership “By the termination of the . . . particular undertaking specified in the agreement.”
The position that in a joint venture the co-venturers do not become mutual agents is a conclusion
that can only be drawn if we premise that a co-venture is not a species of partnerships. Finally,
that a partnership adopts no firm name does not make it void as a contract or a partnership, so
also with a joint venture.
In any event, the distinction between a joint venture as a business medium not falling within the
ambit of Partnership Law, or as not constituting a species of partnerships, has really become
mute since inKilosbayan, Inc. v. Guingona, Jr., 232 SCRA 110, 143 (1994), it was held:
Joint venture is defined as an association of persons or companies jointly undertaking some
commercial enterprise; generally all contribute assets and share risks. It requires a community
of interest in the performance of the subject matter, a right to direct and govern the policy in
connection therewith, and duty, which may be altered by agreement to share both in profit and
losses. The acts of working together in a joint project. (Ibid, citing 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
 40
a property relation whereby two or more persons own pro-indiviso a property, but the
relationship does not seek the business or mercantile pursuit of the property relationship. In
other words, a co-ownership situation comes about other than by a contractual intent to pursue
a business venture in common, and consequently, no separate juridical personality arises from a
purely co-ownership relationship.
Without the contractual intent to pursue a business venture through a common fund, the fact
that co-owners happen to share in the profits that may be produced by the property owned in
common, there is still no partnership arrangement. Thus, Article 1769 of the Civil Code provides
that “In determing whether a partnership exists . . . Co-ownership or co-possession does not of
itself establish a partnership, whether such co-owners or co-possessors do or do not share any
profits made by the use of the property.”
3. Distinguished from Joint Account (Sociedad de Cuentas en Participacion)
A joint account is governed under Article 239 of the Code of Commerce, and still referred to as a
corporate taxpayer under the National Internal Revenue Code. But its use is a rarity in our
jurisdiction because it does not lend itself to commercial or business efficiency, as shown by the
discussion of its features in Bourns v. Carman, 7 Phil. 117 (1906), thus –
. . . A partnership constituted in such manner, the existence of which was only known to those
who had an interest in the same, there being no mutual agreement between the partners, and
without a corporate name indicating to the public in some way that there were other people
beside the one who ostensibly managed and conducted the business, is exactly the accidental
partnership of cuentas en participacion defined in Article 239 of the Code of Commerce.
Those who contract with the person under whose name the business of such partnership
of cuentas en participacion is conducted, shall have only a right of action against such person and
not against the other persons interested, and the latter, on the other hand, shall have no right of
action against the third person who contracted with the manager unless such manager formally
transfers his right to them. (Art. 242 of the Code of Commerce) . . . (at pp. 119-120).
4. Distinguished from Agency
In a pure agency agreement, the agent is merely a legal extension of the personality of the
principal and thereby under the complete control of the principal.
The partnership relationship among the partners makes them mutual agents of one another, and
thereby the control that a principal has over his agent does not pertain between and among the
partners. Likewise, unlike in a pure agency relationship where the agent who acts within the
scope of his authority does not bind himself to the contract or transaction he enters into, in a
partnership situation, the partner binds not only the other partners and the partnership, but also
himself in the pursuit of the partnership enterprise.
In Binglangawa v. Constantino, 109 Phil. 168 (1960), the Court held that just because a duly
appointed agent has made personal advances for the expenses of the business venture that he
had been designated to administer, does not make him a partner of his principal.
In United States v. Muhn, 6 Phil. 164 (1906), it was held that the agent cannot escape the criminal
liabilities of the crime of estafa for conversion of the funds given to him by his principal by
claiming that he had become a partner when the books of accounts kept for the business showed
that the amount was charged to him since the same was “merely a method of keeping an account
of the business, so that the parties would know how much money had been invested and what
the condition thereof was at any particular time.” (Ibid, at p. 166)
5. Distinguished from the Business Trust
As compared to a partnership, a business trust is constituted by deed of trust which is easier and
less expensive to constitute for it is not bounded by any legal requirements like the registration
requirements for partnerships where the real property or more than P3,000 worth of property is
contributed to the partnership.
The creation of a business trust does not give rise to a separate juridical personality, and is
mainly governed by contractual doctrines and the common law principles on trust. There is no
 41
element of mutual agency or co-ownership in a business trust relationship, and in fact the trust
relationship is centered upon the splitting in the properties contributed (the corpus) of the legal
or naked title in the trustee who then manages and control the properties, and beneficial or
equitable title in the beneficiary and for whose benefit the trustee shall manage and control the
properties of the corpus.
6. Distinguished from the Corporation
The most important distinction between the corporation and the partnership are their legal
capacities. With the right of succession, a corporation has a stronger legal personality, enabling it
to continue despite the death, incapacity, withdrawal or insolvency of any of its stockholders or
members. In a partnership, the withdrawal, death, incapacity or insolvency of any partner would
automatically bring about the dissolution of the partnership. (Articles . 1828 and 1830, Civil
Code.)
Limited liability is a main feature in a corporate setting, whereas partners are liable personally
for partnership debts not only to what they have invested in the partnership but even as to their
other properties. (Articles 1816, 1817, 1824, and 1839, Civil Code)
Generally, every partner is an agent of the partnership, (Articles 1803(1), 1818, and 1819, Civil
Code), and by his sole act, he can bind the partnership (Articles 1822 and 1823, Civil Code),
whereas in a corporation, only the Board of Directors or its duly authorized agents can bind the
corporation.
In a partnership setting, although a partner has the power to sell or dispose of his capital interest
or proprietary interest, the buyer or transferee does not assume 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 a Partnership?
The clear distinctions between the corporation and partnership can best be illustrated by
discussing the issue of whether a defective incorporation process that does not result into a
corporate entity, would at least result into a partnership.
It is a legal principle that when parties come together and all the elements of a particular
contract are present, although the parties may have nominated it otherwise, the law will impose
such contractual relationship upon them. In other words, the contract or relationship is what the
law says it is, not how the parties wish to call it. Therefore, it may agreed when five or more
persons come together to contribute money or property to a common venture or fund, with the
intention of dividing the profits among themselves, the parties may wish to call it otherwise,
however, under the definition of the Article 1767 of the Civil Code, it would still be a partnership,
even if the parties had intended a corporation but did not materialize because of certain
registration deficiencies.
If the parties have in fact pursued the incorporation process, by executing and filing with the SEC
the articles of incorporation, then there should be no resulting partnership in the event that the
incorporation process does not bear fruition, based on the following grounds:
Firstly, both corporate and partnership relationships are fundamentally contractual relationship
created by the co-venturers who consent to come together under said relationships. If the parties
had intended to create an association in the form of a corporation, a partnership cannot be
created in its stead since such is not within their intent, and therefore does not constitute a part
of their consent to the contractual relationship.
More importantly, while partnership lies essentially within the norms of Contract Law, the
corporation gets it essence from a particular State-grant of separate juridical personality. In
other words, parties to a corporate venture are fully aware that it is the process of incorporation
and the issuance of the certificate of incorporation by which the corporate entity comes into
being. There is therefore no doubt in the minds of incorporators that they could effect a venture
 42
under a juridical being, and thereby achieve both the advantages and suffer the burdens
associated with such corporate medium, by the mere meeting of minds.
Secondly, the important differences between the corporation and the partnership cannot lead
one to the conclusion that in the absence of the first, the contracting parties would have gone
along with the latter. Limited liability, centralized management and easy transferability of the
units of ownership in a corporation are by themselves strong factors for parties’ intention to be
bound in the corporate relationship, and one cannot presume that if these features are not met
that they would in the alternative wish to be covered by a partnership relationship, which has
generally would involve unlimited liability, mutual agency among the partners, and the delectus
personae feature.
The essence of what constitutes the contractual relationship of partnership under Article 1767 is
the coming “together” or what is known in Partnership Law as “delectus personae” and not just
the joint venture. The essence of partnership is the personal relationship, i.e., that each would-be
partner goes into the venture precisely because he wants the other co-venturers, and no other
person, to be with him in the venture. A venturer who seeks to enter into a corporate
relationship perhaps does not even care about the personality of the other co-venturers, and
fully aware that he himself and others have the ability to transfer their investments to outsiders.
Nonetheless, there indications of a contrary view to the above. Under Section 21 of the
Corporation Code, when parties act and pretend to be a corporation, when in fact none exist, the
law would impute to them a juridical personality to validate the contract under the corporation
by estoppel doctrine; however, it would treat the parties as partners since it expressly makes
them liable as “general partners.”
Under such contrary view, the main issue would be the priority between the personal creditors
of the “partners” in a corporation by estoppel doctrine, and the “corporate” creditors of the
corporation by estoppel, as to the assets invested into the venture. The author would presume
that it would have to be the corporate creditors that would have priority over the “corporate”
assets as this seems to be the moving spirit of the corporation by estoppel doctrine.
This position of the author has been partially justified by the discussions of in Pioneer Insurance
& Surety Corp. v. Court of Appeals,175 SCRA 668 (1989), when it resolved the issue raised: “What
legal rules govern the relationship among co-investors whose agreements was to do business
through the corporate vehicle but who failed to (Ibid, at p. 681).
Quoting from American jurisprudence, the Supreme Court in Pioneer Insurance held that “there
has been the position that as among themselves the rights of the stockholders in a defectively
incorporated association should be governed by the supposed charter and the laws of the state
relating thereto and not by the rules governing partners (Quoting from CORPUS JURIS
SECUNDUM which cited Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584),
nevertheless it has been held that “ordinarily persons who attempt, but fail, to form a
corporation and who carry on business under the corporate name occupy the position of
partners inter se (Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913 A. 1065),
and their rights as members of the company to the property acquired by the company will be
recognized.” (Ibid, citing Smith v. Schoodoc Pond Packing Co., 84 A, 268m 109 Me. 555; Whipple v.
Parker, 29 Mich 369).
Notwithstanding the foregoing, the Court took the position that such partnership relationship
does not exist, “for ordinarily persons cannot be made to assume the relation of partners, as
between themselves, when their purpose is that no partnership shall exist . . . and it should be
implied only when necessary to do justice between the parties; thus, one who takes no part
except to subscribe for stock in a proposed corporation which is never legally formed does not
become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged
partnership and contributions. . . A partnership relation between certain stockholders and other
stockholders, who were also directors, will not be implied in the absence of an agreement, so as
to make the former liable to contribute for payment of debts illegally contracted by the latter.
(Ibid, at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p. 464). Nor will it make the
investor to a would-be corporation liable for losses sustained from its operations under a
partnership inter se theory.” (Ibid, at p. 685). The key elements in resolving the issue seem to
have been in Pioneer Insurance those of intent and participation in business activities.
 43
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, -
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)

(b) Parties who took no part except to subscribe to shares of stock in a proposed corporation, do
The only complication in Lim Tong Lim was that the transaction upon which the personal
not become partners with other subscribers who engaged in business under the name of the
liabilities of the co-venturers was being pursued, was entered into on behalf of “Ocean Quest
pretended corporation, and are not liable for action for settlement of the alleged
Fishing Corporation,” although no such corporation existed nor was there any attempt to
partnership contribution.
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
The doctrinal pronouncements in Pioneer Insurance are consistent with the distinctions between
personal liability of each of the partners in the business venture, which resulted in legal
an investor in partnership venture, where there is a clear intent to participate in the
incongruency.
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
In a partnership, as a legal consequence of the application of the doctrine of mutual agency, every
no intent to participate in the corporate operations, and for which limited liability is afforded by
partner shall be personally liable for partnership debts and liabilities, even when the underlying
law.
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
On the other hand, where the parties to a venture merely use a business name that pretends
embodied in Section 21 of the Corporation Code, it is only the active or managing officers who
there is a corporation, when in fact they was no intention among the co-venturers to formally
assume the liability of a general partner, thus: “All persons who assume to act as a corporation
incorporate a juridical entity, then there can be no doubt that what was really the meeting of
knowing it to be without authority to do so shall be liable as general partners, for all debts,
minds among them was a partnership, for in essence they agreed to set up a common fund (i.e.,
liabilities and damages incurred or arising as a result thereof;” and that consequently, passive
pursue a business venture), with clear indication to divide the profits among themselves. This is
stockholders are not deemed to be personally liable for debts incurred on behalf of the
exactly the situation covered in the decision in Lim Tong Lim v. Philippine Fishing Gear Industries,
ostensible corporation.
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).
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
 44
estoppel doctrine, he cannot be made personally liable for the debts incurred in pursuing the
business venture. Instead of holding that the primary doctrine to apply would be the rules of
unlimited liability since there was duly constituted a valid partnership, the Court instead
humored the argument and went on to also apply the corporation by estoppel doctrine with a
jurisprudential twist when it held —
The doctrine of corporation by estoppel may apply to the alleged corporation and to a third
party. . . . a third party who, knowing an association to be unincorporated, nonetheless treated it
as a corporation and received benefits from it, may be barred from denying its corporate
existence in a suit brought against the alleged corporation. In such case, all those who benefited
from the transaction made by the ostensible corporation, despite knowledge of its legal defects,
may be held liable for contracts they impliedly assented to or took advantage of. (Ibid, at p. 743)
The result is that by mixing principles in Partnership Law and Corporate Law in Lim Tong Lim,
the corporation by estoppel doctrine has grown out of the confines of Section 21 of the
Corporation Code, as to make liable as general partners, not only those parties to acted for the
ostensible corporation, but also all passive parties who knowing there is no such corporation sat
back and benefited from the venture.
6. Cooperative
A cooperative is a duly registered association of persons, with a common bond of interest, who
have voluntarily joined together to achieve lawful common social or economic end, making
equitable contributions to the capital required and accepting a fair share of the risks and benefits
of the undertaking in accordance with universally accepted cooperative principles. (Article 3,
Cooperative Development Authority Act [R.A. 6938]).
A cooperative, like an ordinary corporation and a partnership, has a juridical personality
separate and distinct from its members, and has limited liability feature. (Articles. 12 and 30, R.A.
6938)
The Tax Code defines a cooperative as an association conducted by the members thereof with the
money collected from among themselves and solely for their own protection and not for profit.
(Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129 [2005]).
Unlike ordinary corporations, cooperatives are governed by principles of democratic control
where the members in primary cooperatives shall have equal voting rights on a one-member-
one-vote principle (Articles. 4(2), R.A. 6938); where the Board of Directors manages the affairs
of the cooperative, but it is the general assembly of full membership that exercises all the rights
and performs all of the obligations of the cooperative (Articles 5(3) and 34, R.A. 6938); and are
under the supervision and control of the Cooperative Development of Authority, and not the SEC.
Unlike a partnership which should be organized for profit, and a non-stock corporation which
can be organized for any eleemosynary purpose and no part of the net income is to be
distributed to the officers and members thereof, the primary objective of every cooperative is
self-help: “to provide goods and services to its members and thus enable them to attain
increased income and savings, investments, productivity, and purchasing power and promote
among them equitable distribution of net surplus through maximum utilization of economies of
scale, cost-sharing and risk-sharing without conducting the affairs of the cooperative for
eleemosynary or charitable purposes.” (Article 7, R.A. 6938)
The Law on Cooperatives declares it a policy of the State to foster the creation and growth of
cooperatives as a practical vehicle for promoting self-reliance and harnessing people power
towards the attainment of economic development and social justice. (Article 2, R.A. 6938). In one
case, the Court held that cooperatives are established to provide a strong social and economic
organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of
agrarian reforms. (Corpuz v. Grospe, 333 SCRA 425 [2000]).
—oOo—
 45
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.
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
 46
the constitution of the partnership, becomes the common property of all the partners, as well as
all the profits which they may acquire therewith.” (Article 1779, Civil Code). The Civil Code
further clarifies that “A stipulation for the common enjoyment of any other profits may also be
made; but the property which the partners may acquire subsequently by inheritance, legacy, or
donation cannot be included in such stipulations, except the fruits thereof.” (Article 1779, Civil
Code).
In a universal partnership of profits “all that the partners may acquire by their industry or work
during the existence of the partnership,” as well as the usufruct of all “[m]ovable or immovable
property which each of the partner may possess at the time of the celebration of the contract” of
partnership, shall all pertain to the partnership. (Article 1780, Civil Code).
The default rule under Article 1781 of the Civil Code is that when the “Articles of universal
partnership [are] entered into without specification of its nature, [it will] only constitute a
universal partnership of profits.” The real question that must be asked is when is a partnership
agreement deemed to be even a “universal partnership” for the default rule under Article 1781 to
apply?
Under Article 1782, “Persons who are prohibited from giving each other any donation or
advantage cannot enter into universal partnership.”
On the other hand, Article 1783 of the Civil Code defines a “particular partnership [to be one
that] has for its object determinate things, their use or fruits, or a specific undertaking, or the
exercise of a profession or vocation” There is no doubt then that every professional partnership
and joint venture arrangement would constitute particular partnerships.
What is the practical and legal importance of distinguishing between universal and particular
partnerships? So far, statutorily the only critical usefulness of the distinction is that persons who
are disqualified from donating to one another (like spouses under Article 187 of the Family
Code), cannot enter into a universal partnership of any sort. Is it therefore fair to conclude that
spouses can validly enter into a particular partnership between each other, when actually their
property relations are governed already by a legal property regime?
In Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969), the Court held that the
prohibition under now Article 1782 does not apply when the partners entered into a limited
partnership, the man being the general partner and the woman being the limited partner, and a
year later the two get married.
On the more general question of what are the practical and legal significance of knowing the
difference between universal and particular partnership, may best be exemplified in the decision
in Lyons v. Rosentock, 56 Phil. 632 (1932). In that case, the two partners have been together in
two previous real estate projects. While one partner was abroad, the other partner seized upon a
potentially lucrative piece of property (the San Juan estate) and although he had tried his best to
convince his partner abroad to commit to be part of the new venture, the latter declined. In any
event, when the property was purchased by the local partner he had temporarily used a
partnership property in the previous venture to secure the loan drawn by the local partner in his
own name, but later released it and had his own property mortgaged when it was clear that the
partner abroad did not change his mind about not joining the venture. In any event, the San Juan
estate project proved very successful, and after the local partner died, the partner abroad sought
to recover one-half of the profits of the venture on the ground that he was a partner therein, in
spite of his previous refusal to be part of it, and mainly because partnership property was used
as security for the loan obtained by the local partner to finance his acquisition of the estate.
In resolving that the partner abroad was not entitled to any profits derived from the San Juan
estate project, because he was never a partner thereto, Lyons resolution revolved around the
principle that the two partners never were part of a universal partnership, but that they were at
best partners in particular partnerships for the previous projects entered into before the San
Juan estate project, thus –
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. . .
. Of course, if an actual relation of partnership had existed in the money used, the case might be
different; and much emphasis is laid in the 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
 47
transactions in real estate. No objection can be made to the use of the word partnership as a term
descriptive of the relation in those particular transactions, but it must be remembered that it was
in each case a particular partnership, under article 1678 of the Civil Code. It is clear that Elser, in
buying the San Juan Estate, was not acting for any partnership composed into a proposition
which would make Lyons a participant in this deal contrary to his express determination. (Ibid,
at pp. 641-642)
The other conclusion we can draw from Lyons is that a universal partnership is never presumed,
not even from various transactions or ventures concluded between the partners. The default rule
therefore should be that unless the parties so stipulate in their articles of partnership that they
are entering into a universal partnership, it would be presumed that they have existing between
them merely a particular partnership.
Apart from the foregoing, the concept and medium of universal partnership serves no reasonable
commercial purpose, for legally it can only come about when it is so expressly stipulated in
contract of partnership, and practically, it is difficult to see how two or more persons not
bounded by marriage, faith or vocation (which makes the partnership a particular one), would
commit to one another all that they have and all the fruits of what they do, to one another.
The other important question that may be asked is “By definition under Article 1776 that there
can be a valid partnership for the practice of a profession, why would Article 1783, in defining a
particular partnership, include the ‘exercise of a vocation’ which may not include one that seeks to
provide a livelihood for the so-called partners, such as religious or civic vocation?”
2. As to Duration:
When it comes to the partnership term or life, the law distinguishes between a partnership with
fixed term, partnership for a particular undertaking, and partnership at will.
Both partnerships with fixed term or for a particular undertaking are automatically dissolved
upon the expiration of the stipulated term or the achievement of the particular undertaking
stipulated in the contract of partnership; whereas, in a partnership at will, the partnership has an
indefinite term and it would be dissolved only when an act or cause of dissolution happens or
arises. Nonetheless, under Article 1785 of the Civil Code, when a partnership for a fix term or
particular undertaking is continued after it has terminated without any express agreement,
partnership then become one at will and “the rights and duties of the partners remain the same
as they were at such termination, so far as is consistent with a partnership at will.” The article
also provides that “A continuation of the business by the partners or such of them as habitually
acted therein during the term, without any settlement or liquidation of the partnership affairs, is
prima facie evidence of a continuation of the partnership.”
In Ortega v. Court of Appeals, 245 SCRA 529 (1995), the Court described the characteristics of a
partnership at will in the following manner, thus:
The birth and life of a partnership at will is predicated on the mutual desire and consent of the
partners. The right to choose with whom a person wishes to associate himself is the very
foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each 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)
 48
Ortega also clarified that the designation of the purpose in the articles does not prevent it from
being a partnership at will, thus:
The “purpose” of the partnership is not the specific undertaking referred to in the law.
Otherwise, all partnerships, which necessarily must have a purpose, would all be considered as
partnerships for a definite undertaking. There would therefore be no need to provide for articles
on partnership at will as none would so exist. Apparently what the law contemplates, is a specific
undertaking or “project” which has a definite or definable period of completion.
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court held that where there has been duly
registered articles of partnership, and subsequently the original partners accept an industrial
partner but do not register a new partnership, and thereafter the industrial partner retires from
the business, and the original partners continue under the same set-up as the original
partnership, then although the second partnership was dissolved with the withdrawal of the
industrial partner, there resulted a reversion back into the original partnership under the terms
of the registered articles of partnership. There is not constituted a new partnership at will.
3. As to Extent of Partners’ Liabilities
When it comes to the kinds of liabilities that the partners may be exposed to for partnership
debts and obligations, the Civil Code distinguishes between a general partnership, where all the
partners are unlimitedly liable; and a limited partnership, where there is one or more general
partner who are unlimitedly liable, with one or more limited partners, who are liable for
partnership debts only to the extent of their stipulated contributions under the articles of
partnership.
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728
(1999), Justice Vitug summarized the nature of the liabilities of general partners, thus:
. . . The liability of general partners (in a general partnership as so opposed to a limited
partnership) is laid down in Article 1816 which posits that all partners shall be liable pro rata
beyond the partnership assets for all the contracts which may have been entered into in its
name, under its signature, and by a person authorized to act for the partnership. This rule is to be
construed along with other provisions of the Civil Code which postulate that the partners can be
held soidarily liable with the partnership specifically in these instances–(1) where, by any
wrongful act or omission of any partner acting in the ordinary course of the business of the
partnership or with the authority of his co-partners, loss or injury is caused to any person, not
being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to
the same extent as the partner so acting or omitting to act; (2) where one partner acting within
the scope of his apparent authority receives money or property of a third person and the money
or property so received is misapplied by any partner while it is in the custody of the
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);
 49
(b) The capitalist partner may not engage on in business which are competing with that of the
partnership business (Article 1808, Civil Code); whereas, the industrial partner cannot engage
in any other business at all during his tenure as industrial partner (Article 1789, Civil Code); and

(c) Whereas a capitalist partner is bound to make additional contributions to the partnership in
case of an imminent loss of the business of the partnership, the industrial partner has no such
obligation. (Article 1791, Civil Code)

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

Partnership Law also refers to the managing partner who has been given the management of
the partnership enterprise (Articles 1800 and 1801, Civil Code); the liquidating partner, who
takes charge of the liquidation and winding-up of partnership affairs (Article 1836, Civil Code);
a retiring partner, who ceases to be part of the partnership which is continued after dissolution,
as compared with the partners who remain with the venture as continuing partners (Articles
1837, 1839, 1840 and 1841, Civil Code); and the partner by estoppel, who is not a formal
partner in an existing partnership, but by his act he has led third-parties dealing with the
partnership to believe he is a partner, and thereby becomes liable as a regular partner as so such
relying creditors (Article 1815, Civil Code).

—oOo—
 50
10 – SPECIAL ISSUES OF WHO MAY QUALIFY TO BECOME PARTNERS 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
[Updated: 12 October 2009] partnerships), it seems pretty well implied that spouses, whatever the regime of property
relations prevails in their marriage, are disqualified from entering into any sort of universal
partnership; and consequently, spouses may validly become partners to one another in a
particular partnership, which would include a professional partnership, and both general and
limited partnerships. The critical question must be asked:Can spouses just between
1. May Spouses Validly Enter into a Partnership Relation? themselves or with third parties validly enter into a contract of partnership for gain provided the
resulting partnership is not a universal partnership?
a. Spouses Cannot Enter into a Universal Partnership

If one refers only to the provision of Article 1782, the answer would be in the affirmative.
The main statutory provision invoked when it comes to the issue of whether spouses can enter
In Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969), which currently is the only
between themselves into a partnership agreement is Article 1782 of the Civil Code which
decision to deal with the issue, the Supreme Court affirmed this particular view, relying only on
provides that “Persons who are prohibited from giving each other any donation or advantage
the provisions of Article 1677 of the old Civil Code (now Article 1782), that since the prohibition
cannot enter into universal partnership.” It has thus been opined that since under Article 133 of
for spouses covers expressly only universal partnerships, then they can validly be partners in a
the Civil Code “Every donation between the spouses during the marriage shall be void,” then
limited partnership, with the husband being the general partner and the wife being the limited
spouses are prohibited from entering into a universal partnership, but not necessarily a
partner.
particular or limited partnership. Article 133 of the Civil Code has now been replaced by Article
87 of the Family Code, which reads: On this particular issue, Bautista limited his comment to the effect that the provisions of Article
1782 disqualifies “spouses, with respect to any contract of universal partnership made between
Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses,
them during the marriage,” and other than reporting the relevant portions of the decision
during the marriage should be void, except moderate gifts which the spouse may give each other
in Suter, he did not comment on whether spouses can validly enter into other forms of
on the occasion of any family rejoicing. The prohibition shall also apply to persons living together
partnership for gains. Tolentino does not comment on the provisions of Article 1782, although
as husband and wife without a valid marriage.
his discussion on the matter under his old work under the Code of Commerce was quoted
in Suter.
Bautista discussed the rationale of Article 1782 in this manner:

To the writer, it seems that in addressing the issue raised, it would be error to base the
The prohibition is founded on the theory that a contract of universal partnership is for all
resolution only on of Article 1782 of the Civil Code. Certainly Article 1782 constitutes an
purposes a donation. Its purpose, therefore, is to prevent persons disqualified from making
important statutory provision to resolve that issue, but there are other statutory provisions
donations each other from doing indirectly what the law prohibits them from doing directly.
more primordial in addressing the issue.
(BAUTISTA, at p. 62).
 51
Suter, which was decided under the terms of the old Civil Code and the Code of Commerce, is 1782].” In essence, Suter holds that spouses are not disqualified from becoming partners in a
quite peculiar in its facts because the contract of partnership started out where there was no limited partnership, provided one of them (or at least both of them) is a limited partner.
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 b. Spouses Are Not Qualified to Enter into Other Forms of Partnership for Gain
married, and bought out the interest of Carlson. Under the provisions of the Tax Code, the
It is the writer’s position that apart from a professional partnership, spouses cannot enter into
Commissioner of Internal Revenue then sought to recover income taxes individually against
any form of partnership, be it universal or particular, general or limited partnership, as a
Suter for partnership income under the theory that the separate juridical personality of the
separate property arrangement apart from the property regime prevailing in their marriage, for
partnership by which it was taxed separately as a corporate taxpayer, was extinguished with the
the reasons discussed below.
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
Firstly, apart from a universal partnership, every form of partnership, including a limited
and Spirig and their subsequent acquisition of the interests of remaining partner Carlson in the
partnership, effectively makes partners “donors” to one another of their contributions in the
partnership dissolved the limited partnership, and if they did not, the fiction of juridical
partnership. Although a partnership would have a personality separate and distinct from each of
personality of the partnership should be disregarded for income tax purposes because the
the partners, so that it can hold contributed property in its name, nonetheless, partners are
spouses have exclusive ownership and control of the business.” (27 SCRA 152, at p. 156).
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).
The Court found no merit in the position of the Commissioner, and quoted from the
Effectively, even in a limited partnership, such as the Suter situation, the contribution of the
commentaries of Tolentino, thus:
limited partner wife belonged to the partnership which would then be under the control and
A husband and a wife may not enter into a contract of general copartnership, because under the management of the general partner husband. A partnership arrangement between spouses
Civil Code, which applies in the absence of express provision in the Code of Commerce, persons would thereby be an indirect violation of the provisions of Article 87 of the Family Code which
prohibited from making donations to each other are prohibited from entering into universal provides that “Every donation or grant of gratuitous advantage, direct or indirect, between the
partnerships. (2 Echaverri, 196) It follows that the marriage of partners necessarily brings about spouses during the marriage shall be void.”
the dissolution of a pre-existing partnership (1 Guy de Montella 58). (Ibid, at p. 157, quoted from
Although it can be argued that contributions to a partnership are not in the nature of “donations”
Tolentino, Commentaries and Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th
or “gratuitous advantage,” because a contract of partnership is essentially an onerous and
ed., at p. 58).
commutative contract, whereby the contributions comes with a cost (e.g., becoming unlimitedly
Thus, the Court held that the partnership at issue “was not a universal partnership, but a liable for partnership obligations), nevertheless, such contributions would then violate the
particular one. . . since the contributions of the partners were fixed sums of money, . . . and provisions of Article 1490 of the Civil Code, which prohibits sales or any other form of onerous
neither one of them was an industrial partner. It follows that [it] . . . was not a partnership that dispositions, between spouses not governed by the complete separation of property regime .
[the] spouses were forbidden to enter under Article 1677 of the Civil Code of 1889 [now Article
 52
Secondly, there is clear implication under the Family Code, that the property regime that must Take then the cases of spouses governed by the conjugal partnership of gains, which under
govern spouses must be in accordance with the provisions of said Code, and cannot be the Article 105 of the Family Code, can come into play between spouses only when it has been so
subject of regular partnership rules under the Partnership Law of the New Civil Code. 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
(1) Spouses Governed by the Absolute Community of Property Regime 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
To begin with, the Family Code sets the absolute community of property regime as the default
provisions of Article 87 of the Family Code. In addition, by entering into a contract of particular
rule for marriages, and consequently, it cannot exist consistently with another set of rules
partnership and thereby invoking the provisions of the Partnership Law of the Civil Code on the
governing partnerships for gains under the Partnership Law of the Civil Code. Although Article
conjugal property contributed, would that not in effect be amending, or perhaps even
1782 provides that –
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
Persons who are prohibited from giving each other any donation or advantages cannot enter into
conjugal partnership shall be governed by the rules on the contract of partnership in all that is
a universal partnership,” which beyond doubt should include spouses, yet under Article 75 of the
not in conflict with what is expressly determined in this Chapter or by the spouses in their
Family Code, “In the absence of marriage settlements, or when the regime agreed upon is void,
marriage settlements.” This shows the primacy of the Family Code provisions on governing the
the system of absolute community of property as established in this Code shall govern,” and
conjugal partnership between the spouses, and any attempt to govern conjugal properties under
which under Article 88 of the Family Code, “shall commence at the precise moment that the
a contract of particular partnership would undermine such primacy and therefore void.
marriage is celebrated [and that any] stipulation, express or implied, for the commencement of
the community regime at any other time shall be 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
The absolute community of property regime actually establishes a sort of “universal partnership”
separate properties, because that would in effect constitute donations to one another as
between the spouses, in that it includes “all property owned by the spouses at the time of the
discussed below, and would undermine the rules of the Family Code on how such separate
celebration of the marriage or acquired thereafter.” (Article 91, Family Code). Can spouses
properties should answer for the charges on family affairs.
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
(3) Spouses Governed by the Complete Separation of Property Regime
answer ought to be in the negative, and such partnership agreement would be void, since under
Article 89 of the Family Code “No waiver of rights, interest, shares and effects of the absolute May spouses governed by the complete separation of property regime validly enter into a
community of property during the marriage can be made except in case of judicial separation of contract of particular partnership? The answer ought to be in the negative, for the contribution
property.” In other words, Article 1782 in Partnership Law is not the main rule on regulating of any of their separate properties into the partnership for gain would amount to donation, and
property rights between spouses, but merely suppletory to the primary rules set out by the under Article 87 of the Family Code, which prohibits any form of donation or gratuitous
Family Code. advantage between spouses during marriage, makes no distinction, much less an exception, for
spouses governed by the complete separation of property regime.
(2) Spouses Governed by the Conjugal Partnership of Gains
 53
c. Contract of Partnership May Offend Against the Provisions of the Family Code
A contract of partnership between spouses entered into during marriage would be void because
it would contravene the rules under Articles 76 and 77 of the Family Code that prohibit “any
modification in the marriage settlements” after the “celebration of the marriage,” and which
provide that “The marriage settlement and any modification thereof shall be in writing, signed by
the parties and executed before the celebration of the marriage.”
In essence, the Partnership Law under the New Civil Code, which should be considered general
provisions, cannot overcome the more specific provisions on the Law on Marriages under the
Family Code, which govern specifically the property regime that should prevail between spouses.
The provisions of Partnership Law are geared towards providing for the a contractual
relationship that seeks to undertake a business venture; whereas, the Family Code provisions
governing the property regime prevailing between spouses have considerations that transcend
profit motives, and seek to strengthen the institutions of marriage and the family. Consequently,
a contract of partnership between spouses should be held void in that it seeks to overcome or
undermine the mandatory provisions of the Family Code.
There are several areas where there arises real conflict between doctrines under Partnership
Law and those under the Family Code.
(1) Issue on Control and Binding Effects of Acts of Partners
We take the area of control and binding effect of the acts of partners against other partners and
the partnership itself. Under Partnership Law, every partner is an agent of the partnership and
for the other partners when it comes to transactions that pertain to partnership affairs; thus, the
act of one partner binds the other partners and the partnership property (Articles 1803[1] and
1818, Civil Code). On the other, the general rule under the Family Code, when it comes to
absolute community of property regime (Article 96, Family Code) and conjugal partnership of
gains (Article 124, Family Code), is that both spouses are co-administrators of the conjugal
properties; and any contract, especially an act of disposition or encumbrance of the community
or the conjugal property, done by one without the consent of the other partner, would be void.
(Guiang v. Court of Appeals, 291 SCRA 372 [1998]; Cirelos v. Hernandez, 490 SCRA 625
[2006]; Bautista v. Silva, 502 SCRA 334 [2006]). Take the case of allowing the spouses to enter
into a particular partnership, and they both contribute community or conjugal properties
thereto, would the rules under Partnership Law therefore allow one spouse, without the consent
of the other spouse, to dispose of such property pursuant to partnership affairs?
Article 145, Family Code provides that “Each spouse shall own, dispose of, possess, administer
and enjoy his or her own separate estate, without need of the consent of the other. To each
spouse shall belong all earnings from his or her profession, business or industry and all fruits,
natural, industrial or civil, due or received during the marriage from his or her separate
property.” Under a complete separation of property regime, spouses separately manage and
control their separate properties. Can spouses who are governed by the regime of separation of
property, thereby partially overcome the governing provisions of the Family Code, by being
allowed to validly enter into a particular partnership agreement?
(2) Charges to Partnership Properties
We should look also into the areas of charges against the partnership properties and the effects
of dissolution. Under Partnership Law, partnership properties would be chargeable against any
claim or contract entered into pursuant to partnership affairs. On the other hand, under both the
absolute community of property regime and the conjugal partnership of gains, there are specific
listings of what should first be chargeable against the community property (Articles 94 and 95,
Family Code), or the conjugal property (Articles 121 to 123, Family Code), like support and
debts contracted for the benefit of the marriage. Under a regime of separate property, both
spouses shall bear the family expenses in proportion to their income, or, in case of insufficiency
or default thereof, to the current market value of their separate properties (Article 146, Family
Code).
When community, conjugal or separate property is allowed to be contributed into the
partnership for gain, the rules of first preference of partnership creditors to partnership
property would undermine the claims of personal creditors of spouses, as well as the ability of
 54
marriage properties to properly provide for the family support and upkeep. In addition,
contributions by spouses of marriage property into a partnership for gain would certainly allow
a means by which spouses may defraud their marriage creditors, by making certain marriage
properties subject to greater claims outside of marriage affairs.
d. Professional Partnerships
May spouses by themselves, or together with other professionals, enter validly into a contract of
professional partnership, which by definition of Article 1783 of the Civil Code is always a
particular partnership? The answer seems to be in the affirmative. The reason is that a
professional partnership essentially covering the contribution of service by the spouses, does not
primarily bind actual community or conjugal properties, and therefore thus not operate in
violation of the property rules governing marriage property regimes.
More importantly, professional partnership are not really pursued for profit, but more for civic
or vocational ends and therefore do not address proprietary ends; but rather, the exercise of a
profession, even in the partnership medium, has more to do with the expression of ideals held by
an individual or towards achieving a fruitful life in the mundane world. This fact is recognized
even under the Family Code, where Article 73 provides that “Either spouse may exercise any
legitimate profession, occupation, business or activity without the consent of the other.
2. May Corporations Validly Qualify to Become Partners?
The prevailing rule in the United States is that –
“Unless it is expressly authorized by statute or charter, a corporation cannot ordinarily enter into
partnerships with other corporations or with individuals, for, in entering into a partnership, the
identity of the corporation is lost or merged with that of another and the direction of the affairs
is placed in other hands than those provided by law of its creation. . . A corporation can act only
through its duly authorized officers and agents and is not bound by the acts of anyone else, while
in a partnership each member binds the firm when acting within the scope of the partnership.”
(FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520).
The doctrine is grounded on the theory that the stockholders of a corporation are entitled, in the
absence of any notice to the contrary in the articles of incorporation, to assume that their
directors will conduct the corporate business without sharing that duty and responsibility with
others. (BAUTISTA, at p. 9).
a. Jurisprudential Rule
Tuason v. Bolanos, 95 Phil. 106 (1954), recognized at that time in Philippine jurisdiction the
doctrine in Anglo-American jurisprudence that “a corporation has no power to enter into a
partnership.” (Ibid, at p. 109). Nevertheless, Tuason ruled that a corporation may validly enter
into a joint venture agreement, “where the nature of that venture is in line with the business
authorized by its charter.” (Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R.,
1043, citing Fletcher Cyc. of Corp., Sec. 1082).
A joint venture is essentially a partnership arrangement, although of a special type, since it
pertains to a particular project or undertaking (BAUTISTA, supra, at p. 50). In Torres v. Court of
Appeals, 278 SCRA 793, the Supreme Court held unequivocally that a joint venture agreement for
the development and sale of a subdivision project would constitute a partnership pursuant to the
elements thereof under Article 1767 of the Civil Code that defines when a partnership exists).
AlthoughTuason does not elaborate on why a corporation may become a co-venturer or partner
in a joint venture arrangement, it would seem that the policy behind the prohibition on why a
corporation cannot be made a partner do not apply in a joint venture arrangement. Being for a
particular project or undertaking, when the Board of Directors of a corporation evaluate the
risks and responsibilities involved, they can more or less exercise their own business judgment is
determining the extent by which the corporation would be involved in the project and the likely
liabilities to be incurred. Unlike in an ordinarily partnership arrangement which may expose the
corporation to any and various liabilities and risks which cannot be evaluated and anticipated by
 55
the Board, the situation therefore in a joint venture arrangement, allows the Board to fully bind
the corporation to matters essentially within the Board’s business appreciation and anticipation.
It is clear therefore that what makes a project or undertaking a “joint venture” to authorize a
corporation to be a co-venturer therein is not the name or nomenclature given to the
undertaking, but the very nature and essence of the undertaking that limits it to a particular
project which allows the Board of Directors of the participating corporation to properly evaluate
all the consequences and likely liabilities to which the corporation would be held liable for.
b. SEC Rules
The SEC, in a number of opinions, has recognized the general rule that a corporation cannot
enter into a contract of partnership with an individual or another corporation on the premise
that it would be bound by the acts of the persons who are not its duly appointed and authorized
agents and officers, which is inconsistent with the policy of the law that the corporation shall
manage its own affairs separately and exclusively. (SEC Opinion, 22 December 1966, SEC FOLIO
1960-1976, at p. 278; citing 13 Am. Jr. Sec. 823 (1938); 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl.
1950, at p. 2520).
However, the SEC has on special occasions allowed exceptions to the general rule when the
following conditions are complied with:
(a) The authority to enter into a partnership relation is expressly conferred by the charter or
the articles of incorporation of the corporation, and the nature of the business venture to be
undertaken by the partnership is in line with the business authorized by the charter or articles of
incorporation of the corporation involved (SEC Opinion, 29 February 1980);
(b) The agreement on the articles of partnership must provide that all the partners shall
manage the partnership, and the articles of partnership must stipulate that all the partners shall
be jointly and severally liable for all the obligations of the partnership. (Ibid)
The second condition set by the SEC would have the effect of allowing a corporation to enter as a
general partner in general partnership, which would still have contravened the doctrine of
making the corporation unlimitedly liable for the acts of the other partners who are not its
authorized officers or agents. This interpretation of the second condition was confirmed by the
SEC in 1994, to mean that a partnership of corporations should be organized as a “general
partnership” wherein all the 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
 56
entering into a contract of limited partnership, a corporation would continue to manage its own “We agree with your statements that a reconsideration of the present policy of the Commission
corporate affairs while validly abstaining from participation in the management of the entity in on the matter is timely in order to permit the Philippine commercial environment to maintain its
which it has invested. Accordingly, as there is generally no threat that a corporate limited pace in terms of legal infrastructure with similar developments in the international arena with a
partner would be solidarily liable with the partnership, there would be no reason for requiring a view to encouraging and facilitating greater domestic and foreign investments in Philippine
corporate partner to actually manage the partnership, if it makes the business decision no to do business enterprise.” (Ibid)
so and opts to become a limited partner; and
—oOo—
3. The SEC policy that a corporation cannot enter into a limited partnership, is an offshoot of the
outdated view in the U.S., that, as a general rule, corporations could not form a partnership; that
corporations cannot become limited partners, is based on an assumption which is no longer
current. Jurisprudence and common commercial practice in the U.S., indicate that corporations
are not barred from acting as limited partners. Current American laws support the position that
a corporation can enter into a contract of limited partnership. For example, the Revised Uniform
Limited Partnership Act of 1976 (as amended in 1985), specifically confirms, that corporations
may act as limited partners. Almost all states in the U.S. have adopted limited partnership laws
which provide, in the same manner as the Revised Uniform Limited Partnership Act, that
corporations may act as limited partners. This indicates that many other jurisdictions simply
follow the broad language of the Revised Model Business Corporations Act which suggests that
corporations may act as limited partners and in no event prohibits that activity. These statutes
reaffirm what is indicated by the commercial practice in the U.S., that corporations can act as
limited partners. The proliferation of statutes reversing the doctrine forbidding corporations to
become partners is proof of the unsoundness of and dissatisfaction with such doctrine. (SEC
Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8-9 (No. 1, June 1996).

In that opinion, the SEC conceded on the points raised by confirming that “inasmuch as there is
no existing Philippine law that expressly prohibits a corporation from becoming a limited
partner in a partnership, the Commission is inclined to adopt your view on the matter,” (Ibid)
provided that the power to enter into a partnership is provided for in the corporation’s charter.
The SEC went on to say:
 57
11 – PARTNERSHIP FORMAL AND REGISTRATION REQUIREMENTS
[Updated 14 October 2009]
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. 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. 1772. Every contract of partnership having a capital of Three thousand pesos or more,
in money or property, shall appear in a public instrument, which must be recorded in the
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it
Office of the Securities and Exchange Commission.
is otherwise stipulated. (1679)

Failure to comply with the requirements of the preceding paragraph shall not affect the
_____
liability of the partnership and the members thereof to third persons (n)

Since the contract of partnership is essentially consensual in character, there is generally no

_____
form required, much less a need for the actual delivery of the promised contributions, to perfect
it, and thereby lead to the arising of a separate juridical personality. Article 1771 of the Civil
Code provides that “A partnership may be constituted in any form, except where immovable
Under modern day setting, most partnerships would be formed or constituted
property or real rights are contributed thereto, in which case a public instrument shall be
having contributed capital of more then P3,000.00, for it is doubtful whether two or more
necessary.” The other exception is provided in Article 1772 which provides that “Every contract
persons would come together in pursuit of business with a capital of less than P3,000.00. This
of partnership having a capital of Three thousand pesos or more, in money or property, shall
means that the twin requirements under Article 1772 of the Civil Code of having the contract of
appear in a public instrument, which must be recorded in the Office of the Securities and
partnership in a public document and registered with the SEC apply almost universally to all
Exchange Commission.”
modern-day partnerships. But even then, the twin requirements may have no legal or
commercial significance based on the following grounds:
Public documents and other forms of registration are features of commercial law system, for
indeed the public must deal on the basis of systems, infrastructures and institutions that are
(a) The law does not declare the partnership void when the twin requirements are not met, nor
manifest and made known to them, and in line with the characteristic of uniformity of
is non-compliance meted any adverse legal consequence; and
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
 58
(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 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,
 59
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 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.
 60
2. When Immovable Property 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
Art. 1771. A partnership may be constituted in any form, except where immovable
the partners were going to contribute cash into the venture, then the fact that the partnership
property or real rights are contributed thereto, in which case a public instrument shall be
was expressly organized “to operate fishpond,” did not necessarily mean that either a fishpond
necessary. (1667a)
or a real right to any fishpond was contributed into the venture.

Art. 1773. A contract of partnership is void, whenever immovable property is contributed

The ruling would also support the position that just because the partnership venture owns or
thereto, if an inventory of said property is not made, signed by the parties, and attached to
operates immovables does not mean it comes into the operation of Article 1773, as when such
the public instrument. (1668a)
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

a. Importance of Immovable Property in the Partnership Scheme

It is when immovable property is contributed into the capital of the partnership that the twin
The importance that the law places upon immovable properties which constitute part of the
requirements of public document and SEC registration come into play together with the
assets of the partnership is not only shown by the formal requirements mandated under Article
requirement of an inventory to be prepared, because under Article 1773 it is provided that “A
1773 of the Civil Code, which requires the execution of the inventory covering such properties to
contract of partnership is void, whenever immovable property is contributed thereto, if an
be attached to the public instrument (i.e., the articles of incorporation) that should be registered
inventory of said property is not made, signed by the parties, and attached to the public
with the SEC, but also by what seems to be a superfluous Article 1774 of the Civil Code which
instrument.”
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
Does the declaration of nullity of the partnership under Article 1773 for failure to comply with the
partnership name. Title so acquired can be conveyed only in the partnership name.”
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
Then also, we have the long provisions of Article 1819 of the Civil Code, which detail all the
decision in Torres v. Court of Appeals, 320 SCRA 428 (1999), should be instructive in answering
scenarios under which real property owned by the partnership may be legally dealt with, under
these issues.
various circumstances where title is not registered in the name of the partnership.

In Torres, a “Joint Venture Agreement” was executed among the co-venturers covering the terms
b. When Immovable Property Deemed Contributed
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
 61
articles of partnership was registered with the SEC, much less was the requisite inventory
mandated under Article 1773 of the Civil Code executed and attached to the public document. In
ruling against the contention of the capitalist partners that the partnership was void, the Court
held –
. . . First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo
M. Tolentino states that under the aforecited provision which is a complement of Article 1771,
“the execution of a public instrument would be useless if there is no inventory of the property
contributed, because without its designation and description in the Registry of Property, and
their contribution cannot prejudice third persons. This will result in fraud to those who contract
with the partnership in the belief [in] the efficacy of the guaranty in which the immovables may
consist. Thus, the contract is declared void by law when such inventory is made. The case at bar
does not involve third parties who may be prejudiced.
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. They cannot in one breath
deny the contract and in another recognize it, depending on what momentarily suits their
purpose. Parties cannot adopt inconsistent positions in regard to a contract and courts not
tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint
Venture Agreement an ordinary contract from which the parties’ rights and obligations to each
other may be inferred and enforced. (Ibid, at p. 438).
It is clear from Torres that the formalities mandated under Article 1773 are meant for the
protection of the partnership creditors, and that the declaration that the “partnership is void”
does not affect the intra-partnership relationship between and among the partners and between
the partners and the partnership itself. Thus, Torres held that the “alleged nullity of the
partnership will not prevent courts from considering the Joint Venture Agreement [or any
contract of partnership] an ordinary contract from which the parties’ rights and obligations may
be inferred and enforced.” Therefore, from the intra-partnership point of view, there are dire
consequences that befall the partners and the partnership for failing to comply with the
formalities mandated under Article 1773 of the Civil Code.
If we follow therefore the Torres reasoning that the formalities mandated under Article 1773 are
meant to protect partnership creditors, and every third person who deals with the partnership, I
do not see how the imposition of the rule “partnership is void,” could be beneficial or protective
of the rights of partnership creditors, for the following reasons:
Firstly, the declaration of nullity of the partnership cannot be ascribed to the extra-partnership
relationship between the partners and partnership on one hand, and the partnership creditors
on the other hand, for to do so would adversely affect the contractual rights and standing of the
creditors vis-a-vis the partners on their unlimited liability rule and the partnership, which must
be deemed to exist to protect the integrity of the contracts entered in its name.
Secondly, declaring the partnership void means that all contributed and earned assets of the
partnership pertain to the partners directly as co-owners, since no contract of partnership exist
between them (it is void and inexistent), and no partnership person has arisen with a juridical
personality separate and distinct from each of the partners. Not only does this scenario affect the
integrity of the contracts entered into directly with the partnership, but it also means that the
contributed and earned partnership assets pertain directly to the persons of the partners and
priority as to them pertains to their separate creditors and not to the partnership creditors.
Neither of the afore-described scenarios seem to promote the interests or protect the rights of
partnership creditors.
The Torres ruling has therefore removed any “force” or “teeth” on the 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
 62
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 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
 63
memorandum thereof, be in writing and subscribed by the party charged. Corollarily, no action
can be proved unless the requirement exacted by the statute of frauds is complied with. (at p.
590)
Unfortunately, the Court failed to consider the fact that even under the Statute of Frauds, the
“unenforceability” of covered contracts is lifted the moment there is partial or full execution of
the terms of the contract. Thus, in the future it can be anticipated that the rule of partial
execution, (i.e., the actual contribution made to the partnership, the pursuit of the business
enterprise, etc.), would make mitigate against the deleterious effect of non-compliance with the
public instrument and SEC-registration requirement under Article 1771 and 1772 of the Civil
Code.
In any event, what rendered the purported contract of partnership void in Litonjua was that
since the note indicated that there would be contributed real property to the partnership, then
there was failure to comply with the requirements laid down in Article 1773 of the Civil Code, for
the rendering of the proper inventory and attaching it to the public instrument registered with
the SEC, thus:
Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the
Civil Code applies as long [as] real property or real rights are initially brought into the
partnership. In short, it is really of no moment which of the partners, or, in this case, who
between petitioner and his brother Eduardo, contributed immovables. In context, the more
important consideration is that real property was contributed, in which case an inventory of the
contributed property duly signed by the parties should be attached to the public instrument, else
there is legally no partnership to speak of. (at p. 586).
Litonjua therefore gives the “dire consequences” faced by partners who do not comply with the
formal requirements mandated under Articles 1771 to 1773 of the Civil Code. It would have been
better ifLitonjua had expressly set aside its rulings in Torres and Angeles, so that its doctrine
would have been the clear guide to legal practitioners. For the author, it must be stated that the
rulings in Torres and Angeleswhich have their basis from jurisprudence under the old Civil Code
and the Code of Commerce, will continue to prevail; and that the Litonjuadoctrine of rendering
the contract of partnership void for failure to comply with the requirements under Article 1773
of the Civil Code, applicable only to situations where the claimant that a contract of partnership
has been duly constituted relies only upon a note or instrument, and does not have other
evidence to prove that indeed a contract of partnership has been constituted, such as his exercise
with the tolerance of the other partners, of acts of ownership, demanding for an accounting,
participation in the profit, etc. Indeed, in Litonjua the best evidence presented by the younger
brother to prove a contract of partnership has been constituted was the unsigned typewritten
note, and he failed to prove the essential elements of the contract of partnership, as observed by
the Court, thus:
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the
family businesses supposedly promised by Eduardo to give in the near future. Any suggestion
that the stated amount or the equity component of the promise was intended to go to a common
fund would be to read something not written in Annex “A-1.” Thus, even this angle alone argues
against the very idea of a partnership, the creation of which requires two or more contracting
minds mutually agreeing to contribute money, property or industry to a common fund with the
intention of dividing the profits between or among themselves.” (at pp. 590-591; italics supplied).
Perhaps the afore-quoted passage is the best way to appreciate the decision in Litonjua, that in
the end no contract of partnership arose between the Litonjua sibling even on the basis of the
arrangement purported, since it lacked the essential element of “contributing to a common fund.”
Thus, the rulings on the failure to comply with the provisions of Article 1771 to 1773 of the Civil
Code ought to be considered as obiter dictum.
c. Historical Background of Article 1773
Ruling under the provisions of the Code of Commerce and the old Civil Code which prescribed
formalities for the formation of a partnership where real property is contributed, the Court held
in Borja v. Addison, 44 Phil. 895 (1922), that “knowledge of the existence of the new partnership
or community of property must, at least, be brought home to third persons dealing with the
 64
surviving husband in regard to community real property in order to bind them by the Again, under Article 1839(9), “Where a partner has become insolvent or his estate is insolvent,
community agreement.” (at p. 907) Consequently, third parties without knowledge of the the claims against his separate property shall rank in the following order:
existence of the partnership who deal with the property still registered in the name of one of the
partners have a right to expect full effectivity of such transaction on the property, in spite of the “(a) Those owing to separate creditors;
protestation of the other partners and perhaps even the partnership creditors.
“(b) Those owing to partnership creditors;
d. Registration Requirements under Article 1773 Should Be Considered in Connection
“(c) Those owing to partners by way of contribution. (n)”
with the Priority Rules Set for Claims of Partnership Creditors and the Separate Debtors of
the Partners
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
Failure to comply with the inventory and public documents requirements may, however,
to them the partnership contract is void, if it is necessary to protect their interests, what happens
adversely affect the rights of the partners, the partnership and the partnership creditors, when it
then to real property contributions that have not complied with the statutory formalities, would
comes to the binding effect of transactions relating to real estate and other immovables where
first priority towards them pertain to the separate creditors of the contributing partner?
the controlling doctrine is that such transactions do not bind the public unless they are found in a
public document, and duly registered.
3. The Partnership Name
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 Article 1815 of the Civil Code provides that –
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.
Art. 1815. Every partnership shall operate under a firm name, which may or may not
Decree No. 1459) will prevail as to who has a better claim, right or lien on the property, since
include the name of one or more of the partners.
“registration in good faith and for value,” is the operative rule under the Torrens system.

Those who, not being members of the partnership, include their names in the firm name,
The proper registration of real property contributed into the partnership would have much to do
shall be subject to the liability of a partner. (n)
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
The language of Article 1815 of the Civil Code shows unmistakably that its not an obligation of
are in possession of a court for distribution, partnership creditors shall have priority on
the partners to include their names in the partnership name; but that if an individual includes his
partnership property and separate creditors on individual property, saving the rights of lien or
secured creditors.”
 65
name in the firm name, then he becomes bound to third parties who rely thereon to the same
liabilities as the partners in the partnership.
Article 1815 is the first article under the section which reads “Obligations of the Partners with
Regard to Third Persons,” which indicates clearly the essence of having a firm name: that since a
partnership is given a separate juridical personality which allows it to deal with legal capacity
and enter into contracts with the public, then it must adopt a firm name by which it can be
identified as the party to a contract.
a. Historical Basis of Article 1815
Although the codal provision indicates that it is a new [“(n)”] provision in the Civil Code,
according to Tolentino, Article 1815 was taken from Article 126 of the Code of Commerce
(TOLENTINO, at p. 353). Yet the principle on partnership name under Article 126 was quite
different, for it actually required that the partnership name should be registered containing all
the names of the partners. (Article 126, Code of Commerce).
In Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923), the Court held that the object of
Article 126 in requiring a general partnership to transact business under the name of all its
members, of several of them, or of one only, was to protect the public from imposition and fraud;
and that Article 126 was for the protection of the creditors rather than of the partners
themselves. Jo Chung Cang held that the legal requirement as to firm name must be construed as
rendering contracts made in violation thereof unlawful and unenforceable only as between the
partners and at the instance of the violating party, but not in the sense of depriving innocent
parties of their rights who may have dealt with the offenders in ignorance of the latter having
violated the law; and that contracts entered into by commercial associations defectively
organized are valid when voluntarily executed by the parties, and the only question was whether
or not they complied with the agreement. It essence Jo Chung Cang ruled that partners cannot
avoid the consequences of a partnership contract entered into by invoking in their defense the
anomaly in the firm name which they themselves adopted. The ruling was reiterated
in Philippine National Bank v. Lo, 50 Phil. 802 (1927).
The earlier decision in Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), held that failure
to register a commercial partnership would mean that there is no partnership constituted and
that the rule applicable to protect parties who have dealt in good faith with the enterprise was
the application of Article 120 of the Code of Commerce, that the right of action would be against
the person in charge of the management of the association.
Jo Chung Cang refused to apply the ruling in Hung-Man-Yoc because there was actual registration
of the partnership, and consequently decreed that a general partnership had been constituted as
to make the partners thereof solidarily liable for partnership debt in the event the partnership
itself becomes insolvent. Although failure to comply with the mandatory registration provisions
of the Code of Commerce did not affect the cause of action of creditors to enforce their contracts
against the partnership, did it mean then that as a consequence, if it were the partners and
partnership seeking to enforce such contracts, they would be barred from doing so as a
consequence of their failure to comply with the registration requirements under the law? No
categorical ruling was made on this issue in Jo Chung Cang although it did quote a ruling from the
Supreme Court of Michigan on the common law rule:
As this acts involves purely business transactions, and affects only money interests, we think it
should be construed as rendering contracts made in violation of it unlawful and unenforceable at
the instance of the offending party only, but not as designed to take away the rights of innocent
parties who may have dealt with the offenders in ignorance of their having violated the statute.
(Ibid, at pp. 154-155, citing Cashing v. Pliter 168 Mich 386; Ann. Cas. [1913-C], 67
[1912]; underscoring supplied by author)
To prevent such members of a commercial partnership from recovering on the contracts entered
into on the ground that there was no valid registration or that it did not comply with the rule on
firm name would constitute unjust enrichment. Eventually, the Court applied in 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:
 66
Persons who assume to form a corporation or business association, and exercise corporate (c) more importantly, the arising of the separate juridical personality of the partnership comes
functions, and enter into business relations with third persons, are estopped from denying that with the perfection of the contract of partnership, and not with registration thereof.
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, 4. Registration Given Little Use in Partnership Law
when an action is brought on such obligations, from denying the juristic personality of such
The essence of what constitutes a partnership contract is split into two levels in Philippine
corporations or associations. (Ibid, at p. 12).
Partnership Law:
xxx.
(a) As between and among the partners, it is the point of perfection, when two or more parties
Where a shareholder of an association is called upon to respond to a liability as such, and where have come to a meeting of minds to constitute a common fund and the distribution of profits
a party has contracted with a corporation and is sued upon the contract, neither is permitted to and losses among themselves; and
deny the existence or the legal validity of such corporation. To hold otherwise would be contrary
(b) In relation to third parties who deal with a business enterprise, when a representation has
to the plainest principles of reason and good faith. Parties must take the consequences of the
been made that they are dealing with a partnership, or are dealing with a partner to
position they assume. (Ibid, at p. 13).
a partnership enterprise.
The question in the Jo Chung Cang, PNB and Compania Agricola rulings was that if the provisions
a. Intra-Partnership Relationship
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-
Within the intra-partnership relationship, the main doctrine that applies is that unless there is a
compliance therewith could not prejudice creditors, then what would be their usefulness if no
meeting of minds as to the elements of common fund and distribution of profits, then there can
adverse consequence visits the partners and the partnership whenever they are not complied
be no contract of partnership between the parties involved. On the other hand, once there is such
with?
a meeting of minds, the partnership contract arises, and needs no particular form in order to be
valid, binding and enforceable. Thus, Article 1784 provides that “A partnership begins from the
There is no doubt that there were serious difficulties with enforcing the mandatory provisions
moment of the execution of the contract, unless it is otherwise stipulated.” The partnership
on registration and firm name for commercial partnerships under the Code of Commerce. The
agreement may be proved by competent evidence, whether written or oral, or from the acts and
present rule under Article 1815 of the Civil Code which essentially allows the partners and the
actuations of the parties. So strong is the “consensual” nature of the contract of partnership that
partnership to adopt any firm name they fancy is a more market-friendly rule since:
the failure to comply with the formal requirement of inventory of immovable contributed, public
(a) one who opts to have his name included in the firm name runs to risk of being made liable instrument and registration with the SEC, brings no deleterious effect on the partnership itself,
for partnership debts; and between and among the partners. We shall illustrate this point.

(b) the articles of partnership, when registered provides anyway for the listing of the partners Under Article 1771 of the Civil Code, although it recognizes the general principal that “A
of the partnership enterprise; and partnership may be constituted in any form,” yet it provides expressly that “where immovable
 67
property or real rights are contributed thereto, in which case a public instrument shall be (a) The validity and enforceability of contracts entered into with a purported partner of an
necessary.” This is followed up in Article 1773 which provides that “A contract of partnership is existing partnership or with purported partnership that has not been legally constituted; and
void, whenever immovable property is contributed thereto, if an inventory of said property is
not made, signed by the parties, and attached to the public instrument.” In spite of the clear (b) The standing of partnership creditors to enforce partnership liability personally against the
injunction of the statutory provisions and the laying down of the consequences of failure to partners.
comply with the requisites forms of public document and inventory of the contributed
The general principle in Partnership Law is that a member of the public who deals in good faith
immovable, the Court has always ruled that such requirements are meant for the protection of
with a purported partner or purported partnership in the ordinary course of business of such
third parties who deal with the partnership, and consequently, when no third party interests are
partnership, has a right to expect that his contract can be enforced, and intra-partnership and
involved in a suit, neither the partnership nor any of the parties can invoke failure to comply
technical issues pertaining to the partnership or on the distribution of power and authority
with such requirements, to gain any advantage or so avoid the liability consequences of being a
between the partners cannot generally be raised against such third party to undermine the
partner in a partnership.
enforceability of his contractual dealings with the corporation.
In the same manner, under Article 1772 of the Civil Code, “Every contract of partnership having a
Various statutory provisions in the Partnership Law of the Civil Code, support this doctrine of
capital of three thousand pesos or more, in money or property, shall appear in a public
reliance by third parties dealing in good faith with the purported partner or purported
instrument, which must be recorded in the Office of the Securities and Exchange Commission.”
partnership, thus:
Not only does Article 1772 declare the clearly non-lethal consequence of failure to comply with
the public instrument and SEC registration requirements: “Failure to comply with the
(a) Under Article 1815, “Those who, not being members of the partnership, include their names
requirements of the preceding paragraph shall not affect the liability of the partnership and the
in the firm name, shall be subject to the liability of partner.”
members thereof to third persons,” but the Court has consistently declared that the purpose of
Article 1772 is merely to allow a partner in an oral partnership to have a cause of action to have
(b) Under Article 1818, “Every partner is an agent of the partnership for the purpose of its
the partnership constituted in a manner that allows its terms and conditions be made known to
business, and the act of every partner, including the execution in the partnership name of any
the public through a public instrument and registration with the SEC.
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
Failure to comply with the requirements under Article 1772 may also be basis for the SEC to
the particular manner, and the person with whom he is dealing with has knowledge of the fact
refuse to give supportive aid to partners who have not registered their agreement with the SEC.
that he has no such authority;”

b. Dealings with Third Parties

(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
There are basically two areas that are important to consider when it comes to partnership
such creditors have “no knowledge or notice of the dissolution.”
dealings with third parties:
 68
In fact, even when a partnership has been duly registered with the SEC, the doctrine of the
Supreme Court seems clear that third parties who deal with the partnership are not bound by
the terms of the registered articles of partnership, and unless they have actual knowledge
thereof, they have a right to rely upon what is the normal right and authority of every partner to
generally bind the partnership and the other partners.
Thus, Litton v. Hill & Ceron, 67 Phil. 509 (1939), laid down the rule that –
Third persons . . . are not bound in entering into a contract with any of the two partners, to
ascertain whether or not this partner with whom the transaction is made has the consent of the
other partner. The public need not make inquiries as to the agreements had between the
partners. Its knowledge is enough that it is contracting with the partnership which is
represented by one of the managing partners. (Ibid, at p. 513).
This ruling was reiterated in Goquiolay v. Sycip, 108 Phil. 947 (1960), which held that the
statutory rule on how management power is distributed or exercised within the partnership, and
the consequences of failure to comply with such statutory rule is “an obligation that is imposed
by law on the partners among themselves, that does not necessarily affect the validity of the acts
of a partner, while acting within the scope of the ordinary course of business of the partnership,
as regards third persons without notice. The latter may rightfully assume that the contracting
partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he
would not ordinarily act to the prejudice of his co-partners. The regular course of business
procedure does not require that each time a third person contracts with one of the managing
partners, he should inquire as to the 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
 69
granting to the contracting parties an adequate remedy whereby to compel the execution of a
public writing, or any other special form, whenever such form is necessary in order that the
contract may produce the effect which is desired, according to whatever may be its object.
(Ibid, at pp. 563-564).

Not only is the general rule under Partnership Law jurisprudence that partnership creditors do
not have an obligation to verify the authority of a purported partner acting in the ordinary
course of partnership business, nor to review the registration papers of the partnership, the rule
is that any important changes in partnership relationship must be brought to the knowledge of
the partnership creditors in order to be binding on the latter.

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

—oOo—
 70
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 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
 71
each partner is an authorized agent for the firm and that he has authority to bind it in carrying on
the partnership transaction.
We should therefore consider the old ruling in Council of Red Men v. Veterans Army, 7 Phil. 685
(1907), where the Court interpreted the original provision of Article 1803 of the Civil Code (then
Article 1695 of the old Civil Code), that allowed one partner to act to bind the partnership, to
apply only when there has been no provision at all in the articles of partnership on the exercise
of power or management, thus:
One partner, therefore, is empowered to contract in the name of the partnership only when the
articles of partnership make no provision for the management of the partnership business. In the
case at bar we think that the articles of the Veteran Army of the Philippines do so provide. It is
true that an express disposition to that effect is not found therein, but we think one may be fairly
deduced from the contents of those articles. They declare what the duties of the several officers
are. In these various provisions there is nothing said about the power of making contracts, and
that faculty is not expressly given to any officer. We think that it was, therefore, reserved to the
department as a whole; that is, that in any case not covered expressly by the rules prescribing
the duties of the officers, the department were present. It is hardly conceivable that the members
who formed this organization should have had the intention of giving to any one of the sixteen or
more persons who composed the department the power to make any contract relating to the
society which that particular officer saw fit to make, or that a contract when so made without
consultation with, or knowledge of the other members of the department should bind it. We
therefore, hold that no contract, such as the one in question, is binding on the Veteran Army of
the Philippines unless it was authorized at a meeting of the department. No evidence was offered
to show that the department had never taken any such action. In fact, the proof shows that the
transaction in question was entirely between Apache Tribe, No. 1, and the Lawton Post, and
there is nothing to show that any member of the department ever knew anything about it, or had
anything to do with it. The liability of the Lawton Post is not presented in this appeal. (7 Phil.
685, at pp. 688-689).
We are of the strong position that the doctrine in Council of Red Men,rendered at a time when our
legal jurisdiction was still deciding the proper formulation of the doctrines in Philippine
Partnership Law, no longer applies.
Firstly, the prevailing doctrine now embodied in Articles 1803[1] and 1818 of the Civil Code is
that every partner has the apparent authority to act for and in behalf of the partnership in
carrying on the ordinary or usual business of the partnership.
Secondly, the ruling in Council of Red Men was based on the principal that the special rules of
management of partnership affairs provided for in the articles of partnership is binding on the
public, or at least on every person dealing with the partnership. This is not the rule under
Philippine Partnership Law which characterizes the contract of partnership and the arising of the
partnership juridical person, as being merely consensual with no specific formalities being
required in general. Thus, even when the articles of partnership has been formally executed and
registered with the SEC, the same is not considered to be a public document binding on the
public. Therefore, notwithstanding what specific provisions may be found in the articles of
partnership on the management of the partnership business, the same is binding inter se among
the partners, but does not prejudice the rights of a third party who deals in good faith with the
partners without actual knowledge of the content of the articles of partnership.
Although special management arrangements may be made among partners, and even when so
formalized within the terms of the articles of partnership, generally such special arrangements
do not bind or prejudice third parties who deal with the partnership business without
knowledge of such special arrangement, and who are not mandated to seek formal authority and
that in fact are deemed to have a right to expect, unless otherwise indicated, that their dealings
with the managing partner should bind the partnership.
This situation is best exemplified in the decision in Litton v. Hill & Ceron, 67 Phil. 509 (1935),
where an obligation in a sum of money was sought to be recovered from the partnership Hill &
Ceron in whose name it was entered into by one of the managing partners, when in fact the
articles of partnership provided expressly that: “Sixth. That the management of the business
 72
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 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
 73
in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his co- In the cases of items (c) and (d) above-enumerated, Article 1824 of the Civil Code provides
partners. The regular course of business procedure does not require that each time a third expressly that “All partners are liable solidary with the partnership for everything chargeable to
person contracts with one of the managing partners, he should inquire as to the latter’s authority the partnership.”
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 b. Transactions Not in the Ordinary Course of Partnership Business
obligation was contracted against the express will of one of the managing partners, “it shall not
Article 1818 of the Civil Code enumerates what are certainly not“apparently for the carrying on
be annulled for such reason, and it shall produce its effects without prejudice to the
of the business of the partnership in the usual way,” and will not therefore be valid transactions
responsibility of the member or members who contracted it, for the damages they may have
unless done by or approved by all the partners, thus:
caused to the common fund.” (Ibid, at p. 957)

(a) Assigning of partnership property in trust for creditors or on the assignee’s promise to pay
The right of a partner to manage the affairs of the partnership or to act as an agent of the
the debts of the partnership;
partnership is expressly affirmed by the following statutory provisions:

(b) Disposition of the goodwill of the business;

(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
(c) Confession of a judgment;
partnership;

(d) Entering into a compromise concerning a partnership claim or liability;

(b) Article 1821, which provides that notice to any partner of any matter relating to
partnership affairs, and the knowledge of partner acting in the particular matter, acquired while
a partner or then present to his mind, and the knowledge of any other partner who reasonably
could and should have communicated it to the acting partner, operate as notice or knowledge of
the partnership (except in case of a fraud on the partnership);
(c) Article 1822, which provides that any loss or injury caused to any third person or any
penalty incurred by reason of any wrongful act or omission of a partner acting in the ordinary
course of the business of the partnership or with the authority of his co-partners, shall make
the partnership liable therefore; and
(d) Article 1823, which provides that the partnership is bound to make good the loss caused by
the misapplication by a partner acting within the scope of his apparent authority of money or
property belonging to, or received by the partnership from, a third person.
(e) Submitting a partnership claim or liability to arbitration; or
(f) Renouncing a partnership claim.
The foregoing cases are considered to be not merely acts of administration, but rather acts of
ownership which can only be effected by the concurrence of all the partners who are collectively
deemed to be the “owners” of the partnership and its business enterprise.
One would consider therefore that when the transaction involves the sale, transfer or
encumbrance of the entire partnership business enterprise, it would constitute an act of strict
ownership or an act of alteration, which cannot be considered as within the ordinary course of
business that would come within the apparent authority of one partner. And yet in the early case
 74
of Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court held that the sale of the partnership’s
business enterprise can be considered to be within the power of the managing partner, thus:
Appellants also question the validity of the sale covering the entire firm realty, on the ground
that it, in effect, threw the partnership into dissolution, which requires consent of all the
partners. This view is untenable. That the partnership was left without the real property it
originally had will not work its dissolution, since the 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 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.
 75
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.
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:

On the other hand, under Article 1802, if it has been stipulated that none of the managing (1) Where Title Is in the Partnership Name:
partners shall act without the consent of the others, the concurrence of all shall be necessary for
(i) Any partner may convey title to such property by a conveyance executed in the
the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless
partnership name; the partnership may recover such property only when the partner so
there is imminent danger of grave or irreparable injury to the partnership.
conveying has no such power to so convey, but not against a transferee in good faith and for
It should be emphasized though that the provisions of Articles 1800 to 1802 should be value;
considered to be intramural rules that govern the relationship between and among the partners,
(ii) A partner who conveys the property but in his own name passes the equitable interest of the
and the breach of which can bring about a cause of action against the breaching partners. The
partnership only when the partner so conveying acted with authority; otherwise, no title at all to
rules provided therein do not bind nor apply to invalidate the contract and transactions had with
the immovable property passes to the transferee.
third parties acting in good faith and under the doctrine of apparent authority provided under
Article 1818.
The immediately preceding rule is consistent with the provision of Article 1774 which states that
title to immovable property acquired in the partnership name can be conveyed only in the
d. Power of Alteration
partnership name.
The power of management of the partnership business, should be distinguished from the power
(2) Where Title Is Not in Partnership Name (i.e., in the Name of One or More, or All the
of ownership and control which is subject to a higher level of requirements. Under Article
Partners, or a Third Person in Trust for the Partnership):
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
(i) A conveyance executed by a partner in the name of the partnership or in his own name only
partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the
passes equitable interest of the partnership, only when the partner conveying acted with
interest of the partnership, the court’s intervention may be sought.
authority;

e. Power Over Real Properties of the Partnership

(ii) A conveyance executed by a partner in the name of the partnership or in his own name does
not even pass anything (not even equitable interest of the partnership) when the partner so
Although Article 1774 of the Civil Code provides that immovable property or an interest therein
conveying acted without authority;
may be acquired in the partnership name, the partnership title is not rendered void if the
 76
(3) Where Title Is in the Name of One or More But Not All the Partners:
(i) When the records disclose partnership interests, the partners in whose name the title stands
may convey title to such property; and the partnership may recover only when the partners so
conveying acted without authority, but not against a purchaser in good faith and for value;
(ii) When the records do not disclose the right of the partnership, the partners in whose name
the title stands may convey title to such property, and the partnership may recover against any
transferee when the partners so conveying acted without authority;
(4) Where Title Is in the Name of All of the Partners:
(i) Conveyance executed by all the partners (in whose ever name so conveyed) passes all their
rights in such property. In this case the will of all the partners is the will of the partnership.
2. Partner’s Right to Specific Partnership Property
Although Article 1811 of the Civil Code defines or explains a partner’s “right in specific
partnership property” to mean that “A partner is [merely a] co-owner with his partners of
specific partnership property,” and the enumeration of the “incidents of this co-ownership”
would show that what is being defined is merely an implementation of the principle of mutual
agency, thus:
(a) “A partner . . . has an equal right with his partners to possess specific partnership property
for partnership purposes;”
(b) “A partner’s right in specific partnership property is not assignable except in connection
with the assignment of rights of all the partners in the same property;”
(c) “A partner’s right in specific partnership property is not subject to attachment or execution,
except on a claim against the partnership;” and
(d) “A partner’s right in specific partnership property is not subject to legal support.”
Unlike the proprietary right of an ordinary co-owner to “use the thing owned in common,
provided he does so in accordance with the purpose for which it is intended and in such a way as
not to injure the interest of the co-ownership or prevent the other co-owners from using it
according to their rights” (Article 1486, Civil Code), the right of every partner in specific
partnership property is merely an extension of his right to participate in the management of the
partnership affairs, and bears no proprietary title to himself personally apart from pursuing the
partnership affairs.
It may also be observed that the recognition by the Law on Partnerships of the partners’
purported co-ownership interests in specific partnership property would be in defiance of the
grant of a separate juridical personality to every partnership organized under the Civil Code.
Nonetheless, the purported co-ownership interest of partners is essentially for the furtherance of
the partnership affairs, and emphasizes the fact that in the partnership setting equity ownership
is merged with management prerogatives, equivalent to the recognition of the full-ownership by
the partners, as collective sole-proprietors so-to-speak, of the partnership enterprise and its
assets.
A better way of looking at the purported co-ownership rights of partners to specific partnership
property is to consider that the law constitute the partners as trustees of the corporate
properties, whereby they hold naked title to the partnership properties, with full power to
manage and control the same for the benefit of the partnership venture, thus, “A partner . . . has
equal right with his partners to possess specific partnership property for partnership purposes.”
Thus, in Catlan v. Gatchalian, 105 Phil. 1270 (1959), it was held that when partnership real
property had been mortgaged and foreclosed, the redemptio by any of the partners, even when
using his separate funds, does not allow such redemption to be in his sole favor: “Under the
general principle of law, a partners is an agent of the partnership (Art. 1818, new Civil Code).
Furthermore, every partner becomes a trustee for his copartner with regard to any benefits or
profits derived from his act as a partner (Article 1807, new Civil Code). Consequently, when
 77
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 property is not assignable except in
connection with the assignment of rights of all the partners in the same property.” Bautista had
written that the reasons why a 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 which, because it is not considered an entity or a legal person, a
partnership cannot hold title and hence partnership property is deemed held or owned in
common by the partners for the benefit of the partnership,” (BAUTISTA, at pp. 147-148) as
opposed to the civil law doctrine that affords the partnership a separate juridical personality,
3. Equity Rights of Partners
Article 1812 of the Civil Code defines a “partner’s interest in the partnership” essentially as his
equity interest, thus: “his share of the profits and surplus.” A partner’s interest in the partnership
defines his equity position as a co-proprietor of the partnership enterprise, which entitles
him ipso facto to share in the profits and to share in the losses of the venture.
“Profits” represent the excess of receipts over expenses or the excess of the value of returns over
the value of advances (Citizens National Bank v. Corl. 33 S.E.2d 613, 616 (1945); Fairchild v. Gray,
242 N.Y.S. 192 [1930]; Crawford v. Surety Insurance Co., 139 P. 481, 484 [1970]); whereas;
“surplus” has been defined as the excess of assets over liabilities. (Tupper v. Kroc, 492 P. 2d 1275
[1972]; Anderson v. U.S., 131 F.Supp. 501 (1955); Balaban v. Bank of Nevada, 477 P.2d 860
[1970]).
Bautista wrote that “The interest of the partner in the partnership has thus been otherwise
described as the net balance remaining to him; after all partnership debts or claims against it
have been paid and the equities and accounts between such partner and his copartners have
been adjusted.” (BAUTISTA, at p. 176, citing Claude v. Claude, 228 P.2d 776 [1951]; Preton v. State
Industrial Accident Commission, 149 P.2d 275 [1944]; Swirsky v. Horwich, 47 N.E.2d 452
[1943]; Cunningham v. Cunningham, 135 N.E. 21 [1922]).
a. Assignability of a Partner’s Equity Right
A partner’s equity interest in the partnership truly represents a proprietary interest for his
exclusive benefit as an owner of such intangible right. Therefore, like any other property right, a
partner’s equity is generally transferable or assignable. Nonetheless under Article 1813 of the
Civil Code, the transfer or assignment of a partner’s equity does not make the transferee or
assignee step into the shoes of the partner in his personal capacity as such in relation to the
other partners, thus:
A conveyance by a partner of his whole interest in the partnership does not of itself dissolve the
partnership, or, as against the other partners in the absence of agreement, entitle the assignee,
 78
during the continuance of the partnership, to interfere in the management or administration of
the partnership business or affairs, or to require any information or account of partnership
transactions, or to inspect the partnership books.
In other words, under Article 1813, the only thing that can be conveyed by a partner as an equity
holder, is the sole right to receive profits and surplus assets upon the dissolution of the
partnership, thus: “i merely entitles the assignee to receive in accordance with his contract the
profits to which the assigning partners would otherwise be entitled.” The only instance under
said provision that the transferee or assignee may avail himself of the usual remedies is “in case
of fraud in the management of the partnership.
Unlike in Corporate Law where the rule on equity is that they are essentially transferable, in
Partnership Law, equity interests of partners are not essentially transferable. This statement is
not even accurate because if you look at the language of Article 1813 the proper rule would be,
every partner shall have an absolute right to transfer or assign his equity interest, but such
transaction will not transfer his other rights as a partner. The article also recognizes that just
because a partner “cashes in” on his equity rights in the partnership, which he has every right to
do, the same does not mean that he ceases to be a party to the partnership contract nor does it
trigger the dissolution of the partnership, which means that with respect to his other right to
management the partnership affairs and act as agent of the other partners, these remain in tact.
So separate and divisible is a 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
 79
managing partner under the articles died and was succeeded by his widow, it was contended
that under the terms of the articles she also succeeded to the sole management of the
partnership. In ruling against such a conclusion, the Court held –
. . . While, as we previously stated in our narration of facts, the Articles of Copartnership and the
power of attorney . . . conferred upon the [the sole managing partner] the exclusive management
of the business, such power, premised as it is upon trust and confidence, was a mere personal
right that terminated upon [the sole managing partner’s] demise. The provision in the articles
stating that “in the event of death of any one of the partners within the 10-year term of the
partnership, the deceased partner shall be represented by his heirs”, could not have referred to
the managerial right given to [the deceased husband]; more appropriately, it related to the
succession in the proprietary interest of each partner. (Ibid, at pp. 954-955).
b. Right to Participate in Profits; the Obligation to Participate in Losses
The rights of an equity holder are essentially linked to the operations of the business enterprise,
and as he takes the risk connected with business down-turn, then to him would also accrue the
profits of the enterprise. One who merely participates in the sharing of gross returns of an
enterprise, as indicated in Article 1769(3) of the Civil Code does not necessarily mean that he is
an equity holder, for he does not expose him to the expenses and losses of the business, in
contrast to one who shares in the net profits, who under Article 1769(4) is prima facie evidence
that he is a partner in the business, if such participation is not linked to some other clear
contractual arrangement.
Under Article 1767 of the Civil Code, the essence of a partnership arrangement is the existence of
a common fund or a business enterprise, and which under Article 1770 must be “established for
the common benefit or interest of the partners;” and which is the reason why under Article 1799,
a stipulation in the contract of partnership which excludes one or more of the partners from any
share in the profits or losses is void, but the partnership arrangement remains subsisting.
Article 1797 of the Civil Code provides for the rules governing the distribution of profits and
losses in the partnership business, thus:
(a) Profits and losses shall be distributed in conformity with the agreement between the
partners;
(b) If only the share of each partner in the profits has been agreed upon, the share of each in the
losses shall be in the same proportion;
(c) In the absence of any such agreement, the share of each partner in the profits and losses shall
be in proportion to what he may have contributed, except that the industrial partner shall not be
liable for the losses; as to the profits, the industrial partner shall receive such share as may be
just and equitable under the circumstances; and if he contributed also capital, the shall also
receive a share in the profits in proportion to his capital.
Article 1798 of the Civil Code provides that if the partners have entrusted to a third person the
designation of profits and losses, such designation may be impugned only when it is manifestly
inequitable; and in no case may a partnership who has begun to execute the decision of third
person, or who has not impugned the same within three (3) months from the time he had
knowledge thereof, complain of such decision. The article also provides that the designation of
losses and profits cannot be entrusted to one of the partners.
What happens when one or more of the partners are designated to distribute profits and losses? It
would have to mean that the designation and the exercise thereof would both be void.
4. Other Rights of a Partner
a. Right to Inspect
Article 1805 of the Civil Code expressly provides that every partner shall at any reasonable hour
have access to and may inspect and copy the partnership books which shall be kept at the
principal place of business of the partnership.
In Corporate Law, the right of a stockholder or member to inspect and copy corporate records is
considered to be a common law right, and a right of such importance that its enforcement can be
 80
by an actionmandamus. The right to inspect is critical to safeguarding all other rights of
stockholders or members in the corporation.
The same principles are applicable to a partner’s right to inspect and to demand true and full
information on partnership matters.
b. Right to Demand True and Full Information
Article 1806 of the Civil Code provides that every partner or his legal representative may
demand true and full information from other partners of all things affecting the partnership.
Consequently, in consonance with the fiduciary relationship existing between and among
partners, every partner has the obligations to render true and full information to other partners
of all things affecting the partnership.
c. Right to Demand Accounting
On the other hand, iIn Hanlon v. Haussermann and Beam, 40 Phil. 796 (1920), the Court ruled that
former partners in a joint undertaking to rehabilitate a mining plant have no right to demand
accounting for the profits of such undertaking when the partnership arrangement had been
terminated with the failure of the claiming partners to raise the promised investments into the
enterprise, and that the other two partners pursued the venture on their own account and only
after the partnership arrangement had terminated.
In Lim Tanhu v. Ramolete, 66 SCRA 425 (1975), the Court held that a partner’s right to accounting
for properties of the partnership that are within the custody or control of the other partners
shall apply only when there is proof that such properties, registered in the individual names of
the other partners, have been acquired from the use of partnership funds, thus:
“Accordingly, the defendants have no obligation to account to anyone for such acquisitions in the
absence of clear proof that they had violated the trust of [one of the partners] during the
existence of the partnership.” (Ibid, at p. 477).

d. Right to Dissolve the Partnership

Under Article 1807 of the Civil Code, every partner may demand from every other partner an
accounting to the partnership for any benefit, and hold as trustee for it any profits derived by
The near-absolute legal power of any partnership in a partnership to demand the dissolution of
him without the consent of the other partners from any transaction connected with the
the partnership is in consonance with the doctrine of delectus personae that establishes a
formation, conduct, or liquidation of the partnership or from any use by him of its property.
fiduciary relationship between and among the partners.

Under Article 1809 of the Civil Code, any partner shall have the right to a formal account as to
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court confirmed the right of a partner to
partnership affairs, when he is wrongfully excluded from the partnership business or possession
“unilaterally dissolve the partnership,” by a notice of dissolution, which in effect is a notice of
of its property, if the right exists under the terms of the partnership agreement, whenever
withdrawal from the partnership, thus: “Under Article 1830(2) of the Civil Code, even if there is a
circumstances render it just and reasonable.
specified term, one partner can cause its dissolution by expressly withdrawing even before the
expiration of the period, with or without justifiable cause. Of course, if the cause is not justified
In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746 (1989), the Court held that a
or no cause was given, the withdrawing partner is liable for damages but in no case can he be
partner’s right to accounting exists as long as the partnership exists, and that prescription begins
compelled to remain in the firm. With his withdrawal, the number of members is decreased,
to run only upon the dissolution of the partnership and final accounting is done.
hence, the dissolution.” (Ibid, at pp. 118-119).
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The right of a partner to dissolve the partnership will be discussed in more details on the chapter
on Dissolution, Winding-up and Termination.
5. Obligations of the Partnership
a. Obligations to the Partners
Partnership Law lays down specific provisions to govern the obligation of the partnership to the
partners arising from the management of partnership affairs, thus:
(1) Amounts disbursed for and in Behalf of the Partnership
Article 1796 of the Civil Code provides that the partnership shall be responsible to every partner
for the amounts he may have disbursed on behalf of the partnership and for the corresponding
interest, from the time the expenses are made;
(2) Contracts Entered into for and In Behalf of the Partnership
Article 1797 of the Civil Code provides that the partnership shall also answer to each partner for
the obligations such partner may have contracted in good faith in the interest of the partnership
business, and for the risks and consequence of its management.
(3) Keeping of the Books
Under Article 1805 of the Civil Code, the partnership books shall be kept, subject to any
agreement between the partners, at the principal place of business of the partnerships, and every
partner shall at any reasonable hour have access to and may inspect and copy any of them.
b. Obligations to Third Persons
Partnership Law, particularly under Article 1768, accords to the partnership venture a separate
juridical personality, primarily to allow a more feasible and efficient manner by which to deal
with the public and to organize the venture into a enterprise that provides for a clear delineation
of liability and a hierarchy of claims against its assets.
(1) Liability Arising from the Firm Name
The name of a partnership venture becomes essential in its commercial dealings because it
identifies the person of the partnership which is deemed to be party bound in each of the
contracts entered into. Thus, under Article 1815 of the Civil Code, “Every partnership shall
operate under a firm name, which may or may not include the name of one or more of the
partners.” The inclusion of the name of a person in the partnership name becomes a conclusive
presumption to the public who deals in good faith with the firm that he is a partner thereto.
Consequently, under said article, “[t]hose who, not being members of the partnership, include
their names in the firm name, shall be subject to the liability of a partner.”
(2) Liability Arising from the Acts of the Agent
Since the corporate venture is accorded a separate juridical personality, then the liability that it
incurs with the public that it deals with can only arise from the acts of the 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:
(a) When “the partner so acting has in fact no authority to act for the partnership in the
particular matter, and the person with whom he is dealing has knowledge of the fact that he has
no such authority” (Article 1818, Civil Code); and
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(b) “An act of a partner which is not apparently for the carrying on of the business of the
partnership in the usual way does not bind the partnership unless authorized by the
other partners” (Article 1818, Civil Code); and

(c) “No act of a partner in contravention of a restriction on authority shall bind the partnership
to persons having knowledge of the restriction” (Article 1818, Civil Code).

—oOo—
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13 – DUTIES AND OBLIGATIONS OF PARTNERS
[Updated: 14 October 2009]
1. Obligation to Contribute to the Common Fund
Since the agreement to contribute to a common fund is an essential element for a valid contract
of partnership to arise, Philippine Partnership Law provides for clear statutory provisions
governing such obligations.
In Corporate Law, equity obligations (i.e., the obligation to pay subscriptions to capital stock) are
not treated as debt obligations, and the receivables arising therefrom are not considered as
forming part of the ordinary assets of the corporation. The rule takes it rationale from the “trust
fund doctrine,” that the assets of the corporation corresponding to its capital stock are treated as
a trust fund preserved for the protection of the claims of the corporate creditors who can,
are under the corporate “limited liability” rule, recover on their liabilities to the assets of the
corporation and the investments and promised investments of the stockholders. (Ong Yong v.
Tiu, 401 SCRA 1 [2003]; NTC v. Court of Appeals, 311 SCRA 508 [1999]; Commissioner of Internal
Revenue v. Court of Appeals, 301 SCRA 152 [1999]; Boman Environmental Dev. Corp. v. Court of
Appeals, 167 SCRA 540 [1988]). Consequently, capital contributions and obligations to
contribute capital (i.e., subscription contracts and subscription receivables) cannot be treated
like ordinary contracts and debts, and are not subject to rescission, set-off, or condonation, in
order to ensure their collectibility for the benefit of the corporate creditors.
In Partnership Law, the rule is quite different in that Article 1786 of the Civil Code provides that
“Every partner is a debtor of the partnership for whatever he may have promised to contribute
thereto.” The reason for this rule is that in Partnership Law, the prevailing doctrine is “unlimited
liability” on the part of the partners, and there is no need to consider their capital accounts and
promised contribution as a “trust fund” for the protection of the partnership creditors, who have
the legal right to seek satisfaction of their claims even against the separate properties of each of
the partners not contributed or promised to the partnership.
This is not to say that some of the elements of the trust fund doctrine do not apply to the
partnership setting, for they do, such as the rule that creditors have preference over partners
against the partnership properties. Thus, Article 1826 of the Civil Code provides that “The
creditors of the partnership shall be preferred to those of each partner as regards the
partnership property.”
Why is it then necessary for Partnership Law to declare expressly that a partner is a debtor of the
partnership for whatever he may have promised to contribute thereto? The answer lies in
the primary principle which Partnership Law seeks to promote, which is that the promise or
obligation to contribute to the common fund is of the essence of the contract of partnership and
binds the partners to one another as the very privity of their relationship, and the breach of
which would break the contractual bond (delectus personae). The point is best illustrated by the
following doctrines:
(a) Under Article 1788 of the Civil Code, when a partner fails to deliver his promised
contribution to the partnership, he becomes liable for interests and damages from the time he
should have complied with his obligation;
(b) Under Article 1790 of the Civil Code, “Unless there is a stipulation to the contrary, the
partners shall contribute equal shares to the capital of the partnership.” Under Article 1830(4),
the partnership is automatically dissolved “When a specific thing, which a partner had promised
to contribute to the partnership, perishes before the delivery;”
(c) The remedies available to the partnership and the other partners with respect to the failure
or refusal to comply with contribution obligation takes the normal remedies of interest and
damages, including compensatory damages constituting his shares of the profits (Uy v. Puzon, 79
SCRA 598 [1977];Moran, Jr. v. Court of Appeals, 133 SCRA 88 [1986]);
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(d) When a partner fails to comply with his obligation to deliver what he promised to contribute
to the partnership, and there is no desire to dissolve the partnership, the remedy that is available
to the other partners cannot be rescission, but rather one for specific performance. (Sancho v.
Lizarraga, 55 Phil. 601 [1930]); and
(e) The property contributed by a partner becomes the property of the partnership and cannot
be disposed of without the consent of the other partners. Lozana v. Depakakibo, 107 Phil. 728
[1960]).
a. When Promised Contribution Is a Sum of Money
Under Article 1788 of the Civil Code it is provided that “A partner who has undertaken to
contribute a sum of money to the partnership venture [and fails to do so,] becomes a debtor for
the interest and damages from the time he should have complied with his obligation.”
The article therefore allows the partners and the partnership to recover from the defaulting
partner not only interest due (at the rate stipulated or in default thereof, the legal interest), but
damages, including loss opportunity, shown to have been sustained by the partnership by reason
of the failure of the partner to pay in his contribution.
b. When Promised Contribution Is Property—In General
Whenever a partner has bound himself to contribute a specific or determinate thing to the
partnership, he thereby assumes the position of being a seller of determinate property
contributed into the partnership in that he is liable for:
(a) A breach of the warranty against eviction;
(b) The fruits thereof from the time he obliged himself to deliver the determinate thing, and
without need of demand.
In addition, Article 1795 of the Civil Code establishes the rules on who assumes “[t]he risk of
specific and determinate things . . . contributed to the partnership,” thus:
(a) “If they are not fungible, so that only their use and fruits may be for the common benefit, the
risk shall be borne by the partner who owns them;
(b) “If the things contributed, (i) are fungible, or (ii) cannot be kept without deteriorating, or (iii)
if they were contributed to be sold: the risk shall be borne by the partnership.
(c) “In the absence of stipulation, the risk of things brought and appraised in the inventory, shall
also be borne by the partnership, and in such case the claim shall be limited to the value at
which they were appraised.”
As to who bears the risk of loss of determinate things promised to be contributed but prior to
actual delivery to the partnership, the prevailing view seems to be that it would be the partner
who before actual delivery retains ownership thereof. (BAUTISTA, 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
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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 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.
 86
Even in the case where additional contribution to capital becomes necessary “in case of an
imminent loss of the business of the partnership,” no partner can be compelled to give additional
contribution, but the legal consequence under Article 1791, is that “any partner who refuses to
contribute an additional share to the capital, except an industrial partner, to save the venture,
shall be obliged to sell his interest to the other partners.” Even such a penalty cannot be applied
according to Article 1791 “if there is an agreement to the contrary,” that is a stipulation in the
contract of partnership that even in case of necessity to the save the venture, partners cannot be
compelled to make additional contribution, in which case the forfeiture of their interest cannot
even be enforced.
g. Remedies When There is Default in Obligation to Contribute
Normally, the contract of partnership being one constituted of bilateral (multilateral)
obligations, the remedy to the other partners when one of them fails to comply with his
obligation to contribute, would either be specific performance or rescission. Under the
provisions of the old Civil Code, the Court held in Sancho v. Lizarraga, 55 Phil. 601 (1931), that
the remedy of rescission of the contract of partnership which would mean the return of the
contribution of the complaining partner with interest and damages proven, is not available
because then Articles 1681 and 1682 [now Articles 1786 and 1788] provided for specific
remedies to the contract of partnership, thus:
Owing to the 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
 87
would trigger its dissolution, for it may happen that the partners continue to pursue the business
venture in the hope that there may still be a turn-around.
Under Article 1816 of the Civil Code provides that ”All partners, including industrial ones, shall
be liable pro rata with all their property and after all the partnership assets have been exhausted,
for the contracts which may be entered into in the name and for the account of the partnership.”
Article 1817 provides that “Any stipulation against the liability laid down in [Article 1816] shall
be void, except as among the partners.” Rightly stated, it is the exhaustion of partnership assets
to answer for partnership liabilities that triggers the enforcement of the unlimited liability
mechanism as against partners and their separate assets. And the pro-rata obligation of the
partners does not mean that they become personally liable proportionately in relation to their
contributions in the partnership, but actually means they are liable jointly.
The subsidiary and pro rata liability feature under the old Civil Code was retained under the new
Civil Code, which does not adopt the primary and solidary liability feature for commercial
partners under the Code of Commerce.
2. Fiduciary Duties of Partners
The fiduciary duties of the partners among one another and to the partnership subsists only
while the partnership subsists; consequently the termination of the partnership relation (as
distinguished from mere dissolution) also terminates the fiduciary obligations of the partners to
one another and to the partnership.
In Hanlon v. Haussermann, 40 Phil. 796 (1920), four contracting parties agreed to a joint
enterprise to rehabilitate a mining plant, where the engagement of the three of them was limited
to raising money within a stated period by subscribing to or selling shares of the mining
company. One of the parties who had undertaken thus to raise money defaulted, and under the
express resolutory conditions of the contract the two other parties were discharged.
Subsequently, the two parties thus discharged, who were at the same time stockholders and
officials of the mining company, procured a contract from the mining company by which they
proceeded to restore the mining plant upon their own account. The other two members of the
original enterprise sued to recover shares in the mining company and dividends declared upon
such shares on the ground that they were earned pursuant to the joint enterprise to which they
were entitled to receive their shares. In denying the claims, the Court held –
After the termination of an agency, partnership, or joint adventure, each of the parties is free to
act in his own interest, provided he has done nothing during the continuance of the relation to
lay a foundation for an undue advantage to himself. To act as agent for another does not
necessarily imply the creation of a permanent disability in the agent to act for himself in regard
to the same subject-matter; and certainly no case has been called to our attention in which the
equitable doctrine above referred to has been so applied as to prevent an owner of property
from doing what he pleased with his own after such a contract [of partnership] between the
parties to this lawsuit had lapsed. (Ibid, at p. 818) .
Likewise, in Lim Tanhu v. Remolete, 66 SCRA 425 (1975), the Court held that former partners
have no obligation to account on how they acquired properties in their names, when such
acquisition were effected “long after the partnership had been automatically dissolved as a result
of the death of Po Chuan [the primary managing partner]. Accordingly, defendants have no
obligation to account to anyone for such acquisitions in the absence of clear proof that they had
violated the trust of Po Chuan during the existence of the partnership.” (Ibid, at p. 476)
a. Duty to Account
Since the partners are mutual agents to one another and to the partnership, then necessarily they
are obliged by such fiduciary relationship to render a full accounting on matters they undertake
for the partnership affairs, and are prohibited from obtaining secret benefits for themselves
therefrom. The duty is closely linked to the duty of loyalty.
Under Article 1806 of the Civil Code, partners shall render on demand true and full information
of all things affecting the partnerships to any partner or the legal representative of any deceased
partner or of any partner under disability.
 88
Under Article 1807 of the Civil Code , “Every partner must account to the partnership for any In the event a partner takes any amount from the partnership funds for himself, he becomes a
benefit, and hold as trustee for it any profits derived by him without the consent of the other debtor of the partnership, as well for the interests and damages, which liability under Article
partners from any transaction connected with the formation, conduct, or liquidation of the 1789 of the Civil Code “shall begin from the time he converted the amount to his own use.”
partnership or from any use by him of its property.”
An aspect of a partner’s duty of loyalty arising from the fact that he acts as an agent of the
Aside from the remedy of recovering the profits derived by a partner from partnership affairs, partnership is manifested in Article 1792 of the Civil Code, which provides that when a partner
the same may be a ground to seek judicial dissolution of the partnership under Article 1831 of authorized to manage collects a demandable sum which was owed to him in his own name, but
the Civil Code. 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
b. Duty of Diligence given a receipt for his own credit only; but should the partner have given it for the account of the
partnership credit, the amount shall be fully applied for the account of the partnership. The
Article 1794 of the Civil Code covers a partner’s duty of diligence to the partnership affairs:
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
Every partner is responsible to the partnership for damages suffered by it through his fault, and
stipulate the application of payment], but only if the personal credit of the partner should be
he cannot compensate them with the profits and benefits which he may have earned for the
more onerous to him.”
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
Another aspect of a partner’s duty of loyalty is shown in Article 1793, which provides that a
have been realized.
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
Under Article 1800 of the Civil Code, a duly designated managing partner who acts in bad faith,
insolvent, to bring to the partnership capital what he received even though he may have given a
his particular exercise of power administration may effectively be opposed by the other partners.
receipt for his share only.
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.
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
c. Duty of Loyalty
using his separate funds, does not allow such redemption to be in his sole favor. The summary
reported reads in part as follows:
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
. . . Under the general principle of law, a partner is an agent of the partnership (Art. 1818, new
another the duly of loyalty, which includes the avoiding of entering into transactions or
Civil Code). Furthermore, every partner becomes a trustee for his copartner with regard to any
situations that present a conflict-of-interests. The duty of loyalty in the partnership setting arises
benefits or profits derived from his act as a partner (Article 1807, new Civil Code). Consequently,
necessarily as a consequence of the mutual agency relationship existing between and among the
when Catalan redeemed the properties in question he became a trustee and held the same in
partners.
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trust for his copartner Gatchalian, subject of course to his right to demand from the latter his In Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973), an article of co-partnership was
contribution to the amount of redemption. (Ibid, at p. 1271) executed between three capitalist partners on one hand, and Judge Abad Santos, as an industrial
partner on the other hand, with the capitalist partners being entitled to 70% of the profits, while
d. Specific Fiduciary Duties of Industrial Partner 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
Under Article 1789 of the Civil Code, an industrial partner is prohibited from engaging in
the profits of the company which had been distributed only among the capitalist partners. The
business for himself, unless the partnership expressly permits him to do so. Since even capitalist
capitalist partners sought to have the relationship declared as not a true partnership on the
partners are expected (although not obliged) to contribute service to the partnership enterprise,
ground that the articles were drawn-up merely to cover the special arrangement entitlement by
and when they do so they are not entitled to separate compensation (unless otherwise
which Judge Abad Santos had arranged for a loan financing for the company to be paid only after
stipulated), then in order to make the contribution of service an industrial partner more
the loan has been fully paid; and that in fact being an incumbent judge she rendered to service to
meaningful and truly an obligation, it must mean that is saddled with more burden or
the company, thus:
prohibitions. The coverage of Article 1789 should mean also that:
It is an admitted fact that since before the execution of the amended articles of partnership . . .
(a) Since his main contribution to the partnership is his industry, then an industrial partner
the appellee Estrella Abad Santos has been, and up to the present time still is, one of the judges of
owes to the venture and his fellow partners the obligation to devote his industry towards
the City Court of Manila, devoting all her time to the performance of the duties of her public
the partnership business.
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
(b) Even if the partnership is engaged in a particular form of business, an industrial partner
industrial partner pursuant to Art. 1789 of the Civil Code.
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.
The Court ruled as follows:

If an industrial partner breaches this duty, Article 1789 provides that the capitalist partners may
One cannot read appellee’s testimony just quoted without gaining the very definite impression
either:
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
(a) exclude him from the firm; or
which appellant company was organized. . .

(b) avail themselves of the benefits which the industrial partner may have obtained in violation
xxx.
of such duty, with a right to damages in either case.

It is not disputed that the prohibition against an industrial partner engaging in business for
It seems clear from jurisprudence that in order for an industrial to be held liable for breach of
himself seeks to prevent any conflict of interest between the industrial partner and the
duty under Article 1789, he must have engaged during the term of the partnership into another
partnership, and to insure faithful compliance by said partner with his prestation. There is no
business or an activity that is essentially for profit.
pretense, however, even on the part of appellants that appellee is engaged in any business
 90
antagonistic to that of appellant company, since being a Judge of one of the branches of the City
Court of Manila can hardly be characterized as a business. That appellee has faithfully complied
with her prestation with respect to appellants is clearly shown by the fact that it was only after
the filing of the complaint in this case and the answer thereto that appellants exercised their
right of exclusion under [Article 1789] . . . after around nine (9) years from June 7, 1955 . . .
That subsequent to the filing of defendants’ answer to the complaint, the defendants reached an
agreement whereby the herein plaintiff has been excluded from, and deprived of, her alleged
share, interest or participation, as an alleged industrial partner, in the defendant partnership
and/or in its net profits or income, on the ground that plaintiff has never contributed her
industry to the partnership, and instead she has been and still is a judge of the City Court
(formerly Municipal Court) of the City of Manila, devoting her time to the performance of her
duties as such judge and enjoying the privileges and emoluments appertaining to the said office,
aside from teaching in law school in Manila, without the express consent of the herein
defendants’ (Record On Appeal, pp. 24-25). Having always known appellee as a City Judge even
before she joined appellant company on June 7, 1955 as an industrial partner, why did it take
appellants so many years before excluding her from said company as per aforequoted
allegations? And ‘how can they reconcile such exclusion with their main theory that appellee has
never been such a partner because ‘The real agreement evidenced by Exhibit ‘A’ was to grant the
appellee a share of 30% of the net profits which the appellant partnership may realize from June
7, 1955, until the mortgage loan of P30,000.00 obtained from the Rehabilitation Finance
Corporation shall have been fully paid. . .
The language of the decision in Evangelista & Co. leads to several observations on the nature of
the obligation of an industrial partner.
Firstly, unless otherwise stipulated, an industrial partner need not devote his entire working
hours to the partnership affairs, and he is in fact not prohibited from engaging in other activities
which must be non-business in character.
Secondly, it is possible that the personal circumstances that a would-be industrial partner as
known to the capitalist partners at the time they entered into the contract of partnership, would
prevent the industrial partner from devoting full-time to the partnership affairs, would
constitute an integral part of the manner and nature of what type of service or industry he
should devote to partnership affairs.
Finally, even when an industrial partner fails to live-up to the commitment of service he obliged
himself, the matter must be raised within a reasonable period by the other partners as the basis
for the remedies of exclusion or forfeiture of benefits as provided in Article 1789; otherwise,
such grounds are deemed waived by reason by estoppel by laches.
e. Specific Fiduciary Duties of Capitalist Partners
Under Article 1808 of the Civil Code, “The capitalist partners cannot engage for their own
account in any operation which is of the kind of business in which the partnership is engaged,
unless there is a stipulation to the contrary.” If a capitalist partner breaches this duty of loyalty,
then ”he shall bring to the common funds any profits accruing to him from his transactions, and
shall personally bear all the losses.”
3. Obligation of Subsequently Admitted Partners
Under Article 1826 of the Civil Code, a person admitted as a partner into an existing partnership
is liable for all the obligations of the partnership arising before his admission as though he had
been a partner when such obligations were incurred, except that this liability shall be satisfied
only out of the partnership property, unless there is a stipulation to the contrary.
This is the only aspect of “limited liability” in a general partnership setting.
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4. Obligations of Non-Partners

Under Partnership Law in the Civil Code, the only time when non-partners become liable for the
partner debts and obligation is when there is estoppel, or when the public is made to believe that
one person is a partner of the partnership when in fact he is not, thus:

(a) Under Article 1815, those who, not being members of the partnership, include their names
in the firm name, shall be subject to the liability of a partner;

(b) Under Article 1825, when a person by word or conduct, represents himself, or consents to
another representing him to anyone, as a partner in an existing partnership or with one or more
persons not actual partners, he is liable to any such persons to whom such representation has
been made, who has, on the faith of such representation, given credit to the actual or apparent
partnership;

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

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

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