I. HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP PARTNERSHIP LAW 1. Historical Background and Sources Sources of Philippine Law on Partnership a. Notion of Partnership Is of Ancient Origins Prof. Esteban B. Bautista wrote that as a business device, the partnership ―was well known among the ancients and apparently occupied such an important place in their social and economic life that they made provision for it in their laws— laws —among the Babylonians from the time of Hammurabi, among the Babylonian Jews as early as the fourth century, and among the Romans almost from the time they laid the foundation of their monumental legal system.‖ (BAUTISTA, system.‖ (BAUTISTA, ESTEBAN B., TREATISE ON PHILIPPINE PARTNERSHIP LAW, Rex Book Store, 1995 Ed., at p. 1, hereinafter referred to as ―BAUTISTA‖; citing 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 3 [1948]). He also wrote that ―in medieval times, the device was prominent among the merchant princes in the Italian cities; it also thrived in thirteenth century England where it was regulated by guilds merchant.‖ (BAUTISTA, (BAUTIS TA, at p. 1, citing 4 COLLIERS ENCYCLOPEDIA 257 [1952] and 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 4 [1948]) Professors Hector S. de Leon and Hector M. de Leon, Jr. write that ―As early as 2300 B.C., Hammurabi, the famous king of Babylon, in his compilation of the system of laws of that time, provided for the regulation of the relation called partnership. Commercial partnerships of that time were generally for single transactions or undertakings.‖ (DE LEON, HECTOR S., and DE LEON, HECTOR M., JR., COMMENTS AND CASES ON PARTNERSHIP, AGENCY AND TRUST, Rex Book Store, Inc., Manila, Philippines, 2005 ed. , at p. 2, hereinafter referred to as ―DE LEONS‖). They also write that ―Following the Babylonian period, we find clear -cut references to partnerships in Jewish law . . . however, it must be remembered that the ancient Jews were a pastoral people, and, therefore, the partnership as a business organization under Jewish law was concerned with the holding of title to land by two or more persons.‖ (DE LEONS, at p. 2) b. Civil and Common Law Bases of Partnership Laws
Justice Lord Mansfield into the common law system and that it ―wa s not until the latter years of the 18th century that the law of partnership as we know it today began to assume both form and substance.‖ (DE LEONS, at p. 3) They write that eventually in the United States, in 1914 the Uniform Partnerships Act was endorsed by the National Conference of Commissioners on Uniform State Laws, which had many points of similarity with the English Partnership Act of 1890, and that ―For this reason, the practical operation of the Uniform Partnership Act has a background of application applica tion in the workings of the English Act.‖ (DE LEONS, at p. 5) Bautista suggested that ―the modern world provisions on partnership of every legal system providing for and regulating this type of business organization are based upon the Roman law, of course with several important modifications;‖ . . . and that ‖civil law countries or jurisdiction regard the partnership as a legal entity, while the common law ones generally do not.‖ (BAUTISTA, not.‖ (BAUTISTA, at p. 1, citing 17 ENCYCLOPEDIA BRITANNICA 420 [1969]). The De Leons Leon s observe that ―In fine, modern partnership law may be said to contain combination of principles and concepts developed from three sources: the Roman Law, the law [on] merchant and equity, and the common law courts.‖ (DE LEONS, at p. 5) c.
Particular Bases of Philippine Law on Partnerships
Before the promulgation of the New Civil Code, the Philippine partnership laws formerly distinguished between civil partnership and commercial partnerships. Civil partnerships were governed in Title VIII of Book IV of the old Civil Code of 1889 (Articles 1665 to 1708); while commercial or mercantile partnership were governed by Title I of Book II of the Code of Commerce (Articles 116 to 238). According to Bautista, both sets of laws ―had their origin in the Roman Law.‖ (BAUTISTA, ( BAUTISTA, at p. 2) The present Philippine Law on Partnership is provided under Title IX, Book V of the New Civil Code (Republic Act No. 386), which took effect on 30 August 1950, superseding the old Civil Code and repealed in toto the provisions of the Code Code of Commerce on partnerships, which ―has resulted
private interest or purpose are governed by the provisions of this Code concerning partnerships.‖
Partnership Law therefore provides a stable platform by which individuals may provide an active means to pursue jointly a business enterprise.
While the bulk of the present provisions in the Civil Code were taken from the old Civil Code provisions, the Code Commission reported that ―some provisions provision s were taken from the Code of Commerce,‖ and other rules were adopted from the Uniform Partnership Act and the Uniform Limited Partnership Act of the United States. Bautista assessed that ―[o]n the whole, it may be stated that the bulk of the provisions of the New Civil Code on this subject are of American origin, i.e., based on the United States‘ ‗Uniform Partnership Act and Uniform Limited Partnership Act.‘‖ (BAUTISTA, at p. 2)
The other significant reason coming from the historical background of our Philippine Law on Partnerships is that it draws it strength and its weakness from the fact that it is really an amalgam between two sets of legal traditions: the Civil Law system upon which most of the provisions of the New Civil Code had been drawn, and from the Common Law tradition, particularly from the Uniform Partnership Act of the United States. Properly appreciated, that means that the Philippine Law on Partnerships can truly be molded into a framework that provides a stability from the set of rules and principles that are laid out in the provisions of the New Civil Code, and yet be dynamic and progressive in characteristic to allow Filipino businessmen and the legal profession to be able to evolve them effectively through application in the business world of innovative changes and advances, confirmed and made ―precedential‖ in decisions of o ur courts resolving the acceptability of such cutting-edge innovations.
d. The Significance of Knowing the Historical Background of Philippine Partnership Law The historical background of Philippine Law on Partnerships, finding its source from ancient times, indicate to us the relative efficiency of the medium as it is able to survive up to the modern times. The longevity of the partnership as a medium of doing business can be drawn from two characteristics.
Firstly , that society considers it important enough to provide a legal framework by which entrepreneurs, merchants and businessmen may draw upon a set of rules to govern the medium by which to pursue a venture, without having to enter into costly and time-consuming negotiations and contract drafting. The essential characteristics of partnership as governed by law (under modern settings, they would be: juridical personality, mutual agency, delectus personae and unlimited liability of partners); and allow would-be partners the ability to rely upon the default legal rules, with the assurance of the backings of the State by which to enforce such default rules. This is what may be termed as the ―nominate and principal ‖ characteristic of the contract of partnership. Secondly , that the partnership relationship being essentially contractual in nature, assures would-be partners of the expedience of contractual stipulation, to be able to tailor-fit their relationships in a way that would best address their individual needs and their working relationships with
2. Old Branches of Partnership Law a. Distinguishing Between Civil and Commercial Partnerships Before the New Civil Code, resolution of partnership issues depended on whether it covered a civil partnership for which the provisions of the old Civil Code were made to apply, or commercial partnership, and therefore covered by the Code of Commerce. There was even a third type of partnerships, the industrial partnerships, which may have the characteristics of commercial or civil partnerships, according to whether they have been established in accordance with the requirements of the Code of Commerce or without regard to the latter. ( Prautch, etc. v. Hernandez , 1 Phil. 705, 709-710 [ 1903]). The essence of a commercial partnership was that it was undertaken by merchants, and essentially possessed of the characteristic of ―habitualness‖ (or more properly referred to as ― pursued as a going concern‖) to be governed under the provisions of the Code of Commerce. Article 1 of the Code of Commerce provided that ―For purposes of this Code, the following are merchants: 1. Those who, having legal capacity to
private interest or purpose are governed by the provisions of this Code concerning partnerships.‖
Partnership Law therefore provides a stable platform by which individuals may provide an active means to pursue jointly a business enterprise.
While the bulk of the present provisions in the Civil Code were taken from the old Civil Code provisions, the Code Commission reported that ―some provisions provision s were taken from the Code of Commerce,‖ and other rules were adopted from the Uniform Partnership Act and the Uniform Limited Partnership Act of the United States. Bautista assessed that ―[o]n the whole, it may be stated that the bulk of the provisions of the New Civil Code on this subject are of American origin, i.e., based on the United States‘ ‗Uniform Partnership Act and Uniform Limited Partnership Act.‘‖ (BAUTISTA, at p. 2)
The other significant reason coming from the historical background of our Philippine Law on Partnerships is that it draws it strength and its weakness from the fact that it is really an amalgam between two sets of legal traditions: the Civil Law system upon which most of the provisions of the New Civil Code had been drawn, and from the Common Law tradition, particularly from the Uniform Partnership Act of the United States. Properly appreciated, that means that the Philippine Law on Partnerships can truly be molded into a framework that provides a stability from the set of rules and principles that are laid out in the provisions of the New Civil Code, and yet be dynamic and progressive in characteristic to allow Filipino businessmen and the legal profession to be able to evolve them effectively through application in the business world of innovative changes and advances, confirmed and made ―precedential‖ in decisions of o ur courts resolving the acceptability of such cutting-edge innovations.
d. The Significance of Knowing the Historical Background of Philippine Partnership Law The historical background of Philippine Law on Partnerships, finding its source from ancient times, indicate to us the relative efficiency of the medium as it is able to survive up to the modern times. The longevity of the partnership as a medium of doing business can be drawn from two characteristics.
Firstly , that society considers it important enough to provide a legal framework by which entrepreneurs, merchants and businessmen may draw upon a set of rules to govern the medium by which to pursue a venture, without having to enter into costly and time-consuming negotiations and contract drafting. The essential characteristics of partnership as governed by law (under modern settings, they would be: juridical personality, mutual agency, delectus personae and unlimited liability of partners); and allow would-be partners the ability to rely upon the default legal rules, with the assurance of the backings of the State by which to enforce such default rules. This is what may be termed as the ―nominate and principal ‖ characteristic of the contract of partnership. Secondly , that the partnership relationship being essentially contractual in nature, assures would-be partners of the expedience of contractual stipulation, to be able to tailor-fit their relationships in a way that would best address their individual needs and their working relationships with
2. Old Branches of Partnership Law a. Distinguishing Between Civil and Commercial Partnerships Before the New Civil Code, resolution of partnership issues depended on whether it covered a civil partnership for which the provisions of the old Civil Code were made to apply, or commercial partnership, and therefore covered by the Code of Commerce. There was even a third type of partnerships, the industrial partnerships, which may have the characteristics of commercial or civil partnerships, according to whether they have been established in accordance with the requirements of the Code of Commerce or without regard to the latter. ( Prautch, etc. v. Hernandez , 1 Phil. 705, 709-710 [ 1903]). The essence of a commercial partnership was that it was undertaken by merchants, and essentially possessed of the characteristic of ―habitualness‖ (or more properly referred to as ― pursued as a going concern‖) to be governed under the provisions of the Code of Commerce. Article 1 of the Code of Commerce provided that ―For purposes of this Code, the following are merchants: 1. Those who, having legal capacity to
To illustrate, Evangelista v. Commissioner of Internal Revenue , 102 Phil. 140 (1957), held that there would exists the elements of common fund and intention to divide the profits among the members of the family who borrowed money as a group, when the facts showed that the 1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund. 2. They invested the same, not merely in one transaction, but in a series of transactions. x x x The number of lots (24) acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired . . . In other words, one cannot but perceive a character of habituality peculiar tobusiness transactions engaged in for purposes of gain. 3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separately to several persons who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof. (Ibid , at p. 145). Prior to the New Civil Code, the significant distinctions between civil partnerships from commercial partnerships were as follows: (a) Registration was essential for the coming into existence of commercial partnerships and their acquisition of juridical personalities (Arts. 118-119, Code of Commerce; Hung-Man-Yoc v. Kieng-Chiong Seng , 6 Phil. 498 [1906]); whereas, it was the perfection of a contract of partnership which under the old Civil Code brought about the separate juridical personality of a civil partnership; (b) Commercial partners partners were solidarily liable for partnership partnership debts, albeit in subsidiary and therefore had the benefit of
(c) Commercial partnerships were deemed to be, and subject to Code of Commerce provisions for, merchants. As was aptly observed in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the distinction between civil and commercial partnerships was critical under the old set-up because it determined the applicable rules for registration, liability for the members, and the rights and manner of dissolution. At the onset of Philippine jurisprudential development, it was recognized in Prautch v. Hernandez , 1 Phil. 705 (1903), that a commercial or mercantile partnership had for its object the pursuit of industry or commerce , and was then treated like a merchant that must necessarily be governed by the Code of Commerce and had to comply with the registration requirements thereof to lawfully come into existence. In a commercial partnership, both the partnership and the separate partners thereof may be joined in one action, but the private property of the partners could be taken in payment of the partnership debts only after the common property of the partnership had been exhausted. ( La Compañia Maritima v. Muñoz , 9 Phil. 326 [1907]). The commercial partnership under the Code of Commerce tended to be a more solemn affair, and when it failed to register its articles of partnership in the mercantile registry, it did not become a juridical person nor did it have any personality distinct from the personality of the individuals who composed it ( Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 [1906]; Bourns v. Carman, 7 Phil. 117 [1906]; Ang Seng Quen v. Te Chico, 7 Phil. 541 [1907]); and therefore could not also maintain an action in its name Prautch, etc. v. Hernandez , 1 Phil. 705 [1903]). In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), which involved a commercial partnership, but the requirements of the Code of Commerce for the execution of public document and registration in the mercantile registry (Art. 119, Code of Commerce) were not complied with, the Supreme Court held that the ―alleged partnership never had any legal existence nor has it acquired any juridical personality in the acts and contracted executed and made by it,‖ ( Ibid , at pp. 500-501) and what was
members of the association with whom they may have transaction business in the name of the same.‖ ( Ibid, at p. 500. ) Thus, the legal consequence of failing to comply with the registration requirements under the Code of Commerce was to make the acting partners personally and primarily liable for all partnership debts. The doctrine is similar to the agency doctrine that an agent who enters into a transaction on behalf of a non-existing principal becomes personally liable for the obligations incurred thereby. In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the civil partnership was engaged in the laundry business and governed by the provisions of the Civil Code, it was held that the partnership existed as a separate juridical person even when no formal partnership agreement was entered into and registered, and thereby the obligations of the partners for partnership debts were held to be pro-rata. Nonetheless, the registration requirements under the Code of Commerce were never interpreted to undermine the obligatory force of contracts entered into in the name of the commercial partners. Thus, it was held in Prautch, etc. v. Jones, 8 Phil. 1 (1907), and affirmed in Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909), that while an unregistered commercial partnership and association has no juridical personality, and as such cannot maintain an action in the partnership name, nevertheless, the individual members may sue jointly as individuals, and persons dealing with them in their joint capacity will not be permitted to deny their right to do so. It was held in De los Reyes v. Lukban, 35 Phil. 757 (1916), and affirmed in Philippine National Bank v. Lo, 50 Phil. 802 (1927), that under the Code of Commerce, where the partners‘ liability for a partnership debt was only secondary or subsidiary, their right of excussion was deemed already satisfied where at the time the judgment was executed against the partnership they were unable to show that there were still partnership assets, or when a writ of execution against the partnership had been returned not fully satisfied. There was under the old set-up the debate of whether a partnership can choose which set of laws should govern it; or whether a group of co-
commercial partnership. In Prautch, et. v. Hernandez , 1 Phil. 705 (1903), it was held – If that section includes commercial partnerships then such a partnership can be organized under it selecting from the Code of Commerce such of its provisions as are favorable to the partners and rejecting such as are not, and even including in its articles of agreement the right to do things which by that Code are expressly prohibited. Such a construction would allow a commercial partnership to use or dispense with the Code of Commerce as best suited its own ends. ( Ibid , at pp. 707-708) . . . Is a commercial partnership distinguished from a civil one by the object to which it is devoted or by the machinery with which it is organized? We think that the former distinction is the true one. The Code of Commerce of 1829 distinctly provided that those partnership were mercantile which had for their object an operation of commerce. (Art. 264.). x x x . The Code of Commerce declares the manner in which commercial partnerships can be organized. Such organization can be effected only in certain well-defined ways. The provisions of this Code were well known when the Civil Code was adopted. The author of that Code when writing article 1667, having in mind the provisions of the Code of Commerce, did not say that a partnership may be organized in any form, which would have repealed the said provisions of the Code of Commerce, but did say instead that a civil partnership may be organized in any form. Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), what the Supreme Court held critical was proper application of Article 1670 of the old Civil Code which provided that civil partnerships, on account of the objects to which they are devoted, may adopt all the forms recognized by the Commercial Code, and thereby held that – It will be seen from this provision that whether or not partnerships shall adopt the forms provided for by the Civil or Commercial Codes is left entirely to their discretion. And furthermore, that such civil partnerships shall only be governed by the forms and provisions of the Commercial Code when they expressly adopt them, and then only in so far as they (rules of the Commercial Code) do not conflict with the provisions of the
in their organization. . . We are inclined to the belief that the respective codes, Civil and Commercial, have adopted a complete system for the organization, control, continuance, liabilities, dissolutions, and juristic personalities of associations organized under each. . . It is our opinion that associations organized under the different codes are governed by the provisions of the respective code. ( Ibid , at pp. 10-11) b. Significance of Knowing the Historical Distinctions Between Civil and Commercial Partnerships What may be considered as a good development in our present Law on Partnerships is the removal of the distinctions between civil and commercial partnerships, and which are now governed by a common set of laws, i.e., the relevant provisions of the New Civil Code. The main drawback of such a development is that even commercial partnerships (and admittedly there may not be quite a number operating due to the availability of the corporate medium), would find themselves governed by non-commercial doctrines, such as the non-central role of the institution of registration. And in fact, many issues have arisen under our current Law on Partnerships arising from having adopted in the New Civil Code provisions from the Code of Commerce on registration requirements. In addition, the ―civil-coding‖ of some of the provisions of the Code of Commerce which were copied into the New Civil Code, should provide a better understanding of the legal consequences of current pro visions of the Philippine Law on Partnerships, and a better constructions of the effects they have on the commercial field, by providing a comparison with the old jurisprudential rulings for commercial partnerships under the provisions of the Code of Commerce.
II. THREE LEVELS OF EXISTENCE OF PARTNERSHIPS The Law on Partnerships under the New Civil Code treats of the partnership in three ―levels of existence,‖ namely: (a) As a contractual relationship between and among the partners; (b) As a means or medium of doing business, through the structure o f separate juridical personality, or as the basis of creating multi -leveled contractual relations among various parties; and (c) As a business enterprise, or a business venture, or what is termed in other disciplines as ‖ a going concern.‖ Knowing the three levels at which the Law on Partnerships treats the partnership arrangement is important in determining the legal significance of the various provisions of the New Civil Code regulating partnerships, as well as a manner of appreciating the doctrinal value of such provisions. 1. Illustrative Partnership
Interplay
of
the
Tri-Level
Existence
of
the
It would be important to illustrate the legal interplay between the three (3) levels of partnership existence, and the legal doctrines that result from such interplay. For this purpose we will use the decision of the Supreme Court in Yu v. NLRC , 224 SCRA 75 (1993). In that decision, the facts indicated that a limited partnership was duly registered with the firm name of ― Jade Mountain Products Company Limited ‖ (―Jade Mountain‖), with the partnership business consisting of exploiting a marble deposit found on land situated in Bulacan, but with the partnership having its main office in Makati, Metropolitan Manila. Benjamin Yu was for many years the Assistant General Manager of the partnership business, but only half of his contracted salary was paid under the agreement that the rest would be paid when the partnership is able to source more funding. Majority of the partners eventually sold their equity (about 82%) and the business to a new set of investors who retained the
partnership did not wish to retain his services. He then sought to recover from the new partnership his salary claims which accrued with the original partnership. Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing from November 1984 to October 1988, moral and exemplary damages and attorney‘s fees, against Jade Mountain under the new partnership. The new partners contended that Mr. Yu was never hired as an employee by the present or new partnership. One of the issues raised was whether the new partnership could be held liable for the claims of Yu pertaining to the old partnership which had been dissolved due to the withdrawal of the leading partners. The basic contention of Mr. Yu was the principle that a partnership has a juridical personality separate and distinct from that of each of its members, which subsisted notwithstanding changes in the identities of the partners. Consequently, the employment contract between Benjamin Yu and the partnership and the partnership Jade Mountain could not have been affected by changes in the lat ter‘s membership. The Court defined the inextricable link of the contract of partnership between the original partners and the juridical personality that arose from the nexus of that contract, and that when the contract was rescinded with the withdrawal of the majority of the partners, then the partnership was dissolved and its separate juridical personality ceased to exists to cover the new set of partners, t hus: Two (2) main issues are thus posed for our consideration in the case at bar: (1) whether the partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and replaced by a new partnership composed of Willy Co and Emmanuel Zapanta; and (2) if indeed a new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights under his employment contract as against the new partnership.
partnership was the dissolution of the old partnership which had hired petitioner in 1984 and the emergence of a new firm composed of Willy Co and Emmanuel Zapanta in 1987. ( Ibid , at p. 80.) The Court held that the applicable rule would be Article 1828 of the Civil Code which defines ―dissolution of a partnership [as] the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished from the winding up of the business.‖ Nonetheless, the determination of the right of Mr. Yu to recover from the new partnership which constituted its own separate juridical personality was based on the fact that it continued the old business enterprise of the dissolved partnership, thus: In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of winding up and closing of the affairs of the partnership. In the case at bar, it is important to underscore the fact that the business of the old partnership was simply continued by the new partners, without the old partnership undergoing the procedures relating to dissolution and winding up of its business affairs. In other words, the new partnership simply took over the business enterprise owned by the preceding partnership, and continued using the old name of Jade Mountain Products Company Limited, without winding up the business affairs of the old partnership, paying off its debts, liquidating and distributing its net assets, and then re-assembling the said assets or most of them and opening a new business enterprise. There were, no doubt, powerful tax considerations which underlay such an informal approach to business on the part of the retiring and the incoming partners. It is not, however, necessary to inquire into such matters. What is important for present purposes is that, under the above described situation, not only the retiring partners (Rhodora Bendal, et al.) but also the new partnership itself which continued the business of the old, dissolved, one, are liable for the debts of the preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al., the Court held that under facts very similar to those in the case at bar, a withdrawing partner remains liable to a third party creditor of the old partnership. The liability of the new partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established in Article 1840 of the Civil
Yu therefore recognized the applicability of the successor liability arising from business enterprise transfer ( i.e., that the creditors of the business enterprise have a right to recover payment of their claims against the transferee of the business enterprise), and recognized that the business enterprise transfer doctrine is governed in details under Article 1840 of the Civil Code. Yu also recognized one of the principles in business enterprise transfers, that the new owners of the business enterprise do have a right to choose who would be employed in their newly acquired business, and they cannot be compelled to maintain the employment contracts of the managers and employees existing with the transferor, thus: It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new general or assistant general manager to run the affairs of the business enterprise taken over. An assistant general manager belongs to the most senior ranks of management and a new partnership is entitled to appoint a top manager of its own choice and confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination, or termination without just or authorized cause. We think that the precise authorized cause for termination in the case at bar was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new owner himself, who personally ran the business of Jade Mountain. Benjamin Yu‘s old position as Assistant General Manager thus became superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one month‘s pay for each year of service that he had rendered to th e old partnership, a fraction of at least six (6) months being considered as a whole year. (Ibid , at p. 83-84.) Another illustrative case is the decision in United States v. Clarin, 17 Phil. 84 (1910), where a partner filed estafa charges against his co-partners for the latter‘s failure to deliver to him his half of the profits from the partnership venture. In denying the applicability of the charges of estafa the Court held – The P172 having been received by the partnership, the business
liquidation of the partnership and a levy on its assets if there should be any. x x x [Estafa] . . . does not include money received for a partnership; otherwise the result would be that, if the partnership, instead of obtaining profits, suffered losses, as it could not be held liable civilly for the share of the capitalist partner who reserved the ownership of the money brought in by him, it would have to answer to the charge of estafa, for which would be sufficient to argue that the partnership had received money under the obligation to return it. The complaint for estafa is dismissed without prejudice to the institution of a civil action. ( Ibid , at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 [1952]). The ruling in Clarin should be distinguished from that in People v. de la Cruz, ( G.R. No. 21732 [1957], 03 September 1924, cited in People v. Campos, (CA) 54 O.G. 681 [1957]) where the industrial partner was held liable for estafa for appropriating money that has been given to him by the capitalist partner for a particular transaction. The doctrine was reiterated in Liwanag v. Court of Appeals, 281 SCRA 255 (1997), ―Thus, even assuming that a contract of partnership was indeed entered into by and between the parties, we have ruled that when money or property have been received by a partner for a specific purpose (such as that obtaining i n the instant case) and he later misappropriated it, such partner is guilty of estafa.‖ Perhaps the interplay of the various levels of existence of the partnership arrangement is best exemplified by the decision of the Supreme Court in Rojas v. Maglana, 192 SCRA 110 (1990). In that case, a partnership was constituted between Rojas and Maglana to operate timber forest products concession, and articles of co-partnership were duly executed and registered with the SEC usi ng the firm name ― Eastcoast Development Enterprises‖. Later, the partners took in an industrial partner, whereby they executed an ―Additional Agreement‖ which essentially adopted the registered articles but covering the acceptance of an industrial partner, which agreement was not duly registered with the SEC, and the partnership operated under the original registered firm name. Shortly thereafter, the original partners bought out the interest, share and participation of the industrial partner in the firm, and the partnership was continued without the benefit of any written agreement or reconstitution of their written articles of co-partnership.
Maglana made a formal demand against Rojas for the payment of his promised contribution to the partnership and compliance with his obligation to perform the duties of logging superintendent as provided expressly in the registered articles of co-partnership. When Rojas responded that he would not be able to comply with his promised contribution and will not work as logging superintendent for the partnership, Maglana gave notice of the dissolution of the partnership. In the suit that ensued between the partners, one of the issues that had to be resolved by the Court was the nature of the partnership and the legal relationship of Rojas and Maglana after the retirement of the industrial partner from the second partnership. On this issue, the trial court ruled that the second partnership superseded the first partnership, so that when the second partnership was dissolved by the withdrawal of the industrial partner, there being no written contract of co-partnership when it was continued by the two o riginal partners, there was no reconstitution of the original partnership, and consequently the partnership that was continued between Rojas and Maglana was a de facto partnership at will. In overruling the court a quo, the Court held – . . . [I]t appears evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution of the second one, which they unmistakable called an ―Additional Agreement‖ . . . Except for the fact that they took in one industrial partner, gave him an equal share in the profits and fixed the term of the second partnership to thirty (30) years, everything else was the same. Thus, they adopted the same name, . . . they pursued the same purposes and the capital contributions of Rojas and Maglana as stipulated in both partnership call for the same amounts. Just as important is the fact that all subsequent renewal of Timber License No. 35-36 were secured in favor of the First Partnership, the original licensee. . . To all intents and purpose therefore, the First Articles of Partnership were only amended, in the form of Supplementary Articles of Co-Partnership . . . which was never registered . . . Otherwise stated, even during the existence of the second partnership, all business transactions were carried out under the duly registered articles. ( Ibid , at pp. 117-118) The Court then proceeded to hold that —
the original partners carrying one with the original partnership business and confirming the obligations constituted under the original articles of partnership. The conclusion of the Court was thus: ―Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of [the industrial partner] can neither be considered as a de facto partnership, nor a partnership at will, for as stressed, there is an existing partnership, duly registered.‖ (Ibid , at p. 118)
Rojas therefore affirms two important aspects in Partnership Law: Firstly , that registration of the contract of partnership with the SEC has the legal effect of binding the partners (and perhaps even third parties dealing with the partnership), as to the contractual obligations, the rights and duties of the partners, and which has effective force even as the partnership undergoes changes within its constitution by the acceptance into and withdrawal of partners into the venture. Secondly , the underlying business enterprise, the manner of its operation, has much legal influence of determining the contractual intents of the partners in the determination of inter-partnership rights and obligations. III. PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP _____ Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. (1665a) Art. 1770. A partnership must have a lawfu object or purpose, and must be established for the common benefit or interest of the partners. Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. (1667a)
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679) _____ Article 1767 of the Civil Code defines a ―contract of partnership‖ as one where ―two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves,‖ and includes in its coverage the exercise of a profession pursued in partnership form. The fact that a partnership is first and foremost a contractual relationship, means that it is subject to the rules, principles and doctrines pertaining to contracts in general, but modified in the sense that a partnership is at the same time a ―medium of doing business‖ or a device for undertaking a venture. This means that the Law on Partnerships must balance between the principles governing the relationship of partners among themselves as contractual parties, and also their rights and obligations with respect to the business venture or undertaking that brought them together in the first place. In other words, parties to a partnership do not come together for the sake of coming together, but in order to achieve as a group, a business venture or undertaking. The various provisions of the Law on Partnerships embodied in the Civil Code address either separately or coordinately these ―levels of existence‖ of a partnership: as contractual relationship, and as a means of doing business. An example showing the essence of a partnership as a contract is provided under Article 1771 which bears the doctrine of ―consensuality‖ governing contracts in general: ―A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.‖ Article 1770 also embodies the principle that the provisions of law are deemed incorporated into every contract, even a contract of partnership as it provides that ―A partnership must have a lawful object or purpose.‖ The primary doctrine that first and foremost the partnership must find its nexus in a contractual relationship is exemplified in the decision in Lyons v. Rosentock , 56 Phil. 632 (1932). In that case, Lyons and Elser were already
Elser in the United States to join him in the venture. Elser wrote back clearly indicating that he was not joining Lyons in the San Juan estate venture. The Court held that the fact that Lyons had used as security for the acquisition of the San Juan estate one of the partnership properties in anticipation that Elser would accept the partnership arrangement, but which Elser definitive refused and the partnership property was substituted by Lyons separate property to secure the venture, did not make Lyons a partner in the San Juan estate venture, since there was never any meeting of minds to constitute such partnership. Lyons demonstrate that before there can be a partnership enterprise, it is necessary that there must having been a meeting of minds to constitute a contract of partnership. 1. Characteristics of the Partnership Contract a. Nominate and Principal The contract of partnership is a nominate contract, not only because it has been given a specific name under the New Civil Code, but it is a principal contract and can exists on its own upon the essential elements coming together at perfection; and that once created there is a set of rules (Law on Partnerships of the New Civil Code) that govern such contract, and the parties to such contract cannot refuse generally to be governed by such provisions. Thus, Article 45 of the Civil Code provides that ―Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships.‖ To illustrate the nominate and principal nature of the contract of partnership, Fernandez v. Dela Rosa, 1 Phil. 671 (1903), held that – The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore, (1) mutual contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these two elements the partnership relation results, and the law itself fixes the incidents of this relation if the parties fail to do so.‖ In resolving the motion for reconsideration on in original decision, the Court even held that ―It is of no importance that the parties have failed to reach an agreement with respect to the minor details of contract. These details pertain to the accidental and not to the essential part of the
A contract of partnership is essentially consensual, it is perfected upon meeting of the minds of the parties of the subject matter to undertake a business venture, and the consideration, which is the obligation to contribute of money, property or service to a common fund. Whether the business enterprise is actually constituted or set-up, or whether or not the contributions have been made into the partnership coffers, do not detract from the coming into existence of a valid partnership contract. And failure to comply with the undertaking to deliver the promised contribution does not make a contract of partnership void, but merely gives a ground for its dissolution. Thus, in the early decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), the Court held that ―The execution of a written agreement was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the contributions of the partners not having been in the form of immovables or rights in immovables.‖ (Ibid , at p. 677). This feature of consensuality of a contract of partnership is now embodied in Article 1772 which provides that ―A partnership may be constituted in any form except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.‖ Although Articles 1772 and 1773 provide for public instrument and registration when the capital contribution i s more than P3,000.00, and that of an inventory attached to the public instrument whenever immovable property is contributed, nonetheless jurisprudence even discount the nullity of the resulting contract of partnership, as will be discussed hereunder. In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court held that when members of the family leased out a parcel of land to SHELL Company, and used the advance rentals paid them to allow one of their members to capitalize the dealership with SHELL, then a partnership has been constituted among them: There is no doubt that the parties hereto formed a partnership when they bound themselves to contribute money to a common fund with the intention of dividing the profits among themselves. The sole dealership by the petitioner and the issuance of all government permits and licenses in
In essence, Estanislao demonstrates that it is the true meeting of the minds of the parties (in this case, to pursue a common venture as a family group) that shall govern the rights and obligations of the contracting parties, and not the evidence of a purported agreement (in this case the dealership agreement being registered only in the name of a brother). In contrast, in Yulo v. Yang Chiao Seng , 106 Phil. 111 (1959), the parties executed a ―partnership agreement,‖ to conduct and carry on the business of operating a theatre for the exhibition of motion and talking pictures; nonetheless, the Court held that the real intention of the parties was to effect a sub-lease of the property and the partnership agreement was resorted to in order to avoid the provision in the main lease agreement prohibiting a sublease of the premises. The Court took into consideration the following actuations of the supposed Yulo partner to show that there as never a real agreement to form a partnership, thus: In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish any help or intervention in the management of the theatre. In the third place, it does not appear that she has ever demanded from defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was to receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the premises which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. ―A‖), whic h shows that both parties considered this offer as the real contract between them. ( Ibid , at p. 117.)
Yulo demonstrates the principle that a contract of partnership is consensual in nature and is constituted by the real meeting of the minds; such that even when formal articles of partnership are drawn-up between the parties, when it fact the evidence shows that they never intended to enter into a partnership, the article of partnership cannot create a partnership when in fact there has never been a meeting of minds to constitute one.
enter into a contract of partnership, from that of executing the certificate of partnership itself. In Woodhouse , the plaintiff and the defendant had come to an agreement to enter into a partnership business to bottle and distribute an American brand softdrinks in the Philippines; and that defendant, who would primarily finance the business, agreed to grant plaintiff the right to receive 30% of the profits under his obligation to secure the bottling franchise for the venture. When the venture was eventually set-up, the defendant had refused to finalize the articles of partnership when he learned during the negotiations in the United States that plaintiff did not have for himself the bottling franchise he promised he had secured. The plaintiff brought action to have the articles of partnership executed and to receive his 30% share in the earnings. Prescinding from the language of the original agreement executed between the parties that the very language of the agreement that the parties intended that the execution of the agreement to form a partnership was to be carried out at a later date. They expressly agreed that they shall form a partnership,‖ (Ibid , at p. 539) the Court held – As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the agreement nor execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation to do, not to give. The law recognizes the individual‘s freedom or liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within what Spanish commentators call a very personal act (acto personalisimo), of which courts may not compel compliance, as it is considered an act of violence, to do so. ( Ibid , at p. 539.) We disagree with the afore-quoted ruling of the Court in that it fails to appreciate the consensual nature of a contract of partnership, and that the moment the parties come to an agreement which basically embodies the formation of a common fund with the intention of dividing the profits, as was the case between the parties in Woodhouse , a contract of partnership arises, and the incidents thereof governed by Partnership Law, even in the absence of a formal certificate or articles of co-partnership. Only recently, Tocao v. Court of Appeals , 342 SCRA 20 (2000), summarized the prevailing doctrine on the nature of the contract of partners, thus —
property or industry to a common fund; and (2) intention on the part of the partners to divide the profits among themselves. It may be constituted in any form; a public instrument is necessary only where immovable property or real rights are contributed thereto. This implies that since a contract of partnership is consensual, an oral contract of partnership is as good as a written one. Where no immovable property or real rights are involved, what matters is that the parties have complied with the requisites of a partnership. The fact that there appears to be no record in the Securities and Exchange Commission of a public instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Code did not cause the nullification of the partnership. . . ( Ibid, at pp. 3031.)
Tocao held that so long as the two essential elements of a partnership are present, then the fact that the business was operated under the name of a registered sole proprietorship was of no moment, especially when the registration of the business name with the Bureau of Domestic Trade was only for purpose of being able to secure such business name. ( Ibid , at p. 36.) c. Onerous and Bilateral The onerous and bilateral characteristics of the contract of partnership are demonstrated by the fact that the existence of a partnership requires an agreement for the creation of a common fund from the contributions of t he partners, which may either be in money, property or industry. Under Article 1786, a partner becomes by its very constitution, ―a debtor of the partnership for whatever he may have promised to contr ibute thereto.‖ All partners are bound to contribute to the common fund, or to the partnership, including even the industrial partner who is bound to contribute his service. d. Preparatory and Progressive A contract of partnership is not entered into for the sake of merely creating a contractual relationship between and among the partners, but primarily to pursue a business enterprise ( i.e., creation of a common fund with intent to share profits and losses). Consequently, falling within the
partnership is simply the base upon which other contracts and various other transactions are to be pursued with the public, and for which the partners shall continually adjust their working relationships. The operation of the underlying business enterprise also determines the nature and value of the equity of the partners. Thus, when the nexus of the contract of partnership (the common fund and intention to divide the profits and losses) have been constituted, other contractual relationships are expected to flow therefrom as a matter of course. An early ill ustration of the preparatory and progressive nature of t he contract of partnership can be found in the decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), where once the elements of contribution to a common fund and understanding of sharing of profits had been clearly established between the parties, a contract of partnership arose and all the incidents arising therefrom automatically engendered even if the parties have not yet decided upon the details of their relationship, thus — . . . We have already stated in the opinion what are the essential requisites of a contract of partnership . . . Considering as a whole the probatory facts which appears from the record, we have reached the conclusion that plaintiff and the defendant agreed to the essential parts of that contract, and did in fact constitute a partnership, with the funds of which were purchased the cascoes with which this litigation deals, although it is true that they did not take precaution to precisely establish and determine from the beginning the conditions with respect to the participation of each partner in the profits or losses of the partnership. The disagreements subsequently arising between them, when endeavoring to fix these conditions, should not and cannot produce the effect of destroying that which has been done, to the prejudice of one of the partners, nor could it divest his rights under the partnership which had accrued by the actual contribution of capital which followed the agreement to enter into a partnership, together with the transactions effected with partnership funds. The law has foreseen the possibility of the constitution of a partnership without an express stipulation by the partners upon those conditions, and has established rules which may serve as a basis for the distribution of profits and losses among the partners. . . We consider that the partnership entered into by the plaintiff and the defendant falls within the provision of this article. ( Ibid , at pp. 680-681.)
IV. ESSENTIAL ELEMENTS OF THE CONTRACT OF PARTNERSHIP ______ Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. (1665a).
(b) SUBJECT MATTER: The ―creation of a common fund‖ or more specifically, to undertake a business venture with the ―intention of dividing the profits among themselves‖, or in the case of a professional partnership, to exercise together a common profession; and (c) CONSIDERATION: The contribution of cash, property or service to the business venture.
1. Element of CONSENT ______
Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners. When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime. (1666a) Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. (1667a) Art. 1784. A partnership begins from the moment of the executio of the contract, unless it is otherwise stipulated. (1679). _____ The Law on Partnership under the New Civil Code begins with its definition under Article 1776 as ―contract of partnership,‖ emphasizing that first and foremost the nexus of the legal relationship is contractual in nature. As in any other contract, the essential elements for a contract of partnership to be valid would be as follows:
Art. 1769. In determining whether a partnership exists, these rules shall apply: (1) Except as provided by Article 1825, pesons who are not partners as to each other are not partners as to third persons; (2) Co-ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which t he returns are derived; (4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment: (a) As a debt by installments or otherwise; (b) As wages of an employee or rent to a landlord;
(d) As interest on a loan, though the amount of payment vary with the profits of the business; (e) As the consideration for the sale of a goodwill of a business or other property by installments or otherwise. (n) _____ a. Consent to Pursue a Business Jointly Is the Nexus of the Partnership Relationship The agreement of two or more persons to ―bind themselves‖ to jointly pursue a business venture constitutes the very nexus by which the contract of partnership arises under Article 1767 of the Civil Code. Under Article 1769 of the Civil Code, ―in determining whether a partnership exists,‖ the first and foremost rule is that ―persons who are not partners as to each other are not partners as to third persons.‖ In other words, the general rules is that no person can find himself a partner in a partnership, even as to third parties, unless he previously consented to be in such contractual relationship. One does not become a partner, nor is a partnership constituted, but the fact alone that they are associated together in situation where there is coownership or profits earned therefrom. Thus, under Article 1769(2), ―Co ownership or co-possession does not of itself establish a partnership, whether such co-owners or co-possessors do or do not share any profits made by the use of the property.‖ The essence of every partnership arrangement is the consent of each of the partners to be associated in a business venture. b.
Legal Capacity to Contract
Parties to a contract of partnership must have legal capacity to contract. Under Article 1782, persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. Under Article 87 of the Family Code, a married woman may enter into a contract of partnership even without her husband‘s consent, but the latter may
Since consent is the nexus of all partnership relationships, the principle is exemplified under Article 1804 of the Civil Code which provides even in an already existing partnership, that no person shall be admitted i nto a partnership, or become a party to the partnership arrangement without the consent of all the partners.
2. SUBJECT MATTER: Pursuit of a Business Enterprise Essentially, the consent or meeting of the minds of the parties in a contract of partnership must be upon a particular type of ―subject matter‖, which essentially is the pursuit of a ‖business enterprise‖: (a) an agreement to contribute to a common fund; and (b) with joint interest in the profits and losses thereof. The agreement to share profits and losses from the business venture is the hallmark of a partnership arrangement. It is also the essence of the ―equity‖ position of the partners vis-a-vis the business enterprise, as differentiated from partnership suppliers and creditors, and company employees, who bear no proprietary interest with the business enterprise they deal with. Article 1769 of the Civil Code, in providing for the rules ―In determining whether a partnership exists,‖ states under paragraph (4) that ―The receipt by a person of a share of the profits in the business is prima facie evidence that he is a partner in the business.‖ In contrast, the same article provides, ―The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived.‖ It is fairly implied under Article 1767, as it defines a contract of partnership, that the essence of the agreement among the partners is to become equity-holders in a business enterprise, because their consent must be the creation of a common fund ―with t he intention of dividing the profits among themselves.‖ The essence of an equity holder is to take the
is operated under the medium of a partnership, such person is not a partner in the venture. In Santos v. Reyes, 368 SCRA 261 (2001), the fact that in their ―Articles of Agreement,‖ the parties agreed to divide the profits of a lending business ―in a 70-15-15 manner, with the petitioner getting the lion‘s share . . . proved the establishment of a partnership,‖ (Ibid , at p. 269.) even when the other parties to the agreement were given separate compensations as bookkeeper and creditor investigator. In Tocao v. Court of Appeals, 365 SCRA 463 (2001), the Court held that a creditor of a business enterprise cannot seek recovery of his claim against the partnership from a person who is without any right to participate in the profits and who cannot be deemed as a partner in the business enterprise, since the essence of partnership is that the partners share in the profits and losses. In Moran, Jr. v. Court of Appeals, 133 SCRA 88 (1984), the Court held that – ―Being a contract of partnership, each partner must share in the profits and losses of the venture. That is the essence of a partnership. And even with an assurance made by one of the partners that they would earn a huge amount of profits, in the absence of fraud, the other partners cannot claim a right to recover the highly speculative profits. It is a rare business venture guaranteed to give 100% profits.‖ ( Ibid , at p. 95) The Court also held that any stipulation on the payment of a high commission to one of the partners must be understood have been based on an anticipation of large profits being made from the venture; and since the venture sustained losses, then there is no basis to demand for the payment of the commissions. Nonetheless, even when a person is entitled to share in the ―profits‖ of the business venture, when the legal basis upon such right is based by some other contractual relationship not bo rne out o f equity or proprietary interests, such as payment of the principal and/or interest on a loan or a debt, wages of an employee, rents to a landlord, annuity to a widow or
business venture must always be based upon the assumption of equity interest in the business enterprise upon which the contract of partnership shall arise. a. Co-ownership or Co-Possession Do Not Necessarily Constitute a Partnership In Navarro v. Court of Appeals, 222 SCRA 675 (1993), the Court held that mere co-ownership or co-possession of property does not necessarily constitute the co-owners or co-possessors partners, regardless of whether or not they share any profits derived from the use of the property, when no indication is shown that the parties had intended to enter into a partnership. In Obillos, Jr. v. Commissioner of Internal Revenue, 139 SCRA 436 (1985), four brothers and sisters acquired lots with the original purpose to divide the lots among themselves for residential purposes; when later they found it not feasible to build their residences thereon because of the high cost of construction, they decided to resell the properties to dissolve the coownership. The Court ruled that no partnership was constituted among the siblings, since the original intention was merely to collectively purchase the lots and eventually to partition them among themselves to build their residences; and that in fact they had no choice but to resell the same to dissolve the co-ownership. Obillos found that the division of the profits was merely incidental to the dissolution of the co-ownership which was in the nature of things a temporary state; and that there could not have been any partnership, but merely a co-ownership, since there was utter lack of intent to form a partnership or joint venture. In contrast, in Reyes v. Commissioner of Internal Revenue, 24 SCRA 198 (1968), the Court found that where father and son purchased a lot and building and had it administered by an administrator, and divided equally the net income, there was a partnership formed because profit was the original intention for the common fund. Likewise in Evangelista v. Collector of Internal Revenue , 102 Phil. 140 (1957), where three sisters bought four pieces of real property with every intention to lease them out, and which they in fact leased to various
Under Article 1769(4), the receipt by a person of a share of the net profits of a business is prima facie evidence that he is a partner in the business. However, in the following cases, where there is legal and contractual basis for the receipt of the profits other than as equity holder, there is no partnership constituted, thus: (a) As installment payments of debt and/or interests thereof; (b) As wages of an employee; (c) As rentals paid to a landlord; (d) As annuity to a widow or representative of deceased partner;
and no separate bank accounts kept for that particular line of business. The arrangement was deemed to be one of employment, with Bastida contributing his services to manage the particular line of business of Menzi & Co.
Tocao v. Court of Appeals, 342 SCRA 20 (2001), held that ―while it is true that the receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a partner in the business, the evidence in the case at bar controverts an employer-employee relationship between the parties. In the first place, private respondent had a voice in the management of the affairs of the cookware distributorship, including selection of people who would constitute the administrative staff and the sales force.‖ ( Ibid, at pp. 33-34).
(e) As consideration of sale of goodwill or other property.
c. Meeting of Minds on the Establishing a Common Fund Is the Essence of a Partnership Contract
Thus, in Pastor v. Gaspar , 2 Phil. 592 (1903), the Court held that there was no new partnership formed when a loan was obtained to purchase lorchas needed to expand the shipping business of an existing shipping partnership venture under the condition that the lender would receive part of the profits of the business in lieu of interests.
All the foregoing examples indicate that what brings about a contract of partnership is essentially an agreement to constitute a common fund with the intention of dividing the profits and losses; outside of these essential elements, a contract of partnership cannot subsist.
In Fortis v Gutierrez Hermanos, 6 Phil. 100 (1906), where the t erms of the contract provided for the salary of the bookkeeper to be 5% of net profits of the business, the same did not make the bookkeeper a partner in the business, since it was merely a measure of his salary as an employee of the company. To the same effect is the ruling in Sardane v. Court of Appeals, 167 SCRA 524 (1988). In Bastida v. Menzi & Co., 58 Phil. 188 (1933), the Court held that despite the agreement that Bastida was to receive 35% of the profit from the business of mixing and distributing fertilizer registered in the name of Menzi & Co., there was never any contract of partnership constituted between them based on the following key elements: (a) there was never any common fund created between the parties, since the entire business as well as the expenses and disbursements for operating it were entirely for the account of Menzi & Co.; (b) there was no provision in the
The importance of consent, vis-a-vis the elements of common fund and intention to divide the profits among themselves, is best illustrated in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), where in fact the parties had executed formal articles of partnership, and yet the Court found that the real intention of the parties was really to constitute a relation of sublease between the parties over a commercial land where one party (the lessee) was prohibited under her main contract of lease from subleasing the property, and the other party (the sublessee) wanted to operate a threater in said premises. The Court held – The most important issue raised in the appeal is that contained in the fourth assignment of error, to the effect that the lower court erred in holding that the written contracts, Exhs. ―A‖, ―B‖, and ―C‖, between plaintiff and defendant, are one of lease and not one of partnership. We have gone over the evidence and we fully agree with the conclusion of the trial court that the agreement was a sublease, not a partnership. The
fund; (2) intention on the part of the partners to divide the profits among themselves. (Art. 1767, Civil Code.) In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish any help or intervention in the management of the theatre. In the third place, it does not appear that she has ever demanded from defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was to receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the premises which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of June 17, 1945 (Exh. ―A‖), which shows that both parties considered this offer as the real contract between them.‖ ( Ibid , at pp. 116-117) In the more contemporary decision in Estanislao, Jr. v. Court of Appeals , 160 SCRA 830 (1988), the Court affirmed the decision of the trial court ―Ordering the defendant to execute a public instrument embodying all the provisions of the partnership agreement entered into between plaintiffs and defendant as provided for in Article 1771, Civil Code of the Philippines.‖ In that case, the siblings in a family leased out to SHELL a family commercial lot for the establishment of a gasoline station, and they invested the advanced rentals they received from SHELL to allow one their brother to be the registered dealer of SHELL under the latter‘s policy of ―one station, one dealer,‖ and that in fact the registered dealer had accounted for the operations to the other members of the family. When later on he stopped accounting for the operations, and refused to acknowledge the existence of a partnership over the gasoline station, the Court held – Moreover other evidence in the record shows that there was in fact such partnership agreement between the parties. . . Petitioner submitted to private respondents periodic accounting of the business. . . gave a written authority to private respondent . . ., his sister, to examine and audit the books of their ―common business‖ ( aming negosyo). . . . There is no doubt
issuance of all government permits and licenses in the name of petitioner was in compliance with the afore-stated policy of SHELL and the understanding of the parties of having only one dealer of the SHELL products. (Ibid , at p. 837) The other important aspect is determining whether a partnership has been constituted among several persons, is that under our tax laws, a partnership is treated like a corporate taxpayer and liable separately for income tax for its operations apart from the individual income tax liabilities of each of the partners. Thus, in Evangelista v. Collector of Internal Revenue, 102 Phil. 140 (1957), three sisters borrowed a huge amount of money from their father, and with their personal funds, purchased under several transactions real estate properties, and subsequently appointed their brother as manager thereof who leased them out to various lessees. Eventually, the Collector of Internal Revenue assessed them for the payment of corporate income tax they have been operating the real estate venture. In arguing that they have never formed a partnership, and that they merely constituted themselves a co-owners of the properties bought pro indiviso, the Court held – Pursuant to this article, the essential elements of a partnership are two, namely: (a) an agreement to contribute money, property or industry to a common fund; and (b) intent to divide the profits among the contracting parties. The first element is undoubtedly present in the case at bar, for, admittedly, petitioners have agreed to, and did, contribute money and property to a common fund. Hence, the issue narrows down to their intent in acting as they did. Upon consideration of all the facts and circumstances surrounding the case, we are fully satisfied that their purpose was to engage in real estate transactions for monetary gain and then divide the same among themselves, because: 1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso. They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common fund.
the last three purchases, is strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the aforementioned common fund or even of the property acquired by petitioners in February, 1943. In other words, one cannot but perceive a character of habituality peculiar to business transactions engaged in for purposes of gain. 3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties were leased separately to several persons, who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the utilization thereof. 4. Since August, 1945, the properties have been under the management of one person, namely, Simeon Evangelista, with full power to lease, to collect rents, to issue receipts, to bring suits, to sign letters and contracts, and to indorse and deposit notes and checks. Thus, the affairs relative to said properties have been handled as if the same belonged to a corporation or business enterprise operated for profit. 5. The foregoing conditions have existed for more than ten (10) years, or, to be exact, over fifteen (15) years, since the first property was acquired, and over twelve (12) years, since Simeon Evangelista became the manager. 6. Petitioners have not testified or introduced any evidence, either on their purpose in creating the set up already adverted to, or on the causes for its continued existence. They did not even try to offer an explanation therefore. ( Ibid , at pp. 144-146.) In other words, the essence of the contract of partnership is that the partners ―contract or bind themselves under a contractual arrangement‖ to be joint owners and managers of a business enterprise, which is highlighted by the right to receive the net profits and share the losses therein. Article 1770 of the Civil Code provides that for a partnership contract to be valid it ―must be established for the common benefit or interest of the partners,‖ which clearly indicates the equity or
property arrangement does not make him a partner because he is not made to bear the burdens of ownership, i.e.,to be liable for expenses and losses of the business enterprise. The decision in Ona v. Commissioner of Internal Revenue , 45 SCRA 74 (1972), is illustrative of this principle. In Ona, in the project partition agreed upon by the heirs the agreed to keep the properties of the estate together and to divide the profits in proportion to their stipulated interests therein. In holding that there was thereupon constituted among the coheirs an unregistered partnership subject to corporate income tax under the Tax Code, the Court held – It is thus incontrovertible that petitioners did not, contrary to their contention, merely limited themselves to holding the properties inherited by them. Indeed, it is admitted that during the material years herein involved, some of the said properties were sold at considerable profit and that with said profit, petitioners engaged, thru Lorenzo T. Ona, in the purchase and sale of corporate securities. It is likewise admitted that all the profits from these ventures were divided among petitioners proportionately in accordance with their respective shares in the inheritance. . . the moment petitioners allowed not only the incomes from their respective shares of the inheritance but even the inherited properties themselves to be used by Lorenzo T. Ona as a common fund in undertaking several transactions or in business, with the intent ion of deriving profits to be shared by them proportionally, such act was tantamount to actually contributing such incomes to a common fund and, in effect, they thereby formed an unregistered partnership. ( Ibid , at p. 81.)
Gatchalian v. Collector of Internal Revenue, 67 Phil. 666 (1939), where fifteen people contributed money to buy a sweepstakes ticket with the intention to divide the prize which they may win, and in fact the ticket won third prize, the Court ruled that they had formed a partnership which was subject to tax as a corporate taxpayer. Likewise, in Gallemet v. Tabilaran, 20 Phil. 241 (1911), the Court held that when land is purchased with equal funds to be contributed by the parties, and it was the clear intention to divide the property between the two of them after acquisition, there could not have been formed a partnership.
There have been cases where the existence of the business enterprise became the basis by which the courts would conclude that indeed a contract of partnership had been entered into by the parties. In Idos v. Court of Appeals,] 296 SCRA 194 (1998), in determining whether the partnership enterprise continued to exist and has not been terminated, the Court ruled that ―The best evidence of the existence of the partnership, which was not yet terminated (though in the winding up stage), were the unsold goods and uncollected receivables, which were presented to the trial court. Since the partnership has not been terminated, the petitioner and private complainant remained as copartners.‖ ( Ibid , at p. 206.) In Tocao v. Court of Appeals, 342 SCRA 20 (2000), citing the ruling in Idos, the Court held that the fact that the claiming party ―had been unceremoniously booted out of the partnership . . . she still received her overriding commission (Ibid , at p. 36) . . . The winding up of partnership affairs has not yet been undertaken by the partnership. This is manifest in petitioners‘ claim for stocks that had been entrusted to private respondent in the pursuit of the partnership business.‖ ( Ibid , at p. 38.) e. Doctrine of “Attributes of Proprietorship” as a Means to Prove or Disprove the Existence of a Partnership There are a number of decisions that use the hazy doctrine of ―attributes of proprietorship‖ as one of the indications of the existence of a contract of partnership or a partnership venture. We take the decision in Tocao v. Court of Appeals, 342 SCRA 20 (2000), where the main issue was whether there existed a contract of partnership between three parties, namely Tocao, Bello and Anay, in the face of the assertions of both Tocao and Bello that there was no partnership agreement entered into considering that: (a) there was no written agreement embodying the alleged partnership agreement, and that in fact the business was registered with the government authorities as a single proprietorship in the style of ―Geminesse Enteprise‖ in the name of Tocao; (b) Bello asserts that he never gave any contribution to the venture, but merely guaranteed its credit standing; and (c) Anay never contributed
In brushing aside the assertions of no contract of partnership, the Court, apart from holding that a contract of partnership need not be in writing to be valid and enforceable, held that all three parties had by the evidence adduced exercised rights of proprietorship on the business venture as to show without doubt the existence o f a partnership, thus: Petitioners [Tocao and Belo] admit that private respondent [Anay] had the expertise to engage in the business of distributorship of cookware. Private respondent contributed such expertise to the partnership and hence, under the law, she was the industrial or managing partner. It was through her reputation with the West Bend Company that the partnership was able to pen the business of distributorship of that company‘s cookware products; it was through the same efforts that the business was propelled to financial success. Petitioner Tocao herself admitted private respondent [Anay] held the positions of marketing manager and vice-president for sales . . . x x x. ( Ibid , at p. 31; underscoring supplied ) By the set-up of the business, third persons were made to believe that a partnership had indeed been forged between petitioners [Tacao and Belo] and private respondent [Anay] . . . On the other hand, petitioner Belo‘s denial that he financed the partnership rings hollow in the face of the established fact that he presided over meeting regarding matters affecting the operation of the business. Moreover, his having authorized in writing . . . that private respondent should receive thirty-seven (37%) of the proceeds of her personal sales, could not be interpreted otherwise than that he had a proprietary interest in the business. His claim that he was merely a guarantor is belied by that personal act of proprietorship in the business . . . ( Ibid , at p. 32;underscoring supplied ) The business venture operated under Geminesse Enterprise did not result in an employer-employee relationship between petitioners and private respondent. While it is true that the receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is a partners in the business, the evidence in the case at bar controverts an employeremployee relationship between the parties. In the first place, private respondent had a void in the management of the affairs of the cookware
The exercise of the prerogatives of a proprietor should be viewed as merely collaborative evidence of the partnership relationship between the parties in a business venture; in the end the existence of the contract of partnership must be located in the actual meeting of minds to constitute a common fund and to divide the profits thereof among themselves. The reason why exercising the prerogatives of proprietorship or participating in the management of the business enterprise cannot on their own be weighty evidence to prove the existence of a partnership agreement is because, it is logical for a business enterprise, whether it is operated as a partnership or a single proprietorship, to actually appoint a manager or other agents, authorized to exercise acts of management, without being owners or partners of the b usiness venture. In any event, the application of the suppletory doct rine of ―attributes of proprietorship‖ in jurisprudence is a recognition that a partnership arrangement is in essence a contractual aggregation of sole proprietors, who come together to form a common venture, each acting very much a proprietor of the business venture, while at the same time as agents to one another. The recent decision in Sy v. Court of Appeals , 398 SCRA 301 (2003), succinctly summarizes the badges that would normally accompany a partnership relationship, thus: Article 1767 of the Civil Code states that in a contract of partnership two or more persons bind themselves to contribute money, property or industry to a common fund, with the intention of diving the profits among themselves. Not one of these circumstances is present in this case [which sought to make the truck driver of the company of many years to be characterized as an industrial partner]. No written agreement exists to prove the partnership between the parties. Private respondent did not contribute money, property or industry for the purpose of engaging inthe supposed business. There is no proof that he was receiving a share in the profits as a matter of course, curing the period when the trucking business was under operation. Neither is there any proof that he had actively participated in the management, administration and adoption of policies of the business. ( Ibid , at p. 308.)
common fund or sharing of profits had been adduced during trial. The Court held – Besides, it is indeed odd, if not unnatural, that despite the forty years the partnership was allegedly in existence, Tan Eng Kee never asked for an accounting. The essence of a partnership is that the partners share in the profits and losses. Each has the right to demand an accounting as long as the partnership exists. We have allowed a scenario wherein ―[i] excell ent relations exists among the partners at the start of the business and all the partners are more interested in seeing the firm grow rather than get immediate returns, a deferment of sharing in the profits is perfectly plausible.‖ [Fue Lung v. IAC , 169 SCRA 764, 755 (1989)]. But in the situation in the case at bar, the deferment, if any, had gone too long to be plausible. A person is presumed to take ordinary care of his concerns. . . A demand for periodic accounting is evidence of a partnership. (Ibid , at pp. 755-756, citing Estanislao, Jr. v. Court of Appeals , 160 SCRA 830, 837 [1988]). f. When Subject Matter (the Business Venture) Is Unlawful or Against Public Policy When the subject matter of a contract of partnership is unlawful, Article 1770 of the Civil Code provides that the contract is void; and being void the purported partners have no right to participate in any profits that may have been earned by the partnership enterprise. Thus, the article provides that ―the profits shall be confiscated in favor of the State.‖ In Arbes v. Polistico, 53 Phil. 489 (1929), a partnership organized to engage in illegal gambling was declared void by judicial order, and pursuant to the provisions of Article 1770, all the profits earned were deemed confiscated in favor of the state. However, it decreed that the partners had a right to recover their contributions, thus: Our Code does not state whether, upon the dissolution of the unlawful partnership, the amounts contributed are to be returned to the partners, because it only deals with the disposition of the profits; but the fact that said contributions are not included in the disposal prescribed for said profits, shows that in consequence of said exclusion, the general rules of
possession of the manager or administrator who has refused to return them, by denying to the partners the action to demand them. ( Ibid , at p. 495, quoting from MANRESA, COMMENTARIES ON THE SPANISH CIVIL CODE, Vol. XI, pp. 262-264.) In Deluao v. Casteel , 26 SCRA 475 (1968), the Court held that a contract of partnership that sought to divide between the two partners-applicants the fishpond in contravention of the prohibitory provisions of law was deemed dissolved when the Government did finally issue a fishpond permit to one of the partners.
(e) Article 1830(4), which decrees the dissolution of a partnership when the specific thing, which a partner had promised to contribute to the partnership, perishes before the delivery.
City of Manila v. Cumbe, 13 Phil. 677 (1909), held that ―credit‖, such as a promissory note or other evidence of obligation, or even a mere goodwill, may be validly contributed into the partnership. In other words, if service is a valid contribution to the common fund, then more so when it comes to intangible things, rights and chooses in acti on. 4. Other Essential Elements of Partnership
3. CAUSE or CONSIDERATION: Promised Contributions In a contract of partnership, it is held that the cause or consideration for each partner is the undertaking of the other or others to contribute money, property or industry to a common fund ( i.e., to the business venture). Being essentially a consensual is characteristic, a contract of partnership is perfected by the agreement by the partners to make such contribution (i.e., by the assumption of the obligation to contribute or to render service). The essence of the element of cause or consideration in every contract of partnership is emphasized in: (a) Article 1786, which declares every partner to be a debtor of the partnership for whatever he may have promised to contribute; (b) Article 1787, which makes a partner liable for interest and damages for failing to contribute the sum of money he was bound to pay under the articles of partnership; (c) Article 1789, which prohibits an industrial partner from engaging in business for himself, since he bound himself to contribute service to the partnership; (d) Article 1790, which presumes an obligation to contribute equal shares among the partners when there is no stipulation as to manner and
Although American jurisprudence would consider two other elements to be essential for the contract of partnership to exist, namely: (a) the purpose of a purpose must be to engage in some business enterprise; and (b)
the element of joint control (BAUTISTA, at p. 4);
the same are also present in Philippine Partnership Law. As discussed above, the subject matter of every contract of partnership must be the agreement to jointly pursue a business enterprise. Thus, in Fernandez v. De la Rosa, 1 Phil. 671 (1903), it was held that ―a joint interest in the profits‖ would constitute one of the ―essential points upon which the minds of the parties must meet in a contract of partnership.‖ (Ibid , at pp. 675-676) The element of ―joint control‖ is embodied in the provisions of law that provides for mutual agency in a partnership arrangement. (Art. 1810(3) provides that one of the property rights of a partner is ―His right to participate in the management.‖ Art. 1818 of the Civil Code provides that ―Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership.‖
‗The object of this association shall be to perpetuate the spirit of patriotism and fraternity those men who upheld the Stars and Stripes in the Philippine Islands during the Spanish war and the Philippine insurrection, and to promote the welfare of its members in every just and honorable way; to assist the sick and afflicted and to bury the dead, to maintain among its members in time of peace the same union and harmony with which they served their country in times of war and insurrection.‘‖ ( Ibid , at p. 686.) The Court had raised the point that: ―It seems to be the opinion of the commentators that where the society is not constituted for the purpose of gain, it does not fall within this article of the Civil Code. Such an organization is fully covered by the Law of Associations of 1887, but that law was never extended to the Philippine Islands.‖ ( Ibid , at p. 687.) Nonetheless,Council of Red Men applied the then old Civil Code rule on civil partnership. The only form of partnership where ―business consideration‖ or the ―gaining of profits‖ is not t he primary consideration for the common fund would be the authorized professional partnerships; but even in such cases the Court has considered that a profession is pursued as part of the livelihood undertaking of the partners. ( In the Matter of the Petition for Authority to Continue U se of Firm Name “Sycip, Salazar, et.al. Ozaeta, Romulo, etc.,‖ 92 SCRA 1 [1979].) The element of ―joint control‖ is actually specified as the property rights of a partner under Article 1810 ―to participate in the management‖, as well as the confirmation of the attribute of ―mutual agency‖ under Article 1818 confirming that ―Every partner is an agent of the partnership for the purposes of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership.‖ 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,
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 tha t 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.‖
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
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 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 a ssociations 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
b. Jurisprudential Application of the Doctrine of Separate Juridical Personality of the Partnership In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the contention that since the defendant sued was a partnership that summons must be served upon each of the partners, the Court held – [I]t has been the universal practice in the Philippine Islands since American occupation, and was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as legal or juridical entities and to permit them to sue and be sued in the name of the company, the summons being served solely on the managing agent or other official of the company by the section of the Code of Civil Procedure.‖ ( Ibid , at p. 448) The decision in Campos Rueda & Co. v. Pacific Commercial Co. , 44 Phil. 916 (1923), demonstrates how the separate juridical personality accorded to a partnership arrangement makes certain rules on insolvency work differently as compared to American jurisprudence on the same matter. In Campos Rueda a petition for involuntary insolvency was filed by the creditors of the limited partnership for an act of insolvency provided under the Insolvency Act ( i.e., having failed to its obligations with three creditors for more than thirty days). The trial court denied the petition on the ground that it was not proven, nor alleged, that the partners of the firm were insolvent at the time the application was filed; and that as said partners are personally and solidary liable for the consequences of the transactions of the partnership, it cannot be adjudged insolvent so long as the partners are not alleged and proven to be insolvent. In ruling that the denial of the petition for insolvency was in error, the Court held – Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This being so and the juridical personality of a limited 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
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 b e 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 piercin g 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:
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 i nterests 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 , in Aguila, 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
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 entitled to the constitutional constitutiona l guarantee to due process and equal protection, ( Smith, Bell & Co. v. Natividad , 40 Phil. 136 [1919]; Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA 823 [1971]) the rights against unreasonable searches and seizure; ( Stonehill v. Diokno , 20 SCRA 383 [1967]) but not to the right against self-incrimination. (Bataan Shipyard and Engineering Co., Inc.. v. PCGG, 150 SCRA 181 [1987]). In Smith, Bell & Co. v. Natividad , 40 Phil. 136 (1919), discusses the rationale why corporations would be entitled to constitutional guarantees accorded to individuals, thus: The guarantees of the Fourteenth Amendment and so of the first
. . Private corporations, likewise, are ‗persons‘ within the scope of the guaranties in so far as their property is concerned. . . ( Ibid , at p. 144) The Smith, Bell & Co. rationale has equal application to partnerships which are accorded as separate persons under the Partnership Law. The better rationale applicable to partnership would be the ruling in Bache & Co. (Phil.), Inc. v. Ruiz , 37 SCRA 823 (1971), where the Court held that a corporation is entitled to immunity against unreasonable searches and seizures because ―A corporation is, after all, but an association of individuals under an assumed name and with a distinct legal entity. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. Its property cannot be taken without compensation. It can only be proceeded against by due process of law, and is protected, under the 14th Amendment, against unlawful discrimination.‖ ( Ibid , at p. 837, quoting from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652). In fact, in the partnership setting there is closer identity between the partners and the partnership in the sense that the partners not only own the partnership and its affairs and they directly manage the affairs of the partnership, but more so that the separate juridical personality is closely identified with the personality of the partners under delectus personae considerations. On the other hand, the Court‘s ruling on why corporatio ns 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
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
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 compo se 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 selfincrimination 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.
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 comm on 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.
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
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. VII. ESSENTIAL ATTRIBUTES OF THE PARTNERSHIP _____ Art. 1767. By the contract of partnership two or more persons binds themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1712, first paragraph (n) _____ 1. Attributes of the Partnership Every partnership existing under the Law on Partnerships of the Civil Code
(b) Mutual agency;
partners or such of them as habitually acted therein during the term, without any settlement or liq uidation of the partnership affairs.‖
(c) Delectus personae; (d) Partners Burdened with Unlimited (except for limited partners in a limited partnership).
Liability
An understanding of each of the partnership attributes provides a better appreciation of the multifarious functions of the partnership in the Philippine commercial setting. 2. Non-Solemn or Consensual Juridical Personality In contrast to the corporate juridical personality which can only arise and can only be terminated by complying with the formal processes and procedures approved by the State, the juridical personality accorded to every partnership under Article 1768 of the Civil Code is best described to be ―informal‖, or better yet merely ―consensual‖, as distinguished from being ―formal‖ or ―solemn‖ characteristic. It is very well implied from the substance and sequence of Articles 1767 and 1768 of the Civil Code that the existence of a separate juridical personality for a partnership is conditioned on the perfection and validity of a contract of partnership; and that the separate juridical personality arises as a mandatory consequence under the law from the perfection of a contract of partnership. Consequently, as the contract of partnership is best described as a consensual contract, it follows necessarily that the constitution of a partnership juridical personality would also be consensual. The general rule under Article 1771 is that ―a partnership may be constituted in any form.‖ To illustrate, the partnership‘s separate juridical personality arises in the privacy of the perfection of the contract of partnership: Article 1768 provides that the ―partnership has a juridical personality separate and distinct from that of each of the partnership,‖ which under Article 1784 ―begins from the moment of the execution of the contract, unless it is otherwise stipulated.‖ So informal or casual is the attitude of the law on
What is the reason for the legal attitude of being rather “informal” on the juridical personality of the partnership? It seems from the provisions of the Law on Partnerships of the Civil Code that the ―separate juridical personality‖ granted to the partnership contractual relationship between and among the partners, and the underlying partnership business enterprise, is not the centerpiece of the Partnership Law, but merely an ―add on‖ to allow the business venture to be run more efficiently by the owners thereof (the partners), and to make dealings by it with the public easier and pursued with more efficiency. After all, in common law traditions the partnership has survived and thrived in a setting that does not accord it a juridical personality. In other words, the civil law tradition of providing a partnership with a juridical personality separate and distinct from the partners—or properly speaking, to clothe the business enterprise with a juridical person by which it can better deal with the public —is meant to add to t he commercial efficiency of the partnership both as a medium of association and as a medium of doing business. The default rule of according by operation of law a juridical personality to a partnership arrangement, makes it a cheaper medium of doing business. Therefore, if the manner by which to achieve juridical personality be made more rigorous and formal, then it makes the partnership medium a more expensive proposition, and therefore unattractive especially for businessmen and merchants who embark on modest ventures. a. Exceptions to Personality
Informal or
Consensual Nature
of
Juridical
The only time in the Civil Code when the contract of partnership (and therefore likewise with the partnership juridical person) must assume a ―solemn‖ or ―formal‖ character covers three expressed instances: (a) Under Article 1772, that every contract of partnership having a capital of P3,000 or more shall appear in a public instrument, which must be recorded with the Securities and Exchange Commission (SEC).
(i)
in which case a public instrument shall be necessary; and
(ii) the contract of partnership is void, if an inventory of said property is not made, signed by the parties and attached to the public instrument;
nonetheless in a proper case of estoppel, the courts treated such unregistered commercial partnership as a de factopartnership with a personality of its own in order to protect the rights of third persons. 3. Weak Juridical Personality
(c) Under Articles 1843 and 1844, which requires particular provisions describing limited partners in the articles of limited partnership, and which must be formally registered with the SEC. When the capital contributions not involving real property are in excess of P3,000, and there is failure to comply with the requirement for public instrument and recording with the SEC, Article 1772 does not expressly state what happens to the legal status of the contract of partnership. In fact, Article 1772 provides that ―Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons.‖ What then is the purpose of the law in imposing solemn requirements for partnerships with capital contributions of P3,000, if failure to comply therewith does not present any dire legal consequences? On the other hand, the law is clear that when what is contributed to the partnership is immovable property, and there is failure to provide for an inventory thereof to be attached to the public instrument to be registered with the SEC, the resulting partnership is ―void.‖ The exception when it comes to real property contributions is the public policy contained in our Civil Code and in other special laws, that considers real property as constituting a cornerstone in our economic life, and that dealings therewith must be formal and public, which would afford to the public a reliable means to determine the status of ownership and the existing liens of real property. The only other exception to the informal or consensual nature of the partnership juridical personality would be the mandatory registration requirements for the valid constitution of the limited partnership. Again, this is in line with the principle that limited liability to the owners of a business enterprise is unusual, and if it is to exist to bind the public, it must be pursued and reflected in a formal manner.
On the other hand, the juridical personality of the partnership is ―weak‖ because it can be put asunder without need of formal dissolution process, and by the will of any of the partners or all of them, or even by chance. To illustrate, under Article 1830 of the Civil Code, the partnership may be dissolved by: (a) Express will of any partner, either acting in good faith or even when not in good faith and in contravention of the agreement; (b) Express will of all the partners; (c) Expulsion of any partner; (d) Any event which makes the partnership business unlawful; (e) Loss before delivery of the property promised to be contributed by the partner; (f)
Death, insolvency, or civil interdiction of any partner;
(g) By court decree, when a partner has been declared insane or incapacitated, or guilty of conduct prejudicial to the partnership business or in breach of the agreement, or when the partnership business can only be carried at a loss. The complaint has often been heard in business and legal fora that one of the disadvantages of the partnership medium is that it have a weak juridical personality. I believe that such an observation is misplaced and fails to appreciate the fact that it makes no sense for the Law on Partnerships to infuse a medium that it seeks to invite businessmen and
of the partnership juridical personality is a clear advantage for the partnership as a medium of association and as a medium of doing business.
What is the reason by the law endows the partnership juridical personality with such weakness? The separate juridical personality is employed only to allow the partners and the partnership venture to attain their objectives, and it is either brushed aside or set aside when it begins to obstruct such objectives. The value of the separate juridical personality of the partnership cannot override a value of greater importance in the Law of Partnerships best exemplified by the aphorism, that above all, the partnership is a contractual and personal relationship among the partners who associate together to be able to pursue a business venture collectively. In other words, everything is personal in a partnership set-up, and this is best exemplified by the attributes of ―mutual agency‖ and ―delectus personae‖.
Properly appreciated, a partnership is simply a conglomeration of two or more sole proprietorships, where the original sole proprietor continues to manage his business and also the business of the other proprietors in the association. Consequently, as a sole proprietor is liable with his other assets for the liabilities incurred by his business, then in the same manner, the partners will also be liable personally and for other non-contributed assets for the liabilities incurred by their combined business enterprises. 5. Delectus Personae Bautista refered to delectus personae as follows: ―. . . For, in accordance with the principle of delectus personae (selection of persons), one selects his partners on the basis of their personal qualifications and qualities, such as solvency, ability, honesty, and trustworthiness, among others. It is for this reason that there is mutual representation among the partners so that the act of one is considered the act and responsibility of the others as well.‖ (BAUTISTA, at p. 95)
4. Mutual Agency The default rule under Article 1803(1) of the Civil Code is that each of the partners is an agent of the partnership and all of the other partners in the pursuit of partnership affairs, thus: ―When the manner of management has not been agreed upon . . . All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership.‖ Article 1818 of the Civil Code provides that ―Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in the partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnersh ip.‖ The principle of mutual agency lies at the heart of the partnership arrangement because it defines the prerogative of every partner to participate in the management of the partnership business. It is one of the more important manifestation of the position of the partners as ―owners‖ or ―equity holders‖ of the partnership business enterprise. It also brings into focus the reality that the partnership arrangement is of the most personal of nature, that the parties thereto are not only investors but
The best way to define the concept of delectus personae is that the contract of partnership creates the most personal relationship between and among the partners which when broken, also breaks the bond of the partnership. The doctrine emphasizes the personal-contractual relationship between and among the partners as being more important than the property rights and the business enterprise created in the partnership. Thus, Article 1770 of the Civil Code provides that ―[a] partnership . . . must be established for the common benefit or interest of the partners.‖ The doctrine of delectus personae can be viewed in two ways:
Firstly , it is the embodiment of the principle of relativity or privity in contracts: a partnership arrangement being primarily a contractual relationship, then the privity that is created by its perfection is between and among the partners thereto at the point of perfection; and that such privity cannot be extended beyond the partners without the consent of all the other parties to the contract of partnership. To illustrate the point, although Article 1810 of the Civil Code recognizes that ―interest in the partnership‖ is a property right of a partner,
partnership without the consent of all the other partners, even if the partner having an associate should be a manager.‖ The privity created by the contract of partnership is of the group of partners who consent, that the moment one partner is gone the privity is broken and the partnership contract is terminated. In other words, if five parties come together into a partnership agreement, the privity retains its integrity among the five, and not just between two or three or four of the members. Thus, under Article 1830, the partnership is dissolved by the expulsion, death, insolvency, civil interdiction of any of the partners.
Secondly , that the relationship established in a contract of partnership is of the most fiduciary character, or of the most confidential manner, that once that thrust or confidence is lost, the contract is deemed breached or at least at an end. This is fortified by the fact that the partners are mutual agents to one another, and essentially the relationship between and among them is of fiduciary character, and the character of every agency relation is that it is essentially revocable. Consequently, when the articles of partnership provide for a definite term of existence, under Article 1830, a partnership can be dissolved in midstream ―By the express will of any partner, who must act in good faith.‖ Even the separate juridical personality of the partnership enterprise cannot save the partnership from being dissolved under the rule that the termination of the contract of partnership terminates the separate juridical personality as well. The features of mutual agency and delectus personae define the rights and liabilities of the partners in a partnership arrangement, and constitute the underlying reason why partners are personally liable for partnership debts beyond their contributions and to the extent of their separate properties. In Ortega v. Court of Appeals, 245 SCRA 529 (1995), Justice Vitug wrote one of the best piece of doctrinal description the nature and essence of the doctrine of delectus personae in every partnership, thus – The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. The right to choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the
dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages. ( Ibid , at pp. 535-536) In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the Court held ―An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners to have the power, although not necessarily the right to di ssolve the partnership.‖ ( Ibid , at p. 37) 6. Partners Subject to Unlimited Liability Both Articles 44 and 1768 of the Civil Code recognize that a partnership is granted with ―a juridical personality, separate and distinct from that of each . . . . partner or member,‖ and that Article 46 recog nizes the legal capacity of the partnership therefore to enter into contracts, own and possess properties, thus: ―Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organizations.‖ The ordinary principle of ―relativity‖ under the Law on Contracts that ―Contracts take effect only between the parties, their assigns and heirs‖ (Article 1311, New Civil Code), should mean that that when a juridical person enters into a contract and assumes an obligation by reason thereof, its members or constituents, and its agents, do not ordinarily become liable for the obligations assumed by their p rincipal. And yet, in defiance of the very essence of separate juridical personality of the partnership, the general rule is that every partner is liable personally for his other property not contributed to the partnership for partnership debts and obligations. Articles 1816 and 1817 of the Civil Code thus provide that ―[a]ll partners, including industrial ones, shall be liable pro rata with all their property and after all the partnership assets have been exhausted . . . [and that] [a]ny stipulation against [such] liability shall be void, except as among the partners.‖ Why does the law make partners personally liable for partnership debts contracted as a separate juridical person, and would such unlimited liability still apply without express provision of law?
for partners in a partnership setting for the basic reason that partners essentially occupy the position of sole proprietors albeit associated with other sole proprietors; the basic rule is that sole proprietors are always unlimitedly liable for business debts and obligations even as to their properties not used nor devoted for the business enterprise. The reason why a sole proprietor is liable with his non-business assets for debts and liabilities arising from a business venture is because he controls the business enterprise, and all profits go to him which he can devote into non-business matters, and thereby he must also absorb the losses from the business. Therefore if his business goes bankrupt, he cannot insist that his business creditors are limited only to the business assets for the satisfaction of their claims, and as all benefits and profits can be channeled to his personal non-business affairs, then his non-business properties must also be held liable for the satisfaction of those claims; to rule otherwise would mean that the owner benefits fully on the profits, but lets his creditors absorb the losses from the business. It is a commercial law truism that it is the owner or equity holders of the business enterprise, and not the creditors, who must stand ready to absorb the losses of the enterprise. In a partnership setting, the partners are still collective owners of the business enterprise, as by the principle of mutual agency they all have the power of management of the partnership affairs, and all profits and gains are to their entire benefit and account. Thus, Article 1770 of the Civil Code provides that every ―partnership must be established fo r the common benefit or interest of the partners,‖ and in turn Article 1799 provides that ―[a]ny stipulation which excludes one or more partners from any share in the profits or losses is void.‖ Therefore, despite the separate juridical personality of the partnership enterprise, the partnership is still wholly owned, managed and controlled by the partners as collective sole proprietors of the business enterprise, and consequently, they must bear the full brunt of the reverses of the business. Since the partners benefit fully and personally from the partnership‘s profitable operations, they must thereby stand liable personally for the debts and obligations contracted even in the partnership name. Otherwise ( i.e., to provide for limited liability as to allow creditors recourse only to the partnership assets), would be tantamount to letting the partnership creditors take the risks and consequences of the losses of the partnership enterprise when they draw
VIII. PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA 1. Distinguished from “Joint Venture” Bautista, although confirming that a joint venture ―is an association of two or more persons to carry out a single business enterprise for profit . . . [and] embodies several of the essential elements or characteristics of a partnership and bears such a close resemblance to it that the rights and liabilities of joint adventures are largely governed by rules applied to partnership,‖ (BAUTISTA, at pp. 41 -42) nevertheless would distinguish a partnership and a joint venture in t he following manner: (a) ―a joint venture is ordinarily limited to a single transaction [and] not intended to pursue a continuous business;‖ whereas a partnership, ―though it may exist for a single transaction, usually contemplates the undertaking of a general and continuous business of a particular kind which necessarily involves a series of transactions;‖ ( Ibid , at p. 42.) (b) in a joint venture, ―the property used remains the undivided property of its contributor, whereas in a partnership the same, as a rule, becomes the property of the business entity and hence of all the partners;‖ (Ibid) (c) In a joint venture, none of the co-venturers ―can bind the joint adventure or his co-adventurers, while a partner, when acting in pursuance of the firm business, binds not only himself as a principal but, as their agent as well, also the partnership and his co-partners;‖ (Ibid) and (d) A ―joint adventure has no firm name, is required to operate under a firm name.‖ ( Ibid)
while
a
partnership
To the writer, the foregoing distinctions only affirms the fact that a joint venture is a species of the genus partnership as defined under Article 1767 of the Civil Code, since it contains the two essential elements of the
recognizes the dissolution of a part nership ―By the termination of the . . . particular undertaking specified in the agreement.‖ The position that in a joint venture the co-venturers do not become mutual agents is a conclusion that can only be drawn if we premise that a co-venture is not a species of partnerships. Finally, that a partnership adopts no firm name does not make it void as a contract or a partnership, so also with a joint venture. In any event, the distinction between a joint venture as a business medium not falling within the ambit of Partnership Law, or as not constituting a species of partnerships, has really become mute since inKilosbayan, Inc. v. Guingona, Jr ., 232 SCRA 110, 143 (1994), it was held: Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise; generally all contribute assets and share risks. It requires a community of interest in the performance of the subject matter, a right to direct and govern the policy in connection therewith, and duty, which may be altered by agreement to share both in profit and losses. The acts of working together in a joint project. (Ibid , citing BLACK‘S LAW DICTIONARY, Sixth ed., at p. 839.) In Torres v. Court of Appeals, 320 SCRA 428 (1999), the Court took no exception to defining the terms, rights and obligations of the parties to a ―Joint Venture Agreement‖ covering the development of a subdivision project under provisions of the Civil Code governing partnerships. The Chapter on Joint Ventures provides for a more thorough discussion of the joint venture as a medium of doing business under Philippine setting. 2. Distinguished from Co-Ownership Although the Law on Partnerships recognizes that partners have coownership interest in the partnership properties (Article 1811, Civil Code), nonetheless a co-ownership constitutes merely a property relation whereby two or more persons own pro-indiviso a property, but the relationship does not seek the business or mercantile pursuit of the property relationship. In other words, a co-ownership situation comes about other than by a contractual intent to pursue a business venture in
Without the contractual intent to pursue a business venture through a common fund, the fact that co-owners happen to share in the profits that may be produced by the property owned in common, there is still no partnership arrangement. Thus, Article 1769 of the Civil Code provides that ―In determing whether a part nership exists . . . Co-ownership or copossession does not of itself establish a partnership, whether such coowners or co-possessors do or do not share any profits made by t he use of the property.‖ 3. Distinguished from Joint Account ( Sociedad de Cuentas en Participacion) A joint account is governed under Article 239 of the Code of Commerce, and still referred to as a corporate taxpayer under the National Internal Revenue Code. But its use is a rarity in our jurisdiction because it does not lend itself to commercial or business efficiency, as shown by the discussion of its features in Bourns v. Carman, 7 Phil. 117 (1906), thus – . . . A partnership constituted in such manner, the existence of which was only known to those who had an interest in the same, there being no mutual agreement between the partners, and without a corporate name indicating to the public in some way that there were other people beside the one who ostensibly managed and conducted the business, is exactly the accidental partnership of cuentas en participacion defined in Article 239 of the Code of Commerce. Those who contract with the person under whose name the business of such partnership of cuentas en participacion is conducted, shall have only a right of action against such person and not against the other persons interested, and the latter, on the other hand, shall have no right of action against the third person who contracted with the manager unless such manager formally transfers his right to them. (Art. 242 of the Code of Commerce) . . . (at pp. 119-120). 4. Distinguished from Agency In a pure agency agreement, the agent is merely a legal extension of the personality of the principal and thereby under the complete control of the
The partnership relationship among the partners makes them mutual agents of one another, and thereby the control that a principal has over his agent does not pertain between and among the partners. Likewise, unlike in a pure agency relationship where the agent who acts within the scope of his authority does not bind himself to the contract or transaction he enters into, in a partnership situation, the partner binds not only the other partners and the partnership, but also himself in the pursuit of the partnership enterprise. In Binglangawa v. Constantino, 109 Phil. 168 (1960), the Court held that just because a duly appointed agent has made personal advances for the expenses of the business venture that he had been designated to administer, does not make him a partner of his principal. In United States v. Muhn , 6 Phil. 164 (1906), it was held that the agent cannot escape the criminal liabilities of the crime of estafa for conversion of the funds given to him by his principal by claiming that he had become a partner when the books of accounts kept for the business showed that the amount was charged to him since the same was ―merely a method of keeping an account of the business, so that the parties would know how much money had been invested and what the condition thereof was at any particular time.‖ (Ibid , at p. 166) 5. Distinguished from the Business Trust As compared to a partnership, a business trust is constituted by deed of trust which is easier and less expensive to constitute for it is not bounded by any legal requirements like the registration requirements for partnerships where the real property or more than P3,000 worth of property is contributed to the partnership. The creation of a business trust does not give rise to a separate juridical personality, and is mainly governed by contractual doctrines and the common law principles on trust. There is no element of mutual agency or co-ownership in a business trust relationship, and in fact the trust relationship is centered upon the splitting in the properties contributed (the corpus) of the legal or naked title in the trustee who then manages and control the properties, and beneficial or equitable title in the
6. Distinguished from the Corporation The most important distinction between the corporation and the partnership are their legal capacities. With the right of succession, a corporation has a stronger legal personality, enabling it to continue despite the death, incapacity, withdrawal or insolvency of any of its stockholders or members. In a partnership, the withdrawal, death, incapacity or insolvency of any partner would automatically bring about the dissolution of the partnership. (Articles . 1828 and 1830, Civil Code.) Limited liability is a main feature in a corporate setting, whereas partners are liable personally for partnership debts not only to what they have invested in the partnership but even as to their other properties. (Articles 1816, 1817, 1824, and 1839, Civil Code) Generally, every partner is an agent of the partnership, (Articles 1803(1), 1818, and 1819, Civil Code), and by his sole act, he can bind the partnership (Articles 1822 and 1823, Civil Code), whereas in a corporation, only the Board of Directors or its duly authorized agents can bind the corporation. In a partnership setting, although a partner has the power to sell or dispose of his capital interest or proprietary interest, the buyer or transferee does not assume transferor‘s position as partner, but merely has a right to demand for accounting or distribution of the profits pertaining thereto. (Articles 1804 and 1813, Civil Code) In a corporate setting, every stockholder has the right to transfer his shares in the corporation, and the buyer or transferee assumes the role of stockholder of said shares when the transfer has been duly registered in the corporate books Section 63, Corporation Code. In other words, the position of being partner is inherently not transferable, whereas, shares are freely transferable in the corporate setting. a. Does a Defective Partnership?
Incorporation
Proces s
Result
into
a
The clear distinctions between the corporation and partnership can best be illustrated by discussing the issue of whether a defective incorporation
It is a legal principle that when parties come together and all the elements of a particular contract are present, although the parties may have nominated it otherwise, the law will impose such contractual relationship upon them. In other words, the contract or relationship is what the law says it is, not how the parties wish to call it. Therefore, it may agreed when five or more persons come together to contribute money or property to a common venture or fund, with the intention of dividing the profits among themselves, the parties may wish to call it otherwise, however, under the definition of the Article 1767 of the Civil Code, it would still be a partnership, even if the parties had intended a corporation but did not materialize because of certain registration deficiencies. If the parties have in fact pursued the incorporation process, by executing and filing with the SEC the articles of incorporation, then there should be no resulting partnership in the event that the incorporation process does not bear fruition, based on the following grounds:
Firstly , both corporate and partnership relationships are fundamentally contractual relationship created by the co-venturers who consent to come together under said relationships. If the parties had intended to create an association in the form of a corporation, a partnership cannot be created in its stead since such is not within their intent, and therefore does not constitute a part of their consent to the contractual relationship. More importantly, while partnership lies essentially within the norms of Contract Law, the corporation gets it essence from a particular State-grant of separate juridical personality. In other words, parties to a corporate venture are fully aware that it is the process of incorporation and the issuance of the certificate of incorporation by which the corporate entity comes into being. There is therefore no doubt in the minds of incorporators that they could effect a venture under a juridical being, and thereby achieve both the advantages and suffer the burdens associated with such corporate medium, by the mere meeting of minds.
Secondly , the important differences between the corporation and the partnership cannot lead one to the conclusion that in the absence of the first, the contracting parties would have gone along with the latter. Limited liability, centralized management and easy transferability of the units of
alternative wish to be covered by a partnership relationship, which has generally would involve unlimited liability, mutual agency among the partners, and the delectus personae feature. The essence of what constitutes the contractual relationship of partnership under Article 1767 is the coming ―together‖ or what is known in Partnership Law as ― delectus personae‖ and not just the joint venture. The essence of partnership is the personal relationship, i.e., that each wouldbe partner goes into the venture precisely because he wants the other coventurers, and no other person, to be with him in the venture. A venturer who seeks to enter into a corporate relationship perhaps does not even care about the personality of the other co-venturers, and fully aware that he himself and others have the ability to transfer their investments to outsiders. Nonetheless, there indications of a contrary view to the above. Under Section 21 of the Corporation Code, when parties act and pretend to be a corporation, when in fact none exist, the law would impute to them a juridical personality to validate the contract under the corporation by estoppel doctrine; however, it would treat the parties as partners since it expressly makes them liable as ―general partners.‖ Under such contrary view, the main issue would be the priority between the personal creditors of the ―partners‖ in a corporation by estoppel doctrine, and the ―corporate‖ creditors of the corp oration by estoppel, as to the assets invested into the venture. The author would presume that it would have to be the corporate creditors that would have priority over the ―corporate‖ assets as this seems to be the moving spirit of t he corporation by estoppel doctrine. This position of the author has been partially justified by the discussions of in Pioneer Insurance & Surety Corp. v. Court of Appeals, 175 SCRA 668 (1989), when it resolved the issue raised: ―What legal rules govern the relationship among co-investors whose agreements was to do business through the corporate vehicle but who failed to ( Ibid , at p. 681). Quoting from American jurisprudence, the Supreme Court in Pioneer Insurance held that ―there has been the position that as among
from CORPUS JURIS SECUNDUM which cited Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584), nevertheless it has been held that ―ordinarily persons who attempt, but fail, to form a corporation and who carry on business under the corporate name occupy the position of partners inter se (Ibid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913 A. 1065), and their rights as members of the company to the property acquired by the company will be recognized.‖ ( Ibid, citing Smith v. Schoodoc Pond Packing Co. , 84 A, 268m 109 Me. 555; Whipple v. Parker , 29 Mich 369). Notwithstanding the foregoing, the Court took the position that such partnership relationship does not exist, ―for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their purpose is that no partnership shall exist . . . and it should be implied only when necessary to do justice between the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never legally formed does not become a partner with other subscribers who engage in business under the name of the pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and contributions. . . A partnership relation between certain stockholders and other stockholders, who were also directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for payment of debts illegally contracted by the latter. (Ibid , at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p. 464). Nor will it make the investor to a would-be corporation liable for losses sustained from its operations under a partnership inter se theory.‖ ( Ibid , at p. 685). The key elements in resolving the issue seem to have been in Pioneer Insurance those of intent and participation in business activities. The doctrinal pronouncement in Pioneer Insurance can be summarized as follows: When parties come together intending to form a corporation, but no corporation is formed due to some legal cause, then: (a) Parties who had intended to participate or actually participated in the business affairs of the proposed corporation would be considered as partners under a de facto partnership, and would be liable as such in an action for settlement of partnership obligations;
(b) Parties who took no part except to subscribe to shares of stock in a proposed corporation, do not become partners with other subscribers who engaged i n business under t he name of the pretended corporation, and are not liable for action for settlement of the alleged partnership contribution. The doctrinal pronouncements in Pioneer Insurance are consistent with the distinctions between an investor in partnership venture, where there is a clear intent to participate in the management of the partnership business and for which limited liability is not afforded by law; and an investor in a corporation, where under the principal of centralized management , there is no intent to participate in the corporate operations, and for which limited liability is afforded by law. On the other hand, where the parties to a venture merely use a business name that pretends there is a corporation, when in fact they was no intention among the co-venturers to formally incorporate a juridical entity, then there can be no doubt that what was really the meeting of minds among them was a partnership, for in essence they agreed to set up a common fund (i.e., pursue a business venture), with clear indication to divide the profits among themselves. This is exactly the situation covered in the decision in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc., 317 SCRA 728 (1999), where the liabilities of the parties were adjudged under the corporation by estoppel doctrine. (See more detailed discussions in Chapter 5). In Lim Tong Lim, the Court found that three co-venturers agreed ―to engage in a fishing business, which they started by buying boats worth P3.35 million, financed by a loan . . . In their Compromise Agreement, they subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally among themselves the excess or loss. . . These boats, the purchase and the repair of which were financed with borrowed money, fell under the term ‗common fund‘ under Article 1767. The contribution to such fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed that any loss or profit from the sale and operation of the boats would be divided equally among them also shows that they had indeed formed a partnership.‖ ( Ibid , at p. 739)
entered into on behalf of ―Ocean Quest Fishing Corporation,‖ although no such corporation existed nor was there any attempt to incorporate such entity. Consequently, both the unlimited liability principle under Partnership Law and the corporation by estoppel doctrine in Corporate Law were applied to determine the personal liability of each of the partners in the business venture, which resulted in legal incongruency.
The result is that by mixing principles in Partnership Law and Corporate Law in Lim Tong Lim, the corporation by estoppel doctrine has grown out of the confines of Section 21 of the Corporation Code, as to make liable as general partners, not only those parties to acted for the ostensible corporation, but also all passive parties who knowing there is no such corporation sat back and benefited from the venture.
In a partnership, as a legal consequence of the application of the doctrine of mutual agency, every partner shall be personally liable for partnership debts and liabilities, even when the underlying transaction was effected by another partner, or even when a partner does not participate at all in the affairs of the partnership. On the other hand, under the corporation by estoppel doctrine now embodied in Section 21 of the Corporation Code, it is only the active or managing officers who assume the liability of a general partner, thus: ―All persons who assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners, for all debts, liabilities and damages incurred or arising as a result thereof;‖ and that consequently, passive stockholders are not deemed to be personally liable for debts incurred on behalf of the ostensible corporation.
6. Cooperative
This was in fact the defense raised by the petitioner in Lim Tong Lim, where he held that since he did not participate actively in the business venture, then under the principles of corporation by estoppel doctrine, he cannot be made personally liable for the debts incurred in pursuing the business venture. Instead of holding that the primary doctrine to apply would be the rules of unlimited liability since there was duly constituted a valid partnership, the Court instead humored the argument and went on to also apply the corporation by estoppel doctrine with a jurisprudential twist when it held — The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. . . . a third party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged corporation. In such case, all those who benefited from the transaction made by the ostensible corporation, despite knowledge of its legal defects, may be held liable for
A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily joined together to achieve lawful common social or economic end, making equitable contributions to the capital required and accepting a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative principles. (Article 3, Cooperative Development Authority Act [R.A. 6938]). A cooperative, like an ordinary corporation and a partnership, has a juridical personality separate and distinct from its members, and has limited liability feature. (Articles. 12 and 30, R.A. 6938) The Tax Code defines a cooperative as an association conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit. ( Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129 [2005]). Unlike ordinary corporations, cooperatives are governed by principles of democratic control where the members in primary cooperatives shall have equal voting rights on a one-member-one-vote principle (Articles. 4(2), R.A. 6938); where the Board of Directors manages the affairs of the cooperative, but it is the general assembly of full membership that exercises all the rights and performs all of the obligations of the cooperative (Articles 5(3) and 34, R.A. 6938); and are under the supervision and control of the Cooperative Development of Authority, and not the SEC. Unlike a partnership which should be organized for profit, and a non-stock corporation which can be organized for any eleemosynary purpose and no part of the net income is to be distributed to the officers and members
power and promote among them equitable distribution of net surplus through maximum utilization of economies of scale, cost-sharing and risksharing without conducting the affairs of the cooperative for eleemosynary or charitable purposes.‖ (Article 7, R.A. 6938)
A stipulation for the common enjoyment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy, or donation cannot be included in such stipulation, except the fruits thereof (1674a)
The Law on Cooperatives declares it a policy of the State to foster the creation and growth of cooperatives as a practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic development and social justice. (Article 2, R.A. 6938). In one case, the Court held that cooperatives are established to provide a strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the benefits of agrarian reforms. ( Corpuz v. Grospe, 333 SCRA 425 [2000]).
Art. 1779. In a universal partnership of all present property, the property which belonged to each of the partners at the time of the constitution of the partnership, becomes the common property of all the partners, as well as all the profits which they may acquire therewith.
IX. CLASSES OF PARTNERSHIP AND PARTNER
Art. 1778. A partnership of all present property is that in which the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits which they may acquire therewith. (1673)
_______________ Art. 1783. A particular partnership has for its object determinate things, their use or fruits, or specific undertaking, or the exercise of a profession or vocation. (1678) Art. 1782. Persons who are prohibited from given each other any donation or advantage cannot enter into universal partnership (1677) Art. 1781. Articles of universal partnership, entered into without specification of its nature, only constitute a universal partnership of profits. (1676) Movable or immovable property which each of the partners may posses at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership. (1675) Art. 1780. A universal partnership of profits comprises all that the partners may acquire by their industry or work during the
Art. 1777. A universal partnership may refer to all the present property or to all the profits. (1672) As regards the liability of the partners, a partnership may be general or limited. (1671a) Art. 1776. As to its object, a partnership is either universal or particular. ___________ In order to have a better understanding of the various legal relationships created within the partnership, and the consequent rights and obligations arising from such varied relationships, it may be helpful to determine the classes of partnerships and partners defined under the New Civil Code. 1. As to Object: Universal Partnership versusParticular Partnership When it comes to the object or purpose, or the nature of the business enterprise to be pursued, under Article 1776, a partnership is either
A universal partnership is one where the contract of partnership encompasses expressly or impliedly either all the present properties of the partners or just covering all of the profits. (Article 1777, Civil Code) In a universal partnership of all present property is one where ―the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits they may acquire therewith.‖ (Article 1778, Civil Code). This means that ―the property which belonged to each of the partners at the time of the constitution of the partnership, becomes the common property of all the partners, as well as all the profits which they may acquire therewith.‖ (Article 1779, Civil Code). The Civil Code further clarifies that ―A stipulation for the common enjoy ment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy, or donation cannot be included in such stipulations, except the fruits thereof.‖ (Article 1779, Civil Code).
usefulness of the distinction is that persons who are disqualified from donating to one another (like spouses under Article 187 of the Family Code), cannot enter into a universal partnership of any sort. Is it therefore fair to conclude that spouses can validly enter into a particular partnership between each other, when actually their property relations are governed already by a legal property regime? In Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969), the Court held that the prohibition under now Article 1782 does not apply when the partners entered into a limited partnership, the man being the general partner and the woman being the limited partner, and a year later the two get married.
Under Article 1782, ―Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership.‖
On the more general question of what are the practical and legal significance of knowing the difference between universal and particular partnership, may best be exemplified in the decision in Lyons v. Rosentock , 56 Phil. 632 (1932). In that case, the two partners have been together in two previous real estate projects. While one partner was abroad, the other partner seized upon a potentially lucrative piece of property (the San Juan estate) and although he had tried his best to convince his partner abroad to commit to be part of the new venture, the latter declined. In any event, when the property was purchased by the local partner he had temporarily used a partnership property in the previous venture to secure the loan drawn by the local partner in his own name, but later released it and had his own property mortgaged when it was clear that the partner abroad did not change his mind about not joining the venture. In any event, the San Juan estate project proved very successful, and after the local partner died, the partner abroad sought to recover one-half of the profits of the venture on the ground that he was a partner therein, in spite of his previous refusal to be part of it, and mainly because partnership property was used as security for the loan obtained by the local partner to finance his acquisition of the estate.
On the other hand, Article 1783 of the Civil Code defines a ―particular partnership [to be one that] has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation‖ There is no doubt then that every professional partnership and joint venture arrangement would constitute particular partnerships.
In resolving that the partner abroad was not entitled to any profits derived from the San Juan estate project, because he was never a partner thereto, Lyons resolution revolved around the principle that the two partners never were part of a universal partnership, but that they were at best partners in particular partnerships for the previous projects entered
In a universal partnership of profits ―all that the partners may acquire by their industry or work during the existence of the partnership,‖ as well as the usufruct of all ―[m]ovable or immovable property which each of the partner may possess at the time of the celebration of the contract‖ of partnership, shall all pertain to the partnership. (Article 1780, Civil Code). The default rule under Article 1781 of the Civil Code is that when the ―Articles of universal partnership [are] entered into without specification of its nature, [it will] only constitute a universal partnership of profits.‖ The real question that must be asked is when is a partnership agreement deemed to be even a “universal partnership” for the default rule under Article 1781 to apply?
In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable. . . . Of course, if an actual relation of partnership had existed in the money used, the case might be different; and much emphasis is laid in the appellant‘s brief upon the relation of partnership which, it is claimed, existed. But there was clearly no general relation of partnership between the parties; and the most that can be said is that Elser and Lyons had been coparticipants in various transactions in real estate. No objection can be made to the use of the word partnership as a term descriptive of the relation in t hose particular transactions, but it must be remembered that it was in each case a particular partnership, under article 1678 of the Civil Code. It is clear that Elser, in buying the San Juan Estate, was not acting for any partnership composed into a proposition which would make Lyons a participant in this deal contrary to his express determination. (Ibid , at pp. 641-642) The other conclusion we can draw from Lyons is that a universal partnership is never presumed, not even from various transactions or ventures concluded between the partners. The default rule therefore should be that unless the parties so stipulate in their articles of partnership that they are entering into a universal partnership, it would be presumed that they have existing between them merely a particular partnership. Apart from the foregoing, the concept and medium of universal partnership serves no reasonable commercial purpose, for legally it can only come about when it is so expressly stipulated in contract of partnership, and practically, it is difficult to see how two or more persons not bounded by marriage, faith or vocation (which makes the partnership a particular one), would commit to one another all that they have and all the fruits of what they do, to one another. The other important question that may be asked is ― By definition under Article 1776 that there can be a valid partnership for the practice of a profession, why would Article 1783, in defining a particular partnership, include the „exercise of a vocation‟ which may not include one that seeks to provide a livelihood for the so-called partners, such as religious or civic vocation? ‖ 2. As to Duration:
When it comes to the partnership term or life, the law distinguishes between a partnership with fixed term , partnership for a particular undertaking, and partnership at will . Both partnerships with fixed term or for a particular undertaking are automatically dissolved upon the expiration of the stipulated term or the achievement of the particular undertaking stipulated in the contract of partnership; whereas, in a partnership at will , the partnership has an indefinite term and it would be dissolved only when an act or cause of dissolution happens or arises. Nonetheless, under Article 1785 of the Civil Code, when a partnership for a fix term or particular undertaking is continued after it has terminated without any express agreement, partnership then become one at will and ―the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will.‖ The article also provides that ―A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership.‖ In Ortega v. Court of Appeals, 245 SCRA 529 (1995), the Court described the characteristics of a partnership at will in the following manner, thus: The birth and life of a partnership at wil l is predicated on the mutual desire and consent of the partners. The right to choose with whom a person wishes to associate himself is the very foundation and essence of that partnership. Its continued existence is, in turn, dependent on the constancy of that mutual resolve, along with each partner‘s capability to give it, and the absence of a cause for dissolution provided by law itself. Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the attendance of bad faith can prevent the dissolution of the partnership but that it can result in a liability for damages. ( Ibid , at pp. 535-536) Nonetheless, by way of obiter, Ortega also described the ability of every partner even in a partnership with fixed term or for a particular undertaking, to be able to dissolve the partnership upon the application of
In passing, neither would the presence of a period for its specific duration or the statement of a particular purpose for its creation prevent the dissolution of any partnership by an act or will of a partner. Among partners, mutual agency arises and the doctrine of delectus personae allows them to have the power, although not necessarily the right, to dissolve the partnership. An unjustified dissolution by the partner can subject him to a possible action for damages. ( Ibid , at p. 536)
Ortega also clarified that the designation of the purpose in the articles does not prevent it from being a partnership at will, thus: The ―purpose‖ of the partnership is not the specific undertaking r eferred to in the law. Otherwise, all partnerships, which necessarily must have a purpose, would all be considered as partnerships for a definite undertaking. There would therefore be no need to provide for articles on partnership at will as none would so exist. Apparently what the law contemplates, is a specific undertaking or ―project‖ which has a definite or definable period of completion. In Rojas v. Maglana, 192 SCRA 110 (1990), the Court held that where there has been duly registered articles of partnership, and subsequently the original partners accept an industrial partner but do not register a new partnership, and thereafter the industrial partner retires from the business, and the original partners continue under the same set-up as the original partnership, then although the second partnership was dissolved with the withdrawal of the industrial partner, there resulted a reversion back into the original partnership under the terms of the registered articles of partnership. There is not constituted a new partnership at will. 3. As to Extent of Partners’ Liabilities When it comes to the kinds of liabilities that the partners may be exposed to for partnership debts and obligations, the Civil Code distinguishes between a general partnership, where all the partners are unlimitedly liable; and a limited partnership, where there is one or more general partner who are unlimitedly liable, with one or more limited partners, who are liable for partnership debts only to the extent of their stipulated contributions under the articles of partnership.
In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc ., 317 SCRA 728 (1999), Justice Vitug summarized the nature of the liabilities o f general partners, thus: . . . The liability of general partners (in a general partnership as so opposed to a limited partnership) is laid down in Article 1816 which posits that all partners shall be liable pro rata beyond the partnership assets for all the contracts which may have been entered into in its name, under its signature, and by a person authorized to act for the partnership. This rule is to be construed along with other provisions of the Civil Code which postulate that the partners can be held soidarily liable with the part nership specifically in these instances–(1) where, by any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so acting or omitting to act; (2) where one partner acting within the scope of his apparent authority receives money or property of a third person and the money or property so received is misapplied by any partner while it is in the custody of the partnership –consistently with the rules on the nature of civil liability in delicts and quasi-delicts. ( Ibid , at pp. 746-747). 4. Other Kinds of Partners Other than the general and limited partners that have been previously discussed, there are two kinds of partners when it comes to the nature of their contributions: capitalist partner and industrial partner . A capitalist partner contributes money and/or property to the partnership, while an industrial partner contributes only his industry or his service. The law does not specify the kind of industry that a partner may contribute into the partnership. ( Evangelista & Co. v. Abad Santos, 51 SCRA 416 [1973]). The importance of such distinction is essentially on the nature of the obligations and liabilities that they must assume:
1797, and 1799, Civil Code); whereas, the industrial partner is not liable for losses of the partnership venture (Article 1797, Civil Code); (b) The capitalist partner may not engage on in business which are competing with that of the partnership business (Article 1808, Civil Code); whereas, the industrial partner cannot engage in any other business at all during his tenure as industrial partner (Article 1789, Civil Code); and (c) Whereas a capitalist partner is bound to make additional contributions to the partnership in case of an imminent loss of the business of the partnership, the industrial partner has no such obligation. (Article 1791, Civil Code) Partnership Law also distinguishes between the liabilities assumed by an original partner who is with the partnership at the time of its constitution, and subsequent o r incoming partners, who come during the life of a pre-existing partnership. In the case of an incoming partner, his liability with respect to the partnership obligations which were incurred prior to his admission into the partnership shall be satisfied only out of partnership property, unless it is otherwise stipulated. (Articles 1826 and 1840, Civil Code). Partnership Law also refers to the managing partner who has been given the management of the partnership enterprise (Articles 1800 and 1801, Civil Code); the liquidating partner , who takes charge of the liquidation and winding-up of partnership affairs (Article 1836, Civil Code); a retiring partner , who ceases to be part of the partnership which is continued after dissolution, as compared with the partners who remain with the venture as continuing partners (Articles 1837, 1839, 1840 and 1841, Civil Code); and the partner by estoppel , who is not a formal partner in an existing partnership, but by his act he has led third-parties dealing with the partnership to believe he is a partner, and thereby becomes liable as a regular partner as so such relying creditors (Article 1815, Civil Code). X. SPECIAL ISSUES OF WHO MAY QUALIFY TO BECOME PARTNERS
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 t hat 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 spouses just between critical question must be asked: Can themselves or with third parties validly enter i nto 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
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 t he 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).
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 ot her 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, effe ctively 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
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 in that it includes ―all
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
(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.
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 o ne without the consent of the other partner, would be void. ( Guiang v. Court of Appeals, 291 SCRA 372 [1998]; Cirelos v. Hernandez , 490 SCRA 625 [2006]; Bautista v. Silva, 502 SCRA 334 [2006]). Take the case of allowing the spouses to enter into a particular partnership, and they both contribute community or conjugal properties thereto, would the rules under Partnership Law therefore allow one spouse, without the consent of the other spouse, to dispose of such property pursuant to partnership affairs? Article 145, Family Code provides that ―Each spouse shall own, dispose of, possess, administer and enjoy his or her own separate estate, without need of the consent of the other. To each spouse shall belong all earnings from his or her profession, business or industry and all fruits, natural, industrial or civil, due or received during the marriage from his or her separate property.‖ Under a complete separation of property regime, spouses separately manage and control their separate properties. Can spouses who are governed by the regime of separation of property, thereby partially overcome the governing provisions of the Family Code, by being allowed to validly enter into a particular partnership agreement? (2) Charges to Partnership Properties We should look also into the areas of charges against the partnership properties and the effects of dissolution. Under Partnership Law, partnership properties would be chargeable against any claim or contract entered into pursuant to partnership affairs. On the other hand, under both the absolute community of property regime and the conjugal
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 t hereof, 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
―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 noti ce 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
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.
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 t hat venture is in line with the business authorized by its charter.‖ ( Ibid , quoting from WyomingIndiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing Fletcher Cyc. of Corp., Sec. 1082).
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 li fe 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.
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,
2. May Corporations Validly Qualify to Become Partners?
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 t he 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 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 i nvestments 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
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
view to encouraging and facilitating greater domestic and foreign investments in Philippine business enterprise.‖ (Ibid ) XI. PARTNERSHIP FORMAL & REGISTRATION REQUIREMENTS _____ Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. (1667a) Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679) _____ Since the contract of partnership is essentially consensual in character, there is generally no form required, much less a need for the actual delivery of the promised contributions, to perfect it, and thereby lead to the arising of a separate juridical personality. Article 1771 of t he Civil Code provides that ―A partnership may be constituted i n any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.‖ The other exception is provided in Article 1772 which provides that ―Every contract of partnership having a capital of Three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.‖ Public documents and other forms of registration are features of commercial law system, for indeed the public must deal on the basis of systems, infrastructures and institutions that are manifest and made known to them, and in line with the characteristic of uniformity of commercial transactions. But as will be shown hereunder, the forms and registration requirement for partnerships under the Civil Code are meant more to regulate the relationship of the partners among themselves and with the partnership, but do not really bear into the rights of creditors who deal with the business enterprise. For indeed, Article 1772 of the Civil
1. When Capital Contributions Total P3,000.00 or More _____ Art. 1772. Every contract of partnership having a capital of Three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission. Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons (n) _____
Under modern day setting, most partnerships would be formed or constituted having contributed capital of more then P3,000.00, for it i s doubtful whether two or more persons would come together in pursuit of business with a capital of less than P3,000.00. This means that the twin requirements under Article 1772 of the Civil Code of having the contract of partnership in a public document and registered with the SEC apply almost universally to all modern-day partnerships. But even then, the twin requirements may have no legal or commercial significance based on the following grounds: (a) The law does not declare the partnership void when the twin requirements are not met, nor is non-compliance meted any adverse legal consequence; and (b) The law expressly provides that ―Failure to comply with the requirements . . . shall not affect the liability of the partnership and the members thereof to third persons.‖ In a situation where a partnership is constituted not having complied with the twin requirements of Article 1772 is not declared void as among the partners, and the claims of its creditors are unaffected, why should any
In Angeles v. Secretary of Justice, 465 SCRA 106 (2005), the Supreme Court held that the ―mere failure to register the contract of partnership with the SEC does not invalidate a contract that has the essential requisites of a partnership. The purpose of registration of the contract of partnership is to give notice to third parties. Failure to register the contract of partnership does not affect the liability of the partnership and of the partners to third persons. Neither does such failure to register affect the partnership‘s juridical personality. A partnership may exist even if the partners do not use the words ‗partner‘ or ‗partnership.‘‖ ( Ibid , at p. 115). According to the Code Commission, the business purpose of the requirements under Articles 1771 and 1772 is to prevent evasion of tax liabilities by big partnership and to safeguard the public by enabling it to determine more accurately the membership and capital of partnerships before dealing with them. (Memorandum of Code Commission, Lawyers‘ Journal, October 1955, p. 518, cited in Bautista, at pp. 71-72). Under current tax rules, which essentially taxes the partnership separately as corporate taxpayer, formal registration requirements with the BIR on matters as getting a taxpayer identification number (TIN), to be registered as withholding agent, etc., would require submission of the registered articles of partnership. But then if the motivation is to go below the government radar, and to operate within the underground economy as a means of avoiding tax and administrative burdens, then non-registration with the SEC and other government agencies would be the likely scheme to be followed. And yet if there are no deleterious consequences provided by the Law on Partnerships in not complying the formalities under Article 1771, why would they be complied with? In any event, since Articles 1771 and 1772 do not expressly declare that failure to comply with the public document requirement render the contract of partnership void, then the general rule is that such failure does not render the contract void, but only affects the manner of its registration and affords to the parties affected the remedy of demanding that it be executed in a public instrument. ( Dauden-Hernaez v. De los Angeles, 27 SCRA 1276 [1969]; Fule v. Court of Appeals, 286 SCRA 698 [1998]; Dalion v. Court of Appeals , 182 SCRA 872 [1990]).
twin requirements mandated under Articles 1771 and 1772 of the Civil Code.
capital contributions based on the second articles of partnership, or on the verbal agreement of 80%-20% in favor of Magalana.
In that case, Maglana and Rojas executed their Articles of Co-Partnership, calling their company the ―Eastcoast Development Enterprises (EDE),‖ wi th the purpose to ―apply or secure timber and/or minor forests products licenses and concessions over public and/or private forest lands and to operate, develop and promote such forests rights and concessions.‖ The articles were duly registered with the the SEC, indicating therein an indefinite period for the venture, and providing that the profits would be divided ―share and share alike.‖
The Court placed much weight on the original articles of incorporation executed by Maglana and Rojas, which was duly registered with the SEC, and held that when the second arti cles of co -partnership was executed (but not registered), there was every intention to abide by the original partnership arrangement existing under the registered articles, since it covered the same venture and used the same firm name, thus —
When the venture was not getting off the ground, they invited Pahamatong as industrial partner, and they executed a ―Su pplemental Articles of Co-partnership‖ adopting the original name of the company, but this time providing for a period of thirty (30) years for the life of the venture, and providing for equal distribution of profits among the three partners. The new articles were not registered with the SEC. Although the firm began to operate with profits, eventually Pahamatong withdrew from the arrangement and his equity was bought back by Maglana and Rojas, who then proceeded to operate the firm under the same original name, and with the verbal agreements that the profits would be distributed 80%20% in favor of Maglana. When Rojas abandoned the enterprise to set-up a competing venture in another logging concession, he wit hdrew some of his equipment contributed to EDE to be used in his new venture. Maglana notified Rojas of his (Maglana‘s) withdrawal from the partnership arrangement in EDE, and for Rojas to account fully for the amounts withdrawn from the partnership treasury, which when totaled up would necessitated for Rojas to pay the promised contributions under the original articles of copartnership. The case reached the Supreme Court on the issues of the nature of the partnership that existed between Maglana and Rojas after the withdrawal of the industrial partner; on whether it became a partnership at will as provided under the original articles of partnership as to have justified Maglana‘s termination thereof when the second articles of partnership
After a careful study of the records as against the conflicting claims of Rojas and Maglana, it appears evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution of the second one, which they unmistakably called an ―Additional Agreement‖ . . . Except for the fact that they took in one industrial partner; gave him an equal share in the profits and fixed the term of the second partnership to thirty (30) years, everything else was the same. Thus, they adopted the same name, EASTCOAST DEVELOPMENT ENTERPRISES, they pursued the same purposes and the capital contributions of Rojas and Maglana as stipulated in both partnerships call for the same amounts. Just as important is the fact that all subsequent renewals of Timber License No. 35-36 were secured in favor of the First Partnership, the original licensee. To all intents and purposes therefore, the First Articles of Partnership were only amended, in the form of Supplementary Articles of Co-Partnership . . . which was never registered . . . . Otherwise stated, even during the existence o f the second partnership, all business transactions were carried out under the duly registered articles. As found by the trial court, it is an admitted fact that even up to now, there are still subsisting obligations and contracts of the latter . . . . No rights and obligations accrued in the name of the second partnership except in favor of Pahamotang which was fully paid by the duly registered partnership. . . . (at pp. 117-118; underscoring supplied ). The Court declared the partnership to be one at will, under the terms of the registered articles of co-partnership, and ruled that the sharing scheme between Maglana and Rojas on the profits and loses of the venture would have to comply with that stipulated in the registered articles of co-
Articles of Co-Partnership; that is, all profits and losses of the partnership shall be divided ―share and share alike‖ between the partners. (at p. 119) x x x Consequently, except as to the legal relationship of the partners after the withdrawal of Pahamatong which is unquestionably a continuation of the duly registered partnership and the sharing of profits and losses which should be on the basis of share and share alike as provided for in the duly registered Articles of Co-Partnership, no plausible reason could be found to disturb the findings and conclusions of the trial court.‖ (at p. 119; underscoring supplied ). In Rojas, the Court refers to a partnership arrangement that is not covered by duly registered articles of co-partnership as a ―de factopartnership;‖ the implication is that when a partnership has complied with the formalities and registration required under Articles 1771 and 1772, it would properly be termed as a “de jure partnership.‖ The lesson that can be drawn from Rojas is that compliance with the formal requirements mandated under the Law on Partnerships indeed has a very useful legal purpose: the duly registered articles of co-partnership shall serve to bind the partners as to their contractual intent, and the default rules provided for under the Law on Partnerships in the Civil Code cannot apply to overcome the provisions of the articles of co-partnership that is duly registered with the SEC, except by another instrument that seeks to amend or modify the same and duly registered also with the SEC.
2. When Immovable Property Contributed _____ Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary. (1667a) Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument. (1668a)
The importance that the law places upon immovable properties which constitute part of the assets of the partnership is not only shown by the formal requirements mandated under Article 1773 of the Civil Code, which requires the execution of the inventory covering such properties to be attached to the public instrument ( i.e., the articles of incorporation) that should be registered with the SEC, but also by what seems to be a superfluous Article 1774 of the Civil Code which reiterates the obvious legal capacity of a partnership to own properties as a juridical person, where it provides that ―Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name.‖ Then also, we have the long provisions of Article 1819 of the Civil Code, which detail all the scenarios under which real property owned by the partnership may be legally dealt with, under various circumstances where title is not registered in the name of the partnership. b. When Immovable Property Deemed Contributed
Agad v. Mabato, 23 SCRA 1223 (1968), reminds us that it is not the purpose clause of the articles of partnership or the designated business to be engaged in, that determine whether there should be deemed contributed immovable properties to the venture to trigger the application of Article 1773 of the Civil Code. The Court held in Agad that since the articles of partnership indicated that the partners were going to contribute cash into the venture, then the fact that the partnership was expressly organized ―to operate fishpond,‖ did not necessarily mean that either a fishpond or a real right to any fishpond was contributed into the venture. The ruling would also support the position that just because the partnership venture owns or operates immovables does not mean it comes into the operation of Article 1773, as when such immovables were not contributed by the partners but were purchased during the operations of the partnership business. c.
Rationale Behind the Formal Requirements under Article 1773
It is when immovable property is contributed into the capital of the
of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public i nstrument.‖
Does the declaration of nullity of the partnership under Article 1773 for failure to comply with the formalities therein refer to the intra-partnership relations of the partners among themselves and the partnership, or to the extra-partnership relationship with the creditors, or to both? The decision in Torres v. Court of Appeals, 320 SCRA 428 (1999), should be instructive in answering these issues. In Torres, a ―Joint Venture Agreement‖ was executed among the coventurers covering the terms for the development of a subdivision project, the contributions of the co-venturers and the manner of distribution of the profits. Specifically, t he agreement required from the capitalist partners to contribute the parcels of land upon which t he project was to be developed. No articles of partnership was registered with the SEC, much less was the requisite inventory mandated under Article 1773 of the Civil Code executed and attached to the public document. In ruling against the contention of the capitalist partners that the partnership was void, the Court held – . . . First, Article 1773 was intended primarily to protect third persons. Thus, the eminent Arturo M. Tolentino states that under the aforecited provision which is a complement of Article 1771, ―the execution of a public instrument would be useless if there is no inventory of the property contributed, because without its designation and description in the Registry of Property, and their contribution cannot prejudice third persons. This will result in fraud to those who contract with the partnership in the belief [in] the efficacy of the guaranty in which the immovables may consist. Thus, the contract is declared void by law when such inventory is made. The case at bar does not involve third parties who may be prejudiced. Second, petitioners themselves invoke the allegedly void contract as basis for their claim that respondent should pay them 60 percent of the value of the property. They cannot in one breath deny the contract and in another recognize it, depending on what momentarily suits their purpose. Parties
In short, the alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement an ordinary contract from which the parties‘ rights and obligations to each other may be inferred and enforced. (Ibid , at p. 438). It is clear from Torres that the formalities mandated under Article 1773 are meant for the protection of the partnership creditors, and that the declaration that the ―partnership is void‖ does not affect the intra partnership relationship between and among the partners and between the partners and the partnership itself. Thus, Torres held that the ―alleged nullity of the partnership will not prevent courts from considering the Joint Venture Agreement [or any contract of partnership] an ordinary contract from which the parties‘ rights and obligations may be inferred and enforced.‖ Therefore, from the intra-partnership point of view, there are dire consequences that befall the partners and the partnership for failing to comply with the formalities mandated under Article 1773 of the Civil Code. If we follow therefore the Torres reasoning that the formalities mandated under Article 1773 are meant to protect partnership creditors, and every third person who deals with the partnership, I do not see how the imposition of the rule ―partnership is void,‖ could be beneficial or protective of the rights of partnership creditors, for the following reasons:
Firstly, the declaration of nullity of the partnership cannot be ascribed to the extra-partnership relationship between the partners and partnership on one hand, and the partnership creditors on the other hand, for to do so would adversely affect the contractual rights and standing of the creditors vis-a-vis the partners on their unlimited liability rule and the partnership, which must be deemed to exist to protect the integrity of the contracts entered in its name. Secondly , declaring the partnership void means that all contributed and earned assets of the partnership pertain to the partners directly as coowners, since no contract of partnership exist between them (it is void and inexistent), and no partnership person has arisen with a juridical personality separate and distinct from each of the partners. Not only does this scenario affect the integrity of the contracts entered into directly with
priority as to them pertains to their separate creditors and not to the partnership creditors.
other real estate properties. The typewritten note was not signed by the elder brother, who denied its authenticity during trial.
Neither of the afore-described scenarios seem to promote the interests or protect the rights of p artnership creditors.
The main issue resolved in Litonjua was whether a contract of partnership or joint venture arrangement existed between the siblings, a purely intrapartnership issue that essentially did not involve the rights of third parties dealing with the business enterprise. Yet, the Supreme Court did not at all allude to its decisions in Torres or in Angeles, where it held that the provisions of Articles 1771 to 1773 of the Civil Code, as to the formal requirements for partnerships, applied only for the protection of third parties dealing with the partnership. In resolving that there was constituted no partnership or joint venture between the siblings, or that the same is void, the Court, after quoting Article 1771 to 1773, held in Litonjua that —
The Torres ruling has therefore removed any ―force‖ or ―teeth‖ on the declaration of nullity of the partnership under Article 1773: it cannot hurt but must protect the partnership creditors, and yet it has no bearing or application to the partners and the partnership in their intra-partnership relationship. The author‘s position, as a result of resolving this issue in class discussions, is that contrary to the Torres ruling, the formalities under Article 1773 should be understood as to create adverse consequences for the partners who refuse to comply with the requirements vis-a-vis their relationship with partnership creditors. When the partners fail to comply with the formalities under Article 1773, it ought to mean that they cannot avail of any advantage that the partnership medium affords them. The primary advantage that the partners have under a de jure partnership setting is that their personal liability to partnership creditors for assets that have not been contributed to the firm is only joint and subsidiary, since they have the benefit of excussion. Consequently, when partners do not comply with the formalities under Article 1773, the ―partnership is void‖ in the sense that the partners were deemed to be acting for themselves when they entered into partnership contracts and transactions; and that, similar to the principle in Agency Law that makes the agent primarily liable for contracts entered into in behalf of an inexistent principal, then partners can be held directly liable by partnership creditors for all contracts entered into, and all obligations assumed, in the name of a partnership which is declared void. The landscape has become more complicated with the recent ruling inLitonjua, Jr. v. Litonjua, Sr. , 477 SCRA 576 (2005), where presented in evidence was a typewritten note (referred to as Annex ― A-1”)whereby the elder brother purportedly promised to the younger brother that ―I will make sure that you get ONE MILLION PESOS (P1,000,000.00) or ten
Annex ― A-1,‖ on its face, contains typewritten entries, personal in tone, but is unsigned and undated . As an unsigned document, there can be no quibbling that Annex ― A-1‖ does not meet the public instrumentation requirements exacted under Article 1771 of the Civil Code. Moreover, being unsigned and doubtless referring to a partnership involving more than P3,000.00 in money or property, Annex “ A-1” cannot be presented for notarization, let alone registered with the Securities and Exchange Commission (SEC), as called for under the Article 1172 of the Code . And inasmuch as the inventory requirement under the succeeding Article 1773 goes into the matter of validity when immovable property is contributed to the partnership, the next logical point of inquiry turns on the nature of petitioner‘s contribution, if any, to the supposed partn ership. (at p. 585; italics supplied) It is clear from the afore-quoted passage that Litonjua considers are binding and effective to purely intra-partnership issues the mandatory provisions of Article 1771 and 1773 of the Civil Code that requires that even when there is no issue that the meeting of the minds involves the formation of a partnership ( i.e., the typewritten note ―doubtless referring to a partnership involving more than P3,000.00 in money or property‖) then the requirement that it contract be cast in a public instrument and registered with the SEC were deemed to be essential to sustain a claim that a contract of partnership exist between the parties, otherwise the
The doctrine that failure to comply with the public instrument and SECregistration requirements under Article 1772 of the Civil Code renders the contract of partnership as unenforceable can be deduced from the following portion of the Litonjua decision which relied on provision of the Statute of Frauds, thus: It is at once apparent that what respondent Eduardo imposed upon himself under the above passage, if he indeed wrote Annex ― A-1,‖ is a promise which is not to be performed within one year from ―contract‖ execution on June 22, 1973. Accordingly, the agreemend embodied in Annex ― A-1‖ is covered by the Statute of Frauds and ergounenforceable for noncompliance therewith. By force of the statute of frauds, an agreement that by its terms is not to be performed within a year from the making thereof shall be unenforceable by action, unless the same, or some note or memorandum thereof, be in writing and subscribed by the party charged. Corollarily, no action can be proved unless the requirement exacted by the statute of frauds is complied with. (at p. 590) Unfortunately, the Court failed to consider the fact that even under the Statute of Frauds, the ―unenforceability‖ of covered contracts is lifted the moment there is partial or full execution of the terms of the contract. Thus, in the future it can be anticipated that the rule of partial execution, (i.e., the actual contribution made to the partnership, the pursuit of the business enterprise, etc.), would make mitigate against the deleterious effect of non-compliance with the public instrument and SEC-registration requirement under Article 1771 and 1772 of the Civil Code.
should be attached to the public instrument, else there is legally no partnership to speak of. (at p. 586).
Litonjua therefore gives the ―dire consequences‖ faced by partners who do not comply with the formal requirements mandated under Articles 1771 to 1773 of the Civil Code. It would have been better if Litonjua had expressly set aside its rulings in Torres and Angeles, so that its doctrine would have been the clear guide to legal practitioners. For the author, it must be stated that the rulings in Torres and Angeleswhich have their basis from jurisprudence under the old Civil Code and the Code of Commerce, will continue to prevail; and that the Litonjua doctrine of rendering the contract of partnership void for failure to comply with the requirements under Article 1773 of the Civil Code, applicable only to situations where the claimant that a contract of partnership has been duly constituted relies only upon a note or instrument, and does not have other evidence to prove that indeed a contract of partnership has been constituted, such as his exercise with the tolerance of the other partners, of acts of ownership, demanding for an accounting, participation in the profit, etc. Indeed, in Litonjua the best evidence presented by the younger brother to prove a contract of partnership has been constituted was the unsigned typewritten note, and he failed to prove the essential elements of the contract of partnership, as observed by the Court, thus:
In any event, what rendered the purported contract of partnership void in Litonjua was that since the note indicated that there would be contributed real property to the partnership, then there was failure to comply with the requirements laid down in Article 1773 of the Civil Code, for the rendering of the proper inventory and attaching it to the public instrument registered with the SEC, thus:
Lest it be overlooked, petitioner is the intended beneficiary of the P1 Million or 10% equity of the family businesses supposedly promised by Eduardo to give in the near future. Any suggestion that the stated amount or the equity component of the promise was intended to go to a common fund would be to read something not written in Annex “ A-1.‖ Thus, even this angle alone argues against the very idea of a partnership, the creation of which requires two or more contracting minds mutually agreeing to contribute money, property or industry to a common fund with the intention of dividing the profits between or among themselves .‖ (at pp. 590-591; italics supplied).
Lest it be overlooked, the contract-validating inventory requirement under Article 1773 of the Civil Code applies as long [as] real property or real rights are initially brought into the partnership. In short, it is really of no moment which of the partners, or, in this case, who between petitioner
Perhaps the afore-quoted passage is the best way to appreciate the decision in Litonjua , that in the end no contract of partnership arose between the Litonjua sibling even on the basis of the arrangement purported, since it lacked the essential element of ―contributing to a
c. Historical Background of Article 1773 Ruling under the provisions of the Code of Commerce and the old Civil Code which prescribed formalities for the formation of a partnership where real property is contributed, the Court held in Borja v. Addison, 44 Phil. 895 (1922), that ―knowledge of the existence of the new partnership or community of property must, at least, be brought home to third persons dealing with the surviving husband in regard to community real property in order to bind them by the community agreement.‖ (at p. 907) Consequently, third parties without knowledge of the existence of the partnership who deal with the property still registered in the name of one of the partners have a right to expect full effectivity of such transaction on the property, in spite of the protestation of the other partners and p erhaps even the partnership creditors. d. Registration Requirements under Article 1773 Should Be Considered in Connection with the Priority Rules Set for Claims of Partnership Creditors and the Separate Debtors of the Partners Failure to comply with the inventory and public documents requirements may, however, adversely affect the rights of the partners, the partnership and the partnership creditors, when it comes to the binding effect of transactions relating to real estate and other immovables where the controlling doctrine is that such transactions do not bind the public unless they are found in a public document, and duly registered.
Under Article 1839(8), ―When partnership property and the individual properties of the partners are in possession of a court for distribution, partnership creditors shall have priority on partnership property and separate creditors on individual property, saving the rights of lien or secured creditors.‖ Again, under Article 1839(9), ―Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order: ―(a) Those owing to separate creditors; ―(b) Those owing to partnership creditors; ―(c) Those owing to partners by way of contribution. (n)‖ Since Torres specifically held that the rules of inventory, public instrument and SEC registration under Articles 1772 and 1773 of the Civil Code are meant to protect partnership creditors, and as to them the partnership contract is void, if it is necessary to protect their interests, what happens then to real property contributions that have not complied with the statutory formalities, would first priority towards them pertain to the separate creditors of the contributing partner?
3. The Partnership Name Thus, in Secuya v. Vda. de Selma, 326 SCRA 244 (2000), the Court held that while the sale of land appearing in a private deed is binding between the parties, it cannot be considered binding on third persons if it is not embodied in a public instrument and recorded in the Registry of Deeds. When it comes to contributions of real estate to a partnership, especially when it covers registered land, then the peremptory provisions of the Property Registration Decree (Pres. Decree No. 1459) will prevail as to who has a better claim, right or lien on the property, since ―registration in good faith and for value,‖ is the operative rule under the Torrens system. The proper registration of real property contributed into the partnership would have much to do with the priority rules set under the Law on
Article 1815 of the Civil Code provides that – ________ Art. 1815. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners. Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a
The language of Article 1815 of the Civil Code shows unmistakably that its not an obligation of the partners to include their names in the partnership name; but that if an individual includes his name in the firm name, then he becomes bound to third parties who rely thereon to the same liabilities as the partners in the partnership. Article 1815 is the first article under the section which reads ―Obligations of the Partners with Regard to Third Persons,‖ which indicates clearly the essence of having a firm name: that since a partnership is given a separate juridical personality which allows it to deal with legal capacity and enter into contracts with the public, then it must adopt a firm name by which it can be identified as the party to a contract. a. Historical Basis of Article 1815 Although the codal provision indicates that it is a new [―(n)‖] provision in the Civil Code, according to Tolentino, Article 1815 was taken from Article 126 of the Code of Commerce (TOLENTINO, at p. 353). Yet the principle on partnership name under Article 126 was quite different, for it actually required that the partnership name should be registered containing all the names of the partners. (Article 126, Code of Commerce). In Jo Chung Cang v. Pacific Commercial Co., 45 Phil. 142 (1923), the Court held that the object of Article 126 in requiring a general partnership to transact business under the name of all its members, of several of them, or of one only, was to protect the public from imposition and fraud; and that Article 126 was for the protection of the creditors rather than of the partners themselves. Jo Chung Cang held that the legal requirement as to firm name must be construed as rendering contracts made in violation thereof unlawful and unenforceable only as between the partners and at the instance of the violating party, but not in the sense of depriving innocent parties of their rights who may have dealt with the offenders in ignorance of the latter having violated the law; and that contracts entered into by commercial associations defectively organized are valid when voluntarily executed by the parties, and the only question was whether or not they complied with the agreement. It essence Jo Chung Cang ruled that partners cannot avoid the consequences of a partnership contract entered into by invoking in their defense the anomaly in the firm name
The earlier decision in Hung-Man-Yoc v. Kieng-Chiong-Seng , 6 Phil. 498 (1906), held that failure to register a commercial partnership would mean that there is no partnership constituted and that the rule applicable to protect parties who have dealt in good faith with the enterprise was the application of Article 120 of the Code of Commerce, that the right of action would be against the person in charge of the management of the association.
Jo Chung Cang refused to apply the ruling in Hung-Man-Yoc because there was actual registration of the partnership, and consequently decreed that a general partnership had been constituted as to make the partners thereof solidarily liable for partnership debt in the event the partnership itself becomes insolvent. Although failure to comply with the mandatory registration provisions of the Code of Commerce did not affect the cause of action of creditors to enforce their contracts against the partnership, did it mean then that as a consequence, if it were the partners and partnership seeking to enforce such contracts, they would be barred from doing so as a consequence of their failure to comply with the registration requirements under the law? No categorical ruling was made on this issue in Jo Chung Cang although it did quote a ruling from the Supreme Court of Michigan on the common law rule: As this acts involves purely business transactions, and affects only money interests, we think it should be construed as rendering contracts made in violation of it unlawful and unenforceable at the instance of the offending party only, but not as designed to take away the rights of innocent parties who may have dealt with the offenders in ignorance of their having violated the statute. ( Ibid , at pp. 154-155, citing Cashing v. Pliter 168 Mich 386; Ann. Cas. [1913-C], 67 [1912]; underscoring supplied by author ) To prevent such members of a commercial partnership from recovering on the contracts entered into on the ground that there was no valid registration or that it did not comply with the rule on firm name would constitute unjust enrichment. Eventually, the Court applied in Compañia Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the principles of corporation by estoppel doctrine (Section 21, Corporation Code), even as to unregistered partnerships, thus:
persons, are estopped from denying that they constitute a corporation. So also are the third persons who deal with such a de facto association or corporation, recognizing it as such and thereby incurring liabilities, estopped, when an action is brought on such obligations, from denying the juristic personality of such corporations or associations. (Ibid , at p. 12). xxx. Where a shareholder of an association is called upon to respond to a liability as such, and where a party has contracted with a corporation and is sued upon the contract, neither is permitted to deny the existence or the legal validity of such corporation. To hold otherwise would be contrary to the plainest principles of reason and good faith. Parties must take the consequences of the position they assume. (Ibid , at p. 13).
4. Registration Given Little Use in Partnership Law The essence of what constitutes a partnership contract is split into two levels in Philippine Partnership Law: (a) As between and among the partners, it is the point of perfection, when two or more parties have come to a meeting of minds to constitute a common fund and the distribution of profits and losses among themselves; and (b) In relation to third parties who deal with a business enterprise, when a representation has been made that they are dealing with a partnership, or are dealing with a partner to a partnership enterprise. a. Intra-Partnership Relationship
The question in the Jo Chung Cang, PNB and Compania Agricola rulings was that if the provisions of Article 126 of the Code of Commerce were mandatory in the sense that they were addressed to the partners and partnership more for the protection of partnership creditors, and noncompliance therewith could not prejudice creditors, then what would be their usefulness if no adverse consequence visits the partners and the partnership whenever they are not complied with? There is no doubt that there were serious difficulties with enforcing the mandatory provisions on registration and firm name for commercial partnerships under the Code of Commerce. The present rule under Article 1815 of the Civil Code which essentially allows the partners and the partnership to adopt any firm name they fancy is a more market-friendly rule since: (a) one who opts to have his name included in the firm name runs to risk of being made liable for partnership debts; (b) the articles of partnership, when registered provides anyway for the listing of the partners of the partnership enterprise; and (c)
more importantly, the arising of the separate juridical personality of
Within the intra-partnership relationship, the main doctrine that applies is that unless there is a meeting of minds as to the elements of common fund and distribution of profits, then there can be no contract of partnership between the parties involved. On the other hand, once there is such a meeting of minds, the partnership contract arises, and needs no particular form in order to be valid, binding and enforceable. Thus, Article 1784 provides that ―A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated.‖ The partnership agreement may be proved by competent evidence, whether written or oral, or from the acts and actuations of the parties. So strong is the ―consensual‖ na ture of the contract of partnership that the failure to comply with the formal requirement of inventory of immovable contributed, public instrument and registration with the SEC, brings no deleterious effect on the partnership itself, and between and among the partners. We shall illustrate this point. Under Article 1771 of the Civil Code, although it recognizes the general principal that ―A partnership may be constituted in any form,‖ yet it provides expressly that ―where immovable property or real rights a re contributed thereto, in which case a public instrument shall be necessary.‖ This is followed up in Article 1773 which provides that ―A contract of partnership is void, whenever immovable property is contributed thereto,
comply with the requisites forms of public document and inventory of the contributed immovable, the Court has always ruled that such requirements are meant for the protection of third part ies who deal with the partnership, and consequently, when no third party interests are involved in a suit, neither the partnership nor any of the parties can invoke failure to comply with such requirements, to gain any advantage or so avoid the liability consequences of being a partner in a partnership. In the same manner, under Article 1772 of the Civil Code, ―Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.‖ Not only does Article 1772 declare the clearly non-lethal consequence of failure to comply with the public instrument and SEC registration requirements: ―Failure to comply with the requirements o f the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons,‖ but the Court has consistently declared that the purpose of Article 1772 is merely to allow a partner in an oral partnership to have a cause of action to have the partnership constituted in a manner that allows its terms and conditions be made known to the public through a public instrument and registration with the SEC. Failure to comply with the requirements under Article 1772 may also be basis for the SEC to refuse to give supportive aid to partners who have not registered their agreement with the SEC. b. Dealings with Third Parties There are basically two areas that are important to consider when it comes to partnership dealings with third parties: (a) The validity and enforceability of contracts entered into with a purported partner of an existing partnership or with purported partnership that has not been legally constituted; and (b) The standing of partnership creditors to enforce partnership liability personally against the partners.
in the ordinary course of business of such partnership, has a right to expect that his contract can be enforced, and intra-partnership and technical issues pertaining to the partnership or on the distribution of power and authority between the partners cannot generally be raised against such third party to undermine the enforceability of his contractual dealings with the corporation. Various statutory provisions in the Partnership Law of the Civil Code, support this doctrine of reliance by third parties dealing in good faith with the purported partner or purported partnership, thus: (a) Under Article 1815, ―Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of partner.‖ (b) Under Article 1818, ―Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in t he partnership name of any instrument, for apparently carrying on in the usual way the business of the partnership . . . binds the partnership, unless the partner so acting has in fact no authority to act for the partnership in the particular manner, and the person with whom he is dealing with has knowledge of the fact that he has no such authority;‖ (c) Under Article 1834, partnership creditors who extend credit to the partnership even after there has been dissolution can can claim payment thereof against all the partners, when such creditors have ―no knowledge or notice of the dissolution.‖ In fact, even when a partnership has been duly registered with the SEC, the doctrine of the Supreme Court seems clear that third parties who deal with the partnership are not bound by the terms of the registered articles of partnership, and unless they have actual knowledge thereof, they have a right to rely upon what is the normal right and authority o f every partner to generally bind the part nership and the other partners. Thus, Litton v. Hill & Ceron, 67 Phil. 509 (1939), laid down the rule that –
not make inquiries as to the agreements had between the partners. Its knowledge is enough that it is contracting with the partnership which is represented by one of the managing partners. ( Ibid , at p. 513). This ruling was reiterated in Goquiolay v. Sycip, 108 Phil. 947 (1960), which held that the statutory rule on how management power is distributed or exercised within the partnership, and the consequences of failure to comply with such statutory rule is ―an obligation that is imposed by law on the partners among themselves, that does not necessarily affect the validity of the acts of a partner, while acting within the scope of the ordinary course of business of the partnership, as regards third persons without notice. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that, furthermore, he would not ordinarily act to the prejudice of his copartners. The regular course of business procedure does not require that each time a third person contracts with one of the managing partners, he should inquire as to the latter‘s authority to do so, or that he should first ascertaining whether or not the other partners has given their consent thereto.‖ (Ibid , at p. 957). The reason why the general rule in Agency Law that one dealing with an agent must ascertain the extent of the power of the agent does not normally apply with the same effect in Partnership Law was also explained in Goquiolay in the following manner: ―It is argued that the authority given by Goquiolay to the widow Kong Chai Pin was only to manage the property, and that it did not include the power to alienate . . . What this argument overlooks is that the widow was not a mere agent, because she had become a partner upon her husband‘s death, as expressly provided by the articles of co-partnership.‖ (Ibid , at p. 965). Being therefore a partner, the general rule of Partnership Law, every partner had the power to dispose of partnership property even of its real estate, which is in the normal course of the partnership business of dealing with real property: ―where the avowed purpose of the partnership is to buy and sell real estate (as in the present case), the immovables thus acquired by the firm form part of the its stock-in-trade, and the sale thereof is in pursuance of partnership purposes, hence within the ordinary powers of the partner.‖ (Ibid, at p. 969).
If non-compliance with the formal and registration requirements under Partnership Law of the Civil Code does not render the partnership void, nor does it undermine the enforceability of contracts entered into in the partnership name, and does not generally impose legal consequences on the partners for non-compliance, then what is the usefulness of such statutory provisions? The answer had been addressed early in our jurisdiction in Thunga Chui v. Que Bentec, 2 Phil. 561 (1903), which applied Article 1279 of the old Civil Code, now found as Article 1357 of the new Civil Code, which reads: If the law requires a document or other special form, as in the acts and contracts enumerated in the following articles, the contracting parties may compel each other to observe that form, once the contract has been perfected. This right may be exercised simultaneously with the action upon the contract. In Thunga Chui , the Court held – Article 1279 [now Article 1356] does not impose an obligation, but confers a privilege upon both contracting parties, and the fact that plaintiff has not made use of same does not bar his action. x x x . Article 1279 [now Article 1356], far from making the enforceability of the contract dependent upon any special extrinsic form, recognizes its enforceability by the mere act of granting to the contracting parties an adequate remedy whereby to compel the execution of a public writing, o r any other special form, whenever such form is necessary in order that the contract may produce the effect which is desired, according to whatever may be its object. ( Ibid, at pp. 563-564). Not only is the general rule under Partnership Law jurisprudence that partnership creditors do not have an obligation to verify the authority of a purported partner acting in the ordinary course of partnership business, nor to review the registration papers of the partnership, the rule is that any important changes in partnership relationship must be brought to the knowledge of the partnership creditors in order to be binding on the latter. Thus, in Singson v. Isabela Sawmill , 88 SCRA 623 (1979), the Court held that the failure of a partner to have published her withdrawal from the
to the partnership creditors. The Court held that even if the withdrawing partner acted in good faith, this cannot overcome the position of partnership creditors who also acted in good faith, without knowledge of her withdrawal from the partnership. In particular, Singson ruled that when the partnership executes a chattel mortgage over its properties in favor of a withdrawing partner, and the withdrawal was not published to bind the partnership creditors, and in fact the partnership itself was not dissolved but allowed to be operated as a going concern by the remaining partners, the partnership creditors have standing to seek the annulment of the chattel mortgage for having been entered into adverse to their interests. XII. RIGHTS & POWERS OF PARTNERS Article 1810 of the Civil Code provides that the property rights of every partner in the partnership set-up to be as follows:
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) Right to Participate in t he Management of the Partnership ; a. General Rule on Partnership Management (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 p artners 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
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,
Court held in Munasque v. Court of Appeals, 139 SCRA 533 (1985), that a presumption exists that each partner is an authorized agent for the firm and that he has authority to bind it in carrying on the partnership transaction. We should therefore consider the old ruling in Council of Red Men v. Veterans Army , 7 Phil. 685 (1907), where the Court interpreted the original provision of Article 1803 of the Civil Code (then Article 1695 of the old Civil Code), that allowed one partner to act to bind the partnership, to apply only when there has been no provision at all in the articles of partnership on the exercise of power o r 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 mo re persons who composed the department the power to make any contract relating to the society which that particular officer saw fit to make, or that a contract when so made without consultation with, or knowledge of the other members of the department should bind it. We therefore, hold that no contract, such as the one in question, is binding on the Veteran Army of the Philippines unless it was authorized at a meeting of the department. No evidence was offered to show that the department had never taken any such action. In fact, the proof shows that the transaction in question was entirely between Apache Tribe, No. 1, and the Lawton Post, and there is nothing to show that any member of the department ever knew anything about it, or had anything to do with it. The liability of the Lawton Post is not presented in this appeal. (7 Phil. 685, at pp. 688-689).
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
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
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.‖ (a t 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
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:
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;
(a) Article 1820, which provides that an admission or representation made by any partner concerning partnership affairs within t he scope of his authority is evidence against the partnership;
(c) Confession of a judgment;
(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);
(e) Submitting a partnership claim or liability to arbitration; or
(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 mo ney 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 Business
Not
in
the
Ordinary Course
of
Partnership
(d) Entering into a compromise concerning a partnership claim or liability;
(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 t he 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‖.
accounting and contribution between the co-debtors, that should be ventilated separately. ( Ibid , at p. 960).
outside of the articles of incorporation, but in such case his designation as managing partner is essentially revocable.
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:
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.
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-intrade 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
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.
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.
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;
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 t he 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:
(3) Where Title Is in t he Name of O ne or More But Not All the Partners: (i) When the records disclose partnership interests, the partners in whose name the title stands may convey tit le 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 wit hout authority;
(1) Where Title Is in the Partnership Name : (4) Where Title Is in the Name of All of the Partners: (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
(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 t hat 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 p artnership 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
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 f or 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,‖
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 o f 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 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 t o 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 o f 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
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 t he 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
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
more of the partners from any share in the profits or losses is void, but the partnership arrangement remains subsisting.
partnership books which shall be kept at the principal place of business of the partnership.
Article 1797 of the Civil Code provides for the rules governing the distribution of profits and lo sses in the partnership business, thus: (a) Profits and losses shall be distributed in conformity with the agreement between the partners;
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 actionmandamus. The right to inspect is critical to safeguarding all other rights of stockholders or members in the corporation.
(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;
The same principles are applicable to a partner‘s right to inspect and to demand true and full information o n partnership matters.
(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.
b. Right to Demand True and Full Information
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 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 t he 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.
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 i f 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
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
(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
XIII. DUTIES & OBLIGATIONS OF PARTNERS
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 corporat ion 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 o n their l iabilities 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 pa rtnership 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.
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 it is provided that ―A partn er 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.
(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 the contrary, the partners shall contribute equal shares to the partnership.‖ Under Article 1830(4), the partnership is dissolved ―When a specific thing, which a partner had contribute to the partnership, peri shes before the delivery;‖
stipulati on to the capital of automatically promised to
(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
When Promised Contribution Is a Sum of Money
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.
in such case the claim shall be limited to the value at were appraised.‖
which they
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 t he 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
There can be no doubt that once the contract of partnership is constituted, the industrial partner is from then bound to devote his ti me 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
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.
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 failur e 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).
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 cont ribute 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
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 or progressive contract in that it is entered into to pursue a transaction or series of transactions ( i.e., to operate a business enterprise)
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 o f 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 th e 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.
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
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
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
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, i t must mean that is saddled with more burden or prohibitions. The coverage of Article 1789 should mean also t hat: (a) Since his main contribution to the partnership is his industry, then an industrial partner owes to the venture and his fellow partners t he 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:
(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
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 t he 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
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 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
(a) Under Article 1815, those who, not being members 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 when a person by word or conduct, represents himself, or consents consents to another representing him to anyone, as a partner in an existing partnership or with o ne 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, 1825, when such a person person has made 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 when a person has been thus represented to be a partner in an existing partnership, or with one or more persons 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. XIV. DISSOLUTION, PARTNERSHIP
WINDING
UP
&
TERMINATION
OF
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
Article 1828 of the Civ il 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 o f the Law on Contracts. Article 1829 of the Civil Code implicitly distinguishes ―dissolution‖ from ―termination‖ and ―winding ―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 t he 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 fromParas, Civil Code of the Philippines, Vol. V, 7th ed., p. 516) ‖Winding-up of partnership affairs‖ is therefore the process which is ‖Windingcommenced 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,‖ ―winding (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 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
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
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.
a.
Effect on the Partnership Business Enterprise
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
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 of delectus personae, are terminated, without prejudice to a new partnership arrangement being constituted among the remaining partners. c. Effects on Contracts Entered into With Third Parties In Corporate Law, after dissolution all contracts entered into that pursue new business for the corporate venture are void even as to persons who deal with the corporation in good faith. The reason for this is that the public policy behind the capacity of the corporate juridical personality preempts 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
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‖.
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, petitione r 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 t he 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]).
There was no liquidation of the assets of the partnership. The remaining partners . . . used the properties of said partnership.
3. Causes of Dissolution
xxx.
Partnership Law classifies the causes of dissolution of partnerships into the following categories:
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
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
In a partnership at will, dissolution effected by the will of any partner exercised in good faith
(e) When the partnership business can only be carried on at a loss;
By mutual withdrawal by all the partners
(f)
Expulsion of a partner bona partnership agreement
fide under
powers
granted
in
the
(b) Dissolution Effected in Contravention of the Partnership Agreement, Effected by the Will of Any Partner:
(g) On the application of the purchaser of a partner‘s interest in the partnership:
o
Other circumstances that render dissolution equitable;
When the partnership term has not expired
o
When the particular undertaking for which the partnership has been constituted has not yet terminated
o
After termination of specified term of the partnership After termination of the particular partnership was constituted
undertaking
for
which
the
At any time, in a partnership at will
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
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 o f 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
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 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.
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.
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.
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.
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.
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 t en 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
In essence, Philippine Partnership Law i s 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
(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
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 t he 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 r espondent‘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 priv ate 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 o f 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 partnership; and
to be contributed to the
(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 Fernandez because 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
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 t he 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 to affect prejudicially the carrying on of the business;
as
tends
(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;
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 t he 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
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 personae should 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
a. When Dissolution Is Caused in Any Contravention of the Partnership Agreement
Way,
Except
in
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 i n 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 t he 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
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
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 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.
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.
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 Contracted or Incurred After Dissolution
Liabilities
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
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 partn ership 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 o f general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on.
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 i n 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
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.
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.
(3) As To Third Party Creditors
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.
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.
(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 t he 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
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 only actual knowledge or notice of the dissolution that would place him in bad faith; whereas, in the latter mere notice of dissolution published in
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,
(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
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:
(b) Where the partner has become i nsolvent. (a) What Constitutes Partnership Property? (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
The assets of the partnership partnership liabilities are: (i)
which shall
be
applied
to
pay
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?
a. Who Has Authority to Wind-up?
The liabilities of the partnership shall rank in order of payment as follows:
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:
(i) Those owing to creditors other than partners;
(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 t he last surviving partner, not i nsolvent, 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
(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
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.
petitioners, it is the partnership that must refund the equity of the retiring partners. x x x.
(2) Priority Rules Between Partners’ Cr editors 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.
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)
(3) Priority Rules When Partner Is Insolvent Where a partner has become insolvent or his estate is insolvent, the claims against his separate property shall rank in the following order: (a) Those owing to separate creditors; (b) Those owning to partnership creditors; (c) Those owing to partners by way of contribution. (4) Partner May Demand Share in Net Assets Only After Liquidation and Settlement of Claims of Partnership Creditors In Villareal v. Ramirez , 406 SCRA 145 (2003), the Court ruled that ―A share in a partnership can be returned only after the completion of the 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,
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,
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 e very 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).
a. Who May Assumed?
Continue Partnership
Business
and
Obligations
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;
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
(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
(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 t he 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
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 ordinary creditor an amount equal to the value of the dissolved partnership, with option: (i)
receive as an his interest in
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.
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). XV. LIMITED PARTNERSHIPS
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
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 lia bility,‖ 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 developm ent 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 Italy accomenda. 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
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 regulat ed. 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
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
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 b een 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:
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
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)
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. Hall decision , 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 commit ment under the partnership agreement to hold the limited partners liable for partnership debts and obligations only to the extent of their contributions. To the same effect is the ruling in Jo Chung Cang v. Pacific Commercial Co., (45 Phil. 142 [1923]) under the terms of the Code of Commerce which also required execution of public document and formal registration of the certificate of limited partnership, thus – The supreme court of Spain has repeatedly held that notwithstanding the obligation of the members to register the articles of association in the commercial registry, agreements 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
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.
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.
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 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 b e defrauded. e. Contributions to the Limited Partnership
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
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 ―empl oyment 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
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.
(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 partnership; (g)
a change in
the character of
the business of
the
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;
f. When Certificate Cancelled or Amended (i)
A time is fixed for the dissolution of the partnership, or
(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.
(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
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.
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:
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) Do any act in contravention of the Certificate;
A certificate is amended or cancelled when there is filed for record with the SEC:
(c) Confess a judgment against the partnership;
(a) A writing accomplished in accordance with the provisions for cancellation or amendment of the certificate;
(b) Do any act which would make it impossible to carry on the ordinary business of the partnership;
(d) Possess partnership property, or assign their rights specific partnership property, for other than a partnership purpose;
in
(e) Admit a person as a general partner; (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?
(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 vo ice 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:
(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 li mited partners.
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 o f 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;
Three things must be noted carefully from the provisions of Article 1850.
(b) Dispose of the goodwill of the business;
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.
(c) Confess a judgment;
The real advantage granted by having a specific pro vision 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.
(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 t he 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
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 . . . b e subject to all the restrictions and liabilities of a partnership without limited partners.‖ Mus t 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 relatio nship 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
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 l iabilities 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
(2) Erroneous But in Good Faith Limited Partner
(3) When Limited and General Partner at the Same Time
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:
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.
(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 l imited 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
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
(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: ―I n 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 partner s 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.
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
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 t he 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 l aw; (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 und er 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.
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 i nterest 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.‖
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
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 o f 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
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 a ssets.‖ (DE LEONS, at p. 319) The decision in Goquiolay v. Sycip, 9 SCRA 663 (1963), seems to support such position, t hus – Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say ―necessarily‖) becomes a limited partner fo r 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 p ertains exclusively to the heir, and does not require the assent of the surviving partner. ( Ibid ) We do not agree with such position.
substitution, unless the Certificate is formally amended to so name the assignee or the substitute, as a limit ed partnership.
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.
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.
(6) Limited Right as to Partnership Affairs
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),
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 li ability, 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 o f 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:
(b) The other liabilities of the partnership have not been paid, or the partnership property is i nsufficient for their payment, and the limited partner would otherwise be entitled to the return of his contributions.
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
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).
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.
(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
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.
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:
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 o f 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;
(a) under a right so to do stated in the certificate; or
(c) Those to contributions;
limited
partners
in respect
to
(b) with the consent of all members.
(d) Those to general partners other than for capital and profits;
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
(e) Those to general partners in respect to profits; (f) Those to general partners in respect to capital.
the
capital
of
their
