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 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)

b. Jurisprudential Application of the Doctrine of Separate Juridical Personality of the Partnership

In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the contention that since the defendant sued was a partnership that

summons must be served upon each of the partners, the Court held –
[I]t has been the universal practice in the Philippine Islands since American occupation, and was the practice prior to that time, to

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

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

section of the Code of Civil Procedure.” (Ibid, at p. 448)

The decision in Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1923), demonstrates how the separate juridical

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

jurisprudence on the same matter. InCampos Rueda a petition for involuntary insolvency was filed by the creditors of the limited

partnership for an act of insolvency provided under the Insolvency Act (i.e., having failed to its obligations with three creditors

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

of the firm were insolvent at the time the application was filed; and that as said partners are personally and solidary liable for the

consequences of the transactions of the partnership, it cannot be adjudged insolvent so long as the partners are not alleged and

proven to be insolvent. In ruling that the denial of the petition for insolvency was in error, the Court held –

Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and purposes,

which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This being so and the juridical

personality of a limited partnership being different from that of its members, it must, on general principle, answer for, and suffer,

the consequence of its acts as such an entity capable of being the subject of rights and obligations. If, as in the instant case, the

limited partnership of Campos Rueda & Co. failed to pay its obligations with three creditors for a period of more than thirty

days, which failure constitutes, under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication of

involuntary insolvency can be predicted, this partnership must suffer the consequences of such failure, and must be adjudged

insolvent. We are not unmindful of the fact that some courts of the United States have held that a partnership may not be

adjudged insolvent in an involuntary insolvency proceeding unless all of its members are insolvent, while others have maintained

a contrary view. But it must be borne in mind that under the American common law, partnership have no juridical personality

independent from that of its members; and if now they have such personality for the purposes of the insolvency law. (Ibid, at pp.

918-919.)

In Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947), the Court held that the death of either of the two partners is not a

ground for the dismissal of a pending suit against the partnership, as a partnership possesses a personality distinct from any of the

partners.

In Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988), the Court held that a partnership may sue and be

sued in its name or by its duly authorized representative, and when it has a designated managing partner, he may execute all acts

of administration including the right to sue debtors of the partnership.

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

The “doctrine of piercing the veil of corporate fiction” finds relevance in Corporate Law because it is the means by which to by-

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

personally liable for corporate debts.

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

Partnership Law because the partners are unlimitedly liable (i.e., personally liable with their separate properties) for partnership

debts. And yet, the doctrine found application to partnerships in Commissioner of Internal Revenue v. Suter, 27 SCRA 152

(1969), where the Court addressed the legal position of the Tax Commissioner seeking to make the individual partners liable for
income tax for the income earned by the limited partnership, thus:

It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own, distinct and

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

The bypassing of the existence of the limited partnership as a taxpayer can only be done by ignoring or disregarding clear

statutory mandates and basic principles of our law. The limited 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.

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. (BataanShipyard 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 personaeconsiderations.

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. Likewise, the other features

of the partnership, mainly mutual agency, delectus personae and unlimited liability on the part of the partners, that places a close

identity between the persons of the partners and that of the partnership. This is unlike in corporate setting, where the stockholders
do not own corporate properties, have no participation in management of corporate affairs, and enjoy personal immunity from

the debts and liabilities of the corporation, and where basically the corporation “is its own person,” and acts through a

professional group of managers and agents called the Board of Directors.

While therefore it is understandable that a corporation, that has no heart, feels pain, and has no soul that can be damned, cannot

be expected to be entitled to the constitutional right against self-incrimination, it is quite different in the case of the partnership,

since its person is merely an extension of the group of partners, who having come together in business, and acting still for such

business enterprise, could not be presumed to have waived their individual rights against self-incrimination.

As the author has observed in his writing on Philippine Corporate Law, when it comes to the constitutional right against self-

incrimination, the Court would rely upon old American doctrine which views the corporation as a mere creature of the law and

with separate juridical personality apart from its stockholders or members. In the partnership setting, the difference in the Court’s

stance may lie in the fact that the right against self-incrimination does not really result in physical intrusion into the premises of

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

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

authorities into the premises or physical privacy of the stockholders, members or partners who compose the juridical entity; but

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

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

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

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

is the basis for the difference in stance by the Court between two sets of constitutional rights with respect to corporations, and

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

against unreasonable searches and seizures are all meant to curb the abuse that the State and its representatives may employ upon

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

protection against self-incrimination is not meant to prevent an actual State abuse but to avoid pressuring the individual from

having to tell a lie. “The main purpose of the provision . . . is to prohibit compulsory oral examination of prisoners 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.

6 – PARTNERSHIP AS A BUSINESS ENTERPRISE

[Updated: 23 August 2010]

VI. PARTNERSHIP AS A BUSINESS ENTERPRISE

Although not explicitly stated in the provisions of the Civil Code, the partnership may constitute also a “business enterprise” or

what is known in the disciplines of Economics and Accounting, as “a going concern” — that is separately valued and accounted

for from the individual value of the assets and properties constituting it and from the medium or means by which it is operated

(in the case of partnership, the juridical person created by express provision of law).
Recognition of the existence and operation of the partnership’s business enterprise, as distinguished from the legal effects and

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

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

For example, the right of the partners to specific partnership property and to share in the profits and losses, as well as the right to

manage, are legal matters that necessarily refer to the partnership business enterprise.

This understanding of the business enterprise of a partnership is applicable even to a professional partnership. Our Supreme

Court has defined the term ”profession” as “a group of men pursuing a learned art as a common calling in the spirit of public

service–no less a public service because it may incidentally be a means of livelihood.” (In the Matter of the Petition for Authority

to Continue Use of Firm Name Sycip, Salazar, et. al. Ozaeta, Romulo, etc., 92 SCRA 1 (1979).)

The recognition of the inherent relationship between and among the partners to be bound by the results of operations from the

business enterprise has been well-explained by the Court in Villareal v. Ramirez, 406 SCRA 145 (2003), thus:

First, it seems that the appellate court was under the misapprehension that the total capital contribution was equivalent to the

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

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

return to the partners. Such idea is speculative, conjectural and totally without factual or legal support.

Generally, in the pursuit of a partnership business, its capital is either increased by profits earned or decreased by losses

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

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

omission of any provision for the depreciation of the furniture and the equipment. The amortization of the goodwill (initially

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

actually sustaining substantial losses, which consequently decreased the capital of the partnership. Both the trial and the appellate

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

corresponding decrease of the capital. (Ibid, at p. 153.)

x x x.

Because of the above-mentioned transactions, the partnership capital was actually reduced. When petitioners and respondents

ventured into business together, they should have prepared for the fact that their investment would either grow or shrink. In the

present case, the investment of respondents substantially dwindled. The original amount of P250,000 which they had invested

could no longer be returned to them, because one third of the partnership properties at the time of dissolution did not amount to

that much.

It is a long established doctrine that the law does not relieve parties from the effects of unwise, foolish or disastrous contracts

they have entered into with all the required formalities and with full awareness of what they were doing. Courts have no power to

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

unwise investments. (Ibid, at p. 154.)

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.

10 – SPECIAL ISSUES OF WHO MAY QUALIFY TO BECOME PARTNERS

[Updated: 12 October 2009]

1. May Spouses Validly Enter into a Partnership Relation?

a. Spouses Cannot Enter into a Universal Partnership

The main statutory provision invoked when it comes to the issue of whether spouses can enter between themselves into a

partnership agreement is Article 1782 of the Civil Code which provides that “Persons who are prohibited from giving each other

any donation or advantage cannot enter into universal partnership.” It has thus been opined that since under Article 133 of the

Civil Code “Every donation between the spouses during the marriage shall be void,” then spouses are prohibited from entering

into a universal partnership, but not necessarily a particular or limited partnership. Article 133 of the Civil Code has now been

replaced by Article 87 of the Family Code, which reads:

Art. 87. Every donation or grant of gratuitous advantage, direct or indirect, between the spouses, during the marriage should be

void, except moderate gifts which the spouse may give each other on the occasion of any family rejoicing. The prohibition shall

also apply to persons living together as husband and wife without a valid marriage.

Bautista discussed the rationale of Article 1782 in this manner:

The prohibition is founded on the theory that a contract of universal partnership is for all purposes a donation. Its purpose,

therefore, is to prevent persons disqualified from making donations each other from doing indirectly what the law prohibits them

from doing directly. (BAUTISTA, at p. 62).

From the placement of Article 1782 (coming after the two articles covering the definition, nature and effects of universal

partnerships, and immediately before the article defining particular partnerships), it seems pretty well implied that spouses,

whatever the regime of property relations prevails in their marriage, are disqualified from entering into any sort of universal

partnership; and consequently, spouses may validly become partners to one another in a particular partnership, which would

include a professional partnership, and both general and limited partnerships. The critical question must be asked: Can spouses

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

partnership is not a universal partnership?

If one refers only to the provision of Article 1782, the answer would be in the affirmative. In Commissioner of Internal Revenue

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

particular view, relying only on the provisions of Article 1677 of the old Civil Code (now Article 1782), that since the

prohibition for spouses covers expressly only universal partnerships, then they can validly be partners in a limited partnership,

with the husband being the general partner and the wife being the limited partner.

On this particular issue, Bautista limited his comment to the effect that the provisions of Article 1782 disqualifies “spouses, with

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

portions of the decision in Suter, he did not comment on whether spouses can validly enter into other forms of partnership for
gains. Tolentino does not comment on the provisions of Article 1782, although his discussion on the matter under his old work

under the Code of Commerce was quoted in Suter.

To the writer, it seems that in addressing the issue raised, it would be error to base the resolution only on of Article 1782 of the

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

provisions more primordial in addressing the issue.

Suter, which was decided under the terms of the old Civil Code and the Code of Commerce, is quite peculiar in its facts because

the contract of partnership started out where there was no legal obstacle with the parties entering into a duly registered limited

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

and bought out the interest of Carlson. Under the provisions of the Tax Code, the Commissioner of Internal Revenue then sought

to recover income taxes individually against Suter for partnership income under the theory that the separate juridical personality

of the partnership by which it was taxed separately as a corporate taxpayer, was extinguished with the marriage of Suter and

Spirig, who ended up as the only partners in the venture. The Court held: “The theory of the petitioner, Commissioner of Internal

Revenue, is that the marriage of Suter and Spirig and their subsequent acquisition of the interests of remaining partner Carlson in

the partnership dissolved the limited partnership, and if they did not, the fiction of juridical personality of the partnership should

be disregarded for income tax purposes because the spouses have exclusive ownership and control of the business.” (27 SCRA

152, at p. 156).

The Court found no merit in the position of the Commissioner, and quoted from the commentaries of Tolentino, thus:

A husband and a wife may not enter into a contract of general copartnership, because under the Civil Code, which applies in the

absence of express provision in the Code of Commerce, persons prohibited from making donations to each other are prohibited

from entering into universal partnerships. (2 Echaverri, 196) It follows that the marriage of partners necessarily brings about the

dissolution of a pre-existing partnership (1 Guy de Montella 58). (Ibid, at p. 157, quoted from Tolentino, Commentaries and

Jurisprudence on Commercial Laws of the Philippines, Vol. 1, 4th ed., at p. 58).

Thus, the Court held that the partnership at issue “was not a universal partnership, but a particular one. . . since the contributions

of the partners were fixed sums of money, . . . and neither one of them was an industrial partner. It follows that [it] . . . was not a

partnership that [the] spouses were forbidden to enter under Article 1677 of the Civil Code of 1889 [now Article 1782].” In

essence, Suter holds that spouses are not disqualified from becoming partners in a limited partnership, provided one of them (or

at least both of them) is a limited partner.

b. Spouses Are Not Qualified to Enter into Other Forms of Partnership for Gain

It is the writer’s position that apart from a professional partnership, spouses cannot enter into any form of partnership, be it

universal or particular, general or limited partnership, as a separate property arrangement apart from the property regime

prevailing in their marriage, for the reasons discussed below.

Firstly, apart from a universal partnership, every form of partnership, including a limited partnership, effectively makes partners

“donors” to one another of their contributions in the partnership. Although a partnership would have a personality separate and

distinct from each of the partners, so that it can hold contributed property in its name, nonetheless, partners are expressly granted

by Partnership Law co-ownership interest in the partnership property as to then have a direct co-ownership interest therein.

(Articles 1810 and 1811, Civil Code). Effectively, even in a limited partnership, such as the Suter situation, the contribution of

the limited partner wife belonged to the partnership which would then be under the control and management of the general

partner husband. A partnership arrangement between spouses would thereby be an indirect violation of the provisions of Article

87 of the Family Code which provides that “Every donation or grant of gratuitous advantage, direct or indirect, between the

spouses during the marriage shall be void.”

Although it can be argued that contributions to a partnership are not in the nature of “donations” or “gratuitous advantage,”
because a contract of partnership is essentially an onerous and commutative contract, whereby the contributions comes with a

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

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

not governed by the complete separation of property regime .

Secondly, there is clear implication under the Family Code, that the property regime that must govern spouses must be in

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

the New Civil Code.

(1) Spouses Governed by the Absolute Community of Property Regime

To begin with, the Family Code sets the absolute community of property regime as the default rule for marriages, and

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

the Civil Code. Although Article 1782 provides that –

Persons who are prohibited from giving each other any donation or advantages cannot enter into a universal partnership,” which

beyond doubt should include spouses, yet under Article 75 of the Family Code, “In the absence of marriage settlements, or when

the regime agreed upon is void, the system of absolute community of property as established in this Code shall govern,” and

which under Article 88 of the Family Code, “shall commence at the precise moment that the marriage is celebrated [and that any]

stipulation, express or implied, for the commencement of the community regime at any other time shall be void.

The absolute community of property regime actually establishes a sort of “universal partnership” between the spouses, in that it

includes “all property owned by the spouses at the time of the celebration of the marriage or acquired thereafter.” (Article 91,

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

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

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

effects of the absolute community of property during the marriage can be made except in case of judicial separation of property.”

In other words, Article 1782 in Partnership Law is not the main rule on regulating property rights between spouses, but merely

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

(2) Spouses Governed by the Conjugal Partnership of Gains

Take then the cases of spouses governed by the conjugal partnership of gains, which under Article 105 of the Family Code, can

come into play between spouses only when it has been so stipulated in the marriage settlements. May spouses therefore enter into

a contract of particular partnership for gain by contributing thereto either conjugal property, or their separate properties? When it

comes to conjugal property, the answer ought to be in the negative, since the effect is that spouses would be donating to one

another, as discussed below, contrary to the provisions of Article 87 of the Family Code. In addition, by entering into a contract

of particular partnership and thereby invoking the provisions of the Partnership Law of the Civil Code on the conjugal property

contributed, would that not in effect be amending, or perhaps even contravening, the provisions of the marriage settlements

invoking the Family Code rules covering conjugal partnership of gains? Article 108 of the Family Code provides that “The

conjugal partnership shall be governed by the rules on the contract of partnership in all that is not in conflict with what is

expressly determined in this Chapter or by the spouses in their marriage settlements.” This shows the primacy of the Family

Code provisions on governing the conjugal partnership between the spouses, and any attempt to govern conjugal properties under

a contract of particular partnership would undermine such primacy and therefore void.

For the same reasons, spouses governed by the conjugal partnership of gains cannot also validly enter into a contract of particular

partnership for gain, even when they contribute thereto their separate properties, because that would in effect constitute donations

to one another as discussed below, and would undermine the rules of the Family Code on how such separate properties should

answer for the charges on family affairs.

(3) Spouses Governed by the Complete Separation of Property Regime

May spouses governed by the complete separation of property regime validly enter into a contract of particular partnership? The

answer ought to be in the negative, for the contribution of any of their separate properties into the partnership for gain would

amount to donation, and under Article 87 of the Family Code, which prohibits any form of donation or gratuitous advantage

between spouses during marriage, makes no distinction, much less an exception, for spouses governed by the complete

separation of property regime.

c. Contract of Partnership May Offend Against the Provisions of the Family Code

A contract of partnership between spouses entered into during marriage would be void because it would contravene the rules

under Articles 76 and 77 of the Family Code that prohibit “any modification in the marriage settlements” after the “celebration of

the marriage,” and which provide that “The marriage settlement and any modification thereof shall be in writing, signed by the

parties and executed before the celebration of the marriage.”

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. http://www.blogger.com/post-create.g?blogID=6336731883560557810 - _ftn10Can spouses who are governed by the

regime of separation of property, thereby partially overcome the governing provisions of the Family Code, by being allowed to

validly enter into a particular partnership agreement?

(2) Charges to Partnership Properties

We should look also into the areas of charges against the partnership properties and the effects of dissolution. Under Partnership
Law, partnership properties would be chargeable against any claim or contract entered into pursuant to partnership affairs. On the

other hand, under both the absolute community of property regime and the conjugal partnership of gains, there are specific

listings of what should first be chargeable against the community property (Articles 94 and 95, Family Code), or the conjugal

property (Articles 121 to 123, Family Code), like support and debts contracted for the benefit of the marriage. Under a regime of

separate property, both spouses shall bear the family expenses in proportion to their income, or, in case of insufficiency or

default thereof, to the current market value of their separate properties (Article 146, Family Code).

When community, conjugal or separate property is allowed to be contributed into the partnership for gain, the rules of first

preference of partnership creditors to partnership property would undermine the claims of personal creditors of spouses, as well

as the ability of marriage properties to properly provide for the family support and upkeep. In addition, contributions by spouses

of marriage property into a partnership for gain would certainly allow a means by which spouses may defraud their marriage

creditors, by making certain marriage properties subject to greater claims outside of marriage affairs.

d. Professional Partnerships

May spouses by themselves, or together with other professionals, enter validly into a contract of professional partnership, which

by definition of Article 1783 of the Civil Code is always a particular partnership? The answer seems to be in the affirmative. The

reason 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). Although Tuason does not

elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement, it would seem that the

policy behind the prohibition on why a corporation cannot be made a partner do not apply in a joint venture arrangement. Being

for a particular project or undertaking, when the Board of Directors of a corporation evaluate the risks and responsibilities

involved, they can more or less exercise their own business judgment is determining the extent by which the corporation would

be involved in the project and the likely liabilities to be incurred. Unlike in an ordinarily partnership arrangement which may

expose the corporation to any and various liabilities and risks which cannot be evaluated and anticipated by the Board, the

situation therefore in a joint venture arrangement, allows the Board to fully bind the corporation to matters essentially within the

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 entering into a contract of limited partnership, a corporation would continue to manage its own corporate

affairs while validly abstaining from participation in the management of the entity in which it has invested. Accordingly, as there

is generally no threat that a corporate limited partner would be solidarily liable with the partnership, there would be no reason for

requiring a corporate partner to actually manage the partnership, if it makes the business decision no to do so and opts to become

a limited partner; and

3. The SEC policy that a corporation cannot enter into a limited partnership, is an offshoot of the outdated view in the U.S., that,

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

assumption which is no longer current. Jurisprudence and common commercial practice in the U.S., indicate that corporations are

not barred from acting as limited partners. Current American laws support the position that a corporation can enter into a contract

of limited partnership. For example, the Revised Uniform Limited Partnership Act of 1976 (as amended in 1985), specifically

confirms, that corporations may act as limited partners. Almost all states in the U.S. have adopted limited partnership laws which

provide, in the same manner as the Revised Uniform Limited Partnership Act, that corporations may act as limited partners. This

indicates that many other jurisdictions simply follow the broad language of the Revised Model Business Corporations Act which

suggests that corporations may act as limited partners and in no event prohibits that activity. These statutes reaffirm what is

indicated by the commercial practice in the U.S., that corporations can act as limited partners. The proliferation of statutes

reversing the doctrine forbidding corporations to become partners is proof of the unsoundness of and dissatisfaction with such

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

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

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

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

SEC went on to say:

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

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

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

business enterprise.” (Ibid)

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 inMunasque v. Court of Appeals, 139 SCRA 533 (1985), that

a presumption exists that each partner is an authorized agent for the firm and that he has authority to bind it in carrying on the

partnership transaction.

We should therefore consider the old ruling in Council of Red Men v. Veterans Army, 7 Phil. 685 (1907), where the Court

interpreted the original provision of Article 1803 of the Civil Code (then Article 1695 of the old Civil Code), that allowed one

partner to act to bind the partnership, to apply only when there has been no provision at all in the articles of partnership on the

exercise of power or management, thus:

One partner, therefore, is empowered to contract in the name of the partnership only when the articles of partnership make no

provision for the management of the partnership business. In the case at bar we think that the articles of the Veteran Army of the

Philippines do so provide. It is true that an express disposition to that effect is not found therein, but we think one may be fairly

deduced from the contents of those articles. They declare what the duties of the several officers are. In these various provisions

there is nothing said about the power of making contracts, and that faculty is not expressly given to any officer. We think that it

was, therefore, reserved to the department as a whole; that is, that in any case not covered expressly by the rules prescribing the
duties of the officers, the department were present. It is hardly conceivable that the members who formed this organization

should have had the intention of giving to any one of the sixteen or more persons who composed the department the power to

make any contract relating to the society which that particular officer saw fit to make, or that a contract when so made without

consultation with, or knowledge of the other members of the department should bind it. We therefore, hold that no contract, such

as the one in question, is binding on the Veteran Army of the Philippines unless it was authorized at a meeting of the department.

No evidence was offered to show that the department had never taken any such action. In fact, the proof shows that the

transaction in question was entirely between Apache 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.http://www.blogger.com/post-create.g?blogID=6336731883560557810 - _ftnref4 (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 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 in behalf of

the firm and that, furthermore, he would not ordinarily act to the prejudice of his co- partners. The regular course of business

procedure does not require that each time a third person contracts with one of the managing partners, he should inquire as to the

latter’s authority to do so, or that he should first ascertain whether or not the other partners had given their consent thereto. In

fact, Article 130 of the same Code of Commerce provides that even if a new obligation was contracted against the express will of

one of the managing partners, “it shall not be annulled for such reason, and it shall produce its effects without prejudice to the

responsibility of the member or members who contracted it, for the damages they may have caused to the common fund.” ( Ibid,

at p. 957)

The right of a partner to manage the affairs of the partnership or to act as an agent of the partnership is expressly affirmed by the

following statutory provisions:

(a) Article 1820, which provides that an admission or representation made by any partner concerning partnership affairs within

the scope of his authority is evidence against the partnership;

(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.

In the cases of items (c) and (d) above-enumerated, Article 1824 of the Civil Code provides expressly that “All partners are liable

solidary with the partnership for everything chargeable to the partnership.”

b. Transactions Not in the Ordinary Course of Partnership Business

Article 1818 of the Civil Code enumerates what are certainly not“apparently for the carrying on of the business of the

partnership in the usual way,” and will not therefore be valid transactions unless done by or approved by all the partners, thus:

(a) Assigning of partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership;

(b) Disposition of the goodwill of the business;

(c) Confession of a judgment;

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

(e) Submitting a partnership claim or liability to arbitration; or

(f) Renouncing a partnership claim.

The foregoing cases are considered to be not merely acts of administration, but rather acts of ownership which can only be

effected by the concurrence of all the partners who are collectively deemed to be the “owners” of the partnership and its business

enterprise.

One would consider therefore that when the transaction involves the sale, transfer or encumbrance of the entire partnership

business enterprise, it would constitute an act of strict ownership or an act of alteration, which cannot be considered as within the

ordinary course of business that would come within the apparent authority of one partner. And yet in the early case of Goquiolay

v. Sycip, 108 Phil. 947 (1960), the Court held that the sale of the partnership’s business enterprise can be considered to be within

the power of the managing partner, thus:

Appellants also question the validity of the sale covering the entire firm realty, on the ground that it, in effect, threw the

partnership into dissolution, which requires consent of all the partners. This view is untenable. That the partnership was left

without the real property it originally had will not work its dissolution, since the 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.

Under Article 1801 of the Civil Code, if two or more partners have bee entrusted with the management of the partnership affairs

without specification of their respective duties, or without stipulation that one of them shall not act without the consent of all the

others, each one may separately execute all acts of administration, but if any of them should oppose the acts of the others, the

decision of the majority shall prevail; and in case of a tie, the matter shall be decided by the partner owning the controlling

interest.

On the other hand, under Article 1802, if it has been stipulated that none of the managing partners shall act without the consent

of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any one of

them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership.

It should be emphasized though that the provisions of Articles 1800 to 1802 should be considered to be intramural rules that

govern the relationship between and among the partners, and the breach of which can bring about a cause of action against the

breaching partners. The rules provided therein do not bind nor apply to invalidate the contract and transactions had with third

parties acting in good faith and under the doctrine of apparent authority provided under Article 1818.

d. Power of Alteration

The power of management of the partnership business, should be distinguished from the power of ownership and control which

is subject to a higher level of requirements. Under Article 1803(2) of the Civil Code, none of the partners may, without the

consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the
partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the

court’s intervention may be sought.

e. Power Over Real Properties of the Partnership

Although Article 1774 of the Civil Code provides that immovable property or an interest therein may be acquired in the

partnership name, the partnership title is not rendered void if the registration thereof is not in the name of the partnership but in

one or more, or all, of the partners’ names (or for that matter in the name of a third-party who holds it in trust for the

partnership).

Article 1819 of the Civil Code sets specific rules on how partners may bind real properties pertaining to the partnership,

depending on the manner by which such title was registered, thus:

(1) Where Title Is in the Partnership Name:

(i) Any partner may convey title to such property by a conveyance executed in the partnership name; the partnership may

recover such property only when the partner so conveying has no such power to so convey, but not against a transferee in good

faith and for value;

(ii) A partner who conveys the property but in his own name passes the equitable interest of the partnership only when the

partner so conveying acted with authority; otherwise, no title at all to the immovable property passes to the transferee.

The immediately preceding rule is consistent with the provision of Article 1774 which states that title to immovable property

acquired in the partnership name can be conveyed only in the partnership name.

(2) Where Title Is Not in Partnership Name (i.e., in the Name of One or More, or All the Partners, or a Third Person in

Trust for the Partnership):

(i) A conveyance executed by a partner in the name of the partnership or in his own name only passes equitable interest of the

partnership, only when the partner conveying acted with authority;

(ii) A conveyance executed by a partner in the name of the partnership or in his own name does not even pass anything (not even

equitable interest of the partnership) when the partner so conveying acted without authority;

(3) Where Title Is in the Name of One or More But Not All the Partners:

(i) When the records disclose partnership interests, the partners in whose name the title stands may convey title to such property;

and the partnership may recover only when the partners so conveying acted without authority, but not against a purchaser in good

faith and for value;

(ii) When the records do not disclose the right of the partnership, the partners in whose name the title stands may convey title to

such property, and the partnership may recover against any transferee when the partners so conveying acted without authority;

(4) Where Title Is in the Name of All of the Partners:

(i) Conveyance executed by all the partners (in whose ever name so conveyed) passes all their rights in such property. In this

case the will of all the partners is the will of the partnership.

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 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, 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 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 by an action mandamus. The right to inspect is critical to

safeguarding all other rights of stockholders or members in the corporation.

The same principles are applicable to a partner’s right to inspect and to demand true and full information on partnership matters.

b. Right to Demand True and Full Information

Article 1806 of the Civil Code provides that every partner or his legal representative may demand true and full information from

other partners of all things affecting the partnership.

Consequently, in consonance with the fiduciary relationship existing between and among partners, every partner has the

obligations to render true and full information to other partners of all things affecting the partnership.

c. Right to Demand Accounting

Under Article 1807 of the Civil Code, every partner may demand from every other partner an accounting to the partnership for

any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction

connected with the formation, conduct, or liquidation of the partnership or from any use by him of its property.

Under Article 1809 of the Civil Code, any partner shall have the right to a formal account as to partnership affairs, when he is

wrongfully excluded from the partnership business or possession of its property, if the right exists under the terms of the

partnership agreement, whenever circumstances render it just and reasonable.

In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746 (1989), the Court held that a partner’s right to accounting exists as

long as the partnership exists, and that prescription begins to run only upon the dissolution of the partnership and final

accounting is done.

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

The near-absolute legal power of any partnership in a partnership to demand the dissolution of the partnership is in consonance

with the doctrine of delectus personae that establishes a fiduciary relationship between and among the partners.

In Rojas v. Maglana, 192 SCRA 110 (1990), the Court confirmed the right of a partner to “unilaterally dissolve the partnership,”

by a notice of dissolution, which in effect is a notice of withdrawal from the partnership, thus: “Under Article 1830(2) of the

Civil Code, even if there is a specified term, one partner can cause its dissolution by expressly withdrawing even before the

expiration of the period, with or without justifiable cause. Of course, if the cause is not justified or no cause was given, the

withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. With his withdrawal, the

number of members is decreased, hence, the dissolution.” (Ibid, at pp. 118-119).http://www.blogger.com/post-create.g?

blogID=6336731883560557810 - _ftn2

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

(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)

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]);

(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

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. 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 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.

Under Article 1807 of the Civil Code , “Every partner must account to the partnership for any benefit, and hold as trustee for it

any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct,

or liquidation of the partnership or from any use by him of its property.”

Aside from the remedy of recovering the profits derived by a partner from partnership affairs, the same may be a ground to seek

judicial dissolution of the partnership under Article 1831 of the Civil Code.

b. Duty of Diligence

Article 1794 of the Civil Code covers a partner’s duty of diligence to the partnership affairs:

Every partner is responsible to the partnership for damages suffered by it through his fault, and he cannot compensate them with

the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitable lessen

this responsibility if through the partner’s extraordinary efforts in other activities of the partnership, unusual profits have been

realized.

Under Article 1800 of the Civil Code, a duly designated managing partner who acts in bad faith, his particular exercise of power

administration may effectively be opposed by the other partners. When he acts without just or lawful cause, then his power may

be revoked, except of course when he has been appointed the managing partner under the terms of the articles of partnership.

c. Duty of Loyalty

Although the term is more properly associated to officers and directors of corporations, partners, being managers of the

partnership, and agents to one another, owe both the partnership and one another the duly of loyalty, which includes the avoiding

of entering into transactions or situations that present a conflict-of-interests. The duty of loyalty in the partnership setting arises

necessarily as a consequence of the mutual agency relationship existing between and among the partners.

In the event a partner takes any amount from the partnership funds for himself, he becomes a debtor of the partnership, as well

for the interests and damages, which liability under Article 1789 of the Civil Code “shall begin from the time he converted the

amount to his own use.”

An aspect of a partner’s duty of loyalty arising from the fact that he acts as an agent of the partnership is manifested in Article

1792 of the Civil Code, which provides that when a partner authorized to manage collects a demandable sum which was owed to

him in his own name, but from a person who owned the partnership another sum also demandable, the sum thus collected shall

be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but

should the partner have given it for the account of the partnership credit, the amount shall be fully applied for the account of the

partnership. The article provides for an exception to its application: “The provisions of this article are understood to be without

prejudice to the right granted to the debtor by Article 1252 [on right of debtor to stipulate the application of payment], but only if

the personal credit of the partner should be more onerous to him.”

Another aspect of a partner’s duty of loyalty is shown in Article 1793, which provides that a partner who has received in whole

or in part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should

thereafter become insolvent, to bring to the partnership capital what he received even though he may have given a receipt for his

share only.

In Catalan v. Gatchalian, 105 Phil. 1270 (1959), the Court ruled that when partnership real property had been mortgage and
foreclosed, the redemption by any of the partners, even when using his separate funds, does not allow such redemption to be in

his sole favor. The summary reported reads in part as follows:

. . . Under the general principle of law, a partner is an agent of the partnership (Art. 1818, new Civil Code). Furthermore, every

partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partner (Article 1807,

new Civil Code). Consequently, when Catalan redeemed the properties in question he became a trustee and held the same in trust

for his copartner Gatchalian, subject of course to his right to demand from the latter his contribution to the amount of

redemption. (Ibid, at p. 1271)

d. Specific Fiduciary Duties of Industrial Partner

Under Article 1789 of the Civil Code, an industrial partner is prohibited from engaging in business for himself, unless the

partnership expressly permits him to do so. Since even capitalist partners are expected (although not obliged) to contribute

service to the partnership enterprise, and when they do so they are not entitled to separate compensation (unless otherwise

stipulated), then in order to make the contribution of service an industrial partner more meaningful and truly an obligation, it

must mean that is saddled with more burden or prohibitions. The coverage of Article 1789 should mean also that:

(a) Since his main contribution to the partnership is his industry, then an industrial partner owes to the venture and his

fellow partners the obligation to devote his industry towards the partnership business.

(b) Even if the partnership is engaged in a particular form of business, an industrial partner cannot devote his industry to another

type of undertaking for profit even when it is in a different line of business not in competition with that of the partnership.

If an industrial partner breaches this duty, Article 1789 provides that the capitalist partners may either:

(a) exclude him from the firm; or

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

damages in either case.

It seems clear from jurisprudence that in order for an industrial to be held liable for breach of duty under Article 1789, he must

have engaged during the term of the partnership into another business or an activity that is essentially for profit.

In Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973), an article of co-partnership was executed between three capitalist

partners on one hand, and Judge Abad Santos, as an industrial partner on the other hand, with the capitalist partners being

entitled to 70% of the profits, while the industrial partner was entitled to 30% thereof. Several years into the partnership term,

Judge Abad Santos sought to have an accounting of the partnership affairs and to be given her share of the profits of the company

which had been distributed only among the capitalist partners. The capitalist partners sought to have the relationship declared as

not a true partnership on the ground that the articles were drawn-up merely to cover the special arrangement entitlement by

which Judge Abad Santos had arranged for a loan financing for the company to be paid only after the loan has been fully paid;

and that in fact being an incumbent judge she rendered to service to the company, thus:

It is an admitted fact that since before the execution of the amended articles of partnership . . . the appellee Estrella Abad Santos

has been, and up to the present time still is, one of the judges of the City Court of Manila, devoting all her time to the

performance of the duties of her public office. This fact proves beyond peradventure that it was never contemplated between the

parties, for she could not lawfully contribute her full time and industry which is the obligation of an industrial partner pursuant to

Art. 1789 of the Civil Code.

The Court ruled as follows:

One cannot read appellee’s testimony just quoted without gaining the very definite impression that, even as she was and still is a

Judge of the City Court of Manila, she has rendered services for appellants without which they would not have had the

wherewithal to operate the business for which appellant company was organized. . .

xxx.
It is not disputed that the prohibition against an industrial partner engaging in business for himself seeks to prevent any conflict

of interest between the industrial partner and the partnership, and to insure faithful compliance by said partner with his

prestation. There is no pretense, however, even on the part of appellants that appellee is engaged in any business antagonistic to

that of appellant company, since being a Judge of one of the branches of the City Court of Manila can hardly be characterized as

a business. That appellee has faithfully complied with her prestation with respect to appellants is clearly shown by the fact that it

was only after the filing of the complaint in this case and the answer thereto that appellants exercised their right of exclusion

under [Article 1789] . . . after around nine (9) years from June 7, 1955 . . .

That subsequent to the filing of defendants’ answer to the complaint, the defendants reached an agreement whereby the herein

plaintiff has been excluded from, and deprived of, her alleged share, interest or participation, as an alleged industrial partner, in

the defendant partnership and/or in its net profits or income, on the ground that plaintiff has never contributed her industry to the

partnership, and instead she has been and still is a judge of the City Court (formerly Municipal Court) of the City of Manila,

devoting her time to the performance of her duties as such judge and enjoying the privileges and emoluments appertaining to the

said office, aside from teaching in law school in Manila, without the express consent of the herein defendants’ (Record On

Appeal, pp. 24-25). Having always known appellee as a City Judge even before she joined appellant company on June 7, 1955 as

an industrial partner, why did it take appellants so many years before excluding her from said company as per aforequoted

allegations? And ‘how can they reconcile such exclusion with their main theory that appellee has never been such a partner

because ‘The real agreement evidenced by Exhibit ‘A’ was to grant the appellee a share of 30% of the net profits which the

appellant partnership 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.

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.

14 – DISSOLUTION, WINDING-UP AND TERMINATION OF THE PARTNERSHIP

[Updated: 14 October 2009]

1. Introduction and Definition of Terms

An understanding under Partnership Law in the new Civil Code, of the three terms, namely “dissolution”, “winding-up” and

“termination”, would help clarify the multi-faceted legal relationships that exist in the partnership arrangement.

Article 1828 of the Civil Code, defines “dissolution” as “the change in the relation of the partners caused by any partner

ceasing to be associated in the carrying on as distinguished from the winding up of the business.” “Dissolution” is the term

that pertains primarily to the contract of partnership, the breaking of the vinculum juris, so to speak, between and among

the partners in the partnership arrangement. It is in Partnership Law equivalent to the terms “rescission” and “extinguishment” of

contract of partnership under the general provisions of the Law on Contracts.

Article 1829 of the Civil Code implicitly distinguishes “dissolution” from “termination” and “winding-up” when it provides that

“On dissolution the partnership is not terminated, but continues until the winding up of the partnership affairs is

completed.”

“Termination” therefore pertains essentially to the partnership as a business enterprise, and defines the time when all matters

pertaining to the business enterprises, essentially the completion of pending contracts, the payment of all obligations and

the distribution, if any, of the net assets of the partnership to the partners, have been completed. The Court has defined

“termination” of a partnership as the “point in time after all the partnership affairs have been wound up.” (Idos v. Court of

Appeals, 296 SCRA 194, 206 [1998], quoting from Paras, Civil Code of the Philippines, Vol. V, 7th ed., p. 516)

”Winding-up of partnership affairs” is therefore the process which is commenced by the dissolution of the contract of
partnership between and among the partners, and is concluded upon the termination or complete liquidation of the

partnership business enterprise. The Court has defined “winding-up” as “the process of settling business affairs after

dissolution,” (Idos v. Court of Appeals, 296 SCRA 194, 205 [1998], quoting from Paras, Civil Code of the Philippines, Vol. V,

7th ed., p. 516), and it cites as examples of the winding-up process, the following: “the paying of previous obligations; the

collecting of assets previously demandable; even new business if needed to wind up, as the contracting with a demolition

company for the demolition of the garage used in a ‘used car’ partnership.” (Ibid.)

As will be seen from the discussions hereunder, dissolution which breaks the contractual privity between and among the partners,

does not necessarily give rise to winding-up or termination of the partnership business enterprise, as the dissolution of an

“existing partnership contract” may actually lead to the “constitution of a new partnership contract.” What may therefore “break”

the contractual relationship between and among the partners, may not affect at all the underlying partnership business enterprise,

as when the remaining partners choose to continue the partnership business.

2. Legal Effects of Dissolution

a. Effect on the Partnership Contract and Juridical Personality

In Corporate Law, “dissolution” is the termination of the juridical personality of the corporation which was originally constituted

to pursue new business, and that in fact and in law, the corporate juridical personality continues to exist for three years with only

the capacity to wind-down the corporate affairs. (Republic v. Tancinco, 394 SCRA 386 [2002]) The dissolution of a corporation

affects directly the underlying corporate business enterprise in that it ceases to pursue business as a going concern, and any

contract entered into as “new business” would be considered void as having been entered into with a non-existing corporate

party. (Alhambra Cigar v. SEC, 24 SCRA 269 [1968]; Philippine National Bank v. Court of First Instance of Rizal, Pasig, Br.

XXI, 209 SCRA 294 [1992]).

In stark contrast, the concept of “dissolution” in Partnership Law focuses in the change of the contractual relationship between

and among the partners (the rescission of the partnership contract), as the termination of their association in carrying the business

venture as a going concern. The contract of partnership remains but only in the concept as an association to pursue liquidation

process.

A direct effect of the dissolution of the partnership is provided in Article 1832 of the Civil Code, which extinguishes the right

and power of the partners to represent one another to pursue the partnership as a going concern: “Except so far as may be

necessary to wind up partnership affairs or to complete transactions begun but not then finished, terminates all authority of any

partner to act for the partnership.” Dissolution of a partnership does not therefore undermine existing contracts, nor modify or

extinguish the then existing obligations of the partnership and the partners, and that the completion or performance of existing

contracts and the settlement of partnership obligations are in fact integral parts in the winding-up process.

Since the juridical personality of a partnership is inextricably linked to the underlying contract of partnership, it should mean that

the dissolution of the partnership would bring about the impairment of the partnership juridical person in whose name the

business is pursued remains hovering.

b. Effect on the Partnership Business Enterprise

Likewise, in a partnership setting the underlying partnership business enterprise should cease to exist as “as a going concern”,

but only if the partners remaining do not wish to continue the partnership business, whenever they are entitled under the law the

option to so continue. Dissolution therefore focuses mainly on the breaking-up of the contractual relationship of the partners

among one another, and when Article 1832 provides that “Except so far as may be necessary to wind up partnership affairs or to

complete transactions begun but not then finished, dissolution terminates all authority of any partner to act for the partnership,” it

means that the force of the original contract of partnership between them as to being mutual agents, as well as the enforceability

of the doctrine ofdelectus personae, are terminated, without prejudice to a new partnership arrangement being constituted among
the remaining partners.

c. Effects on Contracts Entered into With Third Parties

In Corporate Law, after dissolution all contracts entered into that pursue new business for the corporate venture are void even as

to persons who deal with the corporation in good faith. The reason for this is that the public policy behind the capacity of the

corporate juridical personality pre-empts the consideration of protecting the public that deal in good faith with a purportedly

validly existing corporation. Is this the same policy when it comes to contracts on new business entered into for and in behalf

partnership after dissolution has occurred?

In covering the general legal effects of the dissolution of a partnership, Bautista cited American decisions, showing that upon

dissolution the partnership continues to exist only for a limited purpose of winding it affairs, and that no new business can be

pursued. (BAUTISTA, at p. 319). We feel that under the Partnership Law provisions of our Civil Code, which expressly

recognize that the non-defaulting partners can choose to continue the business enterprise, the answer to the question raised

should be in the negative, because there is no over-arching public policy of State supervision and control over the juridical

personalities of partnerships. Under Philippine Partnership Law, the partnership juridical personality is merely an “added

feature” to the partnership arrangement to improve the efficiency of partnership transactions, and cannot overcome the more

important public policy considerations, such as the imperative need to protect the contractual expectations of the public that deals

in good faith with the partnership venture.

We see the demonstration of this principle in Singson v. Isabela Sawmill, 88 SCRA 623 (1979), where the Court held —

It is true that the dissolution of a partnership is caused by any partner ceasing to be associated in the carrying on of the business.

However, on dissolution, the partnership is not terminated but continuous until the winding up of the business.

The remaining partners did not terminate the business of the partnership ‘Isabela Sawmill’. Instead of winding up the business of

the partnership, they continued the business still in the name of said partnership. It is expressly stipulated in the memorandum-

agreement that the remaining partners had constituted themselves as the partnership entity, the “Isabela Sawmill”.

There was no liquidation of the assets of the partnership. The remaining partners . . . used the properties of said partnership.

xxx.

It does not appear that the withdrawal of [a partner] from the partnership was published in the newspapers. . . the public in

general had a right to expect that whatever credit they extended to [the remaining partners] doing the business in the name of the

partnership “Isabela Sawmill” could be enforced against the properties of said partnership. . .” (Ibid, at p. 642)

In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held that the fact that the managing partner excludes the industrial

partner from participation in the partnership business did not mean that the partnership was extinguished automatically:

However, a mere falling out or misunderstanding between partners does not convert the partnership into a sham organization.

The partnership exists until dissolved under the law. Since the partnership created by petitioners and private respondent has no

fixed term and is therefore a partnership at will predicated on their mutual desire and consent, it may be dissolved by the will of a

partner. x x x In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership effected her own

withdrawal from the partnership and considered herself as having ceased to be associated with the partnership in the carrying on

of the business. Nevertheless, the partnership is not terminated thereby; it continues until the winding up of the business. (Ibid, at

pp. 37-38).

d. Effects on Determining Liability of Partners for Damages to One Another

In Soncuya v. De Luna, 67 Phil. 646 (1939), that for purposes of determining whether a partner is entitled to damages allegedly

suffered by reason of the supposed fraudulent managment of the partnership by the managing partner, it is first necessary that a

liquidation of the partnership business must be made “to the end that the profit and losses may be known and the causes of the

latter and the responsibility of the defnedant as well as the damages which each partner may have suffered, may be determined.”
(at p. 647; citing Po Yeng Cheo v. Lim Ka Yam, 44 Phil. 172 [1922]).

3. Causes of Dissolution

Partnership Law classifies the causes of dissolution of partnerships into the following categories:

I. Causes Which Legally Dissolve Ipso Jure Without Need of Court Decree:

(a) Dissolution Effected Without Violation of the Partnership Agreement

• Termination of the term of the partnership

• Termination of the specific undertaking for which the partnership was constituted

• In a partnership at will, dissolution effected by the will of any partner exercised in good faith

• By mutual withdrawal by all the partners

• Expulsion of a partner bona fide under powers granted in the partnership agreement

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

• When the partnership term has not expired

• When the particular undertaking for which the partnership has been constituted has not yet terminated

• At any time, in a partnership at will

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

• Loss of the specific thing promised to be contributed

• Partnership business becoming unlawful

• Death, insolvency or civil Interdiction of any partner

• Insolvency of the partnership

II. Dissolution Caused by Court Decree:

(a) When a partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;

(b) When a partner becomes incapacitated in performing his part of the partnership contract;

(c) When a partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the partnership business;

(d) When a partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in

matters relating to the partnership business that it is not reasonably practicable to carry on the business in the partnership with

him;

(e) When the partnership business can only be carried on at a loss;

(f) Other circumstances that render dissolution equitable;

(g) On the application of the purchaser of a partner’s interest in the partnership:

a. Understanding of the Causes of Partnership Dissolution in the Light of the Partnership Being Primarily a Contractual

Relationship

Notice that Articles 1830 and 1831 of the Civil Code clearly separate the causes of partnership dissolution between those which

may be effected extrajudicially, and those which require a court decree in order to be effective.

Partnership being primarily a contractual relationship between and among the partners, the various modes of dissolution are akin

to the general principles covering the extinguishment of contracts.

When it comes to the first category of causes of partnership dissolution, namely, those that are effected ipso jure or without need

of any court decree, perhaps a good way of understanding those causes of dissolution dynamics for partnerships is to think of

dissolution in relation to terms very closely linked to principles of “obligatory force” and “relativity” pertaining to contracts,

namely, the remedy of “rescission”, the legal concepts of “breach of contract” and the “happening of resolutory condition or

term,” as well as the other modes of extinguishment of contracts.

Take the first two causes for dissolution, namely, the termination of the term or the termination or fulfillment of the particular

undertaking for which the partnership has been constituted, which basically take the character of either full performance or

fulfillment of the resolutory condition or term. Whether it be full performance or the happening of the resolutory condition or

term, a contract is deemed extinguished ipso jure, and there need not be any particular act by which the legal effect comes about.

The same legal effect would be the act of any partner declaring the termination of a partnership in a partnership at will.

When all the partners in a partnership comes to a unanimous agreement to terminate the partnership, this is the same legal effect

as in another other contract which is extinguished by mutual withdrawal. Finally, when a partner is expelled bona fide from the

partnership pursuant to the provisions granting such power in the contract of partnership, then this is in accordance with

exercising an extrajudicial right to rescind or cancel a contract, which conforms to the spirit of, and is not in breach, of the

contractual commitment.

On the other hand, when a partner, without any legal or contractual basis, seeks the dissolution of the partnership, the same

would indeed constitute a “breach of contract” for which he become personally liable for damages, and for which he loses the

right to wind-up its affairs, but nevertheless the dissolution would take legal effect, in the same manner as in all contracts that

embody personal obligations to do (like agency), i.e., that they are essentially revocable in spite of contractual stipulations to the

contrary. In this case, there is the application of the doctrine of delectus personae in the partnership relationships.

As has been discussed previously, the principle of delectus personae, which treat of the contractual relationship between and

among the partners of the most extreme personal nature (i.e., the principle of “relativity” in Contract Law applied at it most

extreme norm), would override the principle of “obligatory force” of contractual provisions. Thus, even when the contracting

parties agree that their partnership contract would be irrevocable for say ten years, under the principle of delectus personae, any

partner even without cause may seek to terminate his relationship by withdrawing from the partnership and thereby cause its

dissolution; there is no legal remedy allowed to the other partners to compel the withdrawing partner to remain with the

partnership arrangement within the remaining term of the partnership provided in its articles of partnership. Nevertheless, the

withdrawal from the partnership before the expiration of the agreed term of existence would be in breach of a contractual

agreement, and would subject the withdrawing partnership to liability for damages.

When it comes to dissolutions caused by force majeure or outside the will of the partners, their importance lies in the spirit of

Contract Law that says that force majeure excuses a contracting party from his obligations, and would not make him liable for

damages for the occasion does not constitute a breach of contract.

Finally, the causes of dissolution which require a court decree for their effectivity, usually cover causes of action which either go

into “breach of contract” or “radical change in the conditions or circumstances upon which the contract was entered into”

(i.e., principal of rebus sic stantibus). In either case, the intervention of the courts if required to establish the factual basis of the

breach of contract, or the radical change of the circumstances binding the partners together into the contract of partnership.

The termination of the partnership at will by the act of any partner or when there is a mutual withdrawal by all the partners.

Under either characterization of (namely, contract partners) the legal basis upon which dissolution would come into effect is

when there is a “breach of contract” or when there has been the happening of the resolutory condition or term, which then effects

a rescission or termination of the contract of partnership. The concepts of “rescission”, “breach of contract” and “happening of

the resolutory condition or term,” as the effective criteria for dissolution to come into play in a partnership setting, go into the

application of the doctrine of delectus personae in the partnership relationships.

In essence, Philippine Partnership Law is careful to classify the various causes of dissolution because of the varying legal

consequences of dissolution as an act of rescission or cancellation of the partnership agreement.

b. Dissolution Effected with No Violation the Partnership Contract

Article 1830 of the Civil Code, in enumerating the causes for partnership dissolution distinguishes first between causes “without
violation of the agreement,” and those causes that are “In contravention of the agreement.” Those classified as causes “without

violation of the agreement,” are consistent with the agreed terms of the contract of partnership, thus:

(a) Termination of the term or particular undertaking specified in the partnership agreement;

(b) By the exercise in good faith by any partner of the power to withdraw in a partnership at will (no definite term or particular

undertaking specified in the agreement);

(c) By the mutual withdrawal by all the partners from the partnership; and

(d) By the bona fide expulsion of any partner in accordance with the power provided for in the partnership agreement.

In any of the foregoing enumerated causes, there is no breach or contravention of the partnership agreement, and the dissolution

of the partnership does not give rise to a liability for damages for breach of contract. When it comes to the first three causes,

there being no “partner at fault” means that none of the partners would be disqualified from participating in the winding-up of the

affairs of the partnership. Whereas, in the case of expulsion of a partner in accordance with the power provided in the partnership

agreement, since it can only be exercised bona fide, it could only mean that the partner was expelled “for cause” and

consequently, he would be disqualified from participating in the winding-up of the affairs of the partnership business, and

electing to continue to pursue the partnership business.

c. Dissolution Causes In Violation of the Partnership Contract

In contrast, although any partner is recognized with the power to withdraw from the partnership at any time, it would be “[i]n

contravention of the agreement between the partners, where the circumstances do not permit a dissolution under the provisions”

of Article 1830. In that case, the partner seeking the dissolution would be liable for damages, and he is without right to continue

to pursue the partnership business.

An example of the consequences of an expulsion of a partner effected in bad faith is demonstrated in Tocao v. Court of Appeals,

342 SCRA 20 (2000), where in an oral partnership, the capitalist partner Tocao had excluded the industrial partner Anay from

entrance into any of the business premises of the company or and severed any further dealings she may have with the business

venture. In ruling that the excluded partner had a right to recover damages, to have a formal accounting of the business, and to

receive her shares in the net profits, the Court ruled:

Undoubtedly, the petitioner Tocao unilaterally excluded private respondent [Anay] from the partnership to reap for herself and/or

for petitioner Belo financial gains resulting from private respondent’s efforts to make the business venture a success . . . Her

instruction . . . not to allow private respondent to hold office in both the Makati and Cubao sales offices concretely spoke of her

perception that private respondent was no longer necessary in the business operation, and resulted in a falling out between the

two. However, a mere falling out or misunderstanding between partners does not convert the partnership into a sham

organization. The partnership exists until dissolved under the law. The partnership . . . has no fixed term and is therefore a

partnership at will predicated on their mutual desire and consent, it may be dissolved by the will of a partner . . . An unjustified

dissolution by a partner can subject him to action for damages because by the mutual agency that arises in a partnership, the

doctrine of delectus personae allows the partners to have the power, although not necessarily the right to dissolve the partnership.

In this case, petitioner Tocao’s unilateral exclusion of private respondent from the partnership . . . effected her own withdrawal

from the partnership and considered herself as having ceased to be associated with the partnership in the carrying on of the

business. Nevertheless, the partnership was not terminated thereby; it continued until the winding up of the business. (Ibid, at pp.

36-38)

Essentially, the Court agreed with the decision of the trial court that “a partner who is excluded wrongfully from a partnership is

an innocent partner. Hence, the guilty partner must give him his due upon the dissolution of the partnership as well as damages

or share in the profits ‘realized from the appropriation of the partnership business and goodwill.’ An innocent partner thus

possesses ‘pecuniary interest in every existing contract that was incomplete and in the trade name of the co-partnership and
assets at the time he was wrongfully expelled.’” (Ibid, at p. 29)

d. Force Majeure and Other Similar Causes

A third general category for causes of dissolution are recognized by Article 1830 which occur by force majeure or events that are

outside of the will of the partners:

(a) Events which makes unlawful the partnership business;

(b) Loss of the specific thing promised to be contributed to the partnership; and

(c) Death, insolvency or civil interdiction of any partner.

None of such causes of dissolution constitute a type of breach of the partnership agreement.

An interesting issue would be if the loss of the specific thing promised to be contributed to the partnership would cause the

dissolution of the partnership, then would the return back to a partner of his contribution be deemed to have dissolved the

partnership?

The decision in Fernandez v. Dela Rosa, 1 Phil. 671 (1902), covered the issue of whether the receiving back by a partner of his

contribution to the partnership amount to withdrawal from the partnership to have effected a dissolution thereof. The resolution

of this issue was essential in Fernandezbecause it determined whether the partner so receiving his contribution had a right to

participate in the profits of the venture earned after he had allegedly withdrawn. Thus, the Court asked specifically in Fernandez:

“Did the defendant waive his right to such interest as remained to him in the partnership property by receiving the money? Did

he by so doing waive his right to an accounting of the profits already realized, if any, and a participation in them in proportion to

the amount he had originally contributed to the common fund? Was the partnership dissolved by the will or withdrawal of one of

the partners’ under article 1705 of the Civil Code?” (Ibid, at pp. 677-678) The Court held –

. . . We think these questions must be answered in the negative.

There was no intention on the part of the plaintiff in accepting the money to relinquish his rights as a partner, nor is there any

evidence that by anything that he said or by anything that he omitted to say he gave the defendant any ground whatever to

believe that he intended to relinquish them. On the contrary he notified the defendant that he waived none of his rights in the

partnership. Nor was the acceptance of the money an act which was in itself inconsistent with the continuance of the partnership

relation, as would have been the case had the plaintiff withdrawn his entire interest in the partnership. There is, therefore, nothing

upon which a waiver, either express or implied, can be predicated. The defendant might have himself terminated the partnership

relation at any time, if he had chosen to do so, by recognizing the plaintiff’s right in the partnership property and in the profits.

Having failed to do this he can not be permitted to force a dissolution upon his copartner upon terms which the latter is unwilling

to accept. We see nothing in the case which can give the transaction in question any other aspect than that of the withdrawal by

one partner with the consent of the other of a portion of the common capital.” (Ibid, at p. 678)

e. Causes Equivalent to Rescission or Declaration That the Central Basis Upon Which the Contract of Partnership Has

Been Constituted Is Lost

The fourth general category covers the grounds whereby a partner may seek court order for the dissolution of the partners under

Article 1831 of the Civil Code, thus:

(a) When a partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;

(b) When a partner becomes in any other way incapable of performing his part of the partnership contract;

(c) When a partner has been guilty of conduct as tends to affect prejudicially the carrying on of the business;

(d) When a partner willfully or persistently commits a breach of the partnership agreement, or otherwise so conducts himself in

matters relating to the partnership business that is not reasonably practicable to carry on the business in partnership with him;

(e) When the business of the partnership can only be carried on at a loss;

(f) Other circumstances that render dissolution equitable.

In addition, Article 1831 of the Civil Code recognizes the standing of the assignee of a partner’s interest to seek judicial

dissolution of the partnership when:

(a) Termination of the period upon which the partnership is expressly constituted;

(b) Termination of the particular undertaking upon which the partnership is expressly constituted; or

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

The foregoing grounds enumerated in Article 1831 for which a court order of dissolution may be sought need to be considered

carefully, for each represent a public policy which understands that the business purpose of a partnership which cannot be placed

in a relatively clear vision at the time the contract of partnership is entered into. The article recognizes the inherent risk that

business undertakings are exposed to, many of which cannot be anticipated at the time the partnership agreement is entered into.

Therefore, a mechanism is set (i.e., an appropriate court proceeding for dissolution) by which the parties may ask a tribunal to

determine that the circumstances has rendered the rationale of the partnership agreement inutile. Likewise, each of the grounds

provided under Article 1831 would constitute “substantial breach” of the obligations assumed by the partners, as the basis by

which an action for rescission may be pursued; consequently, the factual basis upon which the substantial breach may arise must

be determined to exist by the courts, and cannot be left to the sole determination of any of the partners.

One would think that when a partner has been judicially declared insane, it would thereby ipso jure cause the dissolution of the

partnership, as in the case of death, insolvency or civil interdiction of a partner. And yet under Article 1831, it would require a

formal petition in court to have the partnership dissolved. The legal implication is that the partnership remains unaffected by the

judicial declaration of insanity of a partner, and the discretion is given to the other partners to seek its dissolution. Judicial

declaration of insanity, like civil interdiction, would render the partner without legal capacity to contract, and yet the former does

not result in automatic dissolution of the partnership. Perhaps it is because, judicial declaration of insanity does not proceed from

a criminal conviction as in the case of civil interdiction, and that the law recognizes that the insane partner still has an estate that

has a right to benefit from the properties and rights to which a partner is entitled to, and the other partners are given the option to

remain in partnership with him to allow his estate to continue to benefit from the partnership business. After all, a partner who

turns out to be insane, may be a better partner to remain with, rather than another partner who turns out to be a boor. This is the

same rationale under the second group for judicial dissolution: when a partner becomes in any other way incapable of performing

his part of the partnership contract.

The last four grounds to seek judicial dissolution (when a partner has been guilty of conduct as tends to affect prejudicially the

carrying on of the business; when a partner willfully or persistently commits a breach of the partnership agreement, or otherwise

so conducts himself in matters relating to the partnership business that is not reasonably practicable to carry on the business in

partnership with him; when the business of the partnership can only be carried on at a loss; and other circumstances that render a

dissolution equitable), look at the primary rationale for the partnership agreement: to operate a business venture for the benefit of

all the partners. When there are circumstances prevailing in the partnership that endanger or undermine the viability of the

partnership enterprise, any of the partners is given standing to seek for court determination of the existence of such situation and

decree the dissolution of the partnership.

For example, in Rojas v. Maglana, 192 SCRA 110 (1990), the Court held that when a partner engages in a separate business

enterprise that is competitive with that of the partnership and even withdraws equipment contributed into the partnership

enterprise, the other partner’s withdrawal from the partnership becomes thereby justified and for which the latter cannot be held

liable for damages. In such an instance, a partner has violated his duty of loyalty, which under the principle of delectus

personaeshould allow the other partners to break any further ties with him.

4. Effects of Dissolution Among the Partners Inter Se

We will now discuss the legal consequences, and the rights and obligations that would govern the relationship of the partners
under the various causes of partnership dissolution.

a. When Dissolution Is Caused in Any Way, Except in Contravention of the Partnership Agreement

Under Article 1837 of the Civil Code, unless otherwise agreed, each partner, as against his co-partners and all persons claiming

through them in respect of their interests in the partnership, may have the partnership property applied to discharge its liability,

and the surplus applied to pay in cash the net amount owing to the respective partners. In other words, when there has been no

breach of the partnership agreement upon the dissolution of a partnership, every partner has a right to insist upon the winding-

down of partnership affairs.

When dissolution of the partnership is caused other than by a breach of the contract of partnership, the “remaining partners” have

no option to continue the partnership business enterprise when the “withdrawing” partner insists on winding-up the partnership

affairs. Consequently, the only way by which the “remaining partners” can hope to continue the partnership business is to come

into a settlement of the liquidation of the “withdrawing partner’s” equity interests in the partnership. The tendency therefore is

that the “withdrawing partner” may receive a premium or a higher price than the actual liquidation value of his share in the net

assets of the partnership in exchange for his not agreeing not to demand the formal winding-up and termination of the partnership

business.

b. When Dissolution Is Caused by the Bona Fide Expulsion of a Partner

Under Article 1837 of the Civil Code, when dissolution is caused by thebona fide expulsion of a partner pursuant to the terms of

the partnership agreement, and if the expelled partner is discharged from all partnership liabilities, either by payment or by

express agreement to that effect between himself, the creditor and the remaining partners (as provided under the second

paragraph of Article 1835 of the Civil Code), then such expelled partner shall receive in cash only the net amount due him from

the partnership.

In other words, the expelled partner is without power or authority to insist upon the formal winding-up and liquidation of the

partnership business enterprise; and that the choice whether to continue with the business enterprise or to formally wind-up and

terminate the partnership is with the remaining partners.

c. When Dissolution Is Caused in Contravention of the Partnership Agreement

In the event the dissolution of the partnership is in contravention of the partnership agreement, there exists legally a formal

“breach of contract,” and the rights and/or liabilities of the partners shall be as follows:

(1) Each partner who has not caused the dissolution wrongfully shall have the right:

(i) to participate in the net assets of the partnership after discharge of all partnership liabilities;

(ii) to damages for breach of the agreement, as against each partner who caused the dissolution wrongfully;

(2) The partners who have not caused the dissolution wrongfully, may, if they so desire:

(i) continue the business in the same name either by themselves or jointly with others, during the rest of the agreed term for

the partnership;

(ii) and for that purpose may possess the partnership property, provided they secure the payment by bond approved by the court,

or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the partnership at the dissolution,

less any damages for breach of the agreement and in like manner indemnify him against all present or future partnership

liabilities;

(3) A partner who has caused the dissolution wrongfully shall only have:

(i) If the business is not continued, all the rights of a partner for share in the net assets of the partnership after payment of all its

liabilities, subject to liability for damages incurred due to such wrongful dissolution;

(ii) If the business is continued, the right as against his co-partners and all claiming through them in respect of their interests in

the partnership, to have the value of his interest in the partnership, less any damage caused to his co-partners by the dissolution,
ascertained and paid to him in cash, or the payment secured by a bond approved by the court, and to be release from

all existing liabilities of the partnership;

But in ascertaining the value of the partner’s interest, the value of the goodwill of the business shall not be considered.

d. When Dissolution Is Caused by the Rescission of the Partnership Agreement Because of Fraud or Misrepresentation

(i.e., By Judicial Decree)

Under Article 1838 of the Civil Code, without prejudice to any other right, the party entitled to rescind or seek the dissolution of

the partnership shall be entitled:

(1) To a lien on, or right of retention of, the surplus of the partnership property after satisfying the partnership liabilities to third

persons, for any sum of money paid by him for the purchase of an interest in the partnership and for any capital or advances

contributed by him;

(2) To stand, after all liabilities to third persons have been satisfied, in the place of the creditors of the partnership for any

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

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

partnership.

5. Effects of Dissolution on Partnership Liabilities Existing or Accrued at the That Time

Discussions on dissolution of the partnership must center around the fourth attribute of partnership of “unlimited

liability”, i.e., that a partner shall be liable jointly with the other partners, for partnership debts which cannot be settled from the

partnership assets. In fact, it is the point of dissolution, that application of the attribute of unlimited liability because most

critical.

a. General Rule on Existing Partnership Liabilities

Under Article 1835 of the Civil Code, the general rule is that the dissolution of the partnership does not of itself discharge the

existing liability of any of the partners.

When it comes to a deceased partner, it provides that “The individual property of a deceased partner shall be liable for all

obligations of the partnership incurred while he was a partner, but subject to the prior payment of his separate debts.”

b. Discharge of a Partner from Existing Partnership Liabilities

Article 1835 provides that the only manner by which a partner may be discharged from any existing liability upon dissolution of

the partnership, is by an agreement to that effect between himself, the partnership creditor and the person or partnership

continuing the business.

Such an agreement may be inferred from the course of dealing between the creditor having knowledge of the dissolution and the

person or partnership continuing the business.

6. Effects of Dissolution on Partnership Liabilities Contracted or Incurred After Dissolution

The rules when it comes to liabilities contracted or incurred on behalf of the partnership after dissolution has come in should be

divided into the following categories:

(a) Those that were incurred pursuant to winding-up proceedings;

(b) Those that were incurred in the nature of “new business” in spite of the fact that the partnership is in winding-up process;

and

(c) Those that were incurred when the partnership enterprise has been continued and no winding-up process have been pursued.

a. Liabilities Incurred Pursuant to Winding-up Proceedings

Article 1832 of the Civil Code clearly implies that even with the dissolution of the partnership, the partners not at fault have full

authority to act for the partnership in all matters that “may be necessary to wind up partnership afffairs or to complete

transactions begun but not then finished.”

Therefore, despite the dissolution of the partnership, it is clear under Article 1829 that the partnership is not terminated on

dissolution, and that the partnership continues to exist “until the winding up of the partnership affairs is completed.” During

winding-up stage, every partner authorized to wind-up partnership affairs has full authority to enter into any contract or

transaction that is consistent with the winding-up of partnership affairs, and such contracts and transactions shall be valid and

binding upon the partnership and those of the partners.

Whether considered from the inter-partnership relationship, or viewed in relationship with third parties, all contracts and

transactions entered into after dissolution of the partnership, which are in pursuit of the winding-up of partnership affairs, are

valid and binding. Thus, Article 1834 provides that “After dissolution, a partner can bind the partnership x x x (1) By any

transaction appropriate for winding up partnership affairs or completing transactions unfinished at dissolution.”

(i) Where Partnership Not Bound Even for Winding-Up Liabilities

Under Article 1834, even when the liability incurred in behalf of the partnership is incurred for winding-up purpose,

nevertheless “[t]he partnership is in no case bound by any act of a partner after dissolution x x x (3) Where the partner has no

authority to wind up partnership affairs; except by a transaction with one who” –

(a) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the acting partner’s want of

authority; or

(b) Had not extended credit to the partnership prior to dissolution, and, having no knowledge or notice of his want of authority,

the fact of his want of authority has not been advertised in the a newspaper of general circulation in the place (or in each place if

more than one) at which the partnership business was regularly carried on.

b. Liabilities Incurred Constituting “New Business” During the Winding-Up Process

Article 1832 of the Civil Code is also clear that after dissolution, and winding-up stage has been reached, and there is no

intention to continue the partnership enterprise, then it terminates all authority of any partner to act for and in behalf of the

partnership and/or the other partners involving “new business” or that which is not in pursuit of the winding-up of partnership

affairs.

The general rule applicable in Partnership Law would then be equivalent to the Agency Law principal that would come into play

is that equivalent to an agent who acts without or outside the scope of his authority, which renders the contract entered into

unenforceable against the principal, but valid against the agent in his personal capacity. From the inter-partnership relationship,

every contract entered into or every liability incurred in the name of the partnership as “new business”, is done without lawful

authority, and is non-binding on the partnership and the other partners. As and between the partners, the liability incurred by the

acting partner shall then be for his sole account.

But the foregoing general rule applies only when the acting partner acts with knowledge of the fact of dissolution of the

partnership; for a partner acting for and in behalf of the partnership after dissolution, but acting in good faith, binds the

partnership. Therefore, in determining whether the acting partner acted in good faith or not, distinguishes among the causes of

dissolution.

(1) When Dissolution Is By the Act, Insolvency or Death of a Partner

Under Article 1833 of the Civil Code, where the dissolution is caused by the act, death or insolvency of a partner, the acting

partner who acts without knowledge of the act, death or insolvency of another partner (i.e., without knowledge that dissolution

has come about), will legally bind the partners to any liability created “for the partnership as if the partnership had not been

dissolved.” On the other hand, only the acting partner shall be liable for the liability entered into in behalf of the partnership,

when he knew at that time of the fact of dissolution of the partnership.

(2) When Dissolution Is NOT By the Act, Insolvency or Death of a Partner

Under Articles 1832 and 1833 of the Civil Code, when the dissolution of the partnership is other than “by the act, insolvency or
death of a partner,” then knowledge of the fact of dissolution is presume to have reached every partner and therefore, as between

and among them, a partner who incurs a liability in the name of the partnership, is deemed to be acting without authority or in

bad faith, and only such acting partner shall be liable for the liability incurred.

(3) As To Third Party Creditors

Whatever may have been the cause of the dissolution of the partnership, third parties who in good faith (i.e., unaware of the

dissolution of the partnership) enter into any contract or transaction with the partnership through any of the partners, are

protected in their contractual expectations that the contract is valid and binding against the partnership. The central principal in

Partnership Law is that any third party who enters into a contract with the purported partnership in good faith, shall have the

validity and enforceability of such contract protected.

Thus, Article 1834 of the Civil Code provides that “After dissolution, a partner can bind the partnership x x x (2) By any

transaction which would bind the partnership if dissolution had not taken place, provided the other party to the transaction:

(a) Had extended credit to the partnership prior to dissolution and had no knowledge or notice of the dissolution; or

(b) Though head not so extended credit, had nevertheless known of the partnership prior to dissolution, and, having no

knowledge or notice of dissolution, the fact of dissolution had not been advertised in a newspaper of general circulation in the

place (or in each place if more than one) at which the partnership business was regularly carried on.

Notice how the law treats differently third parties who have previously extended credit to the partnership prior to dissolution, and

those who have only known of the partnership before dissolution: in the former it is onlyactual knowledge or notice of the

dissolution that would place him in bad faith; whereas, in the latter mere notice of dissolution published in the newspapers would

transform him into a third party acting in bad faith.

When it comes to the effects of dissolution, especially on the power of any partner to bind the partnership and other partners in

“new business” contracts and transactions, jurisprudence has ruled that unless otherwise published or made known personally,

third parties dealing with a partnership in good faith have a right to expect that the partnership relation exist and that the partners

are authorized to pursue partnership business as a going concern.

Thus, in Singson v. Isabela, 88 SCRA 623 (1979), the Court held since it did not appear that the withdrawal of a partner from the

partnership was published in the newspapers, then “the public in general had a right to expect that whatever, credit they extended

to [the remaining partners] doing the business in the [original] name of the partnership ‘Isabela Sawmill’ could be enforced

against the properties of said partnership,” (Ibid, at p. 642) as well as against the properties of the withdrawing partner.

(i) Particular Rule of “Limited Liability”

Although a partner may be bound personally to the liabilities incurred with third parties who act in good faith, nonetheless,

Article 1834 makes it clear that such liability is “limited liability”, that is that “The liability of a partner x x x shall be satisfied

out of partnership assets alone when such partner had been prior to dissolution:”

(a) Unknown as a partner to the person with whom the contract is made; and

(b) So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have

been in any degree due to his connection with it.

(ii) When Creditors Not Deemed to Be In Good Faith

It should be noted that Article 1834 provides that even when third parties enter into a “new business” contract or transaction with

the partnership without actual knowledge or notice of the fact of its dissolution, nonetheless, they will not be considered to be

third parties acting in good faith, and that “[t]he partnership is in no case bound by any act of a partner after dissolution,” in the

following cases:

(a) Where the partnership is dissolved because it is unlawful to carry on the business, unless the act is appropriate for winding

up partnership affairs; or
(b) Where the partner has become insolvent.

(iii) Particular Rule on Partner by Estoppel

Notwithstanding any of the foregoing rules, Article 1834 provides that the liability of any person who after dissolution represents

himself or consents to another representing him as a partner in a partnership engaged in carrying on business, shall be the same

as that provided under Article 1825 on partnership by estoppel.

7. Winding-Up of Partnership Affairs

a. Who Has Authority to Wind-up?

Under Article 1836 of the Civil Code, the person or persons who have the power and authority to wind up the partnership affairs

as a consequence of its formal dissolution, is determined by the following rules:

(a) If there is an agreement on this matter, it is the partner or partners so provided to have such authority, shall wind-up

partnership affairs;

(b) In the absence of any such agreement:

(i) The partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner, not

insolvent, has the right to wind up the partnership affairs;

(ii) However, any partner or his legal representative or assignee, upon cause shown, may obtain winding-up by the courts.

b. Rules and Procedures for Winding-up and Liquidation of Partnership Affairs

Since winding-up and liquidation of the partnership affairs must apply the rules and principles relating to the partnership doctrine

of “unlimited liability”, the partners’ right to the benefit of excussion, and the priority rules among conflicting claims, the Law

on Partnership under Article 1839 of the Civil Code lays down the following tenets, subject to any agreement to the contrary:

(a) What Constitutes Partnership Property?

The assets of the partnership which shall be applied to pay partnership liabilities are:

(i) The partnership property,

(ii) The contributions of the partners necessary for the payment of all the liabilities of the partnership.

(b) What Are the Priority Rules Against Partnership Property?

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

(i) Those owing to creditors other than partners;

(ii) Those owning to partners other than for capital and profits;

(iii) Those owning to partners in respect of capital; and

(iv) Those owing to partners in respect of profits.

(1) Enforcing Contributions from Partners to Cover Partnership Debts

Article 1839 specifically provides that the partners shall contribute “as provided by Article 1797, the amount necessary to satisfy

the liabilities,” and that the individual property of a deceased partner shall be liable for such contribution.

It also provides that an assignee for the benefit of the creditors or any person duly appointed by the court shall have the right to

enforce the contribution specified.

In addition, any partner or his legal representative shall have the right to enforce the contributions to the extent of the amount

which he has paid in excess of his share of the liability.

(2) Priority Rules Between Partners’ Creditors and Partnership Creditors

Under Article 1829(8), when partnership property and the individual properties of the partners are in possession of a court for

distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving

the right of lien of secured creditors.

(3) Priority Rules When Partner Is Insolvent

Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the

following order:

(a) Those owing to separate creditors;

(b) Those owing to partnership creditors;

(c) Those owing to partners by way of contribution.

(4) Partner May Demand Share in Net Assets Only After Liquidation and Settlement of Claims of Partnership Creditors

In Villareal v. Ramirez, 406 SCRA 145 (2003), the Court ruled that “A share in a partnership can be returned only after the

completion of the latter’s dissolution, liquidation and winding up of the business.” But even upon dissolution of the partnership,

a partner has no right to demand from the other partners for them to be personally liable for the return of his contribution,

especially when the partnership operations have been at a loss, thus:

We hold that respondents have no right to demand from petitioners the return of their equity share. Except as managers of the

partnership, petitioners did not personally hold its equity or assets. “The partnership has a juridical personality separate and

distinct from that of each of the partners.” Since the capital was contributed to the partnership, not to petitioners, it is the

partnership that must refund the equity of the retiring partners.

x x x.

Since it is the partnership, as a separate and distinct entity, that must refund the shares of the partners, the amount to be refunded

is necessarily limited to its total resources. In other words, it can only pay out what it has in its coffers, which consists of all its

assets. However, before the partners can be paid their shares, the creditors of the partnership must first be compensated. After all

the creditors have been paid, whatever is left of the partnership assets becomes available for the payment of the partners’ shares.

(Ibid, at pp. 151-152)

The Villareal ruling reiterates the decision in Magdusa v. Albaran, 5 SCRA 511 (1962). It should be noted that in Magdusa the

Supreme Court did not accept the theory of the Court of Appeals that partners have a personal cause of action against the

managing partner for the latter to return their capital on the basis that “Plaintiffs’ action was based on the allegation,

substantiated in evidence, that Gregorion Magdusa, having taken delivery of their shares, failed and refused and still fails and

refuses to pay them their claims. The liability, therefore, is personal to Gregorio Magdusa, and the judgment should be against

his sole interest, not against the partnership’s.” (Ibid, at p. 513) This shows that even when the cause for dissolution is fraud, the

action to recover must still be by way of dissolution and liquidation of the partnership affairs, and cannot be in the form of a

personal action against the allegedly defaulting partner.

Note must be taken of the decision in Martinez v. Ong Pong Co., 14 Phil. 726 (1910), where two persons received from a

capitalist partner the latter’s contribution for the establishment of a business with clear agreement on the sharing of profits and

losses from such venture. When the managing partners refused to render an accounting of the operations of the venture although

they admitted there were small profits made, the trial court rendered judgment directing the managing partners to return the

investment of the capitalist partner. The Court, in affirming the return of contribution, rather than directing the dissolution and

liquidation of the partnership and determining the share of the partners in the net assets, held –

Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part of a partner who acted as agent

in receiving money for a given purpose, for which he has rendered no accounting, such agent is responsible only for the losses

which, by a violation of the provisions of the law, he incurred. This being an obligation to pay in cash, there are no other losses

than the legal interest, which interest is not due except from the time of the judicial demand, or, in the present case from the

filing of the complaint. . . We do not consider that article 1688 is applicable in this case, in so far as it proves “that the

partnership is liable to every partner for the amounts he may have disbursed on account of the same and for the proper interests,”

for the reason that no other money that the contributed as capital is involved. (Ibid, at p. 729)
We believe that the decision in Martinez is wrong, for a contemporaneously held in Villareal, a partner cannot seek recovery of

his contribution, much less share in the net assets of the partnership, unless it be part of the dissolution and liquidation of the

partnership, whereby the claims of partnership creditors have priority payment rights.

And yet the Supreme Court in Uy v. Puzon, 79 SCRA 598 (1977), also ordered the primary partner to reimburse his co-partner

the latter’s investment and unrealized profits. In Uy, the Court found that the primary partner in a construction venture did not

comply with his obligation to devote the project for the benefit of the partnership:

Had the appellant not been remiss in his obligations as partner and as prime contractor of the construction projects in question as

he was bound to perform pursuant to the partnership and sub-contract agreements . . . it is reasonable to expect that the

partnership would have earned much more than the P334,255.61. . . The award, therefore, made by the trial court of the amount

of P200,000.00, as compensatory damages, is not speculative, but based on reasonable estimate. (Ibid, at p. 615).

8. Continuance of Partnership Business Instead of Winding-Up

Article 1840 recognizes that a partnership may be dissolved, but the underlying partnership business enterprise would not be

wound-up, and in fact may be continued as a going concern.

a. Who May Continue Partnership Business and Obligations Assumed?

Article 1837 of the Civil Code recognizes the right of the “partners who have not caused the dissolution wrongfully,” if they so

desire, to continue the business in the same name either by themselves or jointly with others during the agreed term for the

partnership.

If such right to continue the partnership business is so exercised, then such exercising partners must secure the payment by bond

approved by the court, or pay to any partner who has caused the dissolution wrongfully, the value of his interest in the

partnership at the point of dissolution, less any damages recoverable from said defaulting partner, as well as indemnify him

against all present or future partnership liabilities.

b. Disposition of Liabilities When Partnership Business Continued

Article 1840 provides that if the dissolved partnership is not wounded-up and instead the partners so qualified have chosen to

continue the partnership enterprise as a going concern, then the creditors of the dissolved partnership shall also be creditors of the

person or partnership continuing the business:

(a) When any new partner is admitted into an existing partnership, or when any partner retires and assign (or the representative of

the deceased partner assigns) his rights in partnership property to two or more of the partners and one or more third persons, if

the business is continued without liquidation of the partnership affairs;

(b) When all but one partner retires and assigns (or the representative of a deceased partner assigns) their rights in partnership

property to the remaining partner, who continues the business without liquidation of partnership affairs, either alone or with

others;

(c) When any partner retires or dies and the business of the dissolved partnership is continued, with the consent of the retired

partners or the representative of the deceased partner, without any assignment of his right in partnership property;

(d) When all the partners or their representatives assigns their rights in partnership property to one or more third persons who

promise to pay the debts and who continue the business of the dissolved partnership;

(e) When any partner wrongfully causes a dissolution and the remaining partners continue the business, either alone or with

others, and without liquidation of the partnership affairs;

(f) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation

of the partnership affairs.

Article 1840 of the Civil Code provides also that the liability of a third person becoming a partner in the partnership continuing

the business, to the creditors of the dissolved partnership shall be satisfied out of the partnership property only, unless there is a
stipulation to the contrary. This is a form of “limited liability” on the part of a new partner coming into an existing partnership.

The article likewise provides that when the business of a partnership after dissolution is continued under any conditions set forth

therein, the creditors of the dissolved partnership, as against the separate creditors of the retiring or deceased partner or the

representative of the deceased partner, have a prior right to any claim of the retired partner or the representative of the deceased

partner against the person or partnership continuing the business, on account of the retired or deceased partner’s interest in the

dissolved partnership or on account of any consideration promised for such interest or for his right in partnership property.

Nothing in the article shall be held to modify any right of creditors to set aside any assignment on the ground of fraud.

Finally, the article provides that the use by the person or partnership continuing the business of the partnership name, or the name

of a deceased partner as part thereof, shall not of itself make the individual property of the deceased partner liable for any debts

contracted by such person or partnership.

The foregoing rules of liabilities must always be construed in consonance with the primary doctrine of protecting creditors who

deal in good faith with the partnership business and who cannot be expected to be aware of the inner workings of the partnership

and the intramural dealings of the partners. Thus, in Singson v. Isabela Sawmill, 88 SCRA 623 (1979), where the partnership

executed a chattel mortgage over its properties in favor of a withdrawing partner, and the withdrawal was not published to bind

the partnership creditors, the Court ruled that the failure of a partner to have published her withdrawal from the partnership, and

her agreeing to have the remaining partners proceed with running the partnership business instead of insisting on the liquidation

of the partnership, did not relieve such withdrawing partner from her liability to the partnership creditors. Even if the

withdrawing partner acted in good faith, it could not overcome the position of partnership creditors who also acted in

good faith, without knowledge of her withdrawal from the partnership. Thus, the Court affirmed the standing of the

partnership creditors to seek the annulment of the chattel mortgage for having been entered into adverse to their interests.

e. Disposition of Liabilities When Dissolution Is Caused by the Retirement or Death of a Partner

Under Article 1841 of the Civil Code, when any partner retires or dies, and the business is continued under any of the conditions

set forth in Article 1840, or in Article 1837(2), without any settlement of accounts as between him or his estate and the person or

partnership continuing the business, unless otherwise agreed, then the following rules shall apply:

(a) The partner or his legal representative as against such person or partnership may have the value of his interest at the date of

dissolution ascertained; and

(b) The partner or his legal representative shall receive as an ordinary creditor an amount equal to the value of his interest in

the dissolved partnership, with option:

(i) to receive interest; or

(ii) in lieu of interest, the profits attributable to the use of his right in the property of the dissolved partnership.

Nonetheless, the article expressly provides that the creditors of the dissolved partnership as against the separate creditors, or the

representative of the retired or deceased partner, shall have priority on any claim arising under said article, as provided by Article

1840, third paragraph.

9. Partner’s Right to Demand an Accounting

Under Articled 1842 of the Civil Code, in the absence of any agreement to the contrary, the right to receive an accounting of his

interest shall accrue to any partner, or his legal representative, as against the winding-up partners, or the surviving partners, or

the person or partnership continuing the business, at the date of dissolution.

In Fue Leung v. Intermediate Appellate Court, 169 SCRA 746 (1989), the Court held that the right to accounting does not

prescribe during the life of the partnership, and that prescription begins to run only upon the dissolution of the partnership and

final accounting is done, under the rationale that:

. . . As stated by the respondent, a partner shares not only in profits but also in the losses of the firm. If excellent relations exist
among the partners at the start of business and all the partners are more interested in seeing the firm grow rather than get

immediate returns, a deferment of sharing in the profits is perfectly plausible. It would be incorrect to state that if a partner does

not assert his rights anytime within ten years from the start of operations, such rights are irretrievably lost. The private

respondent’s cause of action is premised upon the failure of the petitioner to give him the agreed profits in the operation of Sun

Wah Panciteria. In effect the private respondent was asking for an accounting of his interests in the partnership. (Ibid, at p. 754).

15 – LIMITED PARTNERSHIPS

[Updated: 14 October 2009]

1. Nature, Formation and Registration

According to Tolentino, the provisions of the Civil Code on limited partnerships were taken from the Uniform Limited

Partnership Act of the United States of America. (See annotations in TOLENTINO, CIVIL CODE OF THE PHILIPPINES, Vol

V, pp. 382 to 395 [1992 ed.]; See also Report of the Code Commission, p. 149). In essence, therefore, American decisions

relating to explaining the effects of the provisions of the Uniform Limited Partnership Act should be taken as quite instructive in

considering the provisions of the new Civil Code on limited partnerships.

The De Leons give a more descriptive historical background of the limited partnership as “an outgrowth of the Roman Law,

which provided that one or more persons might turn over property to a slave and avoid personal liability by trading through

him.” (De Leons, p. 295). They describe how the institution of limited partnership “grew up in the civil law, rules governing this

form of business, substituting, of course, for the slaves, free persons who become general partners with unlimited liability,” and

it development into the United States, thus –

Louisiana, which uses the civil instead of the common law, recognized this form of organization. In 1822, the principal rules on

limited partnership which grew up in the civil law were codified and enacted into a statute by the State of New York. New

York’s lead has been followed by most common law jurisdictions though England did not fall into line until 1907. (Charles W.

Gertenberg, “Organization and Control, “ [1919], 3 Modern Business, p. 50). (Ibid)

Bautista quoted from the New York decision in Ames v. Downing, 1 Brad. (N.Y. Surr. Cit.) 321, (BAUTISTA acknowledges that

the American decision is “reproduced in CRANE AND MCGRUDER, CASES ON PARTNERSHIP, 674-675.”) to describe the

origin and development of limited partnerships, thus —

The system of limited partnership, which was introduced by statute into this state, and subsequently very generally adopted in

many other states of the Union, was borrowed from the French Code. (3 Kent. 36; Code de Commerce, 12, 23, 24.) Under the

name of la societe en commandite, it has existed in France from most authentic commercial records, and in the early mercantile

regulations of Maseilles and Montpelier. In the vulgar latinity of the middle ages it was styled commanda, and in

Italyaccomenda. In the states of Pisa and Florence, it is recognized so far back as the year 1166; also in the ordinance of Louise-

le Hutin, of 1315; the statutes of Marseilles, 1253; of Geneva, of 1588. In the middle ages it was one of the most frequent

combinations of trade, and was the basis of the active and widely extended commerce of the opulent maritime cities of Italy. It

contributed largely to the support of the great and prosperous trade carried on along the shores of the Mediterranean, was known

in Laguedoc, Provence, and Lombardy, entered into most of the industrial occupations and pursuits of the age, and even traveled

under the protection of the arms of the Crusaders to the city of Jerusalem. At a period when capital was in the hands of nobles

and clergy, who, from pride of caste, or cannonical regulations, could not engage directly in trade, it afforded the means of

secretly embarking in commercial enterprises, and reaping the profits of such lucrative pursuits, without personal risk; and thus

the vast wealth, which otherwise could have lain dormant in the coffers of the rich, became the foundation, by means of this
ingenious idea, of the great commerce which made princes of the merchants, elevated to the trading class, and brought the

Commons into position as an influential estate in the Commonwealth. Independent of the interest naturally attaching to the

history of a mercantile contract, of such ancient origin, but so recently introduced where the general partnership, known to the

common law has hitherto existed alone, I have been led to refer to the facts just stated, for the purpose of showing that the special

partnership is, in fact, no novelty, but an institution of considerable antiquity, well known, understood and regulated. Ducange

defines it to be: “Societas mercatorem qua uni sociorum tota negotiationis cura commendatur, certis conditionibus.” It was

always considered a proper partnership, societas, with certain reserves and restrictions; and in the ordinance of Louis XIV., of

1793, it is ranked as a regular partnership. In the Code of Commerce it is classed in the same manner. I may add, as an important

fact, for the explanation of the distinction to which I shall shortly advert, that the French Code permits a special partnership, of

which the capital may be divided into shares, or stock, transmissible from hand to hand. In such a case, the death of the special

partner does not dissolve the firm, the creation of transmissible shares being a proof that the association is formed respectu

negotii, and not respectu peronsarum; but even in such a partnership the death of the general partner effects a dissolution, unless

it is expressly stipulated otherwise. But, says M. Troplong, in would be wrong to extend the rule that a partnership, of which the

capital is divided into transmissible shares, is not dissolved by the death of a stockholder, to a special partnership, the capital of

which is not so divided. The statute of New York recognizes only the latter kind of partnership, the names of the parties being

required to be registered, and any change in the name working a dissolution, and turning the firm into a general partnership. Such

a partnership has always been held to be dissolved by the death of the special partner. *** The partnership remains under the

dominion of the common law. It has created between the special and general partner a tie, which is not subjected to the caprice of

unforseen changes; it has produced mutual relations of confidence, which the general partner cannot be forced to extend to

strangers. (BAUTISTA, at pp. 399-400)

It should be recognized that prior to the New Civil Code provisions on limited partnerships, such institution was covered by the

Spanish Code of Commerce. In Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923), our Supreme Court recognized

that there existed provisions in the Code of Commerce governing limited partners: “To establish a limited partnership there must

be, at least one general partner and the name of at least one of the general partners must appear in the firm name. (Code of

Commerce, Arts. 122(2), 146, 148).” (Ibid, at pp. 150-151)

What seems clear from all the foregoing is that the institution of limited partnership had its origin from civil law, was adopted

into the American common law system, from whence it found its current adoption into the Philippine legal system through the

provisions of the new Civil Code of the Philippines. Likewise, limited partnerships originated and grew primarily from

commercial partnership practices. Its origin in “antiquity” may be basis to say that under modern setting, the limited partnership

may be an inadequate medium of doing business, for its main features and objectives could be achieved by the modern

corporation, especially the close corporation vehicle.

a. Essence of the Medium of Limited Partnership

Article 1843 of the Civil Code defines a limited partnership as “one formed by two or more persons under the provisions of the

following article, having as members one or more general partner and one or more limited partners. The limited partners as such

shall not be bound by the obligations of the partnership.”

The American decision in Hoefer v. Hall, 411 P.2d 230 (1966), describes the purpose and essence of the limited partnership

under the terms of the Uniform Limited Partnership Act, thus—

x x x. A limited partnership is strictly a creature of statute, its object being to enable persons not desiring to engage in a particular

business, to invest capital in it and to share in the profits which might be expected to result from its use, without becoming liable

as general partners for all partnership debts. In other words, it is a form of partnership in which the liability to third persons of

one or more of its members is limited to a fixed amount. . . (Citing Vol 2, ROWLEY ON PARTNERSHIP, 2d Ed., sec. 53.0, pp.
549-552; Vol. 8, U.L.A., p. 2; Lanier v. Bowdoin, 282 N.Y. 32, 24 N.E. 2d 732; Ruzicka v. Rager, 305 N.Y. 191, 111 N.E. 2d

878, 39 A.L.R. 2d 288).

As a species of contract, a limited partnership may be characterized as a formal or solemn contract, in that no limited partnership

is formed unless the formalities provided for under Article 1844 of the Civil Code are complied with; and failure to so comply

with the formalities only brings about the creation of a general partnership. Having complied with the formalities mandated by

Partnership Law to form such a medium of doing business, the distinguishing feature of a limited partnership is that it has

through the limited partners been able to institute a form of “limited liability,” in that the limited partner as such shall not be

bound by the obligations of the partnership.

The language used in the last sentence of Article 1843 of the Civil Code (“The limited partners as such shall not be bound by the

obligations of the partnership.”) carries more the doctrine of “no liability” for limited partners, and perhaps more accurately

reflects that in civil law, the debts and obligations of the partnership pertain to it as a separate juridical person, and that generally

non-contracting parties, such as the limited partners, are not bound by said contractual debts and obligations under the principle

of “privity” or “relativity” under general contract law. But frankly, the use of the term “limited liability” for limited partners is

more appropriate since, as will be discussed hereunder, limited partners do assume limited liability pertaining to their

contributions and partnership assets held them under Article 1858.

As will also be shown in the discussions hereunder, the limited liability feature of the limited partnership is achieved by taking

away from the persons of the limited partners most of the key features of partnerships in general, namely, mutual

agency, delectus personae, and the right to manage partnership affairs.

b. Requirements for the Formation of a Limited Partnership

Article 1844 lays down the rules by which two or more persons desiring to form a limited partnership need to comply with, thus:

(1) Sign and swear to a Certificate of Limited Partnership, which shall contain the following provisions describing or

designating the:

• partnership name, adding thereto “Limited”;

• character of the business;

• principal place of business;

• the term of existence;

• name and residence of each of the partners, with clear designation of who are the general and limited partners; and the

right, if given, of partners to admit additional limited partners;

• contributions to the partnership; and the terms under which additional contribution are to be made by the limited

partners;

• right, if given, of a limited partner to substitute an assignee as contributor in his place;

• time, if agreed upon, when the contributions of limited partners shall be returned; and the right, if given, to demand

and receive property other than cash in return for such contribution;

• share of the profits or the other compensation by way of income which each limited partner shall receive by reason of

his contribution; and the right, if given, of one or more of the limited partners to priority over other limited partners, as to

contributions or as to compensation by way of income and the nature of such priority;

• right, if given, of the remaining general partner or partners to continue the business on the death, retirement, civil

interdiction, insanity or insolvency of a general partner; and

(2) File such Certificate with the SEC

Hoefer v. Hall, 411 P.2d 230 (1966), explains the rationale in American jurisdiction, on the formalities required of limited

partnership under the Uniform Limited Partnership Act, thus—

x x x. The main purpose of the statutory regulation is to ensure the limitation on the liability of limited partners. It naturally

follows that in order to obtain the privilege of limited liability, one must conform to the statutory requirements. . . (Citing

Gilman Pain & Varnish Co., v. Legum, 197 Md. 665, 80 A.2d 906; R.S. Oglesby Co. v. Lindsay, 112 Va. 767, 72 S.E. 672; Mud

Control Laboratories v. Covey, 2 Utah 2d 85, 269 P. 2d 854;Bisno v. Hyde, 290 F.2d 560 [9th Cir. 1961]; 68 C.J.S. Partnership

Sec. 450, p. 1006; and 40 Am.Jur., Partnership, Sec. 506, p. 475) Obviously, the purpose of the requirement that the certificate

shall be recorded is to acquaint third persons dealing with the partnership with the essential features of the partnership

arrangement. . . Under the circumstances of this case, where neither the rights of third parties nor a partner’s claim of limited

liability is involved, we cannot se how the failure to record the certificate could affect the existence of a limited partnership

insofar as the parties, inter se, are concerned . . .

The indicated provisions under Article 1846 which would provide for a right “if given,” must yield to the legal conclusion that in

effect the right alluded to does not exist if not expressly provided for in the Certificate of Limited Partnership or by another

provision in the New Civil Code.

With respect to the contents, swearing and SEC-filing of the Certificate of Limited Partnership, Article 1846 recognizes the

doctrine of “substantial compliance”: “A limited partnership is formed if there has been substantial compliance in good faith with

the foregoing requirements.” While there is no doubt that the execution of a sworn Certificate of Limited Partnership and its

filing with the SEC are essential elements to establish a limited partnership, the question that arises is that which of the

enumerated contents of the Certificate under Article 1844 are a “must” to reach the level of “substantial compliance”?

Thus, under the Code of Commerce then in place, Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923), held:

To establish a limited partnership there must be, at least one general partner and the name of at least one of the general partners

must appear in the firm name. (Code of Commerce, arts. 122[2], 146, 148.) But neither of these requirements have been fulfilled.

The general rule is, that those who seek to avail themselves of the protection of laws permitting the creation of limited

partnerships must show a substantially full compliance with such laws. A limited partnership that has not complied with the law

of its creation is not considered a limited partnership at all, but a general partnership in which all the members are liable. (Ibid, at

pp. 150-151, citing MECHEM, ELEMENTS OF PARTNERSHIP, p. 412; GILMORE, PARTNERSHIP, pp. 499, 595; 20 R. C.

L., 1064)

It can thus be concluded, that the institution of who is or are the general partners, and who is or are the limited partners, including

the amount or nature of their contributions, are essential contents of the Certificate of Limited Partnership. In other words,

limited partners cannot claim the benefits of limited liability unless they find themselves expressly classified as such in the duly

filed and registered Certificate of Limited Partnership. (Same ruling in Lowe v. Arizona Power & Light Co.,427 P.2d 366

[1967]).

Nonetheless, the formal requirements to establish a limited partnership are relevant only insofar as establishing the limited

liability rights against third parties. Under American jurisprudence, particularly under the Hoefer v. Halldecision, the issue as to

“substantial compliance” has no relevance in resolving issues inter se among the partners, and general partners are bound by the

contractual commitment under the partnership agreement to hold the limited partners liable for partnership debts and obligations

only to the extent of their contributions. To the same effect is the ruling in Jo Chung Cang v. Pacific Commercial Co., (45 Phil.

142 [1923])http://www.blogger.com/post-create.g?blogID=6336731883560557810 - _ftn2 under the terms of the Code of

Commerce which also required execution of public document and formal registration of the certificate of limited partnership,

thus –

The supreme court of Spain has repeatedly held that notwithstanding the obligation of the members to register the articles of

association in the commercial registry, agreements containing all the essential requisites are valid as between the contracting

parties, whatever the form adopted, and that, while the failure to register in the commercial registry necessarily precludes the
members from enforcing rights acquired by them against third persons, such failure cannot prejudice the rights of third

persons. . . (Ibid, at p. 153).

The mandatory requirement of the filing of the certificate with the SEC constitute the registration or notice that binds the public

to the essential nature of the partnership as one constituting a limited liability on the part of the limited partners. This is

consistent with the commercial law practice that a diminution of rights or the limitation of remedies brought about by a

commercial medium shall come about only when there has be registration that can bind the dealing public.

American jurisprudence requires that the filing of the Certificate of Limited Partnership with the proper government agency (the

SEC in our case), must be done within a reasonable time. (Stowe v. Marrilees, 44 P.2d 368;Solomont v. Polk Development

Co., 54 Cal. Rptr. 22, 27 [1966]) In our jurisdiction, the fact of non-filing of the certificate of limited partnership does not bring

about a limited partnership, and what is deemed constituted is a general partnership.

c. False Statement in the SEC Certificate

Under Article 1847 of the Civil Code, if the Certificate contains a false statement, one who suffers loss by reliance on such

statement may hold liable “any party to the certificate who knew the statement to be false” at the time he signed the certificate or

subsequently failed to cancel or amend the certificate or to file a petition for such cancellation or amendment.

The language covering liability under Article 1847 would indicate that a limited partner who signs the Certificate knowing

provisions therein to be false, may thus become unlimitedly liable to a person who suffers loss by reason of such false statement.

But it does not create general unlimited liability, because only third parties who relied upon such false statements, and have

suffered loss thereby, can hold the limited partner liable beyond his contribution. Thus, in the American decision in Gilman

Paint & Varnish Co. v. Legum, 80 A.2d 906, 29 A.L.R. 2d 286 (1951), it was held that falsely indicating in the articles of limited

partnership the contribution of the limited partner at lower amount than what was actually contributed cannot be a basis to hold

such limited partner liable beyond his contribution, since it would be inconceivable that a creditor could suffer loss by relying on

an investment stated in the certificate of partnership which was smaller than the amount actually contributed; and that it is when

the actual contribution is less than amount stated in the certificate that reliance upon it may cause loss to a creditor.

d. Name of Limited Partnership

Like in the ordinary partnership, the determination of the liabilities assumed by partners and non-partners, is very much tied-up

with the name given to the partnership venture; in other words, the name which a partnership employs to deal with the public

may allow a member of the dealing public basis upon which to enforce the personal liabilities against the partners that arise from

partnership dealings.

Under Article 1844, among the contents of the Certificate of Limited Partnership should be “The name of the partnership, adding

thereto the word ‘Limited’.” In contrast, under Articles 122(2), 146 and 148 of the Code of Commerce, as found by Jo Chung

Cang v. Pacific Commercial Co.,(45 Phil. 142 [1923]) “To establish a limited partnership, there must be, at least, one general

partner and the name of at least one of the general partners must appear in the firm name.” Today, it is not critical under the

terms of Article 1844 that the firm name should contain the names of the general partners, or any of them, and what is imposed is

to add the word “Limited”. In fact, under Article 1815 (which is the first article under the section denominated as “Obligations

of the Partners with Regard to Third Persons”), “Every partner shall operate under a firm name, which may or may not include

the name of one or more of the partners.” This can only lead to the conclusion that under our present Law on Partnerships, it is

not required as an essential element to establish a limited partnership, that the firm name should contain the names of the general

partners, or any of them.

One of the key elements under Partnership Law by which limited partners are to be accorded their limited liability rights, is that

they practically must become invisible to the public when it comes to partnership dealings: they are mere passive investors in the

partnership business, and they do not participate in its management nor are they agents of the partners and of the partnership.
And every indication that would lead the dealing public to believe or presume that a limited partner participates in management

or control of the firm becomes a basis by which such limited partners shall, insofar as the dealing public is concerned, be stripped

of their limited liability right.

Thus, under Article 1846, it is provided that the “surname of a limited partner shall not appear in the partnership name, unless it

happens to be the surname of a general partner or that prior to the time when the limited partner became such, the business had

been carried or under a name in which such surname appeared. As a consequence of the breach of such prohibition, “[a] limited

partner whose surname appears in a partnership name . . . shall be liable as a general partner to partnership creditors who extend

credit to the partnership without actual knowledge that he is not a general partner. Estoppel is therefore the legal basis upon

which a limited partner becomes liable to a creditor who acted on the belief that by the inclusion of his surname, the partner was

a general partner.

The problem with this rule of estoppel is that it would be difficult to imagine how such a partnership creditor could claim good

faith, since with the filing the SEC of the Certificate of Limited Partnership indicating therein a partner as a limited partner,

would amount to constructive knowledge of such fact binding on the whole world. Does Partnership Law not intend that

compliance with the mandatory requirements of execution, swearing and SEC-filing of the Certificate of Limited Partnership

shall amount to registration on a public document binding on the whole world? In any event, Article 1846 relies upon the

principal of “without actual knowledge,” to the exclusion of the principle of constructive knowledge.

It would seem therefore that the default rule in Philippine Partnership Law is that articles of partnership and certificates of

limited partnership, even when formally registered with the SEC, do not constitute a form of constructive notice to the public

dealing with such partnerships, and there is no obligation on the part of the dealing public to determine the legal status of the

partnership, and the intramural arrangements between and among the partners, much less to determine the extent of the sharing

and division of powers among the partners.

What happens if the firm name adopted by limited partnership formally in the Certificate of Limited Partnership does not contain

the word “Limited”, does it qualify to be a limited partnership? We believe this is only a formal and not a substantial

requirement, which cannot strip the limited partners of their right to claim limited liability, for a member of the dealing public

cannot claim to have sustained loss by reason of the non-inclusion of the word “Limited” in the firm name, since the Certificate

clearly indicates who are the limited partners. Again, the drawback of this position is that it places the burden on the dealing

public to know the contents of the Certificate filed with the SEC.

What happens if the sworn Certificate on file with the SEC does not provide at all for a firm name, would it break the limited

liability rights of the expressly designated limited partners therein. We believe that in such a case, there is no “substantial

compliance” with the requirements under Article 1846. The firm name of every partnership is the very means by which its

existence as a juridical person, separate and distinct from its members, and distinguishable from other firms and juridical

persons, constitutes the essence of the “person” of the partnership and thereby the nexus upon which the obligatory force of its

contracts and transactions are fastened. The firm name of a partnership is the essence by which to enforce its standing in its

contractual relationship, and the legal basis upon which its creditors can enforce its obligations and other contractual

commitments. As the firm name is critical to partnerships in general, then it becomes more so in the case of a limited partnership,

where the named limited partners can fasten their limited liability within the four corners of the partnership business enterpriser

duly constituted within the person of the created limited partnership. Without the firm name, it is nearly impossible to determine

where those four corners lie, and may be a basis by which partnership creditors may be defrauded.

e. Contributions to the Limited Partnership

Article 1846 of the Civil Code expressly provides that the contributions of a limited partner may be cash or other property, but

not service. Contribution of service by a limited partner is not allowed because to allow otherwise would be to place a limited
partner into the management of the firm, and thereby constitute a breach of the fundamental reason for being accorded limited

liability privileges.

When the contribution of a limited partner is service or industry, then he not only becomes unlimitedly liable, but really becomes

a general partner.

The contribution of service by a limited partner should be distinguished from being allowed under Article 1855 of the Civil Code

to receive “compensation by way of income stipulated for in the certificate.” This may seem to be a contradictory feature under

the Law on Partnership; for to allow a limited partner to assume management or employment position in the partnership business

would lead a member of the dealing public to assume that he is a regular partner. In other words, such “employment

arrangements,” although allowed under the law, may prove costly to a limited partner. Actually “compensation by way of

income,” should be interpreted to mean that by the very position of being a limited partner, and not because of any service or

industry he will perform, he will be accorded under the terms of the Certificate of Limited Partnership, periodic payments

whether or not the firm is making profits. Nevertheless, in maintaining the preference of creditors to partnership assets, such

payments shall be considered as part of profit distribution.

The language of Article 1844(1)(f) which requires that the Certificate of Limited Partnership should indicate “The amount of

cash and a description of and the agreed value of the other property contributed by each limited partner,” has been taken to mean

that it is imperative that the contributions of limited partners must be given prior to or at the time of the execution of the

Certificate of Limited Partnership, and that the indication of the obligation to give the contribution is not sufficient, and would at

least constitute a false statement in the Certificate which would give rise to an obligation to pay the loss suffered by any person

who relied upon such statement as provided under Article 1847. (DE LEONS, at p. 308)

This position is not supported by the language of Article 1858 which makes the limited partner liable to the partnership for the

difference between his contribution “as having been made” and “[f]or any unpaid contribution which he agreed in the certificate

to make in the future at the time and on the conditions stated in the certificate.” The unmistakable language of Article 1858 show

that it is valid for the partners to agree under the terms of the Certificate of Limited Partnership, for the limited partner or

partners to pay their contributions at some future time.

Does the failure of a limited partner to give his contribution to the limited partnership at the time of the execution and

registration of the Certificate of Limited Partnership, when it is indicated therein that it has in fact been given, make him assume

the liability of a general partner? We do not think so, for the penalty for such false statement is a special one provided under

Article 1847 which does not convert him into a general partner, but merely makes him personally liable (beyond his promised

contribution), and only to a person who suffers loss by reliance on such false statement.

f. When Certificate Cancelled or Amended

(1) When Certificate Cancelled

Under Article 1864, the Certificate shall be cancelled when the partnership is dissolved or all limited partners cease to be such. In

these two cases, the partnership has ceased to be a limited partnership, and may proceed but only as a general partnership. In all

other cases covered below, the Certificate need only be amended.

Article 1865 of the Civil Code provides that the writing to cancel the Certificate shall be signed by all members in order to be

effective.

What happens in the two covered cases (dissolution and no more limited partner remaining), if the Certificate of Limited

Partnership is formally cancelled? In the case of dissolution, usually caused by the

(2) When Certificate Amended

Under Article 1864, the Certificate must be amended when:

(a) There is a change in the name of the partnership or in the amount or character of the contribution of any limited partner;
(b) A person is substituted as a limited partner;

(c) An additional limited partner is admitted;

(d) A person is admitted as a general partner;

(e) A general partner retires, dies, becomes insolvent or insane, or is sentenced to civil interdiction and the business is

continued;

(f) There is a change in the character of the business of the partnership;

(g) There is a false or erroneous statement in the certificate;

(h) There is a change in the time as stated in the certificate for the dissolution of the partnership or for the return of a

contribution;

(i) A time is fixed for the dissolution of the partnership, or

(j) the return of a contribution, no time having been specified in the certificate; or

(k) The members desire to make a change in any other statement in the certificate in order that it shall accurately represent the

agreement among them.

Except for the return of contributions of limited partners, the foregoing provisions must be interpreted to mean that if the

certificate is not amended to cover the instances enumerated, then such changes cannot be given legal affect as between and

among the partners and the public.

(3) Procedure to Amend Certificate

Article 1865 provides that the writing to amend a certificate shall:

(a) Conform to the requirements of Article 1844 as far as necessary to set forth clearly the change in the certificate which it is

desired to make; and

(b) Be signed and sworn to by all members, and an amendment substituting a limited partner or adding a limited or general

partner shall be signed also by the member to be substituted or added, and when a limited partner is to be substituted, the

amendment shall also be signed by the assigning limited partner.

The article also provides that when a person desiring the cancellation or amendment of a certificate may petition the courts to

order such cancellation or amendment whenever any person designated to execute the writing refuses to do so.

A certificate is amended or cancelled when there is filed for record with the SEC:

(a) A writing accomplished in accordance with the provisions for cancellation or amendment of the certificate;

(b) A certified copy of the order of court ordering such cancellation or amendment; and

(c) After the certificate is duly amended, the amended certificate shall thereafter be for all purposes the certificate provided in

the provisions of the Law on Partnership.

2. The General and Limited Partners

a. The General Partners

(1) Who Is a General Partner in a Limited Partnership?

When a limited partnership is duly constituted, then every partner who does not qualify as a limited partner by compliance with

the formal requirements mandated under Article 1844, is deemed to be a general partner and subject to the unlimited liability for

partnership obligations.

(2) Rights and Powers of General Partners in a Limited Partnership

Under Article 1850, a general partner shall have the rights and powers and be subject to all the restrictions and liabilities of

partner in a partnership without limited partners, except that such general partner or all of the general partners in a limited

partnership have no power nor authority to do any of the following acts, without the written consent or ratification of the specific

act by all the limited partners, thus:

(a) Do any act in contravention of the Certificate;

(b) Do any act which would make it impossible to carry on the ordinary business of the partnership;

(c) Confess a judgment against the partnership;

(d) Possess partnership property, or assign their rights in specific partnership property, for other than a partnership purpose;

(e) Admit a person as a general partner;

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

Article 1850 therefore enumerates six (6) instances when the acts of the general partners on behalf of the partnership would not

be valid without the written consent of, or ratification in each transaction by, all the limited partners. In other words, outside of

the enumerated instances under Article 1850, limited partners have no voice in partnership affairs.

Notice that the nature of the six (6) instances enumerated under Article 1850 would require unanimous written consent or

ratification by all the limited partners because they go into either of two matters:

(a) would contravene the contractual stipulations with the limited partners (“limited partners must be protected in their

contractual rights”);

(b) would affect the very commercial reason by which they agreed to become passive investors: undermines the partnership

business venture; or

(c) would undermine the fiduciary duties of the general partners to manage the partnership enterprise themselves for the limited

partners. Therefore, anything that affects the terms of the solemn contract, which the Certificate of Limited Partnership is, would

require limited partnership approval because it would amount to a novation of contract, and easily the following fall into that

category: do any act in contravention of the Certificate; admit a general partner, admit an additional limited partner. The rest of

the enumerated instances under Article 1850 affect substantially the partnership business enterprise, and therefore would require

unanimous consent or ratification by the limited partners.

Three things must be noted carefully from the provisions of Article 1850.

Firstly, although Article 1850 provides that the written consent or ratification of all the limited partners is required for the

admission of a new limited partner, “unless the right to do so is given in the certificate,” the same cannot be interpreted to mean

that when the right to do so is given in the certificate, the admission of a new limited partner no longer requires the consent of all

the limited partners. For even when such right is granted, the provisions of Article 1865 in laying down the procedure for the

amendment of the Certificate provides within its coverage the admission of a limited partner, which requires the written consent

of all the partners. Otherwise, if the Certificate is not amended to include formally the additional limited partner, he or she does

not become a limited partner, and would be exposed to the unlimited liability of a general partner.

The real advantage granted by having a specific provision in the Certificate allowing the admission or substitution of limited

partners is that the same can be done even against the wishes of the limited and general partners, and if their signature to the

amendment of the Certificate cannot be obtained, then there is basis to go to court to obtain an order granting such amendment of

the Certificate.

Secondly, although the act of the general partners in relation to any of the six instances covered by Article 1850 would be void

without the written consent or ratification of all the limited partners, the declaration refers to intra-partnership issues, because

insofar as third persons dealing in good faith with the partnership, the lack of consent or ratification by the limited partners,

cannot be a basis by which they cannot treat their contracts with the partnership as valid, binding and enforceable.

Thirdly, the enumeration of the instances under Article 1850 which would require written consent or ratification of all the limited

partnership to be valid, is apart from the enumerated “act of ownership” or “acts of strict dominion” under Article 1818 which

cannot be effected by “less than all partners,” which includes two of the instances enumerated in Article 1850, thus –

(a) Assign a partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership;
(b) Dispose of the goodwill of the business;

(c) Confess a judgment;

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

(e) Submit a partnership claim or liability to arbitration; and

(f) Renounce a claim of the partnership.

Only two (2) instances are common to both Articles 1818 and 1850, namely:

(a) Do any other act which would make it impossible to carry on the ordinary business of a partnership; and

(b) Confess a judgment against the partnership.

Do we take it to mean that in a limited partnership, but expressly enumerating the six (6) instances under Article 1850 of when

the written consent or ratification of all the limited partners is required, that all the other instances granted under Article 1818

would only need the consent of “all the general partners” and do not require the consent of the limited partners, to be valid and

binding? The difference in the matters pertaining to Article 1818 is that without the requisite unanimous consent, the acts done

would be void, not only against the partnership and the other partners who did not consent, but even as to third parties who dealt

on the other side of the transactions, because such acts or transactions are not deemed to be in the ordinary course of partnership

business, and third parties have no right to expect that the same is within the power of any one or more, but not all of the

partners, to enter into.

(3) Duties and Obligations of General Partner

Article 1850 provides that “A general partner shall . . . be subject to all the restrictions and liabilities of a partnership without

limited partners.” Must we therefore presume that every general partner in a partnership is saddled with the same obligations, and

has the same duties and fiduciary obligations, to the limited partnership and to all the partners, whether general or limited, as

those prevailing in a non-limited partnership arrangement?

Thus, a general partner who is a capitalist partner is saddled with the same fiduciary duty of loyalty, in that he cannot engage in

any business that conflicts with that of the limited partnership. (Article 1789, Civil Code of the Philippines) A general partner

who is such as an industrial partner is also saddled with the same fiduciary duty of loyalty, of being disqualified from engaging

in any business venture. (Article 1789, Civil Code of the Philippines)

While there is no doubt that the general partners, individually and collectively, owe fiduciary duties to the limited partners in a

partnership setting, is the legal basis of such fiduciary relationship that of principal and agency? There seems to be little doubt

that the limited partners do not have any rights of management, and consequently do not act as agents to one another, of the

partnership itself, and of the general partners. On the other hand, although the general partners are mutual agents to one another,

as well as being agents of the partnership, can we consider them agents of the limited partners? The author’s position on this

matter is that there can be no legal way by which the general partners can be treated as agents of the limited partnership, for that

legal relationship would violate the rule under Article 1848 that limited partners cannot involve themselves in the management of

the partnership affairs, since the act of the agents (the general partners) would be equivalent to the act of the principal (the

limited partners).

It is our proposition that the fiduciary relationship that arises between the limited partners on one hand, and the general partner or

partners on the other hand, rather than being borne out by an agency relationship, actually arises more from that of business trust:

that the general partners become in effect the trustee for the limited partners, who assume the role of being beneficiaries to the

corpus, which can be considered to be the properties and the business enterprise of the partnership itself. Not only does the

trustee-beneficiary not only support the existence of a fiduciary relationship between the general partners and the limited

partners, but validates the structure of management and limited liability existing in the limited partnership setting: that as

trustees, the management over the corpus (the properties and business enterprise of the partnership) are placed in the hands of the
general partners, with an obligation to run the partnership affairs to serve the beneficial interests of the limited partners (to

receive their share in the profits as stipulated under the Certificate of Limited Partnership), and thereby make the limited

partners, as mere passive beneficiaries in a trust arrangement, thereby not personally liable for the resulting debts and liabilities

of the partnership venture.

The foregoing thesis explains the reason why, being merely a beneficiary in the partnership trust, limited partners do not thereby

owe any fiduciary obligations to one another, must less to the general partners, and thereby can engaged in a business that may

even compete with that of the limited partnership’s business. Likewise, the thesis would explain why in areas covered under

Article 1818 which do not fall within the enumerations under Article 1850, which are acts of ownership, it may be presumed that

in a limited partnership setting, the requirement that they may be done validly only with the agreement of “all the partners”

would only cover the general partners since they are deemed to be endowed with the power to do acts of ownership as trustees

having naked title to the partnership assets and business enterprise.

b. The Limited Partner

(1) Who is a Limited Partner?

Under Article 1844, no member of a partnership shall be considered a limited partner, unless he is so designated in the Certificate

of Limited Partnership duly filed with the SEC, and under Article 1846, his surname cannot be part of the firm name, and under

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

(2) Erroneous But in Good Faith Limited Partner

Under Article 1852, a person who has contributed to the capital of a business conducted by a person or partnership erroneously

believing that he has become a limited partner in a limited partnership, does not by his exercise of the rights of a limited partner:

(a) become a general partner with the person or in the partnership carrying on the business; nor

(b) be bound by the obligations of such person or partnership;

provided that on ascertaining the mistake he promptly renounces his interest in the profits of the business or other compensation

by way of income.

The situations contemplated under Article 1852 must cover a situation when although there exist a partnership business, it is

conducted not within the medium of a limited partner. Therefore, if one becomes a member of the partnership with the intention

that he becomes a limited partner, and sticks only to exercising the rights of a limited partner, he does not incur liability of a

general partner even as to the partnership creditors, provided he undertakes the “acts of good faith” mandated by law. It is only

when he takes part in the control of the business (as provided in Article 1848), that he then becomes liable as a general partner,

or when having realized the mistake in affiliating with the partnership he does not renounce his interests in the partnership

profits, and severe his relationship with the partnership venture.

Why is it an essential feature of the “acts of good faith” of such limited partner that he must renounce “his interest in the profits

of the business or other compensation by way of income”? The answer to this question lies in the fact that the contract of limited

partnership is considered to be a solemn contract, and thereby void if the solemnities mandated by law have not been complied.

Therefore, in a situation where the party acts in good faith believing himself to be a limited partner, when he learns that he has

not been duly instituted as such, then it can be considered to be a situation where there is a void contract resulting, and if he is

not to be bound by the unlimited liability obligations of an ordinary partner in general, then he must not also partake of any

benefits or advantage arising from the purported contractual relationship.

(3) When Limited and General Partner at the Same Time

Article 1853 provides that a person may be a general partner and a limited partner in the same partnership at the same time,

provided that this fact shall be stated in the certificate of limited partnership. Why would a general partner want to be a limited

partner at the same time, and vice versa? It pertains to availing of the rights of a limited partner with respect to his contribution as
such.

Under Article 1853, even when a limited partner is at the same time a general partner, nonetheless “in respect to his contribution,

he shall have the rights against the other members which he would have had if he were not also a general partner.” What would

those rights be peculiar to him as a limited partner, which are not available to him as a general partner?

Certainly it cannot be “limited liability” rights, for being a general partner at the same time, he cannot have any claim for limited

liability against partnership debts and claims. The only viable rights of a limited partner which are not undermined by the fact

that he is also a general partner at the same time, may pertain only to the priority right to the return of his contributions, share in

the profits as it pertains to him as a limited partner.

c. The Rights and Powers of the Limited Partner

The provisions of the Civil Code provide the following rights to every limited partner in a duly constituted limited partnership:

(a) Right to limited liability (Arts. 1843 and 1848);

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

(c) Right to receive his share in the profits and compensation by way of income (Art. 1851);

(d) Right to assign his equity interest (Art. 1851);

(e) Right to have the partnership books kept at the principal place of business of the partnership, and at a reasonable hour to

inspect and copy any of them (Art. 1851[1]);

(f) Right to have on demand true and full information of all things affecting the partnership, and a formal account of partnership

affairs whenever circumstances render it just and reasonable (Art. 1851[2]); and

(g) Right to have the dissolution and winding-up by decree of court (Arts. 1851[3] and 1857).

Perhaps the best way to describe the rights of limited partners, the nature and extent, even to those granted expressly by law, is

the way Bautista had summarized the ruling in the American case of Millard v. Newmark & Co.,266 N.Y.S.2d 254 (1966), thus:

“In broad terms, it may be stated that a limited partner has such rights and only such rights as the law and his contract afford.”

(BAUTISTA, at p. 425)

(1) Right to Limited Liability

The essence of the doctrine of “limited liability” is that limited partners who are entitled thereto “shall not be bound by the

obligations of the partnership” (Art. 1843) beyond what they contributed or legally bound to contribute to the partnership’s

common fund.

The essence of the medium of limited partnership is to allow a group of investors-the limited partners-to be able to participate in

the profits and losses of the partnership venture without having to be liable to partnership creditors for the separate properties, or

more properly speaking, beyond the value of their contributions in the partnership venture. Thus, Article 1843, as it defines a

limited partnership provides that [t]he limited partners as such shall not be bound by the obligations of the partnership.

The grant of the limited liability status to limited partners comes at a price, in that: (a) they cannot have their surnames form part

of the partnership name (Art. 1846); (b) they cannot participate in the control of the partnership business (Art. 1848); and (c)

therefore they are prohibited from contributing service or industry into the partnership (Art. 1845). If a limited partner violates

any of these restrictions, he becomes unlimitedly liable as in the case of general partners.

It should be noted that the feature of limited liability is poised primarily in relationship to the creditors of the partnership venture

in that they have a right to expect that all partners are unlimited liable for partnership debts, unless they are so indicated in the

Certificate as being limited partners who assume the role of mere passive investors; and that partnership creditors have a right to

expect that a partner who participates in partnership affair is a general partner, and cannot claim the rights to limited liability.

Since it is a limitation on the cause of action that partnership creditors would ordinarily have against the partners, then matters

relating to the application or non-application of the principle of “limited liability” can be raised only by partnership creditors. It
is a matter that is not within the right of partners to raise.

The operative norm of this doctrine is best exemplified in two American decisions: limited partners by definition of law and by

the terms of the certificate of limited partnership have no right to participate or interfere in the affairs of the partnership business

enterprise, and if they do so,Donroy, Ltd. v. United States, 196 F.Supp. 54, 57 (1961), holds that general partners can seek

dissolution of the partnership (since the actuations of the limited partners would tantanmount to a breach of the contract of

partnership); but although the partnership creditors can now hold the limited partners who interefere in partnership affairs as

unlimited liable, nontheless, Weil v. Diversified Properties, 319 Supp. 778 (1970), holds that the general partners cannot, on

account of such intereference, seek to enlarge the liability of the limited partners by having ghem declared as general partners

with obligations to account.

(2) Right to Return of Contributions

Article 1844(1)(h) provides that one of the provisions that should be found in the Certificate of Limited Partnership is “[t]he

time, if agreed upon, when the contribution of each limited partner is to be returned.” Does that mean that when there is no

agreement or provision in the Certificate on this matter, limited partners, like general partners, do not have a right to demand

return of contributions during the life of the partnership? The answer is in the negative, since the nexus of a limited partner’s

relationship in the partnership arrangement is his contribution and the profits that he is entitled by reason of such contribution,

then the ability of the limited partner, as really a mere passive investor, must commercially be linked to his ability to be able to

liquidate his investment within a reasonable time that cannot be linked to the entire “going concern” life of the partnership

business venture.

Article 1856 provides that where there are several limited partners the entire members may agree that one or more of the limited

partners shall have a priority over other limited partners as to the return of their contributions, as to their compensation by way of

income, or as to any other matter, but that “[i]f such an agreement is made it shall be stated in the certificate of limited

partnership, and in the absence of such a statement all the limited partners shall stand upon equal footing.”

It seems clear that priority in return of contributions or share in income to the limited partners must not only be agreed upon by

all the partners, but must find itself expressed in the Certificate of Limited Partnership, either as originally indicated or by way of

amendment thereto. In the absence of such provision in the Certificate, there is no priority between and among the limited

partners, and they shall be treated to be at equal footing. Return of contributions of the limited partners, therefore, is not

necessarily associated with the dissolution of the partnership.

Under Article 1857, a limited partner shall not receive from a general partner or out of partnership property any part of his

contribution until:

(a) All liabilities of the partnership, except liabilities to general partners and to limited partners on account of their contributions,

have been paid, or there remains property of the partnership sufficient to pay them;

(b) The consent of all members is had, unless the return of the contribution may be rightfully demanded under the law;

(c) The certificate is cancelled or so amended as to set forth the withdrawal or reduction.

On the other hand, when all liabilities to third party creditors have been paid or there will remain enough assets to cover them, a

limited partner may rightfully demand the return of his contribution:

(a) On the dissolution of the partnership; or

(b) When the date specified in the certificate for its return has arrived; or

(c) After he has given six months notice in writing to all other members, if no time is specified in the certificate, either for the

return of the contribution or for the dissolution of the partnership.

Article 1857 also provides that “[i]n the absence of any statement in the certificate to the contrary or the consent of all members,

a limited partner, irrespective of the nature of his contribution, has only the right to demand and receive cash in return for his
contributions.”

When the partnership creditors’ preference is respected (either because they will first be all paid, or assets would be provided for

their settlement), do limited partners have the right to demand for the return of their contributions even when it is only in cash,

even when no such right is provided for in the Certificate of Limited Partnership or outside of dissolution scenario? The answers

seems to be in the affirmative because of the separate ground for return provided under Article 1857 “[a]fter he has given six

months notice in writing to all other members, if no time is specified in the certificate, . . . for the return of the contribution,” and

this may seem even when the demand for return does not obtain the unanimous vote of the other partners.

It is true that one of the conditions for the valid return of a limited partner’s contribution is that there has to be the proper

amendment of the Certificate of Limited Partnership, which under the specific provisions governing the same can only be done

with the written consent of all the partners. Nonetheless, the ackwnowledgment of the right of limited partners to have the return

of their contribution upon compliance with the 6-month notice rule, would mean that in the event the other partners oppose such

a return and they refuse to sign on the amendment to the Certificate of Limited Partnership, nonetheless, it would authorize the

withdrawing limited partner to seek court order for the proper amendment thereof.

What needs to be emphasized is that the law recognized that limited partners are mere passive investors in the partnership

venture, and in the end they must have a way of offing-out of the venture either by the ability to assign their equity interests or to

demand properly the return thereof.

(3) Right to Profit or Compensation by Way of Income

Under Article 1856, a limited partner may receive from the partner the share of the profits or the compensation by way of income

stipulated for in the certificate, provided that after such payment, whether from the partner property or property of a general

partner, the partnership assets are in excess of all liabilities of the partnership, except liabilities to limited partners on account of

their contributions and to general partners. Even in a limited partnership, the law recognizes the priority standing of partnership

creditors to those of the limited and general partners in terms of payment from the partnership property.

It must be understood that the meaning of “compensation by way of income,” should not mean that the limited partner is entitlted

to be employed or to participate in the management of or in the operations of the partnership, for which he can be paid

“compensation.” For even when a limited partner is hired as an employee of the firm, this may be treated as participating in the

partnership affairs as to make them unlimitedly liable for partnership debts and obligations. The term “compensation by way of

income,” means any arrangement by which the distribution of profits is termed “compensation” or “salary” done on a regular or

periodic basis as may be agreed upon in the Certificate of Limited Partnership, and paid to the partner by reason of his simply

being a partner, and not by virtue of the services or industry he renders to the firm.

(4) Right to Assign Limited Partners Interest

Under Article 1859, a limited partner’s interest in the limited partnership is assignable, and like in an ordinary partnership, the

assignee steps into the shoes of the assigning limited partner only when admitted by the other members: “A substituted limited

partner is a person admitted to all the rights of a limited partner who had died or has assigned his interest in a partnership.” The

article also provides that “An assignee shall have the right to become a substituted limited partner if all the members consent

thereto or if the assignor, being thereunto empowered by the certificate, gives the assignee that right.” But in the end Article

1859 provides expressly that there is a need to amend the certificate, thus: “An assignee becomes a substituted limited partner

when the certificate is appropriately amended.”

Article 1859 provides that the substituted limited partner has all the rights and powers, and is subject to all the restrictions and

liabilities of his assignor, except those liabilities which he was ignorant of at the time he became a limited partner and which

could not be ascertained from the certificate.

The article also provides that the substitution of the assignee as a limited partner does not release the assignor from liability to
the partnership for false statement in the certificate under Article 1847, and for his contributions liabilities under Article 1858.

Finally, Article 1859 provides that an assignee who does not become a substituted limited partner, has no right to require any

information or account of the partnership transactions or to inspect the partnership books; he is only entitled to receive the share

of the profits or other compensation by way of income, or the return of his contributions, to which his assignor would otherwise

be entitled.

On the other hand, under Article 1849, after the formation of a limited partnership, additional limited partners may be admitted

only upon filing an amendment to the original certificate in accordance with the procedure of amendments provided under

Article 1865. Since Article 1849 does not provide a particular procedure or voting threshold by which additional limited partners

may be admitted into the partnership, then the requirements would have to track the procedure mandated under Article 1865 on

the amendment of the Certificate of Limited Partnership, which provides that the amending certificate “Be signed and sworn to

by all members, and an amendment substituting a limited partner or adding a limited or general partner shall be signed also by

the member to be substituted or added, and when a limited partner is to be substituted, the amendment shall also be signed by the

assigning limited partner.” If existing limited partners are more of passive investors in the partnership venture, why would their

consent be essential in a decision by the general partners to admit additional limited partners, whenever that power is not

expressly provided for in the Certificate of Limited Partnership?

The first reason is that the institution of any limited partner (whether original or additional) requires a formal indication in the

Certificate, otherwise such partners are not deemed to be limited partners, and they will be treated as general partners.

Consequently, the admission of a new limited partner is really equivalent to an amendment or novation of the original or existing

limited partnership agreement, which under the principle of mutuality in Contract Law, cannot be done without the consent of all

contracting parties, including the limited partners. This point emphasizes the legal truism that limited partners must be treated in

two levels of legal relationship in the partnership arrangement: as passive investors in the partnership venture, and as parties to

the contract of limited partnership.

Secondly, the admission of a new limited partner into the partnership venture must necessarily “eat up” on the proportional share

of the existing limited partners in the partnership profits, and therefore like the principle governing pre-emptive rights of

stockholders under Corporate Law, limited partners must give their consent to the admission of a new limited partner which

would have the effect of diluting their proportional right to the partnership profits.

Finally, the admission of a new limited partner into the partnership also dilutes the proportional share that each of the existing

limited partners are to have in the distribution of the net assets of the partnership upon dissolution and winding-up.

If the equity holdings of limited partners in the partnership are impersonal in nature, because they do not entitle the limited

partners to participate in the management of the partnership affairs, much less to act as agents of one another, the partnership or

the general partners, then it becomes a little difficult understanding why the substitution by a limited partner of another person in

his place cannot happen as a matter of commercial right, without having to obtain the consent of all the other partners. Perhaps

the free-transferability of the equity units of limited partners should be instituted as a better feature of the institution of limited

partners in our jurisdiction.

We can understand the rationale for the need to formally amend the Certificate of Limited Partnership whenever a limited partner

is substituted by another person as compliance with the solemn nature of the limited partners’ position vis-a-vis to formally bind

the public to the fact that they are only limitedly liable. However, the same solemnity and notice to the public can be achieved

simply by registering with the SEC the sale or assignment by a limited partner of his equity to another person. Requiring the

formal amendment of the Certificate of Limited Partnership unnecessary involves the participation of all the other partners (by

their written consent or ratification), which makes the process entirely cumbersome and needlessly costly, when such consent can

be presumed to have been part of the original perfection of the contract of partnership among the parties, and, more importantly,
the process of sale and substitution cannot amount to a diminution or prejudice of the rights of any of the other partners, whether

general or limited, since limited partners, whoever they may be, practically have no right or power except as it pertains to their

proprietary interest in the partnership. In short, the entire rationale of delectus personae is completely irrelevant to limited

partners among themselves, and even in their contractual relationship with the general partners.

(5) Heirs of Deceased General Partner Succeed Generally as Limited Partners

Although there is no direct statutory provision that governs this particular situation, the position has been taken that when the

heir of the general partner succeeds to his equity in the limited partnership pursuant to an express provision in the Certificate of

Limited Partnership, the presumption is that he succeeds only to his investments, and thereby becomes only a limited

partner, unless the succeeding heir expressly manifest that he is succeeding as a general partner, (DE LEONS, at pp. 298 and

300-301) “because he would normally prefer to avoid any liability in excess of the value of the estate inherited so as not to

jeopardize his personal assets.” (DE LEONS, at p. 319) The decision in Goquiolay v. Sycip, 9 SCRA 663 (1963), seems to

support such position, thus –

Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say “necessarily”) becomes a limited partner

for his own protection, because he would normally prefer to avoid any liability in excess of the value of the estate inherited so as

not to jeopardize hid personal assets. But this statutory limitation of responsibility being designed to protect the heir, the latter

may disregard it and instead elect to become a collective or general partner, with all the rights and privileges of one, and

answering for the debts of the firm not only with the inheritance but also with the heir’s personal fortune. This choice pertains

exclusively to the heir, and does not require the assent of the surviving partner. (Ibid)

We do not agree with such position.

The institution of limited partnership is solemn or formal under our Partnership Law, and no person becomes a limited partner,

whether by the power of assignment provided under the Certificate, or by the power of substitution, unless the Certificate is

formally amended to so name the assignee or the substitute, as a limited partnership.

Consequently, in a general partnership, when the articles of partnership provide expressly that a deceased partner shall be

substituted by his heirs, the heirs do not become partners, unless formally accepted into the partnership arrangement under the

doctrine of privity or relativity applicable to partnerships as embodying contractual relationship. Only when the succeeding heirs

confirms that he takes more than just the equity rights of the deceased partner and actually steps into the shoes of the deceased

partner thus he even become a partner, and in that case a general partner. In order for him to come in as a limited partnership,

there is a need to formally adopt a Certificate of Limited Partnership as provided by Article 1844.

On the other hand, in a limited partnership scenario, where the Certificate of Limited Partnership provides for substitution of a

general partner by his heir in the event of death, it is hard to see how the automatic application of such provision would thereby

make the heir a partner at all, whether limited or general partner. Since partnership relationship is essentially contractual in

nature where consent is the essence to make one a partner, then an heir succeeds only to the equity rights of the deceased general

partner and unless he formally consents to become a partner, then he does not become one, whether general or limited partner. In

addition, if such consent is obtained, whether expressly or impliedly, from such heir, in the absence of expressly choosing to

become a limited partner, the general rule should be that he becomes a general partner by his acceptance into the partnership. To

become a limited partner, by succeeding a general partner, requires not only indication that one chooses to join only as a limited

partner, but actually requires compliance with the formalities covering the amendment of the Certificate of Limited Partnership,

without which one becomes a general partner subject to unlimited liability.

This position is bolstered by Article 1859 which provides that even when there is a specific provision in the Certificate allowing

a limited partner to substitute another person in his stead, such substitution does not become valid (i.e., the substituted partner

does not become a limited partner), unless there is a formal amendment to the Certificate. When such solemnities are required
when a limited partner is substituted in his stead, it is hard to see why when a general partner dies and is substituted by an heir;

the ipso jure effect is for the substitute to be a limited partner.

(6) Limited Right as to Partnership Affairs

Article 1851 provides that a limited partner shall have the same rights as a general partner only to:

(a) have the partnership books kept at the principal place of business; and to inspect and copy them at reasonable hours;

(b) have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs

whenever circumstances render it just and reasonable;

Under Article 1854, a limited partner may loan money to, and transact other business with, the partnership without adverse

consequences to his standing as a limited partner and his right to demand only limited liability exposure. When he is not also a

general partner, a limited partner may receive on account of resulting claims against the partnership with general creditors a pro

rata share of the assets. Nonetheless, in all these cases, a limited partner shall not:

(a) receive or hold as collateral security any partnership property; or

(b) receive from a general partner or the partnership any payment, conveyance, or release from liability, if at the time the assets

of the partnership are not sufficient to discharge partnership liabilities to persons as general or limited partners.

The violation of any of the immediately foregoing prohibitions shall constitute fraud on the creditors of the partnership.

(7) Right to Dissolve the Limited Partnership

Under Article 1857, a limited partner may have the partnership dissolved and its affairs wound up when:

(a) he rightfully but unsuccessfully demands the return of his contribution; or

(b) The other liabilities of the partnership have not been paid, or the partnership property is insufficient for their payment, and

the limited partner would otherwise be entitled to the return of his contributions.

c. Obligations of Limited Partners

(1) On Original Contributions to the Partnership

Aside from the prohibition against giving service as contribution to the limited partnership (Art. 1845), a limited partner is liable

to the partnership for the difference between his contribution as having been made and for any unpaid contribution which he

agreed in the certificate to make in the future at the time and on the conditions stated therein (Art. 1858).

(2) On Additional Contributions

Under Article 1844(1)(g), a limited partner may be obliged during the life of the partnership to give additional contribution if

such obligation is provided for in the Certificate of Limited Partnership. The default rule therefore is that in the absence of a

provision in the Certificate, limited partners cannot be compelled to give additional contribution to the partnership.

Do the provisions of Article 1791, which obliges a partner to sell his interest to the other partners in the event such selling

partner refuses to contribute additional share to the capital to save the partnership from the imminent loss of its business? The

author’s position is that the provisions of Article 1791 cannot apply to limited partners for their suppletory application to limited

partners would ran contrary the basic principle that limited partners are assured, so long as their remain within their passive role

of investors, be made to assume greater risk or additional loss arising from the operations of the partnership business, beyond

what they have contractually committed to contribute.

(3) On Returned Contributions

Article 1858 provides that “[w]hen a contributor has rightfully received the return in whole or in part of the capital of his

contribution; he is nevertheless liable to the partnership for any sum, not in excess of such return with interest, necessary to

discharge its liabilities to all creditors who extended credit or whose claims arose before such return.”

(4) Liable as Trustee of the Partnership

Under Article 1858, aside from the fact that a limited partner is liable to the partnership for his unpaid contributions when it has
become due under the terms of the certificate, he would become liable as a trustee for the partnership for:

(a) specific property stated in the certificate as contributed by him, which was not been delivered or wrongfully returned to him;

(b) money or other property wrongfully paid or conveyed to him on account of his contribution.

The foregoing liabilities of a limited partner can be waived or compromised only by the consent of all members, and provided it

shall not affect the right of a creditor of the partnership who extended credit or whose claim arose after the filing and before a

cancellation or amendment of the certificate, to enforce such liabilities.

d. Fiduciary Duties of Limited Partners

Are limited partners, being merely passive investors into the partnership business enterprise, bound by any fiduciary obligations

and duties to the limited partnership and to the other partners? There is no doubt that general partners owe fiduciary duties not

only to one another under the principle of mutual agency, and to the limited partners on the consideration that general partners

act as agents (i.e., trustees) for the limited partners. On the other hand, by definition, limited partners do not, and cannot

participate in the management of the partnership affairs, and therefore do not act as agents for one another, for the general

partners, nor for the limited partnership itself. Not assuming the position of agents in the partnership arrangement, limited

partners are not bound by fiduciary obligations.

Therefore, it has been posited by writers, such as the De Leons, that while a capitalist general partner cannot engage in

competitive business with the partnership business, a limited partner is not prohibited from engaging in such competitive

business, thus: “In the absence of statutory restrictions, a limited partnership may carry on any business which could be carried

on by a general partnership.” (DE LEONS, at p. 301).

The SEC has ruled that limited partners that are foreign corporations are not deemed to be doing business in the Philippines (SEC

Opinion, 06 August 1998), which supports the position that limited partners are not deemed to participate in management of the

business enterprise, nor do they constitute mutual agents to one another or are they deemed agents representing the limited

partnership.

e. General Lack Standing for Partnership Suits

Under Article 1866, a contributor, unless he is a general partner (which means that “contributor” covers a limited partner), is not

a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or

liability to the partnership.

3. Dissolution and Winding up of Limited Partnership

a. Causes of Dissolution

Under Article 1860, the retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership,

but not that in the case of a limited partner. But even in those cases the partnership is not dissolved if the business is continued by

the remaining general partners:

(a) under a right so to do stated in the certificate; or

(b) with the consent of all members.

Under Article 1861, in case of death of a limited partner, his executor or administrator shall have all the rights of a limited

partner for the purpose of settling his estate, and such power as the deceased had to constitute his assignee a substituted limited

partner. In turn, the estate of the deceased limited partner shall be liable for all his liabilities as a limited partner.

Under Article 1862, on due application by any creditor of a limited partner, and without prejudice to other existing remedies, the

courts may charge the interest of the indebted limited partner with payment of the unsatisfied amount of such claim, and may

appoint a receiver, and make all other orders, directions, and inquiries which the circumstances of the case may require. Such

interest may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property.

Why is this so?

It should also be noted that upon the declaration of insanity of the general partner, it would constitute a cause for the dissolution

of the limited partnership. This is in contrast to the rule for non-limited partnerships, particular under Article 1831 which

provides that the insanity of a partner becomes only a basis by which to go to court for a judicial declaration of dissolution of the

partnership. Why is the rule different when it comes to a limited partnership?

b. Settling of Accounts

Under Article 1863, in settling accounts after dissolution, the liabilities of the partnership shall be entitled to payment in the

following order:

(a) Those to creditors, in the order of priority as provided by law, except those to limited partners on account of their

contributions, and to general partners;

(b) Those to limited partners in respect to their share of the profits and other compensation by way of income on their

contributions;

(c) Those to limited partners in respect to the capital of their contributions;

(d) Those to general partners other than for capital and profits;

(e) Those to general partners in respect to profits;

(f) Those to general partners in respect to capital.

Article 1863 specifically provides that “[s]ubject to any statement in the certificate or to subsequent agreement, limited partners

share in the partnership assets in respect to their claims for capital, and in respect to their claims for profits or for compensation

by way of income on their contribution respectively, in proportion to the respective amounts of such claims.

Note should be taken that the order of priority in the distribution of the assets of the limited partnership in the event of

dissolution and winding-up provides priority to the claims of partners “as to their share in the profits and compensation by way

of income,” over their claims “in respect to capital.” This actually is the reverse order in the general rules on distribution of

partnership assets upon dissolution under Article 1839(2), which in its ranking of the liabilities of the partnership in order of

payment, give preference ranking to “(c) Those owning to partners in respect of capital,” than to “(d) Those owing to partners in

respect of profits.” Why the difference in preference when it comes to dissolution of a limited partnership?

The difference in liquidation priority among partners in a limited partnership shows that the primary reason for the institution of

a class of limited partners is that of “investment”, rather than management, of the partnership business enterprise. Whereas, the

ability to participate in profits is also a main focus in non-limited partnership set-up, nonetheless, the partners come together as a

group of contractually bound “sole proprietors,” where the right to manage and participate in the affairs of the partnership

business enterprise is the main focus. In a limited partnership scenario, in order to be entitled to the feature of “limited liability”,

the limited partners do not participate in the management of the affairs of the business enterprise; they come in only as passive

investors; and therefore, the main nexus of the relationship between the general partners on one hand, and the limited partners on

the other hand, mainly focuses on the profits that would be earned from the capital contribution of the limited partners.

The return of capital itself is not the priority, for indeed under the limited liability rule, the capital contribution is intended to be

the main source of claim of partnership creditors as against the limited partners. That is perhaps the main reason why upon

dissolution and winding-up of a limited partnership, after having paid all claims of partnership creditors, the priority for the

remaining assets of the limited partnership would have to go to “[t]hose to limited partners in respect to their share of the profits

and other compensation by way of income on their contributions,” before“[t]hose to limited partners in respect to the capital of

their contributions.”

JOINT VENTURES
________________________________________________
1. Introduction
It is fitting that a course in Philippine Partnership Law should end with the section on joint ventures, for it is in this field where
Supreme Court decisions have become truly transcendent when it comes to protection of national interests or upholding the
sanctity of contractual commitments, and consequently where the essence of partnership principles has become more lucent.
Discussions on joint ventures first appeared as a sort-of esoteric medium of doing business in Philippine jurisprudence, with an
original impression that they were a commercial association different from partnerships. The tendency has therefore been to
ascribe to joint venture arrangements certain legal allowances that would never been accepted in the case of “strict” partnership
arrangements. This “partiality” for joint venture arrangements, which still has remnants in sprinkling statutory provisions, may
be attributed to the perception that the joint venture is a more project-oriented medium when compared to the partnership which
tends to be branded with the attributes of primarily being contractual relationship bounded by the doctrine of delectus personae,
and thereby being more “party-oriented”, “person-oriented” or even “personality-oriented.”
Although it may not be readily apparent, but joint venture arrangements have become fairly common medium for doing business
or undertaking projects in the Philippines, both covering local transactions, when it comes to large infra-structure undertakings
involving the resources of big corporations; or structuring partnership arrangements between foreign investors and their local
partners in the pursuit of local projects in the Philippines.
The Philippine Government encourages the pursuit of construction projects and petroleum, coal, geothermal, and other energy
operations under joint venture arrangements. Under the National Internal Revenue Code of 1997 (NIRC), joint ventures formed
for the purpose of engaging in petroleum, coal, geothermal, and other energy operations under an operating or service contract
with the Government, or those formed for the purpose of undertaking construction projects, are exempt from corporate income
tax.
Joint venture arrangements have particularly been the more popular medium when foreign participation is involved in local
projects, since the contractual nature of the arrangement allows the parties flexibility in adopting special rules and procedures
covering their situations, which would otherwise not be applicable in a purely corporate vehicle arrangement because of the
restrictive rules of the Corporation Code and jurisprudence on Philippine Corporate Law.
2. Nature of Joint Venture in Philippine Setting
a. Joint Venture Arrangements Primarily Governed by Partnership Law Principles
There was a time when joint ventures were treated separately from partnerships. Take the 1954 decision of Tuason v. Bolaños, 95
Phil. 106 (1954), where the Supreme Court upheld as applicable the old adage in American Corporate Law that “though a
corporation has no power to enter into a partnership, it may nevertheless enter into a joint venture with another where the nature
of that venture is in line with the business authorized by its charter.” (at p. 109, quoting from Wyoming-Indiana Oil Gas Co., v.
Weston, 80 A.L.R., 1043, citing 2 Fletcher Cyc. of Corp., 1082).Tuason does not explain why there was a difference in treatment
of corporate involvement in partnerships as compared to that when it come to joint ventures.
If we pursue the position that joint ventures must be treated differently from partnerships then it can be said that apart from
specific reference in the National Internal Revenue Code, there is no statutory provision that formally governs directly joint
ventures, although they have been recognized in jurisprudence and commonplace in commercial ventures. Consequently, joint
venture agreements fall generally within the realm of Contract Law.
Since the prevailing contract rule in the Philippines is that parties to a contract may establish such stipulations, clauses, terms and
conditions, as they may deem convenient, provided that they are not contrary to laws, morals, good customs, public order, or
public policy (Article 1306, New Civil Code), no model joint venture agreements have been published by the Securities and
Exchange Commission (SEC), Board of Investments (BOI), nor any other authority.
b. Joint Ventures Are a Species of Partnerships
The treatment of joint ventures today has come full circle, in that the prevailing school of thought in the Philippines is that joint
ventures are a species of the partnerships falling within the definition under Article 1767 of the New Civil Code, which provides
that when “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,” then a partnership is created.
In Kilosbayan, Inc. v. Guingona, 232 SCRA 110 (1994), the Court adopted Black’s definition of a joint venture, thus:
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 connected 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. (At pp. 143-44, citing Black’s Law Dictionary. Reiterated in Information Technology
Foundation of the Philippines v. Commission on Elections, 419 SCRA 141 [2004])
The foregoing definition of a joint venture essentially falls within the statutory definition of what constitutes a partnership. Other
reasons as to why a joint venture must be considered a species of partnerships is that the Law on Partnerships 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.” (Article 1771, Civil Code). That means that no special form, even one seeking to
establish a joint venture arrangement, is necessary to give rise to a partnership.
Following-up on the Kilosbayan’s definition of a joint venture, the Court inInformation Technology Foundation of the
Philippines v. Commission of Elections, 419 SCRA 141 (2004), considered a “consortium” to be an association of corporations
bound in a joint venture arrangement, and held that the involvement of several companies in a large project would not constitute
them into a consortium nor a joint venture when nothing shows a community of interest, a sharing of risks, profits and losses, or
even a representation by them that they have come together in common venture. The Court found in that case that apart from a
short and unsupported statement by one of the companies that it was representing a consortium, no evidence was adduced
covering a joint venture agreement, or authority given by the other companies authorizing the declaring company that to
represent or bind them in a collective basis.
The position that a joint venture is a species of partnerships has been upheld by the Court in Aurbach v. Sanitary Wares
Manufacturing Corp., 180 SCRA 130 (1989), where it held that:
. . . The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general
business with some degree of continuity, while the joint venture is formed for the execution of a single transaction, and is thus of
a temporary nature. . . This observation is not entirely accurate in this jurisdiction, since under the Civil Code, a partnership may
be particular or universal, and a particular partnership may have for its object a specific undertaking. (Art. 1783, Civil Code) It
would seem therefore that under Philippine law, a joint venture is a form of partnership and should thus be governed by the laws
of partnership. (Ibid; emphasis supplied)
Without qualms or equivocation, the Court in JG Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10 (2003), treated a joint
venture arrangement as a partnership.
In Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), the Court observed that a joint venture is akin to a
particular partnership. InPrimelink Properties and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006), the Court ruled –
“When the parties have entered into a Joint Venture Agreement, they have entered into a joint venture arrangement which is a
form of partnership, and as such is to be governed by the laws on partnership.” (at p. 467)
With joint venture arrangements being clearly classified as a form of particular partnership, there is no doubt that the incidents
imposed by the Law on Partnerships on every kind of partnership must befall every joint venture arrangement. Only recently,
in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA 428 (2008), although the corporate parties executed the
instrument as a “Power of Attorney” and referred to themselves as “principal” and “manager,” the Court held that when the
essential elements of a partnership are present, then it would be a joint venture arrangement, governed by the Law on
Partnership, thus -
An examination of the “Power of Attorney” reveals that a partnership or joint venture was indeed intended by the parties. Under
a 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. While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin
to a particular partnership relationship: x x x Perusal of the agreement denominated as the ‘Power of Attorney’ indicates that the
parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the
profits of the business as shown by a 50-50 sharing in the income of the mine. (at pp. 438-439)
(1) Partnership Characteristics of Joint Venture Arrangements
Since a joint venture is a species of partnerships, it would have the following characteristics of a partnership, thus:
(a) It constitutes a juridical personality separate and distinct from that of each of the co-venturers. Article 1768, of the New Civil
Code provides specifically that the partnership has a juridical personality seprate and distinct from that of each of the partners
even in case of failure to comply with the registration requirements of law. Therefore, a joint venture as a firm can enter into
contracts and own properties in the firm’s name; (cf Art. 1774, Civil Code)
(b) Each of the co-venturers would be liable with their private property to the creditors of the joint venture beyond their
contributions to the joint venture; (Arts. 1816, 1817, 1824 to 1826, and 1839, Civil Code)
(c) Even if a co-venturer transfers his interest to another, the transferee does not become a co-venturer to the others in the joint
venture unless all the other co-venturers consent. This is in consonance with the delectus personae principle applicable to
partnerships; (Arts. 1804 and 1813, Civil Code)
(d) Generally, the co-venturers acting on behalf of the joint venture are agents of joint venture and of each other; (Arts. 1803,
1818 to 1823, Civil Code) and
(e) Death, retirement, insolvency, civil interdiction or dissolution of a co-venturer dissolves the joint venture. (Art. 1830, Civil
Code)
In Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005), the Court held that a joint venture is hardly distinguishable from, and
may be likened to, a partnership since their elements are similar, i.e., community of interests in the business and sharing of
profits and losses; and that being a form of partnership, a joint venture is generally governed by the law on partnership.
c. Special Treatments Given to Joint Ventures
Jurisprudence, however, has tended to give joint ventures special treatment not accorded to ordinary partnerships. Philippine
jurisprudence had adopted the prevailing rule in the United States that a corporation cannot ordinarily enter into partnerships
with other corporations or with individuals. The basis for such prohibition on corporations is that 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.
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, Treatise on Philippine Partnership Law, 1978 Ed., at p. 9)
As discussed previously, Tuason v. Bolaños, 95 Phil. 106 (1954), recognized in Philippine jurisdiction the doctrine in Anglo-
American jurisprudence that “a corporation has no power to enter into a partnership.” 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., 1082)
Although Tuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement, it
would seem that the policy behind the prohibition on why a corporation cannot be made a partner does not apply in a joint
venture arrangement. Being only 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. The situation therefore in a joint
venture arrangement, unlike in an ordinarily partnership arrangement which may expose the corporation to any and various
liabilities and risks which cannot be evaluated and anticipated by the board, allows the board to fully bind the corporation to
matters essentially within the boards business appreciation and anticipation.
The previous ruling of the SEC on the matter is that a corporation cannot enter into a contract of partnership with an individual or
another corporation on the premise that if a corporation enters into a partnership agreement, it would be bound by the acts of the
persons who are not its duly appointed and authorized agents and officers, which is entirely inconsistent with the policy in
Corporate Law that the corporation shall be managed by its Board of Directors. (SEC Opinion, 22 December 1966, SEC FOLIO
1960-1976, at p. 278; citing 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl. 1950, Sec. 2520).
Later, the SEC provided for a clear exception to the foregoing ruling, and allowed corporations to enter into partnership
arrangements, provided the following conditions are met: (SEC Opinion, 29 February 1980; SEC Opinion, dated 3 September
1984. Under Sec. 192 of the National Internal Revenue Code, documentary stamps of P15.00 must be affixed on each proxy)
(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;
(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 partners; and
(c) If it is a foreign corporation, it must obtain a license to transact business in the country in accordance with the Philippine
Corporation Code.
In one opinion, the SEC clarified that the conditions imposed meant that since the partners in a partnership of corporations are
required to stipulate that all of them shall manage the partnership and they shall be jointly and severally liable for all the
obligations of the partnership, it necessarily followed that a partnership of corporations should be organized as a “general
partnership”. (SEC Opinion, 23 February 1994, XXVIII SEC Quarterly Bulletin 18 [No. 3, Sept. 1994] )
Lately, the SEC, realizing that the second condition actually prevented a corporation from entering into a limited partnership,
which it allowed to do so would then be more congruent with the policy that the corporation would then not be held liable for its
venture beyond the investments made and determined by its Board of Directors, and would therefore not be held liable (beyond
its investment) for debts arising from the acts of the general partners, reconsidered its position and ruled that a corporation may
become a limited partner in a limited partnership, since “there is no existing Philippine law that expressly prohibits a corporation
from becoming a limited partner in a partnership.” In effect, the SEC dropped the second condition imposed previously. (SEC
Opinion, 17 August 1995, XXX SEC Quarterly Bulletin 8 [No. 1, June 1996])
3. Alternative Forms in Structuring a Joint Venture
In Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), the Supreme Court discussed background of the use
of joint ventures when it comes to Filipino investors inviting foreign participation in a local project, and the risks involved, thus
—
Quite often, Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a local firm are
constrained to seek the technology and marketing assistance of huge multinational corporations of the developed world.
Arrangements are formalized where a foreign group becomes a minority owner of a firm in exchange for its manufacturing
expertise, use of its brand names, and other such assistance. However, there is a always the danger from such arrangements. The
foreign group may, from the start, intend to establish its own sole or monopolistic operations and merely uses the joint venture
arrangement to gain a foothold or test the Philippine waters, so to speak. Or the covetousness may come later. As the Philippine
firm enlarges its operations and becomes profitable, the foreign group undermines the local majority ownership and actively tries
to completely or predominantly take over the entire company. This undermining of joint ventures is not consistent with fair
dealing to say the least. To the extent that such subversive actions can be lawfully prevented, the courts should extend protection
especially in industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens. (at p. 142)
Parties have varied choices of legal forms in planning a joint venture arrangement, and they can pursue the same through the
following formats:
(a) informal or contractual joint venture arrangement;
(b) by partnership arrangement; or
(c) through a joint venture corporation.
a. Informal or Contractual Joint Venture Arrangement
In spite of the peremptory provisions under the Law of Partnerships that any agreement by which two or more persons bind
themselves to contribute money, property or industry to a common fund (i.e., to pursue a business enterprise) with the intention
of dividing the profits among themselves, would necessarily give rise to a partnership (Article 1767, New Civil Code), and
thereby a partnership juridical personality arises “separate and distinct from that of the partners,” (Article 1768, New Civil
Code), nonetheless, in cases of corporations which come together in co-venture over a particular project, there has been in
implicit recognition that such a venture can be pursued merely as a private enterprise with no intention to present a new or
separate “firm” or “company”, and much less a new juridical person, to the public.
Thus, in Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), after the Court held that a joint venture is akin to a
particular partnership, it distinguished one from the other as follows:
(a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership, with no firm name and
no legal personality. In a joint account, the participating merchants can transact business under their own name, and can
be individually liable therefore.
(b) Usually, but not necessarily a joint adventure is limited to a SINGLE TRANSACTION, although the business of pursuing to
a successful termination may continue for a number of years; a partnership generally relates to a continuing business of various
transactions of a certain kind. (At p. 753, citing V.E. PARAS, CIVIL CODE OF THE PHILIPPINES ANNOTATED 546
[13th ed., 1995]; underscoring supplied)
In such an instance, a “Joint Venture Agreement” or a “Memorandum of Agreement” is executed by the co-venturers to provide
for the terms of arrangement, but the business enterprise will be pursued in the names of the co-venturers through their duly
authorized representatives. No separate company office is set-up, no separate books of accounts are kept, no formal registration
of the enterprise is made with the appropriate government agencies. The co-venturers therefore intend their relationship to be
primarily governed by the contractual terms agreement upon them in the joint venture agreement.
Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), has affirmed the principle that joint venture
arrangements must primarily be viewed as binding contractual commitments, thus: “Moreover, the usual rules as regards the
construction and operation of contracts generally apply to a contract of joint venture.” (At p. 147, citing O’Hara v. Harman, 14
App. Dev. (167) 43 NYS 556)
Even the SEC itself has recognized such an informal arrangement. It has ruled that generally, a joint venture agreement of two
corporations need not be registered with the SEC, provided it will not result in the formation of a new partnership or corporation.
However, should there be an intention to acquire a separate Tax Identification Number (TIN) from the Bureau of Internal
Revenue for the business venture; the same requires registration with the SEC in order to have a separate legal personality to
obtain a separate TIN. (SEC Opinion, 30 March 1995, XXIX SEC Quarterly Bulletin 32 [No. 3, Sept. 1995])
The SEC has also ruled that two or more corporations may enter into a joint venture through a contract or agreement (contractual
joint venture) if the nature of the venture is authorized by their charters, which contract need not be registered with the SEC;
provided, however that the joint venture will not result in the formation of a new partnership or corporation. (SEC Opinion, 29
April 1985, SEC Annual Opinions 1985, at p. 89)
Thus, under a “contractual joint-venture format,” the co-venturers pursue the joint venture arrangement by a private contract
between them, choosing not to represent to third parties or to the public a separate firm undertaking the project. Under such an
arrangement, the relationship of the co-venturers, their rights and liabilities, are governed by the joint venture contract executed
among them.
This was the sort of arrangement sought to be pursued in Philex Mining Corp. v. Commissioner of Internal Revenue, 551 SCRA
428 (2008), where in the operation of a mining concession between two corporations, they executed merely a “Power of
Attorney” and designated one another “principal” (the owner of the concession) and “manager” (the entity that would directly
manage development and operations). The Court refused to consider the relationship between the parties as debtor-creditor,
principal-agent, or as principal-manager, since by the terms of the arrangement the essential elements of a partnership existed,
thus –
An examination of the “Power of Attorney” reveals that a partnership or joint venture was indeed intended by the parties. Under
a 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. While a corporation, like petitioner, cannot generally enter into a
contract of partnership unless authorized by law or its charter, it has been held that it may enter into a joint venture which is akin
to a particular partnership relationship: x x x Perusal of the agreement denominated as the ‘Power of Attorney’ indicates that the
parties had intended to create a partnership and establish a common fund for the purpose. They also had a joint interest in the
profits of the business as shown by a 50-50 sharing in the income of the mine. (Ibid, at pp. 438-439)
It is clear from the ruling in Philex Mining, that the parties to a business venture may choose to treat one another as not being
bound by a partnership relationship, but when controversy arises by which rights and obligations have to be determined, the
courts would have no choice by to impute the legal relationship of a partnership or joint venture arrangement when the essential
elements of a partnership are present. In Philex Mining, the Court refused to allow the parties to treat the advances made to the
venture as loans or advances to one another, holding that advances made by a co-venturer in the joint venture business which
cannot be recovered cannot be treated as bad debts and deducted for income tax purposes; the relationship between co-venturers
in a joint venture arrangement cannot be considered a creditor-debtor relationship with respect to their advances and
contributions to the business enterprise.
Ultimately, the failed attempt in Philex Mining to veil the arrangement as one as not being a joint venture arrangement, caused
the mining companies the obligation to pay unpaid income taxes in the several millions of pesos. And the hard lesson that was
learned was that since a joint venture arrangement is a species of partnership, then the peremptory provisions and principles
under the Law on Partnerships will be the once employed by the courts to smoke out whether the underlying agreement was a
joint venture arrangement.
A more graphical example of an attempt to hide the joint venture arrangement can be found in Kilosbayan, Incorporated v.
Guingona, Jr., 232 SCRA 110 (1994). In that case, the Philippine Charity and Sweepstakes Office (PCSO) was prohibited by its
charter from holding and conducting lotteries “in collaboration, association or joint venture with any person, association,
company or entity, whether domestic or foreign.” (Sec. 1, Rep. Act No. 1169, as amended by B.P. Blng. 42) In order not to be
violate such prohibition, PCSO entered into a “Contract of Lease” with the Philippine Gaming Management Corporation
(PGMC), purported for PCSO to lease the lottery facilities of the latter in order to operate nationally the on-line lottery system
known as “lotto”. In finding that “notwithstanding its denomination or designation as a Contract of Lease” (at p. 143), the
purported lease arrangement violated the statutory prohibition, in that it actually covered a joint venture arrangement between
PCSO and PGMC, the Court held –
The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had neither funds of its own nor the expertise to
operate and manage an on-line lottery system, and that although it wished to have the system, it would have it “at no expense or
risks to the government.” x x x.
In short, the only contribution the PCSO would have is its franchise or authority to operate the on-line lottery system; with the
rest, including the risks of the business, being borne by the proponent or bidder. x x x.
The so-called Contract of Lease is not, therefore, what is purports to be. Its denomination as such is a crafty device, carefully
conceived, to provide a built-in defense in the event that the agreement is questioned as violate of the exception in Section 1(b)
of the PCSO’s charter. The acuity or skill of its draftsmen to accomplish that purpose easily manifest itself in the Contract of
lease. It is outstanding for its careful and meticulous drafting designed to given an immediate impression that it is a contract of
lease. Yet, woven therein are provisions which negate its title and betray the true intention of the parties to be in or to have
a joint venture for a period of eight years in the operation and maintenance of the on-line lottery system . (at pp. 144-
146; underscoring supplied).
The joint venture arrangement was found to exists under the Contract of Lease with finding by the Court of the essential element
of participating in the profits of the on-line lottery system, and at the same time bearing the risks of loss. The Court held that
“This risk-bearing provision is unusual in a lessor-lessee relationship, but inherent in a joint venture.” (at p. 147). The Court
observed:
All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit, operation, conduct, and
management of the On-Line Lottery System. They exhibit and demonstrate the parties’ indivisible community of interest in the
conception, birth and growth of the on-line lottery, and, above all, in its profits, with each having a right in the formulation and
implementation of policies related to the business and sharing, as well, in the losses–with the PGMC bearing the greatest burden
because of its assumption of expenses and risks, and the PCSO the lease, because of its confessed unwillingness to bear expenses
and risks. (at pp. 148-149).
b. Joint Venture Pursued under Formal Partnership Arrangements
A second type of joint venture arrangement is to formally operate the joint venture set-up as a partnership, with a separate and
distinct juridical personality. Under such an arrangement, the co-venturers execute formal Articles of Partnership, which may
also be denominated as a “Joint Venture Agreement,” embodying their arrangements, as well as the firm name and structure of
the company that they are forming, and register the same with the SEC.
Such a joint venture arrangement would then be operated as, and be governed by the legal rules and principles pertaining to,
particular partnerships.
As contrasted from the informal joint venture arrangement discussed above, a formal joint venture pursued under formal
partnership arrangements provides better protection for the parties in the sense that they have a set of laws by which they can
base their rights and claims. Apart from the lessons learned from the decisions in Kilosbayan and Philex Mining already
discussed above, this lesson can best be shown in the decision in Tan Eng Kee v. Court of Appeals, 341 SCRA 740 (2000), where
the heirs of the purported co-venturer in a lumber and construction supply business sought to recover the decedents share in the
enterprise and accumulated profits. Although the trial court found that there was a joint venture arrangement, the Supreme Court
affirmed the ruling of the Court of Appeals that in the absence of a contract of partnership, plus the inability of the heirs to
indicate by clear evidence the essential elements of a partnership, no joint venture arrangement can be imputed into the business
enterprise, thus —
Undoubtedly, the best evidence [of a partnership] would have been the contract of partnership itself, or the articles of
partnership. . . . The net effect, however, is that we are asked to determine whether a partnership existed based purely on
circumstantial evidence. A review of the record persuades us that the Court of Appeals correctly reversed the decision of the trial
court. The evidence presented by petitioners falls short of the quantum of proof required to establish a partnership. (at p. 754).
c. Joint Venture Arrangement Pursued Through a Joint Venture Corporation
Equity joint ventures are also available in Philippine setting, which may cover the formation of a new joint venture company,
with each co-venturer being allocated proportionate shareholdings in the outstanding capital stock of the joint venture
corporation.
An equity joint venture may also be pursued where a co-venturer is allocated the agreed shares of stock in an existing
corporation, either from new issuances of the capital stock of the existing corporation, or sold shares from those already issued in
the names of the other co-venturers.
(1) Corporate Principles versus JVA Provisions
In equity joint ventures, the rights and obligations of the parties among themselves are covered not only in a separate joint
venture agreement, but also implemented by certain provisions of the articles of incorporation and by-laws of the joint venture
corporation.
In a situation where a corporate vehicle is formed in pursuance of the joint venture arrangements, ideally the joint ventures
should be able to fit into the various terms and clauses of the articles of incorporation and by-laws (known as the “charter”) of
the joint venture company the salient features of their joint venture agreements. Considering that the co-venturers have chosen
the corporate vehicle by which to pursue their business enterprise, then it would be posited that in situations where joint venture
agreements contain provisions not covered by the charter of the joint venture corporation or vice-versa, the resolutions of issues
arising therefrom ought to be as follows:
(a) In case of conflicts between the provisions of the joint venture agreement and the charter of the joint venture corporation, the
provisions of the latter shall prevail;
(b) In case there are provisions or clauses in the joint venture agreement not found in the charter of the joint venture corporation,
such provisions and clauses remain binding contracts among the joint venture parties signatory to the agreement, but do not bind
the joint venture corporation or other parties not signatories thereto.
The foregoing rules of resolution are based on the well-established doctrine under Philippine Corporate Law that the articles of
incorporation form a basic contract document defining the charter of the corporation. The articles of incorporation is
characterized as a contract between and among three parties: (a) between the State and the corporation; (b) between the
stockholders and the State; and (c) between the corporation and its stockholders. (Government of the P.I. v. Manila Railroad Co.,
52 Phil. 699 [1929]).
In addition, although the joint venture agreement may contain rules on management and control of the joint venture corporation,
it does not authorize the co-venturers, as equity owners, to override the business management of the corporate affairs of the joint
venture corporation by its board of directors. Any stipulation therefore in the joint venture agreement that seeks to arrogate unto
the stockholders thereof the management prerogatives of its board of directors would be null and void. In short, by having
adopted the corporate entity as the medium by which the co-venturers have sought to pursue the joint venture enterprise, they are
bound Corporate Law principles under which the entity must operate.
Jurisprudence does not support the outright primacy of Corporate Law principles in a joint venture scheme pursued through a
joint venture company.
(2) Jurisprudential Rulings on the Scheme of JV Corporation
The decision in Aurbach v. Sanitary Wares Manufacturing Corp., 180 SCRA 130 (1989), best illustrates the strength and
weakness of a joint venture arrangement pursued through the medium of a joint venture corporation.
American Standards Inc. (ASI), a Delaware corporation, entered into an Agreement with Filipino group “to participate in the
ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling abroad
vitreous china and sanitary wares. The parties agreed that the business operations in the Philippines shall be carried on by an
incorporated enterprise and that the name of the corporation shall initially be ‘Sanitary Wares Manufacturing Corporation.’” (at
p. 134). The Agreement executed between the American group taking 40% equity in the venture, and Filipino group taking 60%
equity in the venture, provided for the particulars covering the articles of incorporation of the joint venture company to be
formed, the manner of management thereof, as well as “provisions designed to protect [ASI] as a minority group, including the
grant of veto powers over a number of corporate acts and the right to designate certain officers, such as a member of the
Executive Committee whose vote was required for important corporate transactions.” (at pp. 134-135). In particular, the
Agreement contained the following provision on the Management of the joint venture corporation, and the manner by which the
two groups would elected the Board of Directors, thus:
5. Management
(a) The management of the Corporation shall be vested in a Board of Directors, which shall consist of nine [9] individuals. As
long as American-Standard [ASI] shall own at least 30% of the outstanding stock of the Corporation, three [3] of the nine
directors shall be designated by American-Standard [ASI], and the other six [6] shall be designated by the other stockholders of
the Corporation. (at p. 134).
The joint venture company was registered, and “The joint enterprise thus entered into by the Filipino investors and the American
corporation [ASI] prospered. Unfortunately, with the business successes, there came a deterioration of the initially harmonious
relations between the two groups. According to the Filipino group, a basic disagreement was due to their desire to expand the
export operations of the company to which ASI objected as it apparently had other subsidiaries of joint venture groups in the
countries where Philippine exports were contemplated.” (at p. 135).
In the annual stockholders’ meeting in 1983, the friction between the two groups came to a head, when the American group
wanted to cast their vote, not only on their three (3) nominees, but also on the nominees of the Filipino group on the ground that
under Section 24 of the Corporation Code, which provided for cumulative voting for stock corporations, they had a right to cast
their votes on all nominees for the Board of Directors, and not just on their allotted three nominees.
The Court was asked to decide the issue on “the nature of the business established by the parties—whether it was a joint venture
or a corporation” (at p. 139), since it was the contention of ASI that “the actual intention of the parties should be viewed strict on
the ‘Agreement’ . . . wherein it is clearly stated that the parties’ intention was to form a corporation and not a joint venture” (at p.
139), since a particular provision in the Agreement provided that nothing herein contained shall be construed to constitute any of
the parties hereto partners or joint venturers in respect of any transaction hereunder.”
In resolving the issues, the Court gave the basic doctrine when it comes to joint venture arrangement, which like any partnership
arrangement, are primarily contractual in character, thus:
The rule is that whether the parties to a particular contract have thereby established among themselves a joint venture or some
other relation depends upon the actual intention which is determined in accordance with the rules governing the interpretation
and construction of contracts. (at p. 139, citing Terminal Shares, Inc. v. Chicago, B. and Q.R. Co. (DC MO), 65 F. Suppl
678; Universal Sales Corp. v. California Press Mfg., Co., 20 Cal. 2nd 751, 128 P. 2nd 668).
The Court resolved that –
In the instant cases, our examination of important provisions of the Agreement as well as the testimonial evidence presented by
the [witnesses] shows that the parties agreed to establish a joint venture and not a corporation. The history of the organization of
Saniwares and the unusual arrangements which govern its policy making body are all consistent with a joint venture and not with
an ordinary corporation. (at pp. 140-141).
The Court resolved to apply the mandatory provisions of the Corporation Code within the contractual intentions of the parties
provided in the joint venture Agreement, and affirmed the formula adopted by the Court of Appeals that the American group can
cumulate their votes only within the nominees allotted to them, and held:
To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be beholden to them
would obliterate their minority status as agreed upon by the parties. As aptly stated by the appellate court: x x x ASI, however,
should not be allowed to interfere in the voting within the Filipino group. Otherwise, ASI would be able to designate more than
the three directors it is allowed to designate under the Agreement, and may even be able to get a majority of the board seats, a
result which is clearly contrary to the contractual intent of the parties. x x x .
Equally important as the consideration of the contractual intent of the parties is the consideration as regards the possible
domination by the foreign investors of the enterprise in violation of the nationalization requirements enshrined in the
Constitution and circumvention of the Anti-Dummy Act. x x x. (at p. 148).
In essence, Aurbach emphasizes that joint venture arrangements are first and foremost contractual agreements, and as much as
possible the contractual intent of the co-venturers should be given realization within the corporate medium by which they
pursued the business enterprise.Aurbach recognized that such a principle is not alien to Corporate Law when it quoted arguments
that Section 100 of the Corporation Code expressly makes binding written agreements between the stockholders in a close
corporation.
(3) JV Company Organized as a Close Corporation
Under the Corporation Code, a close corporation is one which provides in its articles of incorporation the following three
requisites:
(a) all of the corporation’s issued stock of all classes, exclusive of treasury shares, shall be held on record by not more than a
specified number of persons, not exceeding twenty (20);
(b) all of the issued stock of all classes shall be subject to one or more specified restrictions on transfer in the nature of a “right of
first refusal;” and
(c) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any class (Section 96,
Corporation Code).
Under a close corporation setting, it may be provided in the articles of incorporation that the business of the corporation shall be
managed by the stockholders of the corporation rather than by a board of directors, and the officers and employees may be
elected or appointed directly by the stockholders (Section 97, Corporation Code).
In particular, Section 100 of the Corporation Code provides that:
Sec. 100. Agreements by stockholders.–
1. Agreements by and among stockholders executed before the formation and organization of a close corporation, signed by all
stockholders, shall survive the incorporation of such corporation and shall continue to be valid and binding between and among
such stockholders, if such be their intent, to the extent that such agreements are not inconsistent with the articles of incorporation,
irrespective of whether the provisions of such agreements are contained, except those required by this Title [on close
corporations] to be embodied, in said articles of incorporation.
x x x.
Although the Court in Aurbuch did not make a formal ruling on the matter, it seems to have given its imprimatur to the
proposition that even when a corporation does not comply with the definition of a close corporation under the Corporation Code
because the three requisites are not expressly provided for in its articles of incorporation, nonetheless, the same principles
applicable to formal close corporations, should also apply to equally closely-held corporation, such as those organized pursuant
to a formal joint venture agreement, thus –
The Lagdameo Group stated in their appellees’ brief in the Court of Appeals:
“x x x.
“Secondly, even assuming that Saniwares is technically not a close corporation because it has more than 20 stockholders, the
undeniable fact is that it is a close-held corporation. Surely, appellants cannot honestly claim that Saniwares is a public issue or a
widely held corporation.
“In the United States, many courts have taken a realistic approach to joint venture corporations and have not rigidly applied
principles of corporation law designed primarily for public issue corporation. Theses courts have indicated that express
arrangements between corporate joint ventures should be construed with less emphasis on the ordinary rules of law usually
applied to corporate entities and with more consideration given to the nature of the agreement between the joint venturers. . . .
These American cases dealt with legal questions as to the extent to which the requirements arising from the corporate form of
joint venture corporations should control, and the courts ruled that substantial justice lay with those litigants who relied on the
joint venture agreement rather than the litigants who relied on the orthodox principles of corporation law.
“x x x.” (at pp. 142-144).
The provisions of the Corporation Code on close corporations, which provides for informal management of its affairs, binding
effect of written agreements among stockholders, etc., should be deemed to be available to resolve issues pertaining to joint
venture corporations.
(4) Right of First Refusal as a Delectus Personae Feature in JV Company Scheme
Another reported case of a joint venture company arrangement would be inJG Summit Holdings, Inc. v. Court of Appeals, 412
SCRA 10 (2003), where the National Investment and Development Corporation (NIDC), a government corporation, entered into
a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries, Ltd. of Kobe, Japan, forming the Philippine Shipyard and
Engineering Corporation (PHILSECO) to engage in operation and management of shipyard. The JVA provided for a 60%
Filipino-40% Japanese equity, and provided a “right of first refusal” on the equity shares should either of the co-venturer decide
to sell, assign or transfer its interest in the joint venture. When later on the government shares in PHILSECO were bidded out,
one of the issues that had to be resolved was the validity of the right of first refusal clause found in the JVA.
The Court matter-of-factly recognized the “partnership” arrangement between the original parties in the joint venture company,
and characterized the right of first refusal clause in the JVA as a “protective mechanisms to preserve their respective interests in
the partnership in the event that (a) one party decides to sell its shares to third parties; and (b) new Philseco shares are issued.” (at
p. 29). The Court further held –
. . . The right of first refusal is meant to protect the original or remaining joint venturer(s) or shareholder(s) from the entry of
third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s). The joint venture between the Philippine
Government and KAWASAKI is in the nature of a partnership which, unlike an ordinary corporation, is based on delectus
personae. No one can become a member of the partnership association without the consent of all the other associates. The right
of first refusal thus ensures that the parties are given control over who may become a new partner in substitution of or in addition
to the original partners. Should the selling partner decide to dispose all its shares, the non-selling partner may acquire all these
shares and terminate the partnership. No person or corporation can be compelled to remain or to continue the partnership . . . (at
p. 31).
What one notices clearly extant in JG Summit Holdings is that although what was bidded were shares of stock is a duly registered
corporation, and the right of first refusal was not found expressed in any provision of the articles of incorporation and by-laws,
nonetheless, the Court applied its enforceability to a third party bidder who was not privy to the terms of the private JVA
between the Government and the foreign investor.

4. Aspects which Influence Choice of JV Scheme

The important aspects in choosing the format or scheme by which to pursue the joint venture arrangement would be the issues
relating to limited liability considerations, exclusion of new parties and non-dilution of equity considerations, tax consequences,
and limitation of foreign equity.
a. Defining Joint Ventures Scope of Business Activity
The principal consideration in defining the scope of business to be undertaken by joint venture in the Philippines basically
revolves around the issue, when it involves foreign investment, of restrictions on foreign equity and foreign management and
control on certain restricted areas or activities. These areas must involve foreign investments as defined under Republic Act No.
7042, known as the Foreign Investments Act of 1991.
”FIA ‘91”, was enacted to promote foreign investments, and prescribes the procedures for registering enterprises doing business
in the Philippines. It is the basic law that provides the conditions, activities, and procedures where foreign enterprises may invest
and do business in the Philippines. It also applies to joint venture arrangements in the Philippines. By the negative list scheme,
the Act simply established the restricted areas, and declared all other areas as open to unlimited foreign equity participation.
Essentially, the FIA ‘91 provides for foreign investment negative list which spells out the activities reserved for Philippine
national. Export enterprises may enter all activities not restricted by Lists A and B of the negative list, and domestic enterprises,
with foreign equity, may enter all activities not restricted by Lists A, B, and C of the negative lists.
(1) Application of the Grandfather Rule
The ‘grandfather rule’ is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or
partly nationalized areas of activities, provided for under the Constitution and other nationalization laws, is computed, in cases
where corporate shareholders are present in the situation, by attributing the nationality of the second or even subsequent tier of
ownership to determine the nationality of the corporate shareholder.
In recognizing and applying the grandfather rule, the SEC has adopted the formula of the Secretary of Justice (DOJ Opinion No.
18, s. 1989) to the effect that:
Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be
considered as of Philippine nationality, but if the percentage of Filipino ownership in the corporation or partnership is less than
60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. (SEC Opinion, 23
November 1993, XXVIII Sec Quarterly Bulletin 39 [No. 1, March 1994]; SEC Opinion, 14 April 1993, XXVII Sec Quarterly
Bulletin 29 [No. 3, Sept. 1993]; SEC Opinion, 23 March 1993, XXVII Sec Quarterly Bulletin 15 (No. 3, Sept. 1993); SEC
Opinion, 6 August 1991, Sec Quarterly Bulletin 44 [No. 4, Dec. 1991]; SEC Opinion, 30 May 1990, XXIV Sec Quarterly
Bulletin 52 [No. 3, Sept. 1990]; SEC Opinion, 14 December 1989, XXIV Sec Quarterly Bulletin 7 [No. 2, June 1990]; SEC
Opinion, 6 November 1989, XXIV Sec Quarterly Bulletin 56 [No. 1, March 1990]).
It must be stressed however, that the afore-quoted SEC rule applies for purposes of resolving issues on investments. The SEC
was quick to add: “However, while a corporation with 60% Filipino and 40% Foreign equity ownership is considered a
Philippine national for purposes of investment, it is nor qualified to invest in or enter into a joint venture agreement with
corporation or partnerships, the capital or ownership of which under the constitution or other special laws are limited to Filipino
citizens only.” (SEC Opinion, 14 December 1989, XXIV Sec Quarterly Bulletin 7 [No. 2, June 1990]). A joint venture
arrangement would mean that such corporation has become a partner and is deemed then to be acting or involving itself in the
operations of a nationalized activity by the acts of the local partners by virtue of the principle of mutual agency
b. Limited Liability Feature
Whether it be the contractual joint venture arrangement or the partnership arrangement, the co-ventures would be faced with
prospects of “unlimited liability” pervading in such arrangement. Under Philippine Partnership Law, partners (except limited
partner in formally registered limited partnership) and con-venturers are liable for partnership debts beyond their contributions to
the parternship or joint venture arrangements.
Therefore, the use of the joint venture company as the format to pursue the joint venture arrangement allows the co-venturers to
take full advantage of the limited liability features of the corporate vehicle especially in projects and undertakings which embody
certain risks.
c. Exclusions of New Parties; Non-Dilution of Equity
The ability of the co-venturers to present the venture among the original parties through a “right of first refusal clause” has been
recognized as valid by the Supreme Court as a means to protect the original or remaining joint venturer(s) or shareholder(s) from
the entry of third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s) . . . [because] The joint venture . . .
is in the nature of a partnership which, unlike an ordinary corporation, is based on delectus personae. No one can become a
member of the partnership association without the consent of all the other associates. The right of first refusal thus ensures that
the parties are given control over who may become a new partner in substitution of or in addition to the original partners.” (JG
Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10, 29-31 [2003]).
d. Tax Issues
In the field of Taxation, both a partnership and a joint venture are treated as corporate taxpayers, and both are subject to
corporate income tax, except that under the National Internal Revenue Code of 1997, “a joint venture or consortium formed for
the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operations
pursuant to an operating or consortium agreement under a service contract with the Government,” shall not be taxed separately as
a corporate taxpayer (Section 22(B), NIRC of 1997).
The contractual joint venture has the advantage of limiting the extent of the arrangement between and among the co-venturers, as
in undertakings that require privacy. In addition, since formal joint ventures are taxed as corporate taxpayer, the contractual joint
venture lessens the need to have to register the project as a separate corporate taxpayer, since the private arrangements should
allow the co-venturers to continue reporting separately their participation in the project in their own tax returns.
The corporate entity route also allows the co-venturers to take advantage of zero rate taxability of dividends declared by
corporations in instances provided under the National Internal Revenue Code.
In the Philippines, the corporation has traditionally been subjected to heavier taxation than other forms of business organization;
dividends distributed are subject to another tax when received by the stockholders. With the trust of Government to encourage
both local and foreign investments in the country, and to entice the use of the corporation as the vehicle for such investment,
many of the previous tax laws that tended to make corporate vehicles expensive had been abolished. Except for dividends
declared by domestic corporation in favor of foreign corporation (Section 25(a) and (b), NIRC of 1977), dividends received by
individuals from corporation (Section 21, NIRC of 1977), as well as inter-corporate dividends between domestic corporations
(Section 24, NIRC of 1977), were subject to zero-rate of income taxation. There had also been an abolition of the personal
holding companies tax and tax on unreasonably accumulated surplus of corporations (Executive Order No. 37 [1986]).
Lately, however, under the reforms embodied in the NIRC of 1997, a final tax of 10% has been re-imposed on dividends
received by residents and citizens declared from corporate earnings after 1 January 1998 (Section 24(B)(2), NIRC of 1997); a
final tax of 20% on dividends received by a nonresident alien individual has been re-imposed from corporate earnings after 1
January 1998 (Section 25(A)(1), NIRC of 1997); and the tax on improperly accumulated earnings has likewise been re-imposed
(Section 29, NIRC of 1997).
The pursuit of joint venture arrangements under a formal partnership arrangement has the disadvantage of inviting into the
arrangement the features of unlimited liability for partnership debts to the co-venturers, and also the inability to take advantage
of the zero-rate of dividends for corporation, when the partnership declares and distributes profits. The aspect of double taxation
looms largely in a partnership joint venture arrangement, since partnerships are subject to the 35% net income tax for
corporations. (Per amendment to NIRC of 1997 introduced by Rep. Act 9337. The income tax rate will go down to 30%
beginning 01 January 2009.) Nevertheless, joint ventures formed for the purpose of undertaking construction projects (Pres.
Decree 929 [1976]), and those formed to engage in petroleum operations pursuant to an operating agreement under a service
contract with the Government (Pres. Decree 1682) are exempt from corporate taxation.