5 – PARTNERSHIP AS A MEANS OF DOING BUSINESS, THROUGH THE JURIDICAL PERSON [Updated: 23 August 2010

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V. PARTNERSHIP AS A MENAS OF DOING BUSINESS, THROUGH THE JURIDICAL ENTITY Art. 1768. The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of Article 1712, first paragraph. (n) Art. 44. The following are juridical persons: x x x. (3) Corporations, partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each shareholder, partner or member. (35a) Art. 45. x x x . Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning partnerships. Art. 46. Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization. (38a) Art. 1774. Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name. (n)

1. Legal Bases of the Partnership Juridical Personality Immediately after defining partnership as a contract under Article 1767 of the Civil Code, the Law on Partnerships provides under Article 1768 that the “partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the [registration] requirements of Article 1772.” Article 44 of the Civil Code expressly recognizes “partnerships” as being “juridical persons,” and provides that “partnerships and associations for private interest or purpose to which the law grants a juridical personality, separate and distinct from that of each . . . partner or member.” Under Article 45 of the Civil Code, it is provided that “Partnerships and associations for private interests or purpose are governed by the provisions of this Code concerning partnerships.”

2. Underlying Business Ends of the Partnership Juridical Person The importance of the grant of separate juridical personality to the partnership is to make it an efficient means by which several persons can collectively pursue business. Thus, under Article 46 of the Civil Code it is provided that “Juridical persons may acquire and possess property of all kinds, as well as incur obligations and bring civil or criminal actions, in conformity with the laws and regulations of their organization.” In the Law on Partnerships, the business purpose of the partnership juridical person is best exemplified by Article 1774 of the Civil Code which provides that “Any immovable property or an interest therein may be acquired in the partnership name,” to avoid the cumbersome need of having all the names of the partners listed in the title to the property. Consequently, the article provides that title to real property acquired in the partnership name may be conveyed only in the partnership name. Although a partnership is treated as a “person” before the law, such juridical personality does not occupy the same level as the “person” of an individual. The “person” of an individual is considered sacrosanct under modern societal doctrine; the State and

civil society are organized towards protecting that person and engendering its safety and well-being. On the other hand, the “person” of a partnership is a legislative grant by the State or a fiction created by the law, not for the benefit of the juridical person, but precisely only as a means or medium by which individuals in society may achieve certain ends, and often they are business or commercial ends. That a partnership is really a creature of the law as a means by which society may pursue certain business or commercial ends means therefore that it is regulated under the Law on Partnerships for the benefit of those who employ it as their medium (the partners) and those who are authorized to deal with said medium (the creditors, the clients and customers). This philosophical understanding of the essence and purpose of the partnership “juridical person” is best exemplified by the provisions of Article 1775 of the Civil Code which denies juridical personality to “Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons.” In other words, if an aggregation of individuals is not meant to undertake a business or commercial venture that is supposed to deal with the public at large, then it is not intended to be a medium of doing business, and there is not purpose of granting it a separate juridical personality.

a. The Case for “Secret Associations” Art. 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership. (1669)

Under Article 1775 of the New Civil Code, “Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be govenred by the provisions relating to co-ownership. (1669). Bautista discussed the rationale and effects of Article 1775 as follows: Not every contract intended to create a partnership produces a juridical personality. The Code [Article 1775] withholds the attribute of juridical personality to “associations and societies whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons.” And applies to such associations or societies only the rules governing co-ownership. The phrase “kept secret among the members,” according to Manresa, does not mean that the articles are known to all the members but withheld from third persons. It contemplates a situation where the articles, which allow any one of the members to contract in his own name with third persons, are known to some members only and kept secret from the rest. In other words, the secrecy is not directed to third persons but to some of the partners. This rule is intended to preserve the equality which must exist among the partners and to prevent any of them from defrauding the partnership or the other members. This being the case it does not prohibit secret stipulations which are not designed to produce this result. It would not, for instance, have the effect of rendering invalid a separate agreement between two members of a partnership pursuant to which one guarantees the other against loss of his capital contribution or assures him of profit. Neither can the rule be invoked as against third persons by the partners entering into the secret stipulations, in consonance with the general principle that a party should not be allowed to take advantage of a nullity which he himself has caused.” (BAUTISTA, at pp. 58-59, citing 11 Manresa 289 to 291)

b. Jurisprudential Application of the Doctrine of Separate Juridical Personality of the Partnership In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying the contention that since the defendant sued was a partnership that summons must be served upon each of the partners, the Court held –

[I]t has been the universal practice in the Philippine Islands since American occupation, and was the practice prior to that time, to treat companies of the class to which the plaintiff belongs as legal or juridical entities and to permit them to sue and be sued in the name of the company, the summons being served solely on the managing agent or other official of the company by the section of the Code of Civil Procedure.” (Ibid, at p. 448) The decision in Campos Rueda & Co. v. Pacific Commercial Co., 44 Phil. 916 (1923), demonstrates how the separate juridical personality accorded to a partnership arrangement makes certain rules on insolvency work differently as compared to American jurisprudence on the same matter. InCampos Rueda a petition for involuntary insolvency was filed by the creditors of the limited partnership for an act of insolvency provided under the Insolvency Act (i.e., having failed to its obligations with three creditors for more than thirty days). The trial court denied the petition on the ground that it was not proven, nor alleged, that the partners of the firm were insolvent at the time the application was filed; and that as said partners are personally and solidary liable for the consequences of the transactions of the partnership, it cannot be adjudged insolvent so long as the partners are not alleged and proven to be insolvent. In ruling that the denial of the petition for insolvency was in error, the Court held – Unlike the common law, the Philippine statutes consider a limited partnership as a juridical entity for all intents and purposes, which personality is recognized in all its acts and contracts (art. 116, Code of Commerce). This being so and the juridical personality of a limited partnership being different from that of its members, it must, on general principle, answer for, and suffer, the consequence of its acts as such an entity capable of being the subject of rights and obligations. If, as in the instant case, the limited partnership of Campos Rueda & Co. failed to pay its obligations with three creditors for a period of more than thirty days, which failure constitutes, under our Insolvency Law, one of the acts of bankruptcy upon which an adjudication of involuntary insolvency can be predicted, this partnership must suffer the consequences of such failure, and must be adjudged insolvent. We are not unmindful of the fact that some courts of the United States have held that a partnership may not be adjudged insolvent in an involuntary insolvency proceeding unless all of its members are insolvent, while others have maintained a contrary view. But it must be borne in mind that under the American common law, partnership have no juridical personality independent from that of its members; and if now they have such personality for the purposes of the insolvency law. (Ibid, at pp. 918-919.) In Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275 (1947), the Court held that the death of either of the two partners is not a ground for the dismissal of a pending suit against the partnership, as a partnership possesses a personality distinct from any of the partners. In Tai Tong Chuache & Co. v. Insurance Commission, 158 SCRA 366 (1988), the Court held that a partnership may sue and be sued in its name or by its duly authorized representative, and when it has a designated managing partner, he may execute all acts of administration including the right to sue debtors of the partnership.

3. Application of the Doctrine of Piercing the Veil of Separate Juridical Fiction The “doctrine of piercing the veil of corporate fiction” finds relevance in Corporate Law because it is the means by which to bypass the effects of the doctrine of “limited liability,” and through piercing acting stockholders and/or officers may be held personally liable for corporate debts. In spite of the partnership being accorded also a separate juridical partnership, the piercing doctrine has less application in Partnership Law because the partners are unlimitedly liable (i.e., personally liable with their separate properties) for partnership debts. And yet, the doctrine found application to partnerships in Commissioner of Internal Revenue v. Suter, 27 SCRA 152 (1969), where the Court addressed the legal position of the Tax Commissioner seeking to make the individual partners liable for

(At p. thus: It being a basic tenet of the Spanish and Philippine law that the partnership has a juridical personality of its own. 20 SCRA 383 [1967]) but . 1768 of the Civil Code. . distinct and separate from that of its partners (unlike American and English law that does not recognize such separate juridical personality). the corporations were already subject to tax when the fiction of their corporate personality was pierced. 40 Phil. the complaint was filed against the partners and officers to enforce essentially a partnership obligation. . Aguila & Sons. (Phil. a factor that justified a disregard of their corporate personalities for tax purposes. Ruiz. The limited partnership’s separate individuality makes it impossible to equate its income with that of the component members. . In this case. v. v. 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. it conducted its own dealings with its customers prior to appellee’s marriage. the Court held – Under Art. but only in the limited area of determining standing in a suit brought against claims pertaining to the partnership. .. Natividad. 159. a partnership ‘has a juridical personality separate and distinct from that of each of the partners. the title to the subject property is in the name of A. (at p. 37 SCRA 823 [1971]) the rights against unreasonable searches and seizure. that corporations as “persons before the law” are entitled to the constitutional guarantee to due process and equal protection.income tax for the income earned by the limited partnership. Court of Appeals. the partners did not enter into matrimony and thereafter buy the interests of the remaining partner with the premeditated scheme or design to use the partnership as a business conduit to dodge the tax laws.C. and had been filing its own income tax returns as such independent entity. or illegal purposes. it is the partnership. the limited partnership is not a mere business conduit of the partner. 136 [1919]. Bache & Co. Hence. unfair or illegal purposes. In ruling that the judgment rendered by the trial court (affirmed by the Court of Appeals) against the individual defendants was void. and A. Co. Diokno. it was organized for legitimate business purposes. in the present case. equal protection.C. As far as the records show. 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. In Aguila. is being used for fraudulent. 158-157. Inc.. A violation of this rule will result to dismissal of the complaint. unfair. The corporations. at pp. 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. The piercing doctrine also found recognition. Bell & Co. or agents.) 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. albeit by way of obiter. *) 4. which should be impleaded in any litigation involving property registered in its name. inAguila. 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.) x x x. unreasonable searches and seizures and the right against self-incrimination. Aguila & Sons. (Stonehill v. Moreover. in the cases cited. private respondent has not shown that A.’ 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. (Ibid. Aguila & Sons. Jr. It is well established in Philippine Corporate Law. Co. 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.). merely served as business conduits or alter egos of the stockholders.spouses. . and the Memorandum of Agreement was executed between private respondent with the consent of her late husband. .C. v. . This is not true in the present case. (Smith. Co. not its officers. not otherwise. In the cited cases. is presumed. as a separate juridical entity. 319 SCRA 246 (1999). . Regularity. represented by petitioner. Here. Jr.

where the Court held that a corporation is entitled to immunity against unreasonable searches and seizures because “A corporation is.. without needing to register its existence with the State or any of its organs. 40 Phil. Ruiz. But a partnership. Its right to act as a corporation are only preserved to it so long as it obeys the laws of its creation. The defense amounts to this. v. Bell & Co. v. where the stockholders . but an association of individuals under an assumed name and with a distinct legal entity. no corporation can be dissolved without the consent of the State. 837. . thus: The guarantees of the Fourteenth Amendment and so of the first paragraph of the Philippine Bill of Rights. having chartered a corporation to make use of certain franchises. are universal in their application to all persons within the territorial jurisdiction. In fact. 150 SCRA 181 (1987). against unlawful discrimination. Private corporations. 50 L. and franchise may refuse to show its hand when charged with an abuse of such privileges. 771.Ed. discusses the rationale why corporations would be entitled to constitutional guarantees accorded to individuals. 43. In organizing itself as a collective body it waives no constitutional immunities appropriate for such body. v. 37 SCRA 823 (1971). It would be a strange anomaly to hold that a state. To state this proposition is to answer it. after all. has less vigor to the partnership setting. at p. . . or nationality.. (55 L. extensively quoted in Bataan Shipyard from Wilson v. (Phil. 136 (1919). 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. 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. Consider the decision in Bataan Shipyard & Engineering Co. This is unlike in corporate setting. It is presumed to be incorporated for the benefit of the public. Henkel. The better rationale applicable to partnership would be the ruling in Bache & Co. 144) The Smith. it does not follow that a corporation. the Court’s ruling on why corporations are not entitled to the rights against self-incrimination.S. could not.) Every corporation is a direct creature of the law and receives an individual franchise from the State. . 780) thus: * * * The corporation is a creature of the state. More importantly. in the exercise of sovereignty. quoting from Hale v. Bell & Co. . It receives certain special privileges and franchises. are ‘persons’ within the scope of the guaranties in so far as their property is concerned. 150 SCRA 181 [1987]). rationale has equal application to partnerships which are accorded as separate persons under the Partnership Law. 780. Its power are limited by law. 55 Law Ed. (Ibid. v. but more so that the separate juridical personality is closely identified with the personality of the partners under delectus personaeconsiderations. at p. vested with special privileges. 201 U. It can make no contract not authorized by its charter.” (Ibid. 652). mainly mutual agency. It can only be proceeded against by due process of law. PCGG. PCGG. becomes a juridical person through a private contract of partnership between and among the partners. United States. and holds them subject to the laws of the state and the limitations of its charter. The word ‘person’ includes aliens .. Inc. although is deemed to be a juridical person by grant of the State. and whether they had been abused. likewise. and is protected. 771. and only after due notice and hearing. Likewise. .Ed. delectus personae and unlimited liability on the part of the partners. There is a reserve right in the legislature to investigate its contracts and find out whether it has exceeded its powers. quoting from Wilson v. Its property cannot be taken without compensation. United States. and demand the production of the corporate books and papers for that purpose. the other features of the partnership. the partnership “person” is a fiction of law given more for the convenience of the partners. 234235. In Smith. that places a close identity between the persons of the partners and that of the partnership. 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. where the Court held that the right against self-incrimination has no application to corporations. under the 14th Amendment. without regard to any differences of race. (150 SCRA 181. While an individual may lawfully refuse to answer incriminating questions unless protected by an immunity statute. Inc. Inc. whereas. (BataanShipyard and Engineering Co. inquire how these franchises had been employed. color. On the other hand. Natividad.not to the right against self-incrimination.).

and where basically the corporation “is its own person. Tan Teng. including the modes upon which they conduct their lives and businesses. Another view is that the constitutional guarantees of due process. cannot be expected to be entitled to the constitutional right against self-incrimination. but would deny acting individuals the right to abuse the medium of separate juridical personality as a means to do folly. that has no heart. and enjoy personal immunity from the debts and liabilities of the corporation. As the author has observed in his writing on Philippine Corporate Law. feels pain. and acting still for such business enterprise. and also in the case of partnerships. On the other hand. Benguet Consolidated. produce records and books before the courts. members or partners who compose the juridical entity. v. . 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.do not own corporate properties. it has no soul that can be damned by a lie. 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..” (U. could not be presumed to have waived their individual rights against self-incrimination.S. Inc. and has no soul that can be damned. . Perhaps that is the basis for the difference in stance by the Court between two sets of constitutional rights with respect to corporations. have no participation in management of corporate affairs. (Tayag v. 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. since its person is merely an extension of the group of partners. or upon trial. 26 SCRA 242. 6 – PARTNERSHIP AS A BUSINESS ENTERPRISE [Updated: 23 August 2010] VI. is to prohibit compulsory oral examination of prisoners before the trial. While therefore it is understandable that a corporation. 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. On the other hand. “The main purpose of the provision . . the partnership may constitute also a “business enterprise” or what is known in the disciplines of Economics and Accounting. it is quite different in the case of the partnership. 248 [1968]) Likewise. 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. 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. for the purpose of extorting unwilling confessions or declarations implicating them in the commission of a crime. PARTNERSHIP AS A BUSINESS ENTERPRISE Although not explicitly stated in the provisions of the Civil Code. 145. and therefore also intrude into the personal and business privacy of the stockholders. 23 Phil. when it comes to the constitutional right against selfincrimination. through its agents. members or partners who compose the juridical person. because it would require only that the partnership. who having come together in business.” and acts through a professional group of managers and agents called the Board of Directors. the juridical person created by express provision of law). 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. the constitutional protection against self-incrimination is not meant to prevent an actual State abuse but to avoid pressuring the individual from having to tell a lie.

or that they take the position of “equity” holders. rights and obligations. Generally. However. Both the trial and the appellate courts in fact recognized the decrease of the partnership assets to almost nil. 154. the investment of respondents substantially dwindled. For example. notable therefrom is the omission of any provision for the depreciation of the furniture and the equipment. the financial statements presented before the trial court showed that the business had made meager profits. they should have prepared for the fact that their investment would either grow or shrink. the right of the partners to specific partnership property and to share in the profits and losses. but the latter failed to recognize the consequent corresponding decrease of the capital. When petitioners and respondents ventured into business together. including absorbing the losses sustained. foolish or disastrous contracts they have entered into with all the required formalities and with full awareness of what they were doing. are legal matters that necessarily refer to the partnership business enterprise. 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. (Ibid. gives rise to legal relationships. because one third of the partnership properties at the time of dissolution did not amount to that much. Our Supreme Court has defined the term ”profession” as “a group of men pursuing a learned art as a common calling in the spirit of public service–no less a public service because it may incidentally be a means of livelihood. Ramirez. In the present case.” and thereby to be entitled to the profits made from the pursuit of the business enterprise. The original amount of P250. which essentially represents the “business enterprise” to be pursued. Salazar. the partnership capital was actually reduced.. We cannot sustain the underlying idea that the capital contribution at the beginning of the partnership remains intact. al.) In fact. It is a long established doctrine that the law does not relieve parties from the effects of unwise. at p.Recognition of the existence and operation of the partnership’s business enterprise. property or industry to a common fund”. Courts have no power to relieve them from obligations they have voluntarily assumed. its capital is either increased by profits earned or decreased by losses sustained. Properly taking these non-cash items into account will show that the partnership was actually sustaining substantial losses. 406 SCRA 145 (2003).) 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. The amortization of the goodwill (initially valued at P500. Such idea is speculative. simply because their contracts turn out to be disastrous deals or unwise investments. thus: First. 153. 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 . Ozaeta. conjectural and totally without factual or legal support.” (In the Matter of the Petition for Authority to Continue Use of Firm Name Sycip. It does not remain static and unaffected by the changing fortunes of the business. 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. Thus. at p. This understanding of the business enterprise of a partnership is applicable even to a professional partnership. Romulo. Because of the above-mentioned transactions. etc.) x x x. et. as distinguished from the legal effects and consequences of the contract of partnership among the partners and the partnership juridical person. and logically to assume the risks connected with it. which consequently decreased the capital of the partnership. to thereby assume the position of being “owners” or “equity holders. in the pursuit of a partnership business. as well as the right to manage. the obligation assumed by each partner “to contribute money. as distinguished from creditors who advance money to the partnership as “debt” holders. and doctrines. it is an essential element to the existence of the partnership under Article 1767 of the Civil Code. (Ibid. unimpaired and available for distribution or return to the partners.000) is not reflected either. 92 SCRA 1 (1979). that can only be accounted for from that level.000 which they had invested could no longer be returned to them. In the present case.

whatever the regime of property relations prevails in their marriage. it seems pretty well implied that spouses. 87. (BAUTISTA. the answer would be in the affirmative. the Supreme Court affirmed this particular view. and consequently. From the placement of Article 1782 (coming after the two articles covering the definition. relying only on the provisions of Article 1677 of the old Civil Code (now Article 1782). with respect to any contract of universal partnership made between them during the marriage. May Spouses Validly Enter into a Partnership Relation? a. but not necessarily a particular or limited partnership. except moderate gifts which the spouse may give each other on the occasion of any family rejoicing. Its purpose. 27 SCRA 152 (1969). with the husband being the general partner and the wife being the limited partner.” then spouses are prohibited from entering into a universal partnership.interest of the partners. then they can validly be partners in a limited partnership. between the spouses. The prohibition shall also apply to persons living together as husband and wife without a valid marriage. at p. nature and effects of universal partnerships.” and other than reporting the relevant portions of the decision in Suter. Likewise. In Commissioner of Internal Revenue v. 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. The critical question must be asked: Can spouses just between themselves or with third parties validly enter into a contract of partnership for gain provided the resulting partnership is not a universal partnership? If one refers only to the provision of Article 1782. 62). 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. which currently is the only decision to deal with the issue. which reads: Art. that since the prohibition for spouses covers expressly only universal partnerships.” It has thus been opined that since under Article 133 of the Civil Code “Every donation between the spouses during the marriage shall be void. during the marriage should be void. is to prevent persons disqualified from making donations each other from doing indirectly what the law prohibits them from doing directly. spouses may validly become partners to one another in a particular partnership. Article 133 of the Civil Code has now been replaced by Article 87 of the Family Code. and both general and limited partnerships. Spouses Cannot Enter into a Universal Partnership The main statutory provision invoked when it comes to the issue of whether spouses can enter between themselves into a partnership agreement is Article 1782 of the Civil Code which provides that “Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership.” which aptly describes their positions as owners of the partnership business enterprise. On this particular issue. he did not comment on whether spouses can validly enter into other forms of partnership for . therefore. from the underlying business enterprise that may remain operating even when the firs two levels are legally dissolved or extinguished. the rules on dissolution and liquidation clearly appreciate the difference between the contract relationship and juridical person constituting the partnership. and immediately before the article defining particular partnerships). 10 – SPECIAL ISSUES OF WHO MAY QUALIFY TO BECOME PARTNERS [Updated: 12 October 2009] 1. Bautista limited his comment to the effect that the provisions of Article 1782 disqualifies “spouses. are disqualified from entering into any sort of universal partnership. direct or indirect. Every donation or grant of gratuitous advantage. which would include a professional partnership. Suter.

the fiction of juridical personality of the partnership should be disregarded for income tax purposes because the spouses have exclusive ownership and control of the business. Commissioner of Internal Revenue. Under the provisions of the Tax Code. 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. the Court held that the partnership at issue “was not a universal partnership. nonetheless. persons prohibited from making donations to each other are prohibited from entering into universal partnerships. 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. 4th ed. such as the Suter situation. as limited partners. Suter. Firstly. but there are other statutory provisions more primordial in addressing the issue. (Articles 1810 and 1811. it would be error to base the resolution only on of Article 1782 of the Civil Code. Tolentino does not comment on the provisions of Article 1782. A partnership arrangement between spouses would thereby be an indirect violation of the provisions of Article 87 of the Family Code which provides that “Every donation or grant of gratuitous advantage. and neither one of them was an industrial partner. as a separate property arrangement apart from the property regime prevailing in their marriage. quoted from Tolentino. To the writer. Civil Code). effectively makes partners “donors” to one another of their contributions in the partnership. Eventually. and quoted from the commentaries of Tolentino.” Although it can be argued that contributions to a partnership are not in the nature of “donations” or “gratuitous advantage. which applies in the absence of express provision in the Code of Commerce. Commentaries and Jurisprudence on Commercial Laws of the Philippines. Thus. at p. even in a limited partnership. The Court held: “The theory of the petitioner. apart from a universal partnership.” In essence. Suter and Spirig were married. b. the contribution of the limited partner wife belonged to the partnership which would then be under the control and management of the general partner husband. 58). spouses cannot enter into any form of partnership. 1. direct or indirect. . for the reasons discussed below. 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]. 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. which was decided under the terms of the old Civil Code and the Code of Commerce. at p.” (27 SCRA 152. 157. . it seems that in addressing the issue raised. was extinguished with the marriage of Suter and Spirig. (Ibid. at p. . . every form of partnership. so that it can hold contributed property in its name. . thus: A husband and a wife may not enter into a contract of general copartnership. partners are expressly granted by Partnership Law co-ownership interest in the partnership property as to then have a direct co-ownership interest therein. although his discussion on the matter under his old work under the Code of Commerce was quoted in Suter.. but a particular one. 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.gains. Suter holds that spouses are not disqualified from becoming partners in a limited partnership. The Court found no merit in the position of the Commissioner. 156). Certainly Article 1782 constitutes an important statutory provision to resolve that issue. be it universal or particular. between the spouses during the marriage shall be void. and if they did not. . and bought out the interest of Carlson. with Spirig and Carlson. because under the Civil Code.” . provided one of them (or at least both of them) is a limited partner. including a limited partnership. who ended up as the only partners in the venture. general or limited partnership. Vol. since the contributions of the partners were fixed sums of money. Effectively. (2 Echaverri. . Although a partnership would have a personality separate and distinct from each of the partners. 196) It follows that the marriage of partners necessarily brings about the dissolution of a pre-existing partnership (1 Guy de Montella 58).

Although Article 1782 provides that – Persons who are prohibited from giving each other any donation or advantages cannot enter into a universal partnership. “shall commence at the precise moment that the marriage is celebrated [and that any] stipulation.” This shows the primacy of the Family Code provisions on governing the conjugal partnership between the spouses. “In the absence of marriage settlements. that the property regime that must govern spouses must be in accordance with the provisions of said Code. May spouses therefore enter into a contract of particular partnership for gain by contributing thereto either conjugal property. For the same reasons. 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. In addition. interest.. the system of absolute community of property as established in this Code shall govern. spouses governed by the conjugal partnership of gains cannot also validly enter into a contract of particular partnership for gain. which prohibits sales or any other form of onerous dispositions. but merely suppletory to the primary rules set out by the Family Code. and would undermine the rules of the Family Code on how such separate properties should answer for the charges on family affairs. express or implied. becoming unlimitedly liable for partnership obligations). because that would in effect constitute donations to one another as discussed below. such contributions would then violate the provisions of Article 1490 of the Civil Code. vary the effects between them on certain community property. since the effect is that spouses would be donating to one another. which under Article 105 of the Family Code. even when they contribute thereto their separate properties. 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. and cannot be the subject of regular partnership rules under the Partnership Law of the New Civil Code. . there is clear implication under the Family Code. by contributing them into a particular partnership for gain? The answer ought to be in the negative.g. the answer ought to be in the negative. between spouses not governed by the complete separation of property regime . contrary to the provisions of Article 87 of the Family Code. or perhaps even contravening. Family Code). can come into play between spouses only when it has been so stipulated in the marriage settlements. or when the regime agreed upon is void. yet under Article 75 of the Family Code. and consequently. and any attempt to govern conjugal properties under a contract of particular partnership would undermine such primacy and therefore void. as discussed below. for the commencement of the community regime at any other time shall be void. it cannot exist consistently with another set of rules governing partnerships for gains under the Partnership Law of the Civil Code. Can spouses governed by the absolute community of property regime. and such partnership agreement would be void. nevertheless.” In other words. the Family Code sets the absolute community of property regime as the default rule for marriages. would that not in effect be amending. The absolute community of property regime actually establishes a sort of “universal partnership” between the spouses.” which beyond doubt should include spouses. (1) Spouses Governed by the Absolute Community of Property Regime To begin with.” (Article 91. Article 1782 in Partnership Law is not the main rule on regulating property rights between spouses.because a contract of partnership is essentially an onerous and commutative contract. Secondly. whereby the contributions comes with a cost (e.” and which under Article 88 of the Family Code. shares and effects of the absolute community of property during the marriage can be made except in case of judicial separation of property. since under Article 89 of the Family Code “No waiver of rights. in that it includes “all property owned by the spouses at the time of the celebration of the marriage or acquired thereafter. or their separate properties? When it comes to conjugal property. (2) Spouses Governed by the Conjugal Partnership of Gains Take then the cases of spouses governed by the conjugal partnership of gains.

to dispose of such property pursuant to partnership affairs? Article 145. c. and they both contribute community or conjugal properties thereto. thereby partially overcome the governing provisions of the Family Code. Civil Code). done by one without the consent of the other partner. and seek to strengthen the institutions of marriage and the family. the general rule under the Family Code. makes no distinction. and any contract. when it comes to absolute community of property regime (Article 96. Consequently. 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. Take the case of allowing the spouses to enter into a particular partnership.blogger. the Family Code provisions governing the property regime prevailing between spouses have considerations that transcend profit motives.” and which provide that “The marriage settlement and any modification thereof shall be in writing. natural. every partner is an agent of the partnership and for the other partners when it comes to transactions that pertain to partnership affairs.(3) Spouses Governed by the Complete Separation of Property Regime May spouses governed by the complete separation of property regime validly enter into a contract of particular partnership? The answer ought to be in the negative. signed by the parties and executed before the celebration of the marriage. administer and enjoy his or her own separate estate. industrial or civil. for the contribution of any of their separate properties into the partnership for gain would amount to donation. http://www. 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. There are several areas where there arises real conflict between doctrines under Partnership Law and those under the Family Code. and under Article 87 of the Family Code. (1) Issue on Control and Binding Effects of Acts of Partners We take the area of control and binding effect of the acts of partners against other partners and the partnership itself. due or received during the marriage from his or her separate property. which govern specifically the property regime that should prevail between spouses. 490 SCRA 625 [2006]. Under Partnership Law. Family Code) and conjugal partnership of gains (Article 124. Cirelos v._ftn10Can spouses who are governed by the regime of separation of property. business or industry and all fruits. the Partnership Law under the New Civil Code.” In essence. 502 SCRA 334 [2006]). possess. To each spouse shall belong all earnings from his or her profession. The provisions of Partnership Law are geared towards providing for the a contractual relationship that seeks to undertake a business venture. Silva. thus. Under Partnership . On the other.g?blogID=6336731883560557810 . spouses separately manage and control their separate properties. whereas.” Under a complete separation of property regime. Hernandez. cannot overcome the more specific provisions on the Law on Marriages under the Family Code. 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. 291 SCRA 372 [1998]. is that both spouses are coadministrators of the conjugal properties. Court of Appeals. the act of one partner binds the other partners and the partnership property (Articles 1803[1] and 1818.com/post-create. would the rules under Partnership Law therefore allow one spouse. especially an act of disposition or encumbrance of the community or the conjugal property. Family Code). for spouses governed by the complete separation of property regime. without need of the consent of the other. (Guiang v. without the consent of the other spouse. dispose of. which prohibits any form of donation or gratuitous advantage between spouses during marriage. Family Code provides that “Each spouse shall own. which should be considered general provisions. would be void. Bautista v. much less an exception.

. This fact is recognized even under the Family Code. since it pertains to a particular project or undertaking (BAUTISTA. v. More importantly. In addition. Family Code). or the conjugal property (Articles 121 to 123. which by definition of Article 1783 of the Civil Code is always a particular partnership? The answer seems to be in the affirmative. where Article 73 provides that “Either spouse may exercise any legitimate profession. or together with other professionals. May Corporations Validly Qualify to Become Partners? The prevailing rule in the United States is that – “Unless it is expressly authorized by statute or charter. “where the nature of that venture is in line with the business authorized by its charter. . 80 A. When community. partnership properties would be chargeable against any claim or contract entered into pursuant to partnership affairs.” (Ibid. at p. Jurisprudential Rule Tuason v. Family Code).) 2520). in case of insufficiency or default thereof. 109). of Corp. at p. has more to do with the expression of ideals held by an individual or towards achieving a fruitful life in the mundane world. The reason is that a professional partnership essentially covering the contribution of service by the spouses. even in the partnership medium. 106 (1954). enter validly into a contract of professional partnership. occupation. business or activity without the consent of the other. conjugal or separate property is allowed to be contributed into the partnership for gain. Ed. but rather. Family Code). in entering into a partnership. 278 SCRA 793. The doctrine is grounded on the theory that the stockholders of a corporation are entitled. quoting from Wyoming-Indiana Oil Gas Co. as well as the ability of marriage properties to properly provide for the family support and upkeep. 9). 50). Nevertheless. to the current market value of their separate properties (Article 146. 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. Professional Partnerships May spouses by themselves. to assume that their directors will conduct the corporate business without sharing that duty and responsibility with others. the Supreme Court held unequivocally . Tuason ruled that a corporation may validly enter into a joint venture agreement. a corporation cannot ordinarily enter into partnerships with other corporations or with individuals.. Weston. Court of Appeals.” (Ibid. does not primarily bind actual community or conjugal properties. Bolanos. A corporation can act only through its duly authorized officers and agents and is not bound by the acts of anyone else.. the exercise of a profession. A joint venture is essentially a partnership arrangement. the rules of first preference of partnership creditors to partnership property would undermine the claims of personal creditors of spouses. 1043. supra. although of a special type. like support and debts contracted for the benefit of the marriage. both spouses shall bear the family expenses in proportion to their income. at p. Sec. (BAUTISTA. there are specific listings of what should first be chargeable against the community property (Articles 94 and 95.R. under both the absolute community of property regime and the conjugal partnership of gains. in the absence of any notice to the contrary in the articles of incorporation. a. Under a regime of separate property. 1082). recognized at that time in Philippine jurisdiction the doctrine in Anglo-American jurisprudence that “a corporation has no power to enter into a partnership. CORPORATIONS (Perm.Law. but more for civic or vocational ends and therefore do not address proprietary ends. d. for.” (FLETCHER CYC. On the other hand. while in a partnership each member binds the firm when acting within the scope of the partnership. or. contributions by spouses of marriage property into a partnership for gain would certainly allow a means by which spouses may defraud their marriage creditors. In Torres v. citing Fletcher Cyc. and therefore thus not operate in violation of the property rules governing marriage property regimes.L. 95 Phil. by making certain marriage properties subject to greater claims outside of marriage affairs. professional partnership are not really pursued for profit. 2.

the corporation chooses not to participate in the management. (SEC Opinion. at p. SEC Rules The SEC. 1994). However.. citing 13 Am. Being for a particular project or undertaking. This interpretation of the second condition was confirmed by the SEC in 1994. Repl. (Ibid). 6 Fletcher Cyc. 278. 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. 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. 823 (1938). 22 December 1966. Ed. as a limited partner. in a number of opinions. (Ibid) The second condition set by the SEC would have the effect of allowing a corporation to enter as a general partner in general partnership. the SEC reversed such interpretation and practically dropped the second requirement. thus: 1. 1950. the situation therefore in a joint venture arrangement. Sec.” (SEC Opinion. and the articles of partnership must stipulate that all the partners shall be jointly and severally liable for all the obligations of the partnership. 2520). they can more or less exercise their own business judgment is determining the extent by which the corporation would be involved in the project and the likely liabilities to be incurred. Perm. Rev. in 1995. Corp. and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or articles of incorporation of the corporation involved (SEC Opinion. 29 February 1980). dated 23 February 1994. 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. Although Tuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement. allows the Board to fully bind the corporation to matters essentially within the Board’s business appreciation and anticipation. 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. when the Board of Directors of a corporation evaluate the risks and responsibilities involved. XXVII SEC Quarterly Bulletin 18 (No.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). 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. 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. 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. However. which is inconsistent with the policy of the law that the corporation shall manage its own affairs separately and exclusively. Jr. SEC FOLIO 1960-1976. at p. 3. (b) The agreement on the articles of partnership must provide that all the partners shall manage the partnership. The rationale given by the SEC for the second condition was that if the corporation is allowed to be a limited partner only. b. a corporate . 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. 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. when it admitted the following reasoning for allowing a corporation to invest in a limited partnership. Sept. Just as a corporate investor has the power to make passive investments in other corporations by purchasing stock.

specifically confirms. corporations could not form a partnership. 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. the Commission is inclined to adopt your view on the matter. does not require that the investing corporation be involved in the management of the investee corporation with a view to protect its investment therein. there would be no reason for requiring a corporate partner to actually manage the partnership. XXX SEC Quarterly Bulletin 8-9 (No. and (c) Equity Interest in the Partnership. that corporations may 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. 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. Section 42 of the Corporation Code which permits a corporation to invest its funds in another corporation or business. indicate that corporations are not barred from acting as limited partners. if it makes the business decision no to do so and opts to become a limited partner. that corporations may act as limited partners. (b) Right in Specific Partnership Property. in the same manner as the Revised Uniform Limited Partnership Act. would no longer be present. The SEC policy that a corporation cannot enter into a limited partnership. Hence.S. Current American laws support the position that a corporation can enter into a contract of limited partnership. as stated in the 1966 SEC opinion. will now be protected from the unlimited liability of the other partners who are not agents or officers of the corporation. 2. the Revised Uniform Limited Partnership Act of 1976 (as amended in 1985). Almost all states in the U.. 17 August 1995. the very reason why as a general rule. 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. that corporations can act as limited partners.S. June 1996). as the corporation. have adopted limited partnership laws which provide. These statutes reaffirm what is indicated by the commercial practice in the U. as a general rule. and 3. Jurisprudence and common commercial practice in the U.S.” (Ibid) 12 – RIGHTS AND POWERS OF PARTNERS [Updated: 14 October 2009] Article 1810 of the Civil Code provides that the property rights of every partner in the partnership set-up to be as follows: (a) Right to Participate in the Management of the Partnership. By entering into a contract of limited partnership.” (Ibid) provided that the power to enter into a partnership is provided for in the corporation’s charter. 1. a corporation cannot enter into a contract of partnership. Accordingly. a corporation would continue to manage its own corporate affairs while validly abstaining from participation in the management of the entity in which it has invested. (SEC Opinion. The enumeration under Article 1810 of the “property rights” of a partner defines the three-fold role that every partner assumes . is based on an assumption which is no longer current. is an offshoot of the outdated view in the U.. that. as there is generally no threat that a corporate limited partner would be solidarily liable with the partnership.S. For example. In that opinion. which is merely a limited partner.. The SEC went on to say: “We agree with your statements that a reconsideration of the present policy of the Commission on the matter is timely in order to permit the Philippine commercial environment to maintain its pace in terms of legal infrastructure with similar developments in the international arena with a view to encouraging and facilitating greater domestic and foreign investments in Philippine business enterprise.investor should also be allowed to make passive investments in partnerships as a limited partner. that corporations cannot become limited partners.

Court of Appeals. Second is that each of the “property rights” of each of the 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). to apply only when there has been no provision at all in the articles of partnership on the exercise of power or management.” This principle is supported by Article 1803 which provides “When the manner of management has not been agreed upon . that in any case not covered expressly by the rules prescribing the . for apparently carrying on in the usual way the business of the partnership of which he is a member binds the partnership. Partner’s Right to Manage the Partnership a. that allowed one partner to act to bind the partnership. therefore. the bundle of “property rights” of a partner is not indivisible. In every partnership. but we think one may be fairly deduced from the contents of those articles. are treated separately.” Thus. where the Court interpreted the original provision of Article 1803 of the Civil Code (then Article 1695 of the old Civil Code). and the act of every partner. and in fact the philosophy under Philippine Partnership Law is to consider them divisible. It is true that an express disposition to that effect is not found therein. 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 these various provisions there is nothing said about the power of making contracts. and as an agent of the partnership juridical person and of the other partners. a manager of the business enterprise (a co-proprietor of the business enterprise). We think that it was. The multi-level positions assumed by partners under a partnership arrangement are potentially wrought with conflict-of-interests situations. In the case at bar we think that the articles of the Veteran Army of the Philippines do so provide. which therefore ensures that partners share the partnership bed only with parties with whom they contracted and there is no occasion in the future for a third party to be allowed to join the group without their unanimous consent. the Court held inMunasque v. and that every partner is afforded the ability to withdraw from the contractual relationship whenever he becomes uncomfortable with any or all of the other partners. and capable of being treated and transacted separately.under a contract of partnership: as an equity holder (investor). therefore.” 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. there is a presumption of apparent authority for every partner to act for and thereby bind the partnership in all that is “apparently for the carrying on of the business of the partnership in the usual way.” 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. 1. 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. reserved to the department as a whole. . 7 Phil. 139 SCRA 533 (1985). Consequently. that is. thus: One partner. two important doctrinal approaches animate the Law on Partnerships as a consequence of such multi-level positions of partners. All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership. In other words. as enumerated under Article 1810. 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. They declare what the duties of the several officers are. General Rule on Partnership Management Article 1818 of the Civil Code provides that “Every partner is an agent of the partnership for the purpose of its business. and that faculty is not expressly given to any officer. Veterans Army. including the execution in the partnership name of any instrument. 685 (1907). The foregoing doctrinal approaches shall animate the discussions hereunder on the rights and obligations of partners in the partnership arrangement.

the same is binding inter se among the partners. notwithstanding what specific provisions may be found in the articles of partnership on the management of the partnership business. 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. 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. 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. In fact. The public need not make inquiries as to the agreements had between the partners. that their dealings with the managing partner should bind the partnership. the same is not considered to be a public document binding on the public. No evidence was offered to show that the department had never taken any such action. transactions and activities of the copartnership. It is hardly conceivable that the members who formed this organization should have had the intention of giving to any one of the sixteen or more persons who composed the department the power to make any contract relating to the society which that particular officer saw fit to make. Litton held that there is a general presumption that each individual partner is an authorized agent for the firm and that he has . and there is nothing to show that any member of the department ever knew anything about it. or knowledge of the other members of the department should bind it. or had anything to do with it. This is not the rule under Philippine Partnership Law which characterizes the contract of partnership and the arising of the partnership juridical person. or that a contract when so made without consultation with. (Ibid. Hill & Ceron.rendered at a time when our legal jurisdiction was still deciding the proper formulation of the doctrines in Philippine Partnership Law. when in fact the articles of partnership provided expressly that: “Sixth. 685. Secondly. 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. Its knowledge is enough that it is contracting with the partnership which is represented by one of the managing 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.” In ruling that the act of just one of the managing partners should properly make the partnership liable for the payment of the debt.com/post-create. We therefore. This situation is best exemplified in the decision in Litton v. The liability of the Lawton Post is not presented in this appeal. even when the articles of partnership has been formally executed and registered with the SEC. and the Lawton Post. and who are not mandated to seek formal authority and that in fact are deemed to have a right to expect. 513). 67 Phil. the proof shows that the transaction in question was entirely between Apache Tribe. are not bound in entering into a contract with any of the two partners. Third persons.blogger. hold that no contract. We are of the strong position that the doctrine in Council of Red Men. such as the one in question. 688-689)._ftnref4 (7 Phil. That the management of the business affairs of the copartnership shall be entrusted to both copartners who shall jointly administer the business affairs. unless otherwise indicated. Firstly. generally such special arrangements do not bind or prejudice third parties who deal with the partnership business without knowledge of such special arrangement. 509 (1935). no longer applies. like the plaintiff. to ascertain whether or not this partner with whom the transaction is made has the consent of the other partner. Thus. at pp.duties of the officers. is binding on the Veteran Army of the Philippines unless it was authorized at a meeting of the department. Although special management arrangements may be made among partners. as being merely consensual with no specific formalities being required in general.g?blogID=6336731883560557810 . 1. and even when so formalized within the terms of the articles of partnership. No. or at least on every person dealing with the partnership. 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. the department were present. Therefore.http://www. at p.

Bell & Co. 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. therefore.” constitute sufficient authority to make such transaction binding against the partnership. which provides that an admission or representation made by any partner concerning partnership affairs within the scope of his authority is evidence against the partnership. while acting within the scope of the ordinary course of business of the partnership. furthermore. The latter may rightfully assume that the contracting partner was duly authorized to contract for and in behalf of the firm and that.authority to bind the firm in carrying on the partnership transaction. upon terms and conditions acceptable to him duly approved in writing by the capitalist partner. at p. . execute and deliver contracts . as against another provision of the articles by which the industrial partner is authorized “To make. as regards third persons without notice. 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. and the members present shall come to an agreement for all contracts or obligations which may concern the association. . 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. In other words. that does not necessarily affect the validity of the acts of a partner.G. v. 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. but just that the firm answer for their value. Article 130 of the same Code of Commerce provides that even if a new obligation was contracted against the express will of one of the managing partners. *). all shall have the power to take part in the direction and management of the common business. “it shall not be annulled for such reason. 1881 (1941). 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. and it shall produce its effects without prejudice to the responsibility of the member or members who contracted it.” 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. 108 Phil. he should inquire as to the latter’s authority to do so. In fact. In addition. he would not ordinarily act to the prejudice of his co. the same does not constitute a public document that binds those who deal with the partnership enterprise.” (at p. businesses and activities of the partnership. seal. operate and direct the affairs. Aznar. 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. even a registered articles of partnership constitutes first and foremost a intra-partnership document that is binding upon the partners. In Goquiolay v. 947 (1960).partners. for the damages they may have caused to the common fund. The regular course of business procedure does not require that each time a third person contracts with one of the managing partners. It is. thus: but this obligation is one imposed by law on the partners among themselves. 40 O. or that he should first ascertain whether or not the other partners had given their consent thereto. In Smith. Litton also supports the legal position that even with the registrations of the article of partnership with the SEC. the provisions in the articles of partnership that the industrial partner “shall manage. 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. 957) The right of a partner to manage the affairs of the partnership or to act as an agent of the partnership is expressly affirmed by the following statutory provisions: (a) Article 1820.” ( Ibid.” 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. sign. Sycip.

which requires consent of all the partners. (e) Submitting a partnership claim or liability to arbitration. much less appreciated. and the knowledge of any other partner who reasonably could and should have communicated it to the acting partner. 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. This argument is lamentably superficial because it fails to differentiate between real estate acquired and held as stock-in-trade and real estate held merely as business site (Vivante’s “taller o banco social”) for the partnership. In the cases of items (c) and (d) above-enumerated. which provides that notice to any partner of any matter relating to partnership affairs. and the knowledge of partner acting in the particular matter. On ruling on the motion for reconsideration. 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. Where the partnership business is to deal in merchandise and . in effect. even as a partner. that should be ventilated separately. a third person. The foregoing cases are considered to be not merely acts of administration. 9 SCRA 663 (1969). (Ibid. since the firm was not organized to exploit these precise lots but to engage in buying and selling real estate. 947 (1960). (c) Article 1822. transfer or encumbrance of the entire partnership business enterprise. And yet in the early case of Goquiolay v. or received by the partnership from.” b. (b) Disposition of the goodwill of the business. One would consider therefore that when the transaction involves the sale. That the partnership was left without the real property it originally had will not work its dissolution. Sycip. Incidentally. and (d) Article 1823. the resolution of Goquiolay v. and “in general real estate agency and brokerage business”. operate as notice or knowledge of the partnership (except in case of a fraud on the partnership). returned on this point and clarified the applicable doctrine as follows: It is next urged that the widow.(b) Article 1821. acquired while a partner or then present to his mind. which cannot be considered as within the ordinary course of business that would come within the apparent authority of one partner. had no authority to sell the real estate of the firm. 108 Phil. it is to be noted that the payment of the solidary obligation of both the partnership and the late Tan Sin An. it would constitute an act of strict ownership or an act of alteration. leaves open the question of accounting and contribution between the co-debtors. 960).” and will not therefore be valid transactions unless done by or approved by all the partners. threw the partnership into dissolution. which provides that the partnership is bound to make good the loss caused by the misapplication by a partner acting within the scope of his apparent authority of money or property belonging to. This view is untenable. shall make the partnership liable therefore. Sycip. Article 1824 of the Civil Code provides expressly that “All partners are liable solidary with the partnership for everything chargeable to the partnership. thus: Appellants also question the validity of the sale covering the entire firm realty. at p. the Court held that the sale of the partnership’s business enterprise can be considered to be within the power of the managing partner. thus: (a) Assigning of partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership. (d) Entering into a compromise concerning a partnership claim or liability. on the ground that it. or (f) Renouncing a partnership claim. (c) Confession of a judgment. 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. Transactions Not in the Ordinary Course of Partnership Business Article 1818 of the Civil Code enumerates what are certainly not“apparently for the carrying on of the business of the partnership in the usual way.

. make any important alteration in the immovable property of the partnership. But where the express and avowed purpose of the partnership is to buy and sell real estate (as in the present case). from an extraordinary act or contract. Martin.” and his powers are irrevocable without just or lawful cause. or without stipulation that one of them shall not act without the consent of all the others. the decision of the majority shall prevail. Under Article 1803(2) of the Civil Code. 671-672). Power of Alteration The power of management of the partnership business. d. at pp.. Gutierrez Hermanos. Thus. because it is not in line with the normal business of the firm. the immovables thus acquired by the firm from part of its stock-in-trade. Mocencio. 12 Phil.” (Teague v. movable property.e. in which case the managing partner “may execute all acts of administration despite the opposition of his partners. to employ a bookkeeper by his sole authority (Fortis v. the Court has also held that the managing partner has no power to purchase “barge. under Article 1802. The foregoing discussions in Goquiolay certainly began to appreciate an act or transaction in the ordinary course of business. 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. Thus. 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. Under Article 1801 of the Civil Code. but in such case his designation as managing partner is essentially revocable. the concurrence of all shall be necessary for the validity of the acts. v. 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. 6 Phil. i. Insurance Commission. c. and the breach of which can bring about a cause of action against the breaching partners. v. Bell & Co. to hire employees (Garcia Ron v. if two or more partners have bee entrusted with the management of the partnership affairs without specification of their respective duties. La Compania de Minas de Batau. none of the partners may. Cordoba & Conde. 158 SCRA 366 (1988). hence within the ordinary powers of the partner. 545 [1906]). . even if it may be useful to the . each one may separately execute all acts of administration. if it has been stipulated that none of the managing partners shall act without the consent of the others. On the other hand.e. 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. Curiously though. the Supreme Court has held that: a manager of a partnership can execute acts of administration without need of consent of the partners. . 5 Phil. It should be emphasized though that the provisions of Articles 1800 to 1802 should be considered to be intramural rules that govern the relationship between and among the partners. and in case of a tie. without the consent of the others. and to commence a suit in the name of the partnership against partnership debtors (Tai Tong Chuache & Co. The same rule would apply when a partner is designated as managing partner outside of the articles of incorporation. unless there is imminent danger of grave or irreparable injury to the partnership. 1882 [1941]). 9 Phil. 130 [1908]). should be distinguished from the power of ownership and control which is subject to a higher level of requirements.goods. especially when it comes to the adding machine. 53 Phil. (Ibid. including the power to purchase goods in the ordinary course of business (Smith. and the absence or disability of any one of them cannot be alleged. 135 [1907]).G. as well to dismiss employees (Martinez v. Aznar. and the sale thereof is in pursuance of partnership purposes. the sale of its real property (immovables) is not within the ordinary powers of a partner. that the partners are all managers of the partnership enterprise). under Article 1800 of the Civil Code it is possible to appoint only one managing partner in the articles of partnership. 40 O. which basically may involve only a sale of assets. the matter shall be decided by the partner owning the controlling interest. to secure a loan to finish the construction of the boat of the partnership (Agustia v. which either disposes of the business enterprise or has the effect of preventing the pursuit of the business enteprise. but if any of them should oppose the acts of the others. 100 [1906]).

the court’s intervention may be sought. and the partnership may recover against any transferee when the partners so conveying acted without authority.partnership. but not against a purchaser in good faith and for value. depending on the manner by which such title was registered. otherwise. 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. 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. or all.e. thus: (1) Where Title Is in the Partnership Name: (i) Any partner may convey title to such property by a conveyance executed in the partnership name. (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. the partners in whose name the title stands may convey title to such property. no title at all to the immovable property passes to the transferee. (4) Where Title Is in the Name of All of the Partners: (i) Conveyance executed by all the partners (in whose ever name so conveyed) passes all their rights in such property. of the partners’ names (or for that matter in the name of a third-party who holds it in trust for the partnership). (ii) When the records do not disclose the right of the partnership. Article 1819 of the Civil Code sets specific rules on how partners may bind real properties pertaining to the partnership. except on a claim against the partnership. e.” (c) “A partner’s right in specific partnership property is not subject to attachment or execution. and the partnership may recover only when the partners so conveying acted without authority.” 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. . has an equal right with his partners to possess specific partnership property for partnership purposes. 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. the partners in whose name the title stands may convey title to such property. the partnership may recover such property only when the partner so conveying has no such power to so convey. in the Name of One or More. (ii) A partner who conveys the property but in his own name passes the equitable interest of the partnership only when the partner so conveying acted with authority. but not against a transferee in good faith and for value. thus: (a) “A partner . But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership. the partnership title is not rendered void if the registration thereof is not in the name of the partnership but in one or more.” (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. (3) Where Title Is in the Name of One or More But Not All the Partners: (i) When the records disclose partnership interests. . In this case the will of all the partners is the will of the partnership. 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.” and . only when the partner conveying acted with authority. (2) Where Title Is Not in Partnership Name (i. or All the Partners..

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.” (at p. when Catalan redeemed the properties in question be became a trustee and held the same in trust for his copartner Gatchalian.” 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. Consequently. It may also be observed that the recognition by the Law on Partnerships of the partners’ purported co-ownership interests in specific partnership property would be in defiance of the grant of a separate juridical personality to every partnership organized under the Civil Code. Civil Code). 162). Furthermore. subject of course to his right to demand from the latter his contribution to the amount of redemption. “A partner . as provided in paragraph (3) of Article 1811.” Unlike the proprietary right of an ordinary co-owner to “use the thing owned in common. in Catlan v. thus: “his share of the profits and surplus. the redemptio by any of the partners. as collective sole-proprietors so-to-speak. Gatchalian. Bautista reminded us in his treatise that the whole of Article 1811 of the Civil Code was taken from the Uniform Partnership Act which. it was held that when partnership real property had been mortgaged and foreclosed.” (BAUTISTA. based on common law. adheres to the “aggregate theory of partnership under which. 105 Phil. at pp.” A partner’s interest in the partnership defines his equity position as a co-proprietor of the partnership . 1818. 3. a partners is an agent of the partnership (Art. 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. Nonetheless. thus. . because it is not considered an entity or a legal person.(d) “A partner’s right in specific partnership property is not subject to legal support. does not allow such redemption to be in his sole favor: “Under the general principle of law. 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. Equity Rights of Partners Article 1812 of the Civil Code defines a “partner’s interest in the partnership” essentially as his equity interest. new Civil Code). at p. has equal right with his partners to possess specific partnership property for partnership purposes. . with full power to manage and control the same for the benefit of the partnership venture. In line with the same rationale. equivalent to the recognition of the full-ownership by the partners. of the partnership enterprise and its assets. and (c) it would indirectly go against the principle that partner’s right in specific partnership property cannot be attached or levied upon. even when using his separate funds. the purported co-ownership interest of partners is essentially for the furtherance of the partnership affairs. 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.” Thus. every partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partner (Article 1807.” (BAUTISTA. and emphasizes the fact that in the partnership setting equity ownership is merged with management prerogatives. and would basically have a stranger become a partner without the consent of all the other partners. whereby they hold naked title to the partnership properties. 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. new Civil Code). and bears no proprietary title to himself personally apart from pursuing the partnership affairs. 1271). paragraph numbered (4) of Article 1811 also provides that a partner’s right in specific partnership property is also not subject to support. 1270 (1959). 147-148) as opposed to the civil law doctrine that affords the partnership a separate juridical personality. 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 coowners from using it according to their rights” (Article 1486.

and may then or later appoint a receiver of his share of the profits.S. (BAUTISTA. equity interests of partners are not essentially transferable. 184-185). thus: “i merely entitles the assignee to receive in accordance with his contract the profits to which the assigning partners would otherwise be entitled.E. 176. 135 N. like any other property right. or to require any information or account of partnership transactions. Article 1814. Bautista wrote that “The interest of the partner in the partnership has thus been otherwise described as the net balance remaining to him. This statement is not even accurate because if you look at the language of Article 1813 the proper rule would be. which he has every right to do.” 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. 501 (1955). Thus. 47 N. 481. the same does not mean that he ceases to be a party to the partnership contract nor does it trigger the dissolution of the partnership. 2d 1275 [1972]. Cunningham.2d 275 [1944]. or to inspect the partnership books. but such transaction will not transfer his other rights as a partner.Crawford v. 492 P. and patterned after the English Partnership Act of 1890. Therefore. or. Swirsky v. as against the other partners in the absence of agreement. whereas. Bautista wrote that Article 1814 was taken from the Uniform Partnership Act. is the sole right to receive profits and surplus assets upon the dissolution of the partnership. Kroc. which means that with respect to his other right to management the partnership affairs and act as agent of the other partners. Anderson v. 228 P. 131 F. thus: A conveyance by a partner of his whole interest in the partnership does not of itself dissolve the partnership. which entitles him ipso facto to share in the profits and to share in the losses of the venture. 149 P.Balaban v. Bank of Nevada. and it was adopted formally to a decided purpose of providing a means by which the separate creditors of a partner may seize upon his property rights without having to disrupt the operations of the partnership enterprise or effectively force the dissolution of the partnership. and of any other money due or to fall due to him in respect of the partnership. a partner’s equity is generally transferable or assignable. Cunningham v. every partner shall have an absolute right to transfer or assign his equity interest. Unlike in Corporate Law where the rule on equity is that they are essentially transferable.S. 616 (1945). “surplus” has been defined as the excess of assets over liabilities. 21 [1922]). In other words.” (BAUTISTA.. 192 [1930]. Gray. a.Supp. during the continuance of the partnership. So separate and divisible is a partner’s equity rights from his other rights as a partner that even during the term of the partnership Article 1814 of the Civil Code allow the personal judgment creditors of a partner to have his equity right in a partnership to “charge the interest of the debtor partner with payment of the unsatisfied amount of such judgment debt with interest thereon. entitle the assignee.E. at p. these remain in tact. “Profits” represent the excess of receipts over expenses or the excess of the value of returns over the value of advances (Citizens National Bank v. U.2d 776 [1951]. 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. 477 P.2d 452 [1943]. 139 P.. Assignability of a Partner’s Equity Right A partner’s equity interest in the partnership truly represents a proprietary interest for his exclusive benefit as an owner of such intangible right. The article also recognizes that just because a partner “cashes in” on his equity rights in the partnership. the transfer or assignment of a partner’s equity does not make the transferee or assignee step into the shoes of the partner in his personal capacity as such in relation to the other partners. (Tupper v.enterprise. Fairchild v.Y. Preton v. Nonetheless under Article 1813 of the Civil Code. State Industrial Accident Commission. which allows the attachment or execution of a . Surety Insurance Co. to interfere in the management or administration of the partnership business or affairs.E. Corl. citing Claude v. in Partnership Law. 484 [1970]).2d 613.2d 860 [1970]). at pp. the only thing that can be conveyed by a partner as an equity holder. Horwich. 33 S.” 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. 242 N. Claude. under Article 1813.

Sycip. Employment Security Commission. who under Article 1769(4) is prima facie evidence that he is a partner in the business. could not have referred to the managerial right given to [the deceased husband]. . such power. (b) If only the share of each partner in the profits has been agreed upon. existing. then to him would also accrue the profits of the enterprise. at pp. which must be upon dissolution and only after the partnership creditors have been fully satisfied. . as indicated in Article 1769(3) of the Civil Code does not necessarily mean that he is an equity holder. . nevertheless. (Ibid. Under Article 1767 of the Civil Code. and which under Article 1770 must be “established for the common benefit or interest of the partners.2d 144 [1946]). the share of each in the losses shall be in the same proportion. Under Article 1827. 47 A. it related to the succession in the proprietary interest of each partner. and not a mere contingent. . thus: (a) Profits and losses shall be distributed in conformity with the agreement between the partners. more appropriately. a stipulation in the contract of partnership which excludes one or more of the partners from any share in the profits or losses is void. One who merely participates in the sharing of gross returns of an enterprise. the Articles of Copartnership and the power of attorney . it can be assigned. In ruling against such a conclusion. conferred upon the [the sole managing partner] the exclusive management of the business. for he does not expose him to the expenses and losses of the business.2d 707 [1971]). 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 partners may agree that one of them cannot sell or assign his interest without the consent of the other or others (Pokrzywnicki v. 954-955). b. 274 A. the Court held – . While.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. the separate creditors of each partner may ask for the attachment and public sale of the share of the partner in the partnership assets. Article 1797 of the Civil Code provides for the rules governing the distribution of profits and losses in the partnership business. it was contended that under the terms of the articles she also succeeded to the sole management of the partnership. 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. or they may enter into an agreement prohibiting such assignment altogether (Chaiken v. 947 (1960). was a mere personal right that terminated upon [the sole managing partner’s] demise. but the partnership arrangement remains subsisting. right. in contrast to one who shares in the net profits. Why is a right of refusal or right of first refusal generally valid for partnership equity and not for shares of stock in a corporation? A good illustration of the sheer divisibility between the property rights of a partner is shown in the decision in Goquiolay v. Kozak.” When the duly designated sole managing partner under the articles died and was succeeded by his widow. since an equity right in partnership is a present. the essence of a partnership arrangement is the existence of a common fund or a business enterprise. where the particular provision on succession in the articles of partnership specifically provided as follows: “In the event of the death of any of the partners at any time before the expiration of said term.” Under American jurisprudence. . the deceased partner shall be represented by his heirs”. and as he takes the risk connected with business down-turn. 108 Phil. if such participation is not linked to some other clear contractual arrangement. as we previously stated in our narration of facts. 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. 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 which is the reason why under Article 1799. premised as it is upon trust and confidence.

Right to Inspect Article 1805 of the Civil Code expressly provides that every partner shall at any reasonable hour have access to and may inspect and copy the partnership books which shall be kept at the principal place of business of the partnership. 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. if the right exists under the terms of the partnership agreement. the Court held that a partner’s right to accounting exists as long as the partnership exists. 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. 796 (1920). 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. the right of a stockholder or member to inspect and copy corporate records is considered to be a common law right. 4. iIn Hanlon v. 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. The right to inspect is critical to safeguarding all other rights of stockholders or members in the corporation. and that prescription begins to run only upon the dissolution of the partnership and final accounting is done. any partner shall have the right to a formal account as to partnership affairs. complain of such decision. Right to Demand True and Full Information Article 1806 of the Civil Code provides that every partner or his legal representative may demand true and full information from other partners of all things affecting the partnership. and that the other two partners pursued the venture on their own account and only after the partnership arrangement had terminated. . when he is wrongfully excluded from the partnership business or possession of its property. in consonance with the fiduciary relationship existing between and among partners. Under Article 1809 of the Civil Code. or liquidation of the partnership or from any use by him of its property. such designation may be impugned only when it is manifestly inequitable.(c) In the absence of any such agreement. conduct. 66 SCRA 425 (1975). Ramolete. the share of each partner in the profits and losses shall be in proportion to what he may have contributed. every partner may demand from every other partner an accounting to the partnership for any benefit. 169 SCRA 746 (1989). c. as to the profits. 40 Phil. Article 1798 of the Civil Code provides that if the partners have entrusted to a third person the designation of profits and losses. and if he contributed also capital. and in no case may a partnership who has begun to execute the decision of third person. In Fue Leung v. In Lim Tanhu v. and a right of such importance that its enforcement can be by an action mandamus. Right to Demand Accounting Under Article 1807 of the Civil Code. the industrial partner shall receive such share as may be just and equitable under the circumstances. On the other hand. Haussermann and Beam. The same principles are applicable to a partner’s right to inspect and to demand true and full information on partnership matters. every partner has the obligations to render true and full information to other partners of all things affecting the partnership. except that the industrial partner shall not be liable for the losses. or who has not impugned the same within three (3) months from the time he had knowledge thereof. In Corporate Law. Other Rights of a Partner a. the shall also receive a share in the profits in proportion to his capital. The article also provides that the designation of losses and profits cannot be entrusted to one of the partners. Intermediate Appellate Court. b. Consequently. whenever circumstances render it just and reasonable.

118-119). 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._ftn2 The right of a partner to dissolve the partnership will be discussed in more details on the chapter on Dissolution. subject to any agreement between the partners. Thus. In Rojas v. b.” by a notice of dissolution. at p.com/post-create. with or without justifiable cause. (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. which in effect is a notice of withdrawal from the partnership. Winding-up and Termination. not being members of the partnership. primarily to allow a more feasible and efficient manner by which to deal with the public and to organize the venture into a enterprise that provides for a clear delineation of liability and a hierarchy of claims against its assets. from the time the expenses are made. 192 SCRA 110 (1990). thus: “Accordingly. shall be subject to the liability of a partner.blogger.http://www. if the cause is not justified or no cause was given. include their names in the firm name. at pp. Maglana.registered in the individual names of the other partners.” (Ibid. “[t]hose who. the Court confirmed the right of a partner to “unilaterally dissolve the partnership. at the principal place of business of the partnerships. (3) Keeping of the Books Under Article 1805 of the Civil Code. 5.g? blogID=6336731883560557810 . “Every partnership shall operate under a firm name.” (2) Liability Arising from the Acts of the Agent . under Article 1815 of the Civil Code. the withdrawing partner is liable for damages but in no case can he be compelled to remain in the firm. under said article. and for the risks and consequence of its management. accords to the partnership venture a separate juridical personality. Consequently. particularly under Article 1768. and every partner shall at any reasonable hour have access to and may inspect and copy any of them. Of course. With his withdrawal. have been acquired from the use of partnership funds. which may or may not include the name of one or more of the partners. Obligations of the Partnership a. one partner can cause its dissolution by expressly withdrawing even before the expiration of the period. 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. 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.” 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. the number of members is decreased. thus: “Under Article 1830(2) of the Civil Code. Obligations to Third Persons Partnership Law. d. hence. even if there is a specified term.” (Ibid. the partnership books shall be kept. 477). the dissolution. 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. (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.

.” that the assets of the corporation corresponding to its capital stock are treated as a trust fund preserved for the protection of the claims of the corporate creditors who can. in order to ensure their collectibility for the benefit of the corporate creditors. Philippine Partnership Law provides for clear statutory provisions governing such obligations. Boman Environmental Dev. Thus. and the receivables arising therefrom are not considered as forming part of the ordinary assets of the corporation. Court of Appeals. 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.Since the corporate venture is accorded a separate juridical personality. Civil Code). Court of Appeals. Commissioner of Internal Revenue v. 311 SCRA 508 [1999]. Civil Code). the obligation to pay subscriptions to capital stock) are not treated as debt obligations. Court of Appeals. 301 SCRA 152 [1999]. 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: (a) When “the partner so acting has in fact no authority to act for the partnership in the particular matter. 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. NTC v. recover on their liabilities to the assets of the corporation and the investments and promised investments of the stockholders. equity obligations (i. capital contributions and obligations to contribute capital (i. set-off. and the person with whom he is dealing has knowledge of the fact that he has no such authority” (Article 1818. Tiu. for they do. and are not subject to rescission. a third person who knows of the lack of authority of the partner acting in a partnership transactions generally cannot claim against the partnership.” Why is it then necessary for Partnership Law to declare expressly that a partner is a debtor of the partnership for whatever he . and there is no need to consider their capital accounts and promised contribution as a “trust fund” for the protection of the partnership creditors. are under the corporate “limited liability” rule. or condonation.. Civil Code). Consequently. 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. v. subscription contracts and subscription receivables) cannot be treated like ordinary contracts and debts. the prevailing doctrine is “unlimited liability” on the part of the partners. In Corporate Law. 167 SCRA 540 [1988]). the rule is quite different in that Article 1786 of the Civil Code provides that “Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto. The rule takes it rationale from the “trust fund doctrine.” The reason for this rule is that in Partnership Law. In Partnership Law. such as the rule that creditors have preference over partners against the partnership properties. and (c) “No act of a partner in contravention of a restriction on authority shall bind the partnership to persons having knowledge of the restriction” (Article 1818. 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. Thus. This is not to say that some of the elements of the trust fund doctrine do not apply to the partnership setting. which by default rule would be every partner (Article 1818. (Ong Yong v.e. Corp. Civil Code) 13 – DUTIES AND OBLIGATIONS OF PARTNERS [Updated: 14 October 2009] 1. 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. 401 SCRA 1 [2003].e.

. When Promised Contribution Is Property—In General Whenever a partner has bound himself to contribute a specific or determinate thing to the partnership. . so that only their use and fruits may be for the common benefit. (b) “If the things contributed. “Unless there is a stipulation to the contrary. Depakakibo. v. and (e) The property contributed by a partner becomes the property of the partnership and cannot be disposed of without the consent of the other partners. Lizarraga. (b) Under Article 1790 of the Civil Code. In addition. Article 1795 of the Civil Code establishes the rules on who assumes “[t]he risk of specific and determinate things . perishes before the delivery. (i) are fungible. perishes before the delivery. and there is no desire to dissolve the partnership. the prevailing view seems to be that it would be the partner who before actual delivery retains ownership thereof. 728 [1960]). Lozana v. a.” As to who bears the risk of loss of determinate things promised to be contributed but prior to actual delivery to the partnership. and in such case the claim shall be limited to the value at which they were appraised. Court of Appeals. “[w]hen a specific thing which a partner had promised to contribute to the partnership. 601 [1930]). b. 55 Phil.” 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. 91. the partners shall contribute equal shares to the capital of the partnership. the remedy that is available to the other partners cannot be rescission. or (ii) cannot be kept without deteriorating. which a partner had promised to contribute to the partnership.] becomes a debtor for the interest and damages from the time he should have complied with his obligation. (d) When a partner fails to comply with his obligation to deliver what he promised to contribute to the partnership. Moran. 79 SCRA 598 [1977]. (BAUTISTA. the legal interest). 150 [1958]) But in such case. but damages.” dissolves the partnership. 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. Jr. when a partner fails to deliver his promised contribution to the partnership. including compensatory damages constituting his shares of the profits (Uy v. the risk shall be borne by the partner who owns them. Partnership at p. Puzon. 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. . 107 Phil. and without need of demand. including loss opportunity. the risk of things brought and appraised in the inventory. When Promised Contribution Is a Sum of Money Under Article 1788 of the Civil Code it is provided that “A partner who has undertaken to contribute a sum of money to the partnership venture [and fails to do so. contributed to the partnership. (Sancho v. at p.” (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. citing Francisco. under Article 1829(4). the partnership is automatically dissolved “When a specific thing. 133 SCRA 88 [1986]).” Under Article 1830(4). or (iii) if they were contributed to be sold: the risk shall be borne by the partnership. and the breach of which would break the contractual bond (delectus personae). shall also be borne by the partnership.may have promised to contribute thereto? The answer lies in the primary principle which Partnership Law seeks to promote. he becomes liable for interests and damages from the time he should have complied with his obligation.” thus: (a) “If they are not fungible. but rather one for specific performance. shown to have been sustained by the partnership by reason of the failure of the partner to pay in his contribution. (c) “In the absence of stipulation. (b) The fruits thereof from the time he obliged himself to deliver the determinate thing. The point is best illustrated by the following doctrines: (a) Under Article 1788 of the Civil Code.

The difficulty arises from the fact that the obligation essentially involves the personal obligation “to do”. at pp. fraud. The plaintiffs are not seeking compensation for the services they rendered the partnership. which requires in such case that the contract of partnership must be in a public instrument. why should he not make good the loss. It is undoubtedly true. 92-94) discusses the points as follows: . and according to the current prices. or wanton misconduct of any partner in the court of partnership business. . whether directly or through their own liability to third persons. also contribute their services to the partnership for which they do not also obtain. Contribution of Service or Industry. . . If. that partners are not entitled to charge each other. . that when an industrial partner has failed to render the proper service he is obliged to render to the business . if an inventory of said property is not made. the Industrial Partner There can be no doubt that once the contract of partnership is constituted. without reasonable cause. and without comparison of value. and in the absence of stipulation. . Contribution is Real Property Under Article 1773 of the Civil Code. and generally an industrial partner who does not contribute the services promised cannot be compelled to do so.” 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. being mutual agents with one another and generally empowered to jointly manage the partnership affairs. without regard to the services of his copartners. (69 Pa. . or such agreement can be implied from the course of dealing between them.00. a contract of partnership would be void. says Mr. quoted in Bautista. d. or the firm of which they are members for their services in the copartnership business. and attached to the public instrument mandated under Article 1771 of the Civil Code. 30. he will ordinarily be responsible over to the other partners for all the losses and injuries. as a general rule. their appraisal must be made in the manner prescribed in the contract of partnership. as in the case of the industrial partner. unless there is a special agreement to that effect. signed by the parties. . . is liable to account to the firm for the value of the services in the settlement of the partnership accounts. A more detailed discussion of the effects on the non-fulfillment with the requirements mandated by law can be found on the chapter on Formalities Required for Partnerships. unless otherwise stipulated. By the well-settled law of partnership. . the industrial partner is from then bound to devote his time towards fulfilling the nature of the service he has contracted himself to contribute. The only question in this case is whether a partner who neglects and refuses. “When the capital or a part thereof which a partner is bound to contribute consists of goods. it shall be made by experts chosen by the partners. . . . why should not the defendant be answerable to the partnership for breach of the agreement to perform the services stipulated? It is clear therefore. every partner is bound to work to the extent of his ability for the benefit of the whole. The American case of Marsh’s’ Appeal. the subsequent changes thereof being for the account of the partnership. the partnership suffers any loss from the gross negligence. If this be the law. 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. . and damages sustained thereby. to perform the personal services which he has stipulated to render the partnership. be estimated and equalized by compensation of differences. unskillfulness. e. St.000. and put the firm in the same condition it would have been if he had not broken the agreement? . otherwise specific performance on the matter would violate the public policy against involuntary servitude. 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. . a compensation therefor. for services to the firm cannot. The other difficulty that arises is that even non-industrial partners.c. Justice Story. from their very nature. Contribution is Goods Under Article 1787 of the Civil Code. whenever immovable property is contributed. If the partnership has suffered loss by his breach of the agreement.

such that it becomes nearly impossible to return the parties back to their original position. This article cannot be applied to the case in question. 601 (1931). he loses direct ownership . (Ibid. but the legal consequence under Article 1791. g. Even in the case where additional contribution to capital becomes necessary “in case of an imminent loss of the business of the partnership.of the firm. 55 Phil. f. with recovery of interests and damages as provided for in Articles 1786 and 1788. 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. and instead directed the dissolution of the partnership. would either be specific performance or rescission. he became indebted to it for the remainder. Lizarraga. 603-604). In other words. is not available because then Articles 1681 and 1682 [now Articles 1786 and 1788] provided for specific remedies to the contract of partnership. the Court held in Sancho v. which only has a prospective effect of terminating the contractual relationship. Remedies When There is Default in Obligation to Contribute Normally. thus: Owing to the defendant’s failure to pay to the partnership the whole amount which he bound himself to pay. “As for profits. the industrial partner shall receive such share as may be just and equitable under the circumstances. In addition.” Even such a penalty cannot be applied according to Article 1791 “if there is an agreement to the contrary. It may be said that dissolution is a form of rescission unique to partnerships (also for corporations. In Sancho the Court affirmed the decision of the lower court which effectively denied the prayer for rescission. shall be obliged to sell his interest to the other partners. especially close corporations). he can be made liable for the damages sustained by the firm for such failure. is not allowed under the contract of partnership. except an industrial partner. the remedy to the other partners when one of them fails to comply with his obligation to contribute. whereas articles 1681 and 1682 specifically refer to the contract of partnership in particular. Under the provisions of the old Civil Code. in which case the forfeiture of their interest cannot even be enforced. there is generally no obligation for any partner to contribute beyond what was originally stipulated in the articles of partnership.e. is that “any partner who refuses to contribute an additional share to the capital. the remedy of rescission. This special type of remedies is indicative of the essential nature of the contract of partnership as (for lack of a better term) a preparatory orprogressive contract in that it is entered into to pursue a transaction or series of transactions (i. and thus not produce the retroactive effect of extinguishing the contract as though it never existed and providing for mutual restitution.” that is a stipulation in the contract of partnership that even in case of necessity to the save the venture. at pp. with interest and any damages occasioned thereby.” The fiduciary duties of an industrial partner are discussed more in detail hereunder. but the plaintiff did not thereby acquire the right to demand rescission of the partnership contract according to article 1124 of the Code. the accounting and liquidation of its affairs. And it is a well known principle that special provisions prevail over general provisions.” no partner can be compelled to give additional contribution. The proper remedies would be to seek a collection of the promised contribution. 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. the contract of partnership being one constituted of bilateral (multilateral) obligations. to save the venture. partners cannot be compelled to make additional contribution. which seeks to extinguish the contractual relationship and effect mutual restitution. unless there is a stipulation providing for additional contributions. or ask for dissolution of the partnership under Article 1831. because it refers to the resolution of obligations in general. to operate a business enterprise) that changes the nature and content of the things that have been contributed thereto. Obligation for “Additional Contribution” Since the nexus of the obligation of a partner arises from the contract of partnership.. The ruling is also consistent with the rule that once a partner gives a contribution to the partnership.

66 SCRA 425 (1975). 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. 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. except as among the partners. for the contracts which may be entered into in the name and for the account of the partnership. 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. In denying the claims. Haussermann.” Rightly stated. at p. 476) . One of the parties who had undertaken thus to raise money defaulted. who were at the same time stockholders and officials of the mining company. notwithstanding the separate juridical entity of the partnership. The subsidiary and pro rata liability feature under the old Civil Code was retained under the new Civil Code. Doctrine of Unlimited Liability The “unlimited liability” feature in the partnership setting makes partners personally liable for partnership debts. Likewise. and under the express resolutory conditions of the contract the two other parties were discharged. which upon application of the trust fund doctrine. including industrial ones. such liabilities of partners are better covered in the chapter on Dissolution. h. for it may happen that the partners continue to pursue the business venture in the hope that there may still be a turn-around. 40 Phil. at p.over said property which is now owned by the partnership as a separate juridical person. shall be liable pro rata with all their property and after all the partnership assets have been exhausted. or joint adventure. because the triggering mechanism would in effect be only if the partnership becomes insolvent. each of the parties is free to act in his own interest.” Article 1817 provides that “Any stipulation against the liability laid down in [Article 1816] shall be void.” (Ibid. Fiduciary Duties of Partners The fiduciary duties of the partners among one another and to the partnership subsists only while the partnership subsists. 818) . and that it is integrated into the partnership business enterprise. but actually means they are liable jointly. the two parties thus discharged. 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. which does not adopt the primary and solidary liability feature for commercial partners under the Code of Commerce. in Lim Tanhu v. (Ibid. Accordingly. Remolete. four contracting parties agreed to a joint enterprise to rehabilitate a mining plant. 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. Winding Up and Termination. 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. 2. provided he has done nothing during the continuance of the relation to lay a foundation for an undue advantage to himself. the Court held – After the termination of an agency. 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. partnership. Personal Obligations for Partnership Debts. Subsequently. 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]. In Hanlon v. Under Article 1816 of the Civil Code provides that ”All partners. 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. But this is not to mean that the insolvency of the partnership necessarily would trigger its dissolution. 796 (1920). defendants have no obligation to account to anyone for such acquisitions in the absence of clear proof that they had violated the trust of Po Chuan during the existence of the partnership. the Court held that former partners have no obligation to account on how they acquired properties in their names. procured a contract from the mining company by which they proceeded to restore the mining plant upon their own account. However.

” Aside from the remedy of recovering the profits derived by a partner from partnership affairs. When he acts without just or lawful cause. even though he may have given a receipt for his own credit only. b. the amount shall be fully applied for the account of the partnership. The duty of loyalty in the partnership setting arises necessarily as a consequence of the mutual agency relationship existing between and among the partners. Under Article 1807 of the Civil Code . but should the partner have given it for the account of the partnership credit. unusual profits have been realized. and are prohibited from obtaining secret benefits for themselves therefrom. which provides that when a partner authorized to manage collects a demandable sum which was owed to him in his own name. and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry. owe both the partnership and one another the duly of loyalty.a. but only if the personal credit of the partner should be more onerous to him. Gatchalian.” 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. Duty of Loyalty Although the term is more properly associated to officers and directors of corporations. the sum thus collected shall be applied to the two credits in proportion to their amounts. c. being managers of the partnership. a duly designated managing partner who acts in bad faith. In the event a partner takes any amount from the partnership funds for himself. 1270 (1959). 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 hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation. and agents to one another. However. In Catalan v. when the other partners have not collected theirs. which includes the avoiding of entering into transactions or situations that present a conflict-of-interests. Under Article 1800 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. his share of a partnership credit. which provides that a partner who has received in whole or in part. but from a person who owned the partnership another sum also demandable. the Court ruled that when partnership real property had been mortgage and . The duty is closely linked to the duty of loyalty. the same may be a ground to seek judicial dissolution of the partnership under Article 1831 of the Civil Code. his particular exercise of power administration may effectively be opposed by the other partners. as well for the interests and damages. shall be obliged. to bring to the partnership capital what he received even though he may have given a receipt for his share only. the courts may equitable lessen this responsibility if through the partner’s extraordinary efforts in other activities of the partnership. he becomes a debtor of the partnership. partners. which liability under Article 1789 of the Civil Code “shall begin from the time he converted the amount to his own use. conduct. then necessarily they are obliged by such fiduciary relationship to render a full accounting on matters they undertake for the partnership affairs. if the debtor should thereafter become insolvent. “Every partner must account to the partnership for any benefit.” Another aspect of a partner’s duty of loyalty is shown in Article 1793. Under Article 1806 of the Civil Code. Duty to Account Since the partners are mutual agents to one another and to the partnership. or liquidation of the partnership or from any use by him of its property. then his power may be revoked. 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]. except of course when he has been appointed the managing partner under the terms of the articles of partnership. 105 Phil.

. a partner is an agent of the partnership (Art. In Evangelista & Co. unless the partnership expressly permits him to do so. an industrial partner is prohibited from engaging in business for himself. even when using his separate funds. . the appellee Estrella Abad Santos has been. . Several years into the partnership term. It seems clear from jurisprudence that in order for an industrial to be held liable for breach of duty under Article 1789. when Catalan redeemed the properties in question he became a trustee and held the same in trust for his copartner Gatchalian. The Court ruled as follows: One cannot read appellee’s testimony just quoted without gaining the very definite impression that.foreclosed. Article 1789 provides that the capitalist partners may either: (a) exclude him from the firm. or (b) avail themselves of the benefits which the industrial partner may have obtained in violation of such duty. the redemption by any of the partners. does not allow such redemption to be in his sole favor. while the industrial partner was entitled to 30% thereof. The coverage of Article 1789 should mean also that: (a) Since his main contribution to the partnership is his industry. . Under the general principle of law. then an industrial partner owes to the venture and his fellow partners the obligation to devote his industry towards the partnership business. 1271) d. she has rendered services for appellants without which they would not have had the wherewithal to operate the business for which appellant company was organized. 1789 of the Civil Code. Specific Fiduciary Duties of Industrial Partner Under Article 1789 of the Civil Code. one of the judges of the City Court of Manila. devoting all her time to the performance of the duties of her public office. and Judge Abad Santos. (b) Even if the partnership is engaged in a particular form of business. even as she was and still is a Judge of the City Court of Manila. at p. and that in fact being an incumbent judge she rendered to service to the company. 51 SCRA 416 (1973). (Ibid. Furthermore. Since even capitalist partners are expected (although not obliged) to contribute service to the partnership enterprise. 1818. subject of course to his right to demand from the latter his contribution to the amount of redemption. . This fact proves beyond peradventure that it was never contemplated between the parties. 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. . every partner becomes a trustee for his copartner with regard to any benefits or profits derived from his act as a partner (Article 1807. 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. as an industrial partner on the other hand. and up to the present time still is. If an industrial partner breaches this duty. The summary reported reads in part as follows: . xxx. he must have engaged during the term of the partnership into another business or an activity that is essentially for profit. new Civil Code). and when they do so they are not entitled to separate compensation (unless otherwise stipulated). new Civil Code). an article of co-partnership was executed between three capitalist partners on one hand. v. then in order to make the contribution of service an industrial partner more meaningful and truly an obligation. 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. thus: It is an admitted fact that since before the execution of the amended articles of partnership . with the capitalist partners being entitled to 70% of the profits. Consequently. for she could not lawfully contribute her full time and industry which is the obligation of an industrial partner pursuant to Art. with a right to damages in either case. . Abad Santos. it must mean that is saddled with more burden or prohibitions.

. and he is in fact not prohibited from engaging in other activities which must be non-business in character. Specific Fiduciary Duties of Capitalist Partners Under Article 1808 of the Civil Code. The language of the decision in Evangelista & Co. 1955 . until the mortgage loan of P30. . Obligation of Subsequently Admitted Partners Under Article 1826 of the Civil Code. on the ground that plaintiff has never contributed her industry to the partnership. unless there is a stipulation to the contrary. since being a Judge of one of the branches of the City Court of Manila can hardly be characterized as a business. even on the part of appellants that appellee is engaged in any business antagonistic to that of appellant company. pp. even when an industrial partner fails to live-up to the commitment of service he obliged himself. Having always known appellee as a City Judge even before she joined appellant company on June 7. an industrial partner need not devote his entire working hours to the partnership affairs. why did it take appellants so many years before excluding her from said company as per aforequoted allegations? And ‘how can they reconcile such exclusion with their main theory that appellee has never been such a partner because ‘The real agreement evidenced by Exhibit ‘A’ was to grant the appellee a share of 30% of the net profits which the appellant partnership may realize from June 7. without the express consent of the herein defendants’ (Record On Appeal.” 3. 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. . aside from teaching in law school in Manila. would constitute an integral part of the manner and nature of what type of service or industry he should devote to partnership affairs. as an alleged industrial partner. unless otherwise stipulated. in the defendant partnership and/or in its net profits or income. and shall personally bear all the losses. otherwise. interest or participation. after around nine (9) years from June 7. e. except that this liability shall be satisfied only out of the partnership property. Finally. . then ”he shall bring to the common funds any profits accruing to him from his transactions. . .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. would prevent the industrial partner from devoting full-time to the partnership affairs. There is no pretense. 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. . 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] . leads to several observations on the nature of the obligation of an industrial partner.00 obtained from the Rehabilitation Finance Corporation shall have been fully paid.000. That subsequent to the filing of defendants’ answer to the complaint. the defendants reached an agreement whereby the herein plaintiff has been excluded from. 1955 as an industrial partner. however. 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. This is the only aspect of “limited liability” in a general partnership setting. devoting her time to the performance of her duties as such judge and enjoying the privileges and emoluments appertaining to the said office. Firstly. unless there is a stipulation to the contrary. 24-25).” If a capitalist partner breaches this duty of loyalty. her alleged share. Secondly. and to insure faithful compliance by said partner with his prestation. “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. and instead she has been and still is a judge of the City Court (formerly Municipal Court) of the City of Manila. such grounds are deemed waived by reason by estoppel by laches. 1955. and deprived of.

It is in Partnership Law equivalent to the terms “rescission” and “extinguishment” of contract of partnership under the general provisions of the Law on Contracts. 14 – DISSOLUTION. or when the public is made to believe that one person is a partner of the partnership when in fact he is not. a partnership act or obligation results. (d) Under Article 1825. V. 516) ”Winding-up of partnership affairs” is therefore the process which is commenced by the dissolution of the contract of . those who.” “Termination” therefore pertains essentially to the partnership as a business enterprise. Court of Appeals. would help clarify the multi-faceted legal relationships that exist in the partnership arrangement. 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. the only time when non-partners become liable for the partner debts and obligation is when there is estoppel. of the three terms. between and among the partners in the partnership arrangement. given credit to the actual or apparent partnership. (b) Under Article 1825. so to speak. represents himself. when a person has been thus represented to be a partner in an existing partnership. 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. Article 1829 of the Civil Code implicitly distinguishes “dissolution” from “termination” and “winding-up” when it provides that “On dissolution the partnership is not terminated. Article 1828 of the Civil Code. essentially the completion of pending contracts. Introduction and Definition of Terms An understanding under Partnership Law in the new Civil Code.” (Idos v. (c) Under Article 1825. but in all other cases it is the joint act or obligation of the person acting and persons consenting to the representation. shall be subject to the liability of a partner. include their names in the firm name. when such a person has made such representation or consent to its being made in a public manner he is liable to such person. thus: (a) Under Article 1815. p. but continues until the winding up of the partnership affairs is completed. 206 [1998].. 296 SCRA 194. or consents to another representing him to anyone. Obligations of Non-Partners Under Partnership Law in the Civil Code.” “Dissolution” is the term that pertains primarily to the contract of partnership. WINDING-UP AND TERMINATION OF THE PARTNERSHIP [Updated: 14 October 2009] 1. Civil Code of the Philippines. not being members of the partnership. 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. quoting from Paras. namely “dissolution”.4. when a person by word or conduct. 7th ed. the payment of all obligations and the distribution. and (e) Under Article 1825. if any. and defines the time when all matters pertaining to the business enterprises. on the faith of such representation. the breaking of the vinculum juris. Vol. “winding-up” and “termination”. as a partner in an existing partnership or with one or more persons not actual partners. he is liable to any such persons to whom such representation has been made. when all the members of the existing partnership consent to the representation. of the net assets of the partnership to the partners. who has. or with one or more persons not actual partners. 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.

) As will be seen from the discussions hereunder.” it means that the force of the original contract of partnership between them as to being mutual agents. The Court has defined “winding-up” as “the process of settling business affairs after dissolution. Pasig. Civil Code of the Philippines. does not necessarily give rise to winding-up or termination of the partnership business enterprise. and it cites as examples of the winding-up process.partnership between and among the partners. quoting from Paras.” (Ibid. and that in fact and in law. V. the following: “the paying of previous obligations. 296 SCRA 194.. even new business if needed to wind up. in a partnership setting the underlying partnership business enterprise should cease to exist as “as a going concern”. The contract of partnership remains but only in the concept as an association to pursue liquidation process. (Alhambra Cigar v. the corporate juridical personality continues to exist for three years with only the capacity to wind-down the corporate affairs.” (Idos v.” Dissolution of a partnership does not therefore undermine existing contracts. 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. SEC. dissolution which breaks the contractual privity between and among the partners. 24 SCRA 269 [1968]. “dissolution” is the termination of the juridical personality of the corporation which was originally constituted to pursue new business. 7th ed. 516). Br. and is concluded upon the termination or complete liquidation of the partnership business enterprise. nor modify or extinguish the then existing obligations of the partnership and the partners. Legal Effects of Dissolution a. 205 [1998]. 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. terminates all authority of any partner to act for the partnership. as the contracting with a demolition company for the demolition of the garage used in a ‘used car’ partnership. Court of Appeals. Court of First Instance of Rizal. whenever they are entitled under the law the option to so continue. as well as the enforceability of the doctrine ofdelectus personae. the collecting of assets previously demandable. as the dissolution of an “existing partnership contract” may actually lead to the “constitution of a new partnership contract. (Republic v. may not affect at all the underlying partnership business enterprise.” What may therefore “break” the contractual relationship between and among the partners. 209 SCRA 294 [1992]). are terminated. A direct effect of the dissolution of the partnership is provided in Article 1832 of the Civil Code. but only if the partners remaining do not wish to continue the partnership business. b. 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. Philippine National Bank v. as the termination of their association in carrying the business venture as a going concern. Tancinco. Since the juridical personality of a partnership is inextricably linked to the underlying contract of partnership. Dissolution therefore focuses mainly on the breaking-up of the contractual relationship of the partners among one another. Effect on the Partnership Contract and Juridical Personality In Corporate Law. and any contract entered into as “new business” would be considered void as having been entered into with a non-existing corporate party. 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). Vol. Effect on the Partnership Business Enterprise Likewise. 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. 2. without prejudice to a new partnership arrangement being constituted among . XXI. In stark contrast. dissolution terminates all authority of any partner to act for the partnership. p. as when the remaining partners choose to continue the partnership business. and that the completion or performance of existing contracts and the settlement of partnership obligations are in fact integral parts in the winding-up process.

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. Nevertheless. such as the imperative need to protect the contractual expectations of the public that deals in good faith with the partnership venture. may be determined. It is expressly stipulated in the memorandumagreement that the remaining partners had constituted themselves as the partnership entity. the partnership juridical personality is merely an “added feature” to the partnership arrangement to improve the efficiency of partnership transactions. 67 Phil. (BAUTISTA. it may be dissolved by the will of a partner. De Luna. the partnership is not terminated but continuous until the winding up of the business. 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. Court of Appeals. 37-38).” (Ibid. which expressly recognize that the non-defaulting partners can choose to continue the business enterprise.the remaining partners. 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. . . 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. (Ibid. 342 SCRA 20 (2000). xxx. The remaining partners . However. Isabela Sawmill. There was no liquidation of the assets of the partnership. Under Philippine Partnership Law. 646 (1939). 88 SCRA 623 (1979). at pp. used the properties of said partnership. it continues until the winding up of the business. The reason for this is that the public policy behind the capacity of the corporate juridical personality pre-empts the consideration of protecting the public that deal in good faith with a purportedly validly existing corporation. . c. a mere falling out or misunderstanding between partners does not convert the partnership into a sham organization. We feel that under the Partnership Law provisions of our Civil Code. petitioner Tocao’s unilateral exclusion of private respondent from the partnership effected her own withdrawal from the partnership and considered herself as having ceased to be associated with the partnership in the carrying on of the business. The remaining partners did not terminate the business of the partnership ‘Isabela Sawmill’. . d. The partnership exists until dissolved under the law. It does not appear that the withdrawal of [a partner] from the partnership was published in the newspapers. x x x In this case. We see the demonstration of this principle in Singson v. the Court held that the fact that the managing partner excludes the industrial partner from participation in the partnership business did not mean that the partnership was extinguished automatically: However. Instead of winding up the business of the partnership. because there is no over-arching public policy of State supervision and control over the juridical personalities of partnerships. 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. the partnership is not terminated thereby. at p. Effects on Determining Liability of Partners for Damages to One Another In Soncuya v. the “Isabela Sawmill”. 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. showing that upon dissolution the partnership continues to exist only for a limited purpose of winding it affairs. . . Bautista cited American decisions. the answer to the question raised should be in the negative. they continued the business still in the name of said partnership. on dissolution. at p. Effects on Contracts Entered into With Third Parties In Corporate Law. and cannot overcome the more important public policy considerations. and that no new business can be pursued. 642) In Tocao v.” . 319). 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.

3. . 172 [1922]). Lim Ka Yam. perhaps a good way of understanding those causes of dissolution dynamics for partnerships is to think of dissolution in relation to terms very closely linked to principles of “obligatory force” and “relativity” pertaining to contracts. (b) When a partner becomes incapacitated in performing his part of the partnership contract. (d) When a partner willfully or persistently commits a breach of the partnership agreement. the various modes of dissolution are akin to the general principles covering the extinguishment of contracts. (c) When a partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the partnership business. Causes of Dissolution Partnership Law classifies the causes of dissolution of partnerships into the following categories: I. 647.” as well as the other modes of extinguishment of contracts. Causes Which Legally Dissolve Ipso Jure Without Need of Court Decree: (a) Dissolution Effected Without Violation of the Partnership Agreement • • • • • • • • • • • • Termination of the term of the partnership Termination of the specific undertaking for which the partnership was constituted In a partnership at will. (e) When the partnership business can only be carried on at a loss. those that are effected ipso jure or without need of any court decree. (f) Other circumstances that render dissolution equitable. 44 Phil. the remedy of “rescission”. citing Po Yeng Cheo v. insolvency or civil Interdiction of any partner Insolvency of the partnership II. Effected by the Will of Any Partner: When the partnership term has not expired When the particular undertaking for which the partnership has been constituted has not yet terminated At any time. or otherwise so conducts himself in matters relating to the partnership business that it is not reasonably practicable to carry on the business in the partnership with him. namely. 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. When it comes to the first category of causes of partnership dissolution. dissolution effected by the will of any partner exercised in good faith By mutual withdrawal by all the partners Expulsion of a partner bona fide under powers granted in the partnership agreement (b) Dissolution Effected in Contravention of the Partnership Agreement. and those which require a court decree in order to be effective. 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. 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. (g) On the application of the purchaser of a partner’s interest in the partnership: a. the legal concepts of “breach of contract” and the “happening of resolutory condition or term.(at p. namely. Partnership being primarily a contractual relationship between and among the partners.

When all the partners in a partnership comes to a unanimous agreement to terminate the partnership. b. a contract is deemed extinguished ipso jure. Under either characterization of (namely. in the same manner as in all contracts that embody personal obligations to do (like agency). seeks the dissolution of the partnership. without any legal or contractual basis. which then effects a rescission or termination of the contract of partnership. namely. which treat of the contractual relationship between and among the partners of the most extreme personal nature (i. Whether it be full performance or the happening of the resolutory condition or term. in enumerating the causes for partnership dissolution distinguishes first between causes “without . principal of rebus sic stantibus). Finally. and there need not be any particular act by which the legal effect comes about.. and for which he loses the right to wind-up its affairs. go into the application of the doctrine of delectus personae in the partnership relationships. the same would indeed constitute a “breach of contract” for which he become personally liable for damages. which basically take the character of either full performance or fulfillment of the resolutory condition or term. Finally.” as the effective criteria for dissolution to come into play in a partnership setting. under the principle of delectus personae. when a partner is expelled bona fide from the partnership pursuant to the provisions granting such power in the contract of partnership. the principle of delectus personae. which conforms to the spirit of. In essence. 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. their importance lies in the spirit of Contract Law that says that force majeure excuses a contracting party from his obligations. this is the same legal effect as in another other contract which is extinguished by mutual withdrawal. 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. the principle of “relativity” in Contract Law applied at it most extreme norm). then this is in accordance with exercising an extrajudicial right to rescind or cancel a contract. Nevertheless. the intervention of the courts if required to establish the factual basis of the breach of contract. The termination of the partnership at will by the act of any partner or when there is a mutual withdrawal by all the partners. On the other hand. In either case. but nevertheless the dissolution would take legal effect. and would subject the withdrawing partnership to liability for damages. of the contractual commitment. any partner even without cause may seek to terminate his relationship by withdrawing from the partnership and thereby cause its dissolution. would override the principle of “obligatory force” of contractual provisions. “breach of contract” and “happening of the resolutory condition or term. The concepts of “rescission”. The same legal effect would be the act of any partner declaring the termination of a partnership in a partnership at will. the termination of the term or the termination or fulfillment of the particular undertaking for which the partnership has been constituted.e. i. there is the application of the doctrine of delectus personae in the partnership relationships. the causes of dissolution which require a court decree for their effectivity.Take the first two causes for dissolution. that they are essentially revocable in spite of contractual stipulations to the contrary. Thus.. or the radical change of the circumstances binding the partners together into the contract of partnership. even when the contracting parties agree that their partnership contract would be irrevocable for say ten years. In this case. and is not in breach. Dissolution Effected with No Violation the Partnership Contract Article 1830 of the Civil Code.. As has been discussed previously. when a partner. and would not make him liable for damages for the occasion does not constitute a breach of contract. the withdrawal from the partnership before the expiration of the agreed term of existence would be in breach of a contractual agreement.e. When it comes to dissolutions caused by force majeure or outside the will of the partners.e. 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. Philippine Partnership Law is careful to classify the various causes of dissolution because of the varying legal consequences of dissolution as an act of rescission or cancellation of the partnership agreement.

it would be “[i]n contravention of the agreement between the partners. 36-38) Essentially.” and those causes that are “In contravention of the agreement. the Court ruled: Undoubtedly. Whereas. and resulted in a falling out between the two. In this case.’ An innocent partner thus possesses ‘pecuniary interest in every existing contract that was incomplete and in the trade name of the co-partnership and . thus: (a) Termination of the term or particular undertaking specified in the partnership agreement. When it comes to the first three causes. although not necessarily the right to dissolve the partnership. The partnership . and he is without right to continue to pursue the partnership business. . the partner seeking the dissolution would be liable for damages.” Those classified as causes “without violation of the agreement. An unjustified dissolution by a partner can subject him to action for damages because by the mutual agency that arises in a partnership. 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. Nevertheless. (Ibid. although any partner is recognized with the power to withdraw from the partnership at any time. Her instruction . . The partnership exists until dissolved under the law. the partnership was not terminated thereby. the Court agreed with the decision of the trial court that “a partner who is excluded wrongfully from a partnership is an innocent partner. and electing to continue to pursue the partnership business. c. and (d) By the bona fide expulsion of any partner in accordance with the power provided for in the partnership agreement. . where the circumstances do not permit a dissolution under the provisions” of Article 1830. the guilty partner must give him his due upon the dissolution of the partnership as well as damages or share in the profits ‘realized from the appropriation of the partnership business and goodwill. it may be dissolved by the will of a partner . at pp. it continued until the winding up of the business. to have a formal accounting of the business. in the case of expulsion of a partner in accordance with the power provided in the partnership agreement. it could only mean that the partner was expelled “for cause” and consequently. Hence. (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). In that case. 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. An example of the consequences of an expulsion of a partner effected in bad faith is demonstrated in Tocao v. In any of the foregoing enumerated causes. where in an oral partnership. . . In ruling that the excluded partner had a right to recover damages. Dissolution Causes In Violation of the Partnership Contract In contrast. and to receive her shares in the net profits. Court of Appeals. . the doctrine of delectus personae allows the partners to have the power. the capitalist partner Tocao had excluded the industrial partner Anay from entrance into any of the business premises of the company or and severed any further dealings she may have with the business venture. the petitioner Tocao unilaterally excluded private respondent [Anay] from the partnership to reap for herself and/or for petitioner Belo financial gains resulting from private respondent’s efforts to make the business venture a success . since it can only be exercised bona fide. 342 SCRA 20 (2000).” are consistent with the agreed terms of the contract of partnership. 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. has no fixed term and is therefore a partnership at will predicated on their mutual desire and consent. he would be disqualified from participating in the winding-up of the affairs of the partnership business. However. . (c) By the mutual withdrawal by all the partners from the partnership. . . . there is no breach or contravention of the partnership agreement.violation of the agreement. a mere falling out or misunderstanding between partners does not convert the partnership into a sham organization. petitioner Tocao’s unilateral exclusion of private respondent from the partnership . and the dissolution of the partnership does not give rise to a liability for damages for breach of contract.

(f) Other circumstances that render dissolution equitable. nothing upon which a waiver. 1 Phil. 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. . then would the return back to a partner of his contribution be deemed to have dissolved the partnership? The decision in Fernandez v. as would have been the case had the plaintiff withdrawn his entire interest in the partnership. There was no intention on the part of the plaintiff in accepting the money to relinquish his rights as a partner. 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. if he had chosen to do so. Thus. The defendant might have himself terminated the partnership relation at any time. either express or implied. 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. by recognizing the plaintiff’s right in the partnership property and in the profits. Causes Equivalent to Rescission or Declaration That the Central Basis Upon Which the Contract of Partnership Has Been Constituted Is Lost The fourth general category covers the grounds whereby a partner may seek court order for the dissolution of the partners under Article 1831 of the Civil Code.” (Ibid. None of such causes of dissolution constitute a type of breach of the partnership agreement. and (c) Death. therefore. thus: (a) When a partner has been declared insane in any judicial proceeding or is shown to be of unsound mind. On the contrary he notified the defendant that he waived none of his rights in the partnership. 677-678) The Court held – . 29) d. Nor was the acceptance of the money an act which was in itself inconsistent with the continuance of the partnership relation. 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. 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. 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. can be predicated. 678) e. at pp. Dela Rosa. (e) When the business of the partnership can only be carried on at a loss. The resolution of this issue was essential in Fernandezbecause it determined whether the partner so receiving his contribution had a right to participate in the profits of the venture earned after he had allegedly withdrawn. 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. 671 (1902). There is. (c) When a partner has been guilty of conduct as tends to affect prejudicially the carrying on of the business.’” (Ibid. if any. 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. (d) When a partner willfully or persistently commits a breach of the partnership agreement. at p.assets at the time he was wrongfully expelled. insolvency or civil interdiction of any partner. nor is there any evidence that by anything that he said or by anything that he omitted to say he gave the defendant any ground whatever to believe that he intended to relinquish them. . We think these questions must be answered in the negative. (b) Loss of the specific thing promised to be contributed to the partnership. (b) When a partner becomes in any other way incapable of performing his part of the partnership contract. at p. .

The article recognizes the inherent risk that business undertakings are exposed to.. 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. a mechanism is set (i. For example. and the discretion is given to the other partners to seek its dissolution. 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. In such an instance. for each represent a public policy which understands that the business purpose of a partnership which cannot be placed in a relatively clear vision at the time the contract of partnership is entered into. 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. as the basis by which an action for rescission may be pursued. in a partnership at will. and cannot be left to the sole determination of any of the partners. After all.e. a partner has violated his duty of loyalty. each of the grounds provided under Article 1831 would constitute “substantial breach” of the obligations assumed by the partners. (b) Termination of the particular undertaking upon which the partnership is expressly constituted. and that the law recognizes that the insane partner still has an estate that has a right to benefit from the properties and rights to which a partner is entitled to. Effects of Dissolution Among the Partners Inter Se We will now discuss the legal consequences. 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. it would require a formal petition in court to have the partnership dissolved. And yet under Article 1831. 192 SCRA 110 (1990). like civil interdiction. Therefore. look at the primary rationale for the partnership agreement: to operate a business venture for the benefit of all the partners. many of which cannot be anticipated at the time the partnership agreement is entered into. 4. and yet the former does not result in automatic dissolution of the partnership. Likewise. One would think that when a partner has been judicially declared insane.In addition. The legal implication is that the partnership remains unaffected by the judicial declaration of insanity of a partner. Maglana. Judicial declaration of insanity. in Rojas v. when the business of the partnership can only be carried on at a loss. consequently. the factual basis upon which the substantial breach may arise must be determined to exist by the courts. may be a better partner to remain with. or (c) At any time. Perhaps it is because. insolvency or civil interdiction of a partner. as in the case of death. which under the principle of delectus personaeshould allow the other partners to break any further ties with him. a partner who turns out to be insane. judicial declaration of insanity does not proceed from a criminal conviction as in the case of civil interdiction. and other circumstances that render a dissolution equitable). 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. The foregoing grounds enumerated in Article 1831 for which a court order of dissolution may be sought need to be considered carefully. rather than another partner who turns out to be a boor. 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. when a partner willfully or persistently commits a breach of the partnership agreement. 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. it would thereby ipso jure cause the dissolution of the partnership. and the rights and obligations that would govern the relationship of the partners . When there are circumstances prevailing in the partnership that endanger or undermine the viability of 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. 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. would render the partner without legal capacity to contract.

When Dissolution Is Caused in Any Way. when dissolution is caused by thebona fide expulsion of a partner pursuant to the terms of the partnership agreement. there exists legally a formal “breach of contract. The tendency therefore is that the “withdrawing partner” may receive a premium or a higher price than the actual liquidation value of his share in the net assets of the partnership in exchange for his not agreeing not to demand the formal winding-up and termination of the partnership business. all the rights of a partner for share in the net assets of the partnership after payment of all its liabilities. to have the value of his interest in the partnership. When dissolution of the partnership is caused other than by a breach of the contract of partnership. then such expelled partner shall receive in cash only the net amount due him from the partnership. (ii) to damages for breach of the agreement. the value of his interest in the partnership at the dissolution. if they so desire: (i) continue the business in the same name either by themselves or jointly with others. each partner. Except in Contravention of the Partnership Agreement Under Article 1837 of the Civil Code. or pay to any partner who has caused the dissolution wrongfully. during the rest of the agreed term for the partnership. and the surplus applied to pay in cash the net amount owing to the respective partners. a. (ii) and for that purpose may possess the partnership property. the expelled partner is without power or authority to insist upon the formal winding-up and liquidation of the partnership business enterprise. every partner has a right to insist upon the windingdown of partnership affairs. provided they secure the payment by bond approved by the court. (ii) If the business is continued. In other words. the creditor and the remaining partners (as provided under the second paragraph of Article 1835 of the Civil Code).under the various causes of partnership dissolution. as against each partner who caused the dissolution wrongfully. less any damage caused to his co-partners by the dissolution. In other words. 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. (2) The partners who have not caused the dissolution wrongfully. and if the expelled partner is discharged from all partnership liabilities. when there has been no breach of the partnership agreement upon the dissolution of a partnership. may have the partnership property applied to discharge its liability. the “remaining partners” have no option to continue the partnership business enterprise when the “withdrawing” partner insists on winding-up the partnership affairs. . (3) A partner who has caused the dissolution wrongfully shall only have: (i) If the business is not continued. less any damages for breach of the agreement and in like manner indemnify him against all present or future partnership liabilities. either by payment or by express agreement to that effect between himself. Consequently. unless otherwise agreed. the only way by which the “remaining partners” can hope to continue the partnership business is to come into a settlement of the liquidation of the “withdrawing partner’s” equity interests in the partnership. the right as against his co-partners and all claiming through them in respect of their interests in the partnership. When Dissolution Is Caused by the Bona Fide Expulsion of a Partner Under Article 1837 of the Civil Code. subject to liability for damages incurred due to such wrongful dissolution. as against his co-partners and all persons claiming through them in respect of their interests in the partnership.” 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. and that the choice whether to continue with the business enterprise or to formally wind-up and terminate the partnership is with the remaining partners. b. may. c.

When Dissolution Is Caused by the Rescission of the Partnership Agreement Because of Fraud or Misrepresentation (i. General Rule on Existing Partnership Liabilities Under Article 1835 of the Civil Code. a. 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. (2) To stand. i.e. and (3) To be indemnified by the person guilty of the fraud or making the representation against all debts and liabilities of the partnership.ascertained and paid to him in cash. 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. the partners not at fault have full authority to act for the partnership in all matters that “may be necessary to wind up partnership afffairs or to complete transactions begun but not then finished. without prejudice to any other right. for partnership debts which cannot be settled from the partnership assets. 5. d.” . but subject to the prior payment of his separate debts. But in ascertaining the value of the partner’s interest. that a partner shall be liable jointly with the other partners. the partnership creditor and the person or partnership continuing the business. 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”. a. 6. is by an agreement to that effect between himself. and (c) Those that were incurred when the partnership enterprise has been continued and no winding-up process have been pursued. In fact. (b) Those that were incurred in the nature of “new business” in spite of the fact that the partnership is in winding-up process. after all liabilities to third persons have been satisfied. 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. the value of the goodwill of the business shall not be considered. By Judicial Decree) Under Article 1838 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. that application of the attribute of unlimited liability because most critical. and to be release from all existing liabilities of the partnership. Effects of Dissolution on Partnership Liabilities Contracted or Incurred After Dissolution The rules when it comes to liabilities contracted or incurred on behalf of the partnership after dissolution has come in should be divided into the following categories: (a) Those that were incurred pursuant to winding-up proceedings.e.. it is the point of dissolution.” b. the surplus of the partnership property after satisfying the partnership liabilities to third persons.. or right of retention of. Liabilities Incurred Pursuant to Winding-up Proceedings Article 1832 of the Civil Code clearly implies that even with the dissolution of the partnership. 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. in the place of the creditors of the partnership for any payment made by him in respect of the partnership liabilities. the party entitled to rescind or seek the dissolution of the partnership shall be entitled: (1) To a lien on. or the payment secured by a bond approved by the court. When it comes to a deceased partner.

and winding-up stage has been reached. 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. From the inter-partnership relationship.” During winding-up stage. insolvency or . binds the partnership. is done without lawful authority. 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. or viewed in relationship with third parties. the liability incurred by the acting partner shall then be for his sole account. which renders the contract entered into unenforceable against the principal. and there is no intention to continue the partnership enterprise.” On the other hand. will legally bind the partners to any liability created “for the partnership as if the partnership had not been dissolved. Article 1834 provides that “After dissolution. death or insolvency of another partner (i.Therefore. Insolvency or Death of a Partner Under Articles 1832 and 1833 of the Civil Code. every contract entered into or every liability incurred in the name of the partnership as “new business”. despite the dissolution of the partnership. in determining whether the acting partner acted in good faith or not. Liabilities Incurred Constituting “New Business” During the Winding-Up Process Article 1832 of the Civil Code is also clear that after dissolution. and such contracts and transactions shall be valid and binding upon the partnership and those of the partners. and. which are in pursuit of the winding-up of partnership affairs. without knowledge that dissolution has come about). Thus. As and between the partners. death or insolvency of a partner. 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. when the dissolution of the partnership is other than “by the act.e. it is clear under Article 1829 that the partnership is not terminated on dissolution. and that the partnership continues to exist “until the winding up of the partnership affairs is completed. where the dissolution is caused by the act. and is non-binding on the partnership and the other partners. even when the liability incurred in behalf of the partnership is incurred for winding-up purpose. (1) When Dissolution Is By the Act. b. 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. Insolvency or Death of a Partner Under Article 1833 of the Civil Code. or (b) Had not extended credit to the partnership prior to dissolution. Therefore. are valid and binding. distinguishes among the causes of dissolution.. the acting partner who acts without knowledge of the act. 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. Whether considered from the inter-partnership relationship. but acting in good faith. for a partner acting for and in behalf of the partnership after dissolution. 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. having no knowledge or notice of his want of authority. But the foregoing general rule applies only when the acting partner acts with knowledge of the fact of dissolution of the partnership. the fact of his want of authority has not been advertised in the a newspaper of general circulation in the place (or in each place if more than one) at which the partnership business was regularly carried on. 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.” (i) Where Partnership Not Bound Even for Winding-Up Liabilities Under Article 1834. but valid against the agent in his personal capacity. all contracts and transactions entered into after dissolution of the partnership.

jurisprudence has ruled that unless otherwise published or made known personally.” in the following cases: (a) Where the partnership is dissolved because it is unlawful to carry on the business. 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.death of a partner. and only such acting partner shall be liable for the liability incurred. the Court held since it did not appear that the withdrawal of a partner from the partnership was published in the newspapers. third parties who in good faith (i. 642) as well as against the properties of the withdrawing partner. 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. and. at p. 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. a partner who incurs a liability in the name of the partnership. (ii) When Creditors Not Deemed to Be In Good Faith It should be noted that Article 1834 provides that even when third parties enter into a “new business” contract or transaction with the partnership without actual knowledge or notice of the fact of its dissolution. unless the act is appropriate for winding up partnership affairs. is deemed to be acting without authority or in bad faith.. had nevertheless known of the partnership prior to dissolution. Thus. Article 1834 makes it clear that such liability is “limited liability”. they will not be considered to be third parties acting in good faith. then “the public in general had a right to expect that whatever. (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. 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. and (b) So far unknown and inactive in partnership affairs that the business reputation of the partnership could not be said to have been in any degree due to his connection with it. (3) As To Third Party Creditors Whatever may have been the cause of the dissolution of the partnership. especially on the power of any partner to bind the partnership and other partners in “new business” contracts and transactions. nonetheless. and those who have only known of the partnership before dissolution: in the former it is onlyactual knowledge or notice of the dissolution that would place him in bad faith. 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. having no knowledge or notice of dissolution. 88 SCRA 623 (1979). whereas.e. 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. as between and among them. When it comes to the effects of dissolution. Thus. Notice how the law treats differently third parties who have previously extended credit to the partnership prior to dissolution. in Singson v.” (Ibid. Article 1834 of the Civil Code provides that “After dissolution. and that “[t]he partnership is in no case bound by any act of a partner after dissolution.” then knowledge of the fact of dissolution is presume to have reached every partner and therefore. or (b) Though head not so extended credit. in the latter mere notice of dissolution published in the newspapers would transform him into a third party acting in bad faith. or . Isabela. a partner can bind the partnership x x x (2) By any transaction which would bind the partnership if dissolution had not taken place.

shall be the same as that provided under Article 1825 on partnership by estoppel. (iii) Particular Rule on Partner by Estoppel Notwithstanding any of the foregoing rules. partnership creditors shall have priority on partnership property and separate creditors on individual property. (1) Enforcing Contributions from Partners to Cover Partnership Debts Article 1839 specifically provides that the partners shall contribute “as provided by Article 1797. 7. shall wind-up partnership affairs. (ii) However. the amount necessary to satisfy the liabilities. any partner or his legal representative or assignee. it is the partner or partners so provided to have such authority. the Law on Partnership under Article 1839 of the Civil Code lays down the following tenets. 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.(b) Where the partner has become insolvent. (b) What Are the Priority Rules Against Partnership Property? The liabilities of the partnership shall rank in order of payment as follows: (i) Those owing to creditors other than partners. (3) Priority Rules When Partner Is Insolvent . Rules and Procedures for Winding-up and Liquidation of Partnership Affairs Since winding-up and liquidation of the partnership affairs must apply the rules and principles relating to the partnership doctrine of “unlimited liability”. not insolvent. when partnership property and the individual properties of the partners are in possession of a court for distribution. It also provides that an assignee for the benefit of the creditors or any person duly appointed by the court shall have the right to enforce the contribution specified. and (iv) Those owing to partners in respect of profits. (iii) Those owning to partners in respect of capital. Winding-Up of Partnership Affairs a. (b) In the absence of any such agreement: (i) The partners who have not wrongfully dissolved the partnership or the legal representative of the last surviving partner. In addition. the person or persons who have the power and authority to wind up the partnership affairs as a consequence of its formal dissolution. (2) Priority Rules Between Partners’ Creditors and Partnership Creditors Under Article 1829(8). upon cause shown. (ii) Those owning to partners other than for capital and profits. and the priority rules among conflicting claims. b. is determined by the following rules: (a) If there is an agreement on this matter. saving the right of lien of secured creditors. Who Has Authority to Wind-up? Under Article 1836 of the Civil Code. 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. has the right to wind up the partnership affairs. The contributions of the partners necessary for the payment of all the liabilities of the partnership. subject to any agreement to the contrary: (a) What Constitutes Partnership Property? The assets of the partnership which shall be applied to pay partnership liabilities are: (i) (ii) The partnership property. the partners’ right to the benefit of excussion.” and that the individual property of a deceased partner shall be liable for such contribution. may obtain winding-up by the courts.

not to petitioners. held – Inasmuch as in this case nothing appears other than the failure to fulfill an obligation on the part of a partner who acted as agent in receiving money for a given purpose. which interest is not due except from the time of the judicial demand. which consists of all its assets. at p. However. the action to recover must still be by way of dissolution and liquidation of the partnership affairs. The liability. “The partnership has a juridical personality separate and distinct from that of each of the partners. by a violation of the provisions of the law. it can only pay out what it has in its coffers. and the judgment should be against his sole interest. that must refund the shares of the partners. in the present case from the filing of the complaint. (c) Those owing to partners by way of contribution.” for the reason that no other money that the contributed as capital is involved. or. 513) This shows that even when the cause for dissolution is fraud. Note must be taken of the decision in Martinez v. Since it is the partnership. When the managing partners refused to render an accounting of the operations of the venture although they admitted there were small profits made. (Ibid. and cannot be in the form of a personal action against the allegedly defaulting partner. 14 Phil. petitioners did not personally hold its equity or assets. In other words. a partner has no right to demand from the other partners for them to be personally liable for the return of his contribution.” Since the capital was contributed to the partnership. The Court. that Gregorion Magdusa. 729) . substantiated in evidence.” But even upon dissolution of the partnership. in so far as it proves “that the partnership is liable to every partner for the amounts he may have disbursed on account of the same and for the proper interests. before the partners can be paid their shares. . is personal to Gregorio Magdusa. especially when the partnership operations have been at a loss.. This being an obligation to pay in cash.” (Ibid. therefore. whatever is left of the partnership assets becomes available for the payment of the partners’ shares. the amount to be refunded is necessarily limited to its total resources. in affirming the return of contribution. the claims against his separate property shall rank in the following order: (a) Those owing to separate creditors. such agent is responsible only for the losses which. 406 SCRA 145 (2003). at p. 151-152) The Villareal ruling reiterates the decision in Magdusa v. (Ibid. 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. for which he has rendered no accounting. at pp. thus: We hold that respondents have no right to demand from petitioners the return of their equity share. 5 SCRA 511 (1962). Ramirez. as a separate and distinct entity. x x x. liquidation and winding up of the business. failed and refused and still fails and refuses to pay them their claims.Where a partner has become insolvent or his estate is insolvent. After all the creditors have been paid. We do not consider that article 1688 is applicable in this case. not against the partnership’s. Albaran. it is the partnership that must refund the equity of the retiring partners. (4) Partner May Demand Share in Net Assets Only After Liquidation and Settlement of Claims of Partnership Creditors In Villareal v. the trial court rendered judgment directing the managing partners to return the investment of the capitalist partner. 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. he incurred. rather than directing the dissolution and liquidation of the partnership and determining the share of the partners in the net assets. there are no other losses than the legal interest. Ong Pong Co. having taken delivery of their shares. Except as managers of the partnership. the Court ruled that “A share in a partnership can be returned only after the completion of the latter’s dissolution. . 726 (1910). the creditors of the partnership must first be compensated. (b) Those owing to partnership creditors.

Puzon. unless there is a . Article 1840 of the Civil Code provides also that the liability of a third person becoming a partner in the partnership continuing the business.255. 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 . Who May Continue Partnership Business and Obligations Assumed? Article 1837 of the Civil Code recognizes the right of the “partners who have not caused the dissolution wrongfully. . either alone or with others. (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.61. The award.00. and without liquidation of the partnership affairs. If such right to continue the partnership business is so exercised. Continuance of Partnership Business Instead of Winding-Up Article 1840 recognizes that a partnership may be dissolved.We believe that the decision in Martinez is wrong. (f) When a partner is expelled and the remaining partners continue the business either alone or with others without liquidation of the partnership affairs. who continues the business without liquidation of partnership affairs. a partner cannot seek recovery of his contribution. (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. 615). therefore. 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. without any assignment of his right in partnership property. to continue the business in the same name either by themselves or jointly with others during the agreed term for the partnership. b. (e) When any partner wrongfully causes a dissolution and the remaining partners continue the business. (Ibid. 8. In Uy. 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. but the underlying partnership business enterprise would not be wound-up. whereby the claims of partnership creditors have priority payment rights. then such exercising partners must secure the payment by bond approved by the court. to the creditors of the dissolved partnership shall be satisfied out of the partnership property only.000. . (c) When any partner retires or dies and the business of the dissolved partnership is continued. the value of his interest in the partnership at the point of dissolution. if the business is continued without liquidation of the partnership affairs. 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. . less any damages recoverable from said defaulting partner. also ordered the primary partner to reimburse his co-partner the latter’s investment and unrealized profits. with the consent of the retired partners or the representative of the deceased partner. a. much less share in the net assets of the partnership. for a contemporaneously held in Villareal. it is reasonable to expect that the partnership would have earned much more than the P334. And yet the Supreme Court in Uy v. made by the trial court of the amount of P200. is not speculative. 79 SCRA 598 (1977). as well as indemnify him against all present or future partnership liabilities. but based on reasonable estimate. at p. unless it be part of the dissolution and liquidation of the partnership. and in fact may be continued as a going concern.” if they so desire. either alone or with others. . as compensatory damages. or pay to any partner who has caused the dissolution wrongfully.

or the representative of the retired or deceased partner. the Court held that the right to accounting does not prescribe during the life of the partnership. or the surviving partners. as against the winding-up partners. Partner’s Right to Demand an Accounting Under Articled 1842 of the Civil Code. without any settlement of accounts as between him or his estate and the person or partnership continuing the business. Thus. the article expressly provides that the creditors of the dissolved partnership as against the separate creditors. shall not of itself make the individual property of the deceased partner liable for any debts contracted by such person or partnership. or his legal representative. Intermediate Appellate Court. Even if the withdrawing partner acted in good faith. The article likewise provides that when the business of a partnership after dissolution is continued under any conditions set forth therein. in Singson v. as against the separate creditors of the retiring or deceased partner or the representative of the deceased partner. Finally. and her agreeing to have the remaining partners proceed with running the partnership business instead of insisting on the liquidation of the partnership. or the name of a deceased partner as part thereof. shall have priority on any claim arising under said article. 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. If excellent relations exist . as provided by Article 1840. and (b) The partner or his legal representative shall receive as an ordinary creditor an amount equal to the value of his interest in the dissolved partnership. in the absence of any agreement to the contrary. The foregoing rules of liabilities must always be construed in consonance with the primary doctrine of protecting creditors who deal in good faith with the partnership business and who cannot be expected to be aware of the inner workings of the partnership and the intramural dealings of the partners. it could not overcome the position of partnership creditors who also acted in good faith. at the date of dissolution. or (ii) in lieu of interest. . and the business is continued under any of the conditions set forth in Article 1840. or the person or partnership continuing the business. the Court ruled that the failure of a partner to have published her withdrawal from the partnership. when any partner retires or dies. where the partnership executed a chattel mortgage over its properties in favor of a withdrawing partner. under the rationale that: . with option: (i) to receive interest. the creditors of the dissolved partnership. Thus. This is a form of “limited liability” on the part of a new partner coming into an existing partnership. e. without knowledge of her withdrawal from the partnership. 9. . third paragraph. Disposition of Liabilities When Dissolution Is Caused by the Retirement or Death of a Partner Under Article 1841 of the Civil Code. the profits attributable to the use of his right in the property of the dissolved partnership. or in Article 1837(2). Isabela Sawmill. 169 SCRA 746 (1989).stipulation to the contrary. unless otherwise agreed. the right to receive an accounting of his interest shall accrue to any partner. 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. the article provides that the use by the person or partnership continuing the business of the partnership name. a partner shares not only in profits but also in the losses of the firm. Nothing in the article shall be held to modify any right of creditors to set aside any assignment on the ground of fraud. and that prescription begins to run only upon the dissolution of the partnership and final accounting is done. 88 SCRA 623 (1979). did not relieve such withdrawing partner from her liability to the partnership creditors. Nonetheless. In Fue Leung v. 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. As stated by the respondent. 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. and the withdrawal was not published to bind the partnership creditors.

by means of this . (Ibid. Cit.”) to describe the origin and development of limited partnerships. of Geneva. substituting. the statutes of Marseilles. it afforded the means of secretly embarking in commercial enterprises. In essence. CASES ON PARTNERSHIP. pp. 12. and in Italyaccomenda. Gertenberg.Y. of 1315. could not engage directly in trade. In the middle ages it was one of the most frequent combinations of trade. of 1588. Surr. 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.) Under the name of la societe en commandite. “Organization and Control. See also Report of the Code Commission. was known in Laguedoc. for the slaves. CIVIL CODE OF THE PHILIPPINES. thus – Louisiana.” and it development into the United States. and thus the vast wealth. (N. thus — The system of limited partnership. At a period when capital was in the hands of nobles and clergy. and was the basis of the active and widely extended commerce of the opulent maritime cities of Italy. who. which was introduced by statute into this state. and subsequently very generally adopted in many other states of the Union. (3 Kent.]. They describe how the institution of limited partnership “grew up in the civil law. p. of course. without personal risk. free persons who become general partners with unlimited liability. 382 to 395 [1992 ed. Provence. 36. from pride of caste. 3 Modern Business. Nature. (Charles W. (Ibid) Bautista quoted from the New York decision in Ames v. (BAUTISTA acknowledges that the American decision is “reproduced in CRANE AND MCGRUDER. 295). 50). rules governing this form of business. In the vulgar latinity of the middle ages it was styled commanda. or cannonical regulations. it has existed in France from most authentic commercial records. The De Leons give a more descriptive historical background of the limited partnership as “an outgrowth of the Roman Law.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. and even traveled under the protection of the arms of the Crusaders to the city of Jerusalem. p. 149).) 321. entered into most of the industrial occupations and pursuits of the age. American decisions relating to explaining the effects of the provisions of the Uniform Limited Partnership Act should be taken as quite instructive in considering the provisions of the new Civil Code on limited partnerships. therefore. It contributed largely to the support of the great and prosperous trade carried on along the shores of the Mediterranean. 24. a deferment of sharing in the profits is perfectly plausible. and in the early mercantile regulations of Maseilles and Montpelier. it is recognized so far back as the year 1166. and reaping the profits of such lucrative pursuits. 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. In effect the private respondent was asking for an accounting of his interests in the partnership. and Lombardy. It would be incorrect to state that if a partner does not assert his rights anytime within ten years from the start of operations. Code de Commerce. (See annotations in TOLENTINO. which uses the civil instead of the common law. the provisions of the Civil Code on limited partnerships were taken from the Uniform Limited Partnership Act of the United States of America. Formation and Registration According to Tolentino. also in the ordinance of Louisele Hutin. 674-675. 23. “ [1919]. which provided that one or more persons might turn over property to a slave and avoid personal liability by trading through him. was borrowed from the French Code. which otherwise could have lain dormant in the coffers of the rich. In the states of Pisa and Florence. Downing.” (De Leons. 754). 1253. In 1822. such rights are irretrievably lost. Vol V. recognized this form of organization. at p. New York’s lead has been followed by most common law jurisdictions though England did not fall into line until 1907. p. 1 Brad. 15 – LIMITED PARTNERSHIPS [Updated: 14 October 2009] 1. became the foundation.

without becoming liable as general partners for all partnership debts. In the Code of Commerce it is classed in the same manner. and in the ordinance of Louis XIV. 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. I may add. it has produced mutual relations of confidence. 122(2). but an institution of considerable antiquity. societas. or stock. it is ranked as a regular partnership. of which the capital is divided into transmissible shares.” It was always considered a proper partnership. understood and regulated. *** The partnership remains under the dominion of the common law. In other words. which the general partner cannot be forced to extend to strangers. 146. and brought the Commons into position as an influential estate in the Commonwealth. for the purpose of showing that the special partnership is. The limited partners as such shall not be bound by the obligations of the partnership. 142 (1923). . such institution was covered by the Spanish Code of Commerce. pp. of the great commerce which made princes of the merchants. and any change in the name working a dissolution. 411 P. the capital of which is not so divided. in would be wrong to extend the rule that a partnership. for the explanation of the distinction to which I shall shortly advert. Troplong. (BAUTISTA. 2d Ed. Ducange defines it to be: “Societas mercatorem qua uni sociorum tota negotiationis cura commendatur. But. 399-400) It should be recognized that prior to the New Civil Code provisions on limited partnerships. unless it is expressly stipulated otherwise. but so recently introduced where the general partnership.” (Ibid. The statute of New York recognizes only the latter kind of partnership. the creation of transmissible shares being a proof that the association is formed respectu negotii.. A limited partnership is strictly a creature of statute. Likewise. our Supreme Court recognized that there existed provisions in the Code of Commerce governing limited partners: “To establish a limited partnership there must be. of 1793. having as members one or more general partner and one or more limited partners. transmissible from hand to hand. .0.” The American decision in Hoefer v. certis conditionibus. with certain reserves and restrictions.ingenious idea. limited partnerships originated and grew primarily from commercial partnership practices. at pp. its object being to enable persons not desiring to engage in a particular business. no novelty. Its origin in “antiquity” may be basis to say that under modern setting. 53. 150-151) What seems clear from all the foregoing is that the institution of limited partnership had its origin from civil law. In Jo Chung Cang v. for its main features and objectives could be achieved by the modern corporation. from whence it found its current adoption into the Philippine legal system through the provisions of the new Civil Code of the Philippines. describes the purpose and essence of the limited partnership under the terms of the Uniform Limited Partnership Act. . to invest capital in it and to share in the profits which might be expected to result from its use. of such ancient origin. elevated to the trading class. the names of the parties being required to be registered. that the French Code permits a special partnership. the limited partnership may be an inadequate medium of doing business. as an important fact. Independent of the interest naturally attaching to the history of a mercantile contract. it is a form of partnership in which the liability to third persons of one or more of its members is limited to a fixed amount. (Citing Vol 2.. known to the common law has hitherto existed alone. Pacific Commercial Co. and turning the firm into a general partnership. In such a case. but even in such a partnership the death of the general partner effects a dissolution. ROWLEY ON PARTNERSHIP. 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. a. at pp. to a special partnership.2d 230 (1966). in fact. which is not subjected to the caprice of unforseen changes. Arts. Hall. well known. 148). sec. 45 Phil. the death of the special partner does not dissolve the firm. It has created between the special and general partner a tie.. especially the close corporation vehicle. says M. was adopted into the American common law system. thus— x x x. I have been led to refer to the facts just stated. is not dissolved by the death of a stockholder. of which the capital may be divided into shares. Such a partnership has always been held to be dissolved by the death of the special partner. and not respectu peronsarum.

in that no limited partnership is formed unless the formalities provided for under Article 1844 of the Civil Code are complied with. of partners to admit additional limited partners. if given. • right. with clear designation of who are the general and limited partners.E. of one or more of the limited partners to priority over other limited partners. if given. 411 P. such as the limited partners. and the terms under which additional contribution are to be made by the limited • • • right. character of the business. namely. as will be discussed hereunder. Hall.Y. if given. and that generally non-contracting parties. are not bound by said contractual debts and obligations under the principle of “privity” or “relativity” under general contract law.L. the distinguishing feature of a limited partnership is that it has through the limited partners been able to institute a form of “limited liability. time.” in that the limited partner as such shall not be bound by the obligations of the partnership.E. a limited partnership may be characterized as a formal or solemn contract. as to contributions or as to compensation by way of income and the nature of such priority.. 2d 288). to demand and receive property other than cash in return for such contribution. the term of existence. civil interdiction. p. contributions to the partnership. 111 N. Rager. if given. 32. insanity or insolvency of a general partner. on the formalities required of limited partnership under the Uniform Limited Partnership Act. 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. when the contributions of limited partners shall be returned. and the right. share of the profits or the other compensation by way of income which each limited partner shall receive by reason of his contribution.R. name and residence of each of the partners. and the right. and (2) File such Certificate with the SEC Hoefer v. Ruzicka v. principal place of business.”) carries more the doctrine of “no liability” for limited partners. partnership name. explains the rationale in American jurisdiction. of the remaining general partner or partners to continue the business on the death. 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. U. 305 N. 2d 878.Y.2d 230 (1966). As a species of contract. 2d 732. But frankly. b.A. mutual agency. 282 N. and the right. Vol. if agreed upon. the debts and obligations of the partnership pertain to it as a separate juridical person. which shall contain the following provisions describing or designating the: • • • • • • partners. 2. Lanier v. retirement. thus— . if given.549-552. 191. and the right to manage partnership affairs. 39 A. thus: (1) Sign and swear to a Certificate of Limited Partnership. adding thereto “Limited”. delectus personae. Bowdoin. As will also be shown in the discussions hereunder. limited partners do assume limited liability pertaining to their contributions and partnership assets held them under Article 1858. the use of the term “limited liability” for limited partners is more appropriate since. and perhaps more accurately reflects that in civil law.L. 24 N. Having complied with the formalities mandated by Partnership Law to form such a medium of doing business. 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. 8. and failure to so comply with the formalities only brings about the creation of a general partnership. of a limited partner to substitute an assignee as contributor in his place.

) But neither of these requirements have been fulfilled. v. 80 A..blogger. 290 F. Halldecision. 197 Md. 2 Utah 2d 85. It naturally follows that in order to obtain the privilege of limited liability.. including the amount or nature of their contributions.2d 366 [1967]). 499. whatever the form adopted. Jo Chung Cang v. (Ibid. 2d 854. Nonetheless. 672. held: To establish a limited partnership there must be. 72 S.Bisno v.S. Partnership Sec. 767. (Same ruling in Lowe v. p. v.S.” 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. Lindsay. and general partners are bound by the contractual commitment under the partnership agreement to hold the limited partners liable for partnership debts and obligations only to the extent of their contributions. 1064) It can thus be concluded. p. C. 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. Sec. 142 (1923).2d 560 [9th Cir. To the same effect is the ruling in Jo Chung Cang v. Legum.” 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.com/post-create. Mud Control Laboratories v. 122[2]._ftn2 under the terms of the Code of Commerce which also required execution of public document and formal registration of the certificate of limited partnership. The indicated provisions under Article 1846 which would provide for a right “if given.2d 906. R. 142 [1923])http://www. 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. pp.. Oglesby Co. Arizona Power & Light Co..427 P. 665. the issue as to “substantial compliance” has no relevance in resolving issues inter se among the partners. 412. L.. Covey. 150-151. but a general partnership in which all the members are liable. are essential contents of the Certificate of Limited Partnership. are concerned . inter se. Under the circumstances of this case. GILMORE. arts. In other words. 475) Obviously. . particularly under the Hoefer v. 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. Pacific Commercial Co. 148. 68 C. citing MECHEM. A limited partnership that has not complied with the law of its creation is not considered a limited partnership at all. Under American jurisprudence. 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. Hyde. 269 P. 595. at least one general partner and the name of at least one of the general partners must appear in the firm name. Pacific Commercial Co. 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. With respect to the contents.. 112 Va. under the Code of Commerce then in place. (45 Phil. and who is or are the limited partners. 45 Phil. one must conform to the statutory requirements. and 40 Am. .x x x. 20 R.Jur. 506. agreements containing all the essential requisites are valid as between the contracting parties. (Code of Commerce. that the institution of who is or are the general partners. 146. 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.E. 450. . ELEMENTS OF PARTNERSHIP. the formal requirements to establish a limited partnership are relevant only insofar as establishing the limited liability rights against third parties. 1006. p. (Citing Gilman Pain & Varnish Co. at pp. Partnership. The general rule is. 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. PARTNERSHIP. and that. . while the failure to register in the commercial registry necessarily precludes the . . The main purpose of the statutory regulation is to ensure the limitation on the liability of limited partners. .J.g?blogID=6336731883560557810 . 1961].

the fact of non-filing of the certificate of limited partnership does not bring about a limited partnership. Pacific Commercial Co. 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.2d 906. which may or may not include the name of one or more of the partners. can hold the limited partner liable beyond his contribution. v. False Statement in the SEC Certificate Under Article 1847 of the Civil Code. 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. Legum. (Ibid. such failure cannot prejudice the rights of third persons. 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. The language covering liability under Article 1847 would indicate that a limited partner who signs the Certificate knowing provisions therein to be false. .. under Article 1815 (which is the first article under the section denominated as “Obligations of the Partners with Regard to Third Persons”). it is not required as an essential element to establish a limited partnership.(45 Phil. Name of Limited Partnership Like in the ordinary partnership. among the contents of the Certificate of Limited Partnership should be “The name of the partnership. (Stowe v. if the Certificate contains a false statement. because only third parties who relied upon such false statements. But it does not create general unlimited liability. 142 [1923]) “To establish a limited partnership. may thus become unlimitedly liable to a person who suffers loss by reason of such false statement. as found by Jo Chung Cang v. and what is imposed is to add the word “Limited”. the determination of the liabilities assumed by partners and non-partners. . 22. 146 and 148 of the Code of Commerce. in other words. at least. adding thereto the word ‘Limited’. under Articles 122(2). American jurisprudence requires that the filing of the Certificate of Limited Partnership with the proper government agency (the SEC in our case).L. Marrilees.Solomont v.2d 368. Rptr. there must be. must be done within a reasonable time. c. In fact. that the firm name should contain the names of the general partners. . or any of them. 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. 44 P.” Today. One of the key elements under Partnership Law by which limited partners are to be accorded their limited liability rights. 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. 29 A. 27 [1966]) In our jurisdiction. 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. or any of them. 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.members from enforcing rights acquired by them against third persons.R. and have suffered loss thereby. “Every partner shall operate under a firm name. 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. d. Polk Development Co. and what is deemed constituted is a general partnership. 153). one general partner and the name of at least one of the general partners must appear in the firm name. and they do not participate in its management nor are they agents of the partners and of the partnership.” This can only lead to the conclusion that under our present Law on Partnerships. Under Article 1844.” In contrast. it is not critical under the terms of Article 1844 that the firm name should contain the names of the general partners. in the American decision in Gilman Paint & Varnish Co. 2d 286 (1951). 80 A. is very much tied-up with the name given to the partnership venture.. Thus. 54 Cal. at p.

does it qualify to be a limited partnership? We believe this is only a formal and not a substantial requirement.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. separate and distinct from its members. under Article 1846. and the legal basis upon which its creditors can enforce its obligations and other contractual commitments. 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. then it becomes more so in the case of a limited partnership. Contribution of service by a limited partner is not allowed because to allow otherwise would be to place a limited . . since with the filing the SEC of the Certificate of Limited Partnership indicating therein a partner as a limited partner. the partner was a general partner. The problem with this rule of estoppel is that it would be difficult to imagine how such a partnership creditor could claim good faith. and the intramural arrangements between and among the partners. Article 1846 relies upon the principal of “without actual knowledge. 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. The firm name of a partnership is the essence by which to enforce its standing in its contractual relationship. would it break the limited liability rights of the expressly designated limited partners therein. We believe that in such a case. What happens if the firm name adopted by limited partnership formally in the Certificate of Limited Partnership does not contain the word “Limited”. 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. since the Certificate clearly indicates who are the limited partners. there is no “substantial compliance” with the requirements under Article 1846. it is provided that the “surname of a limited partner shall not appear in the partnership name. As the firm name is critical to partnerships in general. be stripped of their limited liability right. Again. unless it happens to be the surname of a general partner or that prior to the time when the limited partner became such. would amount to constructive knowledge of such fact binding on the whole world. and distinguishable from other firms and juridical persons. even when formally registered with the SEC. Contributions to the Limited Partnership Article 1846 of the Civil Code expressly provides that the contributions of a limited partner may be cash or other property. the business had been carried or under a name in which such surname appeared. Without the firm name. It would seem therefore that the default rule in Philippine Partnership Law is that articles of partnership and certificates of limited partnership. 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. What happens if the sworn Certificate on file with the SEC does not provide at all for a firm name. 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. much less to determine the extent of the sharing and division of powers among the partners. 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. . Does Partnership Law not intend that compliance with the mandatory requirements of execution. but not service. and there is no obligation on the part of the dealing public to determine the legal status of the partnership. Thus. insofar as the dealing public is concerned. As a consequence of the breach of such prohibition.” to the exclusion of the principle of constructive knowledge. and may be a basis by which partnership creditors may be defrauded. do not constitute a form of constructive notice to the public dealing with such partnerships. The firm name of every partnership is the very means by which its existence as a juridical person. “[a] limited partner whose surname appears in a partnership name . which cannot strip the limited partners of their right to claim limited liability. it is nearly impossible to determine where those four corners lie. 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. e.

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 partnership has ceased to be a limited partnership. if the Certificate of Limited Partnership is formally cancelled? In the case of dissolution.” has been taken to mean that it is imperative that the contributions of limited partners must be given prior to or at the time of the execution of the Certificate of Limited Partnership. he will be accorded under the terms of the Certificate of Limited Partnership. In other words. for the penalty for such false statement is a special one provided under Article 1847 which does not convert him into a general partner.” should be interpreted to mean that by the very position of being a limited 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. When Certificate Cancelled or Amended (1) When Certificate Cancelled Under Article 1864. at p. 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. the Certificate need only be amended. 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. What happens in the two covered cases (dissolution and no more limited partner remaining). 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. Nevertheless. Actually “compensation by way of income. the Certificate shall be cancelled when the partnership is dissolved or all limited partners cease to be such.” although allowed under the law. The language of Article 1844(1)(f) which requires that the Certificate of Limited Partnership should indicate “The amount of cash and a description of and the agreed value of the other property contributed by each limited partner. 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. then he not only becomes unlimitedly liable. in maintaining the preference of creditors to partnership assets. and that the indication of the obligation to give the contribution is not sufficient. and may proceed but only as a general partnership. make him assume the liability of a general partner? We do not think so. such payments shall be considered as part of profit distribution. f.” 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. In all other cases covered below. When the contribution of a limited partner is service or industry. 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. In these two cases. but really becomes a general partner. may prove costly to a limited partner. such “employment arrangements. and only to a person who suffers loss by reliance on such false statement.” This may seem to be a contradictory feature under the Law on Partnership. when it is indicated therein that it has in fact been given. and thereby constitute a breach of the fundamental reason for being accorded limited liability privileges. and not because of any service or industry he will perform. (DE LEONS.partner into the management of the firm. usually caused by the (2) When Certificate Amended Under Article 1864. . but merely makes him personally liable (beyond his promised contribution). periodic payments whether or not the firm is making profits. for the limited partner or partners to pay their contributions at some future time.

becomes insolvent or insane. 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. 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. (g) There is a false or erroneous statement in the certificate. or the return of a contribution. or is sentenced to civil interdiction and the business is continued. thus: . (i) (j) (k) A time is fixed for the dissolution of the partnership. (d) A person is admitted as a general partner. the foregoing provisions must be interpreted to mean that if the certificate is not amended to cover the instances enumerated. (3) Procedure to Amend Certificate Article 1865 provides that the writing to amend a certificate shall: (a) Conform to the requirements of Article 1844 as far as necessary to set forth clearly the change in the certificate which it is desired to make. (b) A certified copy of the order of court ordering such cancellation or amendment. (f) There is a change in the character of the business of the partnership. The General and Limited Partners a. no time having been specified in the certificate. dies. Except for the return of contributions of limited partners. the amendment shall also be signed by the assigning limited partner. without the written consent or ratification of the specific act by all the limited partners. The General Partners (1) Who Is a General Partner in a Limited Partnership? When a limited partnership is duly constituted. then every partner who does not qualify as a limited partner by compliance with the formal requirements mandated under Article 1844. and (c) After the certificate is duly amended. (e) A general partner retires. (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. 2. and (b) Be signed and sworn to by all members. (2) Rights and Powers of General Partners in a Limited Partnership Under Article 1850. the amended certificate shall thereafter be for all purposes the certificate provided in the provisions of the Law on Partnership. 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.(b) A person is substituted as a limited partner. (c) An additional limited partner is admitted. A certificate is amended or cancelled when there is filed for record with the SEC: (a) A writing accomplished in accordance with the provisions for cancellation or amendment of the certificate. 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. or 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. is deemed to be a general partner and subject to the unlimited liability for partnership obligations. and when a limited partner is to be substituted. then such changes cannot be given legal affect as between and among the partners and the public.

Notice that the nature of the six (6) instances enumerated under Article 1850 would require unanimous written consent or ratification by all the limited partners because they go into either of two matters: (a) would contravene the contractual stipulations with the limited partners (“limited partners must be protected in their contractual rights”). limited partners have no voice in partnership affairs. because insofar as third persons dealing in good faith with the partnership. Thirdly. binding and enforceable. 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. admit an additional limited partner. although the act of the general partners in relation to any of the six instances covered by Article 1850 would be void without the written consent or ratification of all the limited partners. (c) Confess a judgment against the partnership. Otherwise.” the same cannot be interpreted to mean that when the right to do so is given in the certificate. or (c) would undermine the fiduciary duties of the general partners to manage the partnership enterprise themselves for the limited partners. the declaration refers to intra-partnership issues. Three things must be noted carefully from the provisions of Article 1850. unless the right so to do is given in the certificate. thus – (a) Assign a partnership property in trust for creditors or on the assignee’s promise to pay the debts of the partnership. the enumeration of the instances under Article 1850 which would require written consent or ratification of all the limited partnership to be valid. he or she does not become a limited partner. 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. 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. (b) would affect the very commercial reason by which they agreed to become passive investors: undermines the partnership business venture. “unless the right to do so is given in the certificate.(a) Do any act in contravention of the Certificate. which the Certificate of Limited Partnership is. For even when such right is granted. if the Certificate is not amended to include formally the additional limited partner. the admission of a new limited partner no longer requires the consent of all the limited partners. all the limited partners. outside of the enumerated instances under Article 1850. or assign their rights in specific partnership property. and if their signature to the amendment of the Certificate cannot be obtained. the lack of consent or ratification by the limited partners. 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. cannot be a basis by which they cannot treat their contracts with the partnership as valid. Therefore. . (e) Admit a person as a general partner. The rest of the enumerated instances under Article 1850 affect substantially the partnership business enterprise. Firstly. In other words. and therefore would require unanimous consent or ratification by the limited partners.” which includes two of the instances enumerated in Article 1850. (d) Possess partnership property. (b) Do any act which would make it impossible to carry on the ordinary business of the partnership. admit a general partner. The real advantage granted by having a specific provision in the Certificate allowing the admission or substitution of limited partners is that the same can be done even against the wishes of the limited and general partners. which requires the written consent of all the partners. and would be exposed to the unlimited liability of a general partner. then there is basis to go to court to obtain an order granting such amendment of 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. Secondly. anything that affects the terms of the solemn contract. for other than a partnership purpose. or ratification in each transaction by. (f) Admit a person as a limited partner.

not only against the partnership and the other partners who did not consent.(b) Dispose of the goodwill of the business. and consequently do not act as agents to one another. Only two (2) instances are common to both Articles 1818 and 1850. is the legal basis of such fiduciary relationship that of principal and agency? There seems to be little doubt that the limited partners do not have any rights of management. individually and collectively. and third parties have no right to expect that the same is within the power of any one or more. whether general or limited. (Article 1789.” Must we therefore presume that every general partner in a partnership is saddled with the same obligations. namely: (a) Do any other act which would make it impossible to carry on the ordinary business of a partnership. to enter into. of being disqualified from engaging in any business venture. because such acts or transactions are not deemed to be in the ordinary course of partnership business. and the general partner or partners on the other hand. (e) Submit a partnership claim or liability to arbitration. 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. the acts done would be void. (d) Enter into a compromise concerning a partnership claim or liability. to the limited partnership and to all the partners. a general partner who is a capitalist partner is saddled with the same fiduciary duty of loyalty. of the partnership itself. and has the same duties and fiduciary obligations. be subject to all the restrictions and liabilities of a partnership without limited partners. as those prevailing in a non-limited partnership arrangement? Thus. (Article 1789. since the act of the agents (the general partners) would be equivalent to the act of the principal (the limited partners). to be valid and binding? The difference in the matters pertaining to Article 1818 is that without the requisite unanimous consent. 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. It is our proposition that the fiduciary relationship that arises between the limited partners on one hand. . Civil Code of the Philippines) While there is no doubt that the general partners. (3) Duties and Obligations of General Partner Article 1850 provides that “A general partner shall . which can be considered to be the properties and the business enterprise of the partnership itself. and (b) Confess a judgment against the partnership. actually arises more from that of business trust: that the general partners become in effect the trustee for the limited partners. but expressly enumerating the six (6) instances under Article 1850 of when the written consent or ratification of all the limited partners is required. that all the other instances granted under Article 1818 would only need the consent of “all the general partners” and do not require the consent of the limited partners. Not only does the trustee-beneficiary not only support the existence of a fiduciary relationship between the general partners and the limited partners. as well as being agents of the partnership. rather than being borne out by an agency relationship. and (f) Renounce a claim of the partnership. but not all of the partners. the management over the corpus (the properties and business enterprise of the partnership) are placed in the hands of the . . although the general partners are mutual agents to one another. in that he cannot engage in any business that conflicts with that of the limited partnership. (c) Confess a judgment. and of the general partners. but validates the structure of management and limited liability existing in the limited partnership setting: that as trustees. owe fiduciary duties to the limited partners in a partnership setting. but even as to third parties who dealt on the other side of the transactions. On the other hand. for that legal relationship would violate the rule under Article 1848 that limited partners cannot involve themselves in the management of the partnership affairs. Do we take it to mean that in a limited partnership. who assume the role of being beneficiaries to the corpus.

no member of a partnership shall be considered a limited partner. when he learns that he has not been duly instituted as such. Therefore. 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. the thesis would explain why in areas covered under Article 1818 which do not fall within the enumerations under Article 1850. 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. that he then becomes liable as a general partner. and thereby can engaged in a business that may even compete with that of the limited partnership’s business. he does not have the right or option to contribute service to the partnership. (2) Erroneous But in Good Faith Limited Partner Under Article 1852. 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). provided he undertakes the “acts of good faith” mandated by law. provided that this fact shall be stated in the certificate of limited partnership. (3) When Limited and General Partner at the Same Time Article 1853 provides that a person may be a general partner and a limited partner in the same partnership at the same time. limited partners do not thereby owe any fiduciary obligations to one another. and thereby make the limited partners.general partners. The Limited Partner (1) Who is a Limited Partner? Under Article 1844. b. and if he is not to be bound by the unlimited liability obligations of an ordinary partner in general. and sticks only to exercising the rights of a limited partner. thereby not personally liable for the resulting debts and liabilities of the partnership venture. The foregoing thesis explains the reason why. it is conducted not within the medium of a limited partner. nor (b) be bound by the obligations of such person or partnership. does not by his exercise of the rights of a limited partner: (a) become a general partner with the person or in the partnership carrying on the business. must less to the general partners. 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. It is only when he takes part in the control of the business (as provided in Article 1848). then he must not also partake of any benefits or advantage arising from the purported contractual relationship. and vice versa? It pertains to availing of the rights of a limited partner with respect to his contribution as . his surname cannot be part of the firm name. as mere passive beneficiaries in a trust arrangement. then it can be considered to be a situation where there is a void contract resulting. and severe his relationship with the partnership venture. and thereby void if the solemnities mandated by law have not been complied. or when having realized the mistake in affiliating with the partnership he does not renounce his interests in the partnership profits. Why would a general partner want to be a limited partner at the same time. and under Article 1846. it may be presumed that in a limited partnership setting. Likewise. in a situation where the party acts in good faith believing himself to be a limited partner. and under Article 1845. he does not incur liability of a general partner even as to the partnership creditors. being merely a beneficiary in the partnership trust. unless he is so designated in the Certificate of Limited Partnership duly filed with the SEC. 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. which are acts of ownership. if one becomes a member of the partnership with the intention that he becomes a limited partner. Therefore.

(d) Right to assign his equity interest (Art. 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. unless they are so indicated in the Certificate as being limited partners who assume the role of mere passive investors. or more properly speaking. Under Article 1853. he shall have the rights against the other members which he would have had if he were not also a general partner.Y. which are not available to him as a general partner? Certainly it cannot be “limited liability” rights. 1851[2]). It . thus: “In broad terms.2d 254 (1966). and at a reasonable hour to inspect and copy any of them (Art. share in the profits as it pertains to him as a limited partner. as it defines a limited partnership provides that [t]he limited partners as such shall not be bound by the obligations of the partnership.such. at p. 1843) beyond what they contributed or legally bound to contribute to the partnership’s common fund. 1845). 1851). (b) Right to the return of his contribution (Art. 1848). 1851[3] and 1857). (b) they cannot participate in the control of the partnership business (Art.266 N. If a limited partner violates any of these restrictions. and that partnership creditors have a right to expect that a partner who participates in partnership affair is a general partner. (e) Right to have the partnership books kept at the principal place of business of the partnership. he cannot have any claim for limited liability against partnership debts and claims. Newmark & Co. 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. 1843 and 1848). Since it is a limitation on the cause of action that partnership creditors would ordinarily have against the partners. 1851[1]). and (c) therefore they are prohibited from contributing service or industry into the partnership (Art..” (BAUTISTA. and cannot claim the rights to limited liability. The grant of the limited liability status to limited partners comes at a price. for being a general partner at the same time. beyond the value of their contributions in the partnership venture. (f) Right to have on demand true and full information of all things affecting the partnership. in that: (a) they cannot have their surnames form part of the partnership name (Art. 1851). it may be stated that a limited partner has such rights and only such rights as the law and his contract afford. Perhaps the best way to describe the rights of limited partners. even to those granted expressly by law. the nature and extent. 1846). then matters relating to the application or non-application of the principle of “limited liability” can be raised only by partnership creditors. 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. and a formal account of partnership affairs whenever circumstances render it just and reasonable (Art.” What would those rights be peculiar to him as a limited partner. nonetheless “in respect to his contribution.S. is the way Bautista had summarized the ruling in the American case of Millard v. Thus. may pertain only to the priority right to the return of his contributions. and (g) Right to have the dissolution and winding-up by decree of court (Arts. It should be noted that the feature of limited liability is poised primarily in relationship to the creditors of the partnership venture in that they have a right to expect that all partners are unlimited liable for partnership debts. 1851). he becomes unlimitedly liable as in the case of general partners. Article 1843. even when a limited partner is at the same time a general partner. 425) (1) Right to Limited Liability The essence of the doctrine of “limited liability” is that limited partners who are entitled thereto “shall not be bound by the obligations of the partnership” (Art. (c) Right to receive his share in the profits and compensation by way of income (Art.

either as originally indicated or by way of amendment thereto. 778 (1970). except liabilities to general partners and to limited partners on account of their contributions. do not have a right to demand return of contributions during the life of the partnership? The answer is in the negative. 319 Supp. limited partners. 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. Article 1857 also provides that “[i]n the absence of any statement in the certificate to the contrary or the consent of all members. (c) The certificate is cancelled or so amended as to set forth the withdrawal or reduction. have been paid. and they shall be treated to be at equal footing. but that “[i]f such an agreement is made it shall be stated in the certificate of limited partnership. holds that the general partners cannot. or (b) When the date specified in the certificate for its return has arrived. either for the return of the contribution or for the dissolution of the partnership.” 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.Donroy. or (c) After he has given six months notice in writing to all other members. United States. unless the return of the contribution may be rightfully demanded under the law. nontheless. Weil v. but although the partnership creditors can now hold the limited partners who interefere in partnership affairs as unlimited liable. is not necessarily associated with the dissolution of the partnership. and if they do so. a limited partner may rightfully demand the return of his contribution: (a) On the dissolution of the partnership. Under Article 1857.Supp. or there remains property of the partnership sufficient to pay them. 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. and in the absence of such a statement all the limited partners shall stand upon equal footing. if no time is specified in the certificate. irrespective of the nature of his contribution.is a matter that is not within the right of partners to raise. like general partners. (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. 57 (1961). In the absence of such provision in the Certificate. 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). has only the right to demand and receive cash in return for his . On the other hand. then the ability of the limited partner. 54. as to their compensation by way of income. therefore. when all liabilities to third party creditors have been paid or there will remain enough assets to cover them. when the contribution of each limited partner is to be returned. a limited partner. if agreed upon. 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. seek to enlarge the liability of the limited partners by having ghem declared as general partners with obligations to account. or as to any other matter. (b) The consent of all members is had. but must find itself expressed in the Certificate of Limited Partnership. v. as really a mere passive investor. Ltd. on account of such intereference. Diversified Properties. Return of contributions of the limited partners.” Does that mean that when there is no agreement or provision in the Certificate on this matter. there is no priority between and among the limited partners. 196 F. 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. must commercially be linked to his ability to be able to liquidate his investment within a reasonable time that cannot be linked to the entire “going concern” life of the partnership business venture.

except liabilities to limited partners on account of their contributions and to general partners. which under the specific provisions governing the same can only be done with the written consent of all the partners.contributions. gives the assignee that right. What needs to be emphasized is that the law recognized that limited partners are mere passive investors in the partnership venture. The article also provides that the substitution of the assignee as a limited partner does not release the assignor from liability to . or assets would be provided for their settlement). whether from the partner property or property of a general partner. 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. and paid to the partner by reason of his simply being a partner. if no time is specified in the certificate.” Article 1859 provides that the substituted limited partner has all the rights and powers. the ackwnowledgment of the right of limited partners to have the return of their contribution upon compliance with the 6-month notice rule. 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. provided that after such payment. do limited partners have the right to demand for the return of their contributions even when it is only in cash. even when no such right is provided for in the Certificate of Limited Partnership or outside of dissolution scenario? The answers seems to be in the affirmative because of the separate ground for return provided under Article 1857 “[a]fter he has given six months notice in writing to all other members.” When the partnership creditors’ preference is respected (either because they will first be all paid. (4) Right to Assign Limited Partners Interest Under Article 1859. Even in a limited partnership.” 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 this may seem even when the demand for return does not obtain the unanimous vote of the other partners. and is subject to all the restrictions and liabilities of his assignor.” 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. The term “compensation by way of income. . the partnership assets are in excess of all liabilities of the partnership. 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. . being thereunto empowered by the certificate. a limited partner’s interest in the limited partnership is assignable. for the return of the contribution. 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. 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. for which he can be paid “compensation. (3) Right to Profit or Compensation by Way of Income Under Article 1856.” 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.” But in the end Article 1859 provides expressly that there is a need to amend the certificate.” For even when a limited partner is hired as an employee of the firm. nonetheless. thus: “An assignee becomes a substituted limited partner when the certificate is appropriately amended. this may be treated as participating in the partnership affairs as to make them unlimitedly liable for partnership debts and obligations. It must be understood that the meaning of “compensation by way of income. . and like in an ordinary partnership. it would authorize the withdrawing limited partner to seek court order for the proper amendment thereof. Nonetheless. and not by virtue of the services or industry he renders to the firm. 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. except those liabilities which he was ignorant of at the time he became a limited partner and which could not be ascertained from the certificate.

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. when such consent can be presumed to have been part of the original perfection of the contract of partnership among the parties. after the formation of a limited partnership. and they will be treated as general partners. the partnership or the general partners. the admission of a new limited partner is really equivalent to an amendment or novation of the original or existing limited partnership agreement. then the requirements would have to track the procedure mandated under Article 1865 on the amendment of the Certificate of Limited Partnership. and when a limited partner is to be substituted. to which his assignor would otherwise be entitled. has no right to require any information or account of the partnership transactions or to inspect the partnership books. 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. Requiring the formal amendment of the Certificate of Limited Partnership unnecessary involves the participation of all the other partners (by their written consent or ratification). including the limited partners. more importantly. 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. why would their consent be essential in a decision by the general partners to admit additional limited partners. and for his contributions liabilities under Article 1858.the partnership for false statement in the certificate under Article 1847.” If existing limited partners are more of passive investors in the partnership venture. under Article 1849. This point emphasizes the legal truism that limited partners must be treated in two levels of legal relationship in the partnership arrangement: as passive investors in the partnership venture. Secondly. Since Article 1849 does not provide a particular procedure or voting threshold by which additional limited partners may be admitted into the partnership. 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. or the return of his contributions. because they do not entitle the limited partners to participate in the management of the partnership affairs. without having to obtain the consent of all the other partners. Consequently. . and. 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. which provides that the amending certificate “Be signed and sworn to by all members. he is only entitled to receive the share of the profits or other compensation by way of income. 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. Finally. the amendment shall also be signed by the assigning limited partner. and therefore like the principle governing pre-emptive rights of stockholders under Corporate Law. Article 1859 provides that an assignee who does not become a substituted limited partner. 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. much less to act as agents of one another. 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. the admission of a new limited partner into the partnership also dilutes the proportional share that each of the existing limited partners are to have in the distribution of the net assets of the partnership upon dissolution and winding-up. On the other hand. 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. However. otherwise such partners are not deemed to be limited partners. Finally. If the equity holdings of limited partners in the partnership are impersonal in nature. which under the principle of mutuality in Contract Law. cannot be done without the consent of all contracting parties. which makes the process entirely cumbersome and needlessly costly. and as parties to the contract of limited partnership.

the process of sale and substitution cannot amount to a diminution or prejudice of the rights of any of the other partners, whether general or limited, since limited partners, whoever they may be, practically have no right or power except as it pertains to their proprietary interest in the partnership. In short, the entire rationale of delectus personae is completely irrelevant to limited partners among themselves, and even in their contractual relationship with the general partners. (5) Heirs of Deceased General Partner Succeed Generally as Limited Partners Although there is no direct statutory provision that governs this particular situation, the position has been taken that when the heir of the general partner succeeds to his equity in the limited partnership pursuant to an express provision in the Certificate of Limited Partnership, the presumption is that he succeeds only to his investments, and thereby becomes only a limited partner, unless the succeeding heir expressly manifest that he is succeeding as a general partner, (DE LEONS, at pp. 298 and 300-301) “because he would normally prefer to avoid any liability in excess of the value of the estate inherited so as not to jeopardize his personal assets.” (DE LEONS, at p. 319) The decision in Goquiolay v. Sycip, 9 SCRA 663 (1963), seems to support such position, thus – Besides, as we pointed out in our main decision, the heir ordinarily (and we did not say “necessarily”) becomes a limited partner for his own protection, because he would normally prefer to avoid any liability in excess of the value of the estate inherited so as not to jeopardize hid personal assets. But this statutory limitation of responsibility being designed to protect the heir, the latter may disregard it and instead elect to become a collective or general partner, with all the rights and privileges of one, and answering for the debts of the firm not only with the inheritance but also with the heir’s personal fortune. This choice pertains exclusively to the heir, and does not require the assent of the surviving partner. (Ibid) We do not agree with such position. The institution of limited partnership is solemn or formal under our Partnership Law, and no person becomes a limited partner, whether by the power of assignment provided under the Certificate, or by the power of substitution, unless the Certificate is formally amended to so name the assignee or the substitute, as a limited partnership. Consequently, in a general partnership, when the articles of partnership provide expressly that a deceased partner shall be substituted by his heirs, the heirs do not become partners, unless formally accepted into the partnership arrangement under the doctrine of privity or relativity applicable to partnerships as embodying contractual relationship. Only when the succeeding heirs confirms that he takes more than just the equity rights of the deceased partner and actually steps into the shoes of the deceased partner thus he even become a partner, and in that case a general partner. In order for him to come in as a limited partnership, there is a need to formally adopt a Certificate of Limited Partnership as provided by Article 1844. On the other hand, in a limited partnership scenario, where the Certificate of Limited Partnership provides for substitution of a general partner by his heir in the event of death, it is hard to see how the automatic application of such provision would thereby make the heir a partner at all, whether limited or general partner. Since partnership relationship is essentially contractual in nature where consent is the essence to make one a partner, then an heir succeeds only to the equity rights of the deceased general partner and unless he formally consents to become a partner, then he does not become one, whether general or limited partner. In addition, if such consent is obtained, whether expressly or impliedly, from such heir, in the absence of expressly choosing to become a limited partner, the general rule should be that he becomes a general partner by his acceptance into the partnership. To become a limited partner, by succeeding a general partner, requires not only indication that one chooses to join only as a limited partner, but actually requires compliance with the formalities covering the amendment of the Certificate of Limited Partnership, without which one becomes a general partner subject to unlimited liability. This position is bolstered by Article 1859 which provides that even when there is a specific provision in the Certificate allowing a limited partner to substitute another person in his stead, such substitution does not become valid (i.e., the substituted partner does not become a limited partner), unless there is a formal amendment to the Certificate. When such solemnities are required

when a limited partner is substituted in his stead, it is hard to see why when a general partner dies and is substituted by an heir; the ipso jure effect is for the substitute to be a limited partner. (6) Limited Right as to Partnership Affairs Article 1851 provides that a limited partner shall have the same rights as a general partner only to: (a) have the partnership books kept at the principal place of business; and to inspect and copy them at reasonable hours; (b) have on demand true and full information of all things affecting the partnership, and a formal account of partnership affairs whenever circumstances render it just and reasonable; Under Article 1854, a limited partner may loan money to, and transact other business with, the partnership without adverse consequences to his standing as a limited partner and his right to demand only limited liability exposure. When he is not also a general partner, a limited partner may receive on account of resulting claims against the partnership with general creditors a pro rata share of the assets. Nonetheless, in all these cases, a limited partner shall not: (a) receive or hold as collateral security any partnership property; or (b) receive from a general partner or the partnership any payment, conveyance, or release from liability, if at the time the assets of the partnership are not sufficient to discharge partnership liabilities to persons as general or limited partners. The violation of any of the immediately foregoing prohibitions shall constitute fraud on the creditors of the partnership. (7) Right to Dissolve the Limited Partnership Under Article 1857, a limited partner may have the partnership dissolved and its affairs wound up when: (a) he rightfully but unsuccessfully demands the return of his contribution; or (b) The other liabilities of the partnership have not been paid, or the partnership property is insufficient for their payment, and the limited partner would otherwise be entitled to the return of his contributions. c. Obligations of Limited Partners (1) On Original Contributions to the Partnership Aside from the prohibition against giving service as contribution to the limited partnership (Art. 1845), a limited partner is liable to the partnership for the difference between his contribution as having been made and for any unpaid contribution which he agreed in the certificate to make in the future at the time and on the conditions stated therein (Art. 1858). (2) On Additional Contributions Under Article 1844(1)(g), a limited partner may be obliged during the life of the partnership to give additional contribution if such obligation is provided for in the Certificate of Limited Partnership. The default rule therefore is that in the absence of a provision in the Certificate, limited partners cannot be compelled to give additional contribution to the partnership. Do the provisions of Article 1791, which obliges a partner to sell his interest to the other partners in the event such selling partner refuses to contribute additional share to the capital to save the partnership from the imminent loss of its business? The author’s position is that the provisions of Article 1791 cannot apply to limited partners for their suppletory application to limited partners would ran contrary the basic principle that limited partners are assured, so long as their remain within their passive role of investors, be made to assume greater risk or additional loss arising from the operations of the partnership business, beyond what they have contractually committed to contribute. (3) On Returned Contributions Article 1858 provides that “[w]hen a contributor has rightfully received the return in whole or in part of the capital of his contribution; he is nevertheless liable to the partnership for any sum, not in excess of such return with interest, necessary to discharge its liabilities to all creditors who extended credit or whose claims arose before such return.” (4) Liable as Trustee of the Partnership Under Article 1858, aside from the fact that a limited partner is liable to the partnership for his unpaid contributions when it has

become due under the terms of the certificate, he would become liable as a trustee for the partnership for: (a) specific property stated in the certificate as contributed by him, which was not been delivered or wrongfully returned to him; (b) money or other property wrongfully paid or conveyed to him on account of his contribution. The foregoing liabilities of a limited partner can be waived or compromised only by the consent of all members, and provided it shall not affect the right of a creditor of the partnership who extended credit or whose claim arose after the filing and before a cancellation or amendment of the certificate, to enforce such liabilities. d. Fiduciary Duties of Limited Partners Are limited partners, being merely passive investors into the partnership business enterprise, bound by any fiduciary obligations and duties to the limited partnership and to the other partners? There is no doubt that general partners owe fiduciary duties not only to one another under the principle of mutual agency, and to the limited partners on the consideration that general partners act as agents (i.e., trustees) for the limited partners. On the other hand, by definition, limited partners do not, and cannot participate in the management of the partnership affairs, and therefore do not act as agents for one another, for the general partners, nor for the limited partnership itself. Not assuming the position of agents in the partnership arrangement, limited partners are not bound by fiduciary obligations. Therefore, it has been posited by writers, such as the De Leons, that while a capitalist general partner cannot engage in competitive business with the partnership business, a limited partner is not prohibited from engaging in such competitive business, thus: “In the absence of statutory restrictions, a limited partnership may carry on any business which could be carried on by a general partnership.” (DE LEONS, at p. 301). The SEC has ruled that limited partners that are foreign corporations are not deemed to be doing business in the Philippines (SEC Opinion, 06 August 1998), which supports the position that limited partners are not deemed to participate in management of the business enterprise, nor do they constitute mutual agents to one another or are they deemed agents representing the limited partnership. e. General Lack Standing for Partnership Suits Under Article 1866, a contributor, unless he is a general partner (which means that “contributor” covers a limited partner), is not a proper party to proceedings by or against a partnership, except where the object is to enforce a limited partner’s right against or liability to the partnership. 3. Dissolution and Winding up of Limited Partnership a. Causes of Dissolution Under Article 1860, the retirement, death, insolvency, insanity or civil interdiction of a general partner dissolves the partnership, but not that in the case of a limited partner. But even in those cases the partnership is not dissolved if the business is continued by the remaining general partners: (a) under a right so to do stated in the certificate; or (b) with the consent of all members. Under Article 1861, in case of death of a limited partner, his executor or administrator shall have all the rights of a limited partner for the purpose of settling his estate, and such power as the deceased had to constitute his assignee a substituted limited partner. In turn, the estate of the deceased limited partner shall be liable for all his liabilities as a limited partner. Under Article 1862, on due application by any creditor of a limited partner, and without prejudice to other existing remedies, the courts may charge the interest of the indebted limited partner with payment of the unsatisfied amount of such claim, and may appoint a receiver, and make all other orders, directions, and inquiries which the circumstances of the case may require. Such interest may be redeemed with the separate property of any general partner, but may not be redeemed with partnership property. Why is this so?

and to general partners. of the partnership business enterprise. the limited partners do not participate in the management of the affairs of the business enterprise. The return of capital itself is not the priority.” JOINT VENTURES ________________________________________________ .” than to “(d) Those owing to partners in respect of profits. the partners come together as a group of contractually bound “sole proprietors.It should also be noted that upon the declaration of insanity of the general partner. after having paid all claims of partnership creditors. (c) Those to limited partners in respect to the capital of their contributions. in the order of priority as provided by law. (b) Those to limited partners in respect to their share of the profits and other compensation by way of income on their contributions. the capital contribution is intended to be the main source of claim of partnership creditors as against the limited partners. they come in only as passive investors. rather than management. Why is the rule different when it comes to a limited partnership? b.” where the right to manage and participate in the affairs of the partnership business enterprise is the main focus. Article 1863 specifically provides that “[s]ubject to any statement in the certificate or to subsequent agreement. Note should be taken that the order of priority in the distribution of the assets of the limited partnership in the event of dissolution and winding-up provides priority to the claims of partners “as to their share in the profits and compensation by way of income. in settling accounts after dissolution.” over their claims “in respect to capital. the ability to participate in profits is also a main focus in non-limited partnership set-up. and the limited partners on the other hand.” Why the difference in preference when it comes to dissolution of a limited partnership? The difference in liquidation priority among partners in a limited partnership shows that the primary reason for the institution of a class of limited partners is that of “investment”. (d) Those to general partners other than for capital and profits. In a limited partnership scenario. (e) Those to general partners in respect to profits. Settling of Accounts Under Article 1863. give preference ranking to “(c) Those owning to partners in respect of capital. and therefore. the main nexus of the relationship between the general partners on one hand. and in respect to their claims for profits or for compensation by way of income on their contribution respectively. in order to be entitled to the feature of “limited liability”. it would constitute a cause for the dissolution of the limited partnership. except those to limited partners on account of their contributions. the priority for the remaining assets of the limited partnership would have to go to “[t]hose to limited partners in respect to their share of the profits and other compensation by way of income on their contributions.” This actually is the reverse order in the general rules on distribution of partnership assets upon dissolution under Article 1839(2). limited partners share in the partnership assets in respect to their claims for capital. for indeed under the limited liability rule. (f) Those to general partners in respect to capital. Whereas. mainly focuses on the profits that would be earned from the capital contribution of the limited partners. which in its ranking of the liabilities of the partnership in order of payment. That is perhaps the main reason why upon dissolution and winding-up of a limited partnership. in proportion to the respective amounts of such claims. nonetheless. 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. the liabilities of the partnership shall be entitled to payment in the following order: (a) Those to creditors.” before“[t]hose to limited partners in respect to the capital of their contributions.

nor any other authority. and other energy operations under joint venture arrangements. although they have been recognized in jurisprudence and commonplace in commercial ventures. Take the 1954 decision of Tuason v. with the intention of dividing the profits among themselves. the acts of working together in a joint project. or structuring partnership arrangements between foreign investors and their local partners in the pursuit of local projects in the Philippines. or public policy (Article 1306. and duty. b. Discussions on joint ventures first appeared as a sort-of esoteric medium of doing business in Philippine jurisprudence. citing 2 Fletcher Cyc. joint ventures formed for the purpose of engaging in petroleum. morals. In Kilosbayan. “person-oriented” or even “personality-oriented.” (at p. (At pp. thus: Joint venture is defined as an association of persons or companies jointly undertaking some commercial enterprise–generally all contribute assets and share risks. public order.. 95 Phil. Joint Ventures Are a Species of Partnerships The treatment of joint ventures today has come full circle. coal. provided that they are not contrary to laws. 106 (1954).Tuason does not explain why there was a difference in treatment of corporate involvement in partnerships as compared to that when it come to joint ventures. This “partiality” for joint venture arrangements. The tendency has therefore been to ascribe to joint venture arrangements certain legal allowances that would never been accepted in the case of “strict” partnership arrangements. where the Supreme Court upheld as applicable the old adage in American Corporate Law that “though a corporation has no power to enter into a partnership. and consequently where the essence of partnership principles has become more lucent. Under the National Internal Revenue Code of 1997 (NIRC). Bolaños. it may nevertheless enter into a joint venture with another where the nature of that venture is in line with the business authorized by its charter. Reiterated in Information Technology . geothermal. good customs. and other energy operations under an operating or service contract with the Government. Nature of Joint Venture in Philippine Setting a.R. which would otherwise not be applicable in a purely corporate vehicle arrangement because of the restrictive rules of the Corporation Code and jurisprudence on Philippine Corporate Law. v. since the contractual nature of the arrangement allows the parties flexibility in adopting special rules and procedures covering their situations. Guingona.1. the Court adopted Black’s definition of a joint venture. may be attributed to the perception that the joint venture is a more project-oriented medium when compared to the partnership which tends to be branded with the attributes of primarily being contractual relationship bounded by the doctrine of delectus personae. which may be altered by agreement to share both in profit and losses. both covering local transactions. are exempt from corporate income tax. 1082).. Introduction It is fitting that a course in Philippine Partnership Law should end with the section on joint ventures. v. with an original impression that they were a commercial association different from partnerships. 80 A. and thereby being more “party-oriented”.. joint venture agreements fall generally within the realm of Contract Law. If we pursue the position that joint ventures must be treated differently from partnerships then it can be said that apart from specific reference in the National Internal Revenue Code.” then a partnership is created. clauses. in that the prevailing school of thought in the Philippines is that joint ventures are a species of the partnerships falling within the definition under Article 1767 of the New Civil Code. New Civil Code). geothermal. Joint venture arrangements have particularly been the more popular medium when foreign participation is involved in local projects. a right to direct and govern the policy connected therewith. no model joint venture agreements have been published by the Securities and Exchange Commission (SEC). of Corp. but joint venture arrangements have become fairly common medium for doing business or undertaking projects in the Philippines. when it comes to large infra-structure undertakings involving the resources of big corporations. or industry to a common fund. 232 SCRA 110 (1994). which provides that when “two or more persons bind themselves to contribute money. terms and conditions. Consequently. 1043. citing Black’s Law Dictionary. 143-44. or those formed for the purpose of undertaking construction projects. Board of Investments (BOI). 109. which still has remnants in sprinkling statutory provisions. coal.” Although it may not be readily apparent.L. property. Weston. The Philippine Government encourages the pursuit of construction projects and petroleum. quoting from Wyoming-Indiana Oil Gas Co. Inc. for it is in this field where Supreme Court decisions have become truly transcendent when it comes to protection of national interests or upholding the sanctity of contractual commitments. there is no statutory provision that formally governs directly joint ventures. Since the prevailing contract rule in the Philippines is that parties to a contract may establish such stipulations. It requires a community of interest in the performance of the subject matter. as they may deem convenient. 2. Joint Venture Arrangements Primarily Governed by Partnership Law Principles There was a time when joint ventures were treated separately from partnerships.

412 SCRA 10 (2003). The position that a joint venture is a species of partnerships has been upheld by the Court in Aurbach v. or even a representation by them that they have come together in common venture. Following-up on the Kilosbayan’s definition of a joint venture. cannot generally enter into a contract of partnership unless authorized by law or its charter. and a particular partnership may have for its object a specific undertaking. Commission on Elections. 419 SCRA 141 [2004]) The foregoing definition of a joint venture essentially falls within the statutory definition of what constitutes a partnership. or authority given by the other companies authorizing the declaring company that to represent or bind them in a collective basis. a joint venture as a firm can enter into contracts and own properties in the firm’s name. . 438-439) (1) Partnership Characteristics of Joint Venture Arrangements Since a joint venture is a species of partnerships. governed by the Law on Partnership. the Court ruled – “When the parties have entered into a Joint Venture Agreement. even one seeking to establish a joint venture arrangement. the Court inInformation Technology Foundation of the Philippines v. a joint venture is a form of partnership and should thus be governed by the laws of partnership. That means that no special form. The main distinction cited by most opinions in common law jurisdiction is that the partnership contemplates a general business with some degree of continuity. In Heirs of Tan Eng Kee v. the Court in JG Summit Holdings. then it would be a joint venture arrangement. (cf Art. thus: (a) It constitutes a juridical personality separate and distinct from that of each of the co-venturers. in which case a public instrument shall be necessary. with the intention of dividing the profits among themselves. since under the Civil Code. (at pp. 551 SCRA 428 (2008). and as such is to be governed by the laws on partnership. InPrimelink Properties and Dev. like petitioner. and held that the involvement of several companies in a large project would not constitute them into a consortium nor a joint venture when nothing shows a community of interest. . considered a “consortium” to be an association of corporations bound in a joint venture arrangement. profits and losses. Court of Appeals.” the Court held that when the essential elements of a partnership are present. Civil Code) (c) Even if a co-venturer transfers his interest to another. 1783. Civil Code) It would seem therefore that under Philippine law. 341 SCRA 740 (2000).” (at p. and is thus of a temporary nature. Therefore. (Art. there is no doubt that the incidents imposed by the Law on Partnerships on every kind of partnership must befall every joint venture arrangement. 467) With joint venture arrangements being clearly classified as a form of particular partnership.” (Article 1771. 1824 to 1826. Under a contract of partnership. the transferee does not become a co-venturer to the others in the joint . Civil Code) (b) Each of the co-venturers would be liable with their private property to the creditors of the joint venture beyond their contributions to the joint venture. in Philex Mining Corp. or industry to a common fund. and 1839. Court of Appeals. Corp. no evidence was adduced covering a joint venture agreement. v. two or more persons bind themselves to contribute money. property. a partnership may be particular or universal. it has been held that it may enter into a joint venture which is akin to a particular partnership relationship: x x x Perusal of the agreement denominated as the ‘Power of Attorney’ indicates that the parties had intended to create a partnership and establish a common fund for the purpose. emphasis supplied) Without qualms or equivocation. Sanitary Wares Manufacturing Corp. they have entered into a joint venture arrangement which is a form of partnership. although the corporate parties executed the instrument as a “Power of Attorney” and referred to themselves as “principal” and “manager. Inc. Only recently. While a corporation. Commission of Elections. The Court found in that case that apart from a short and unsupported statement by one of the companies that it was representing a consortium. 493 SCRA 444 (2006). while the joint venture is formed for the execution of a single transaction. 419 SCRA 141 (2004).Foundation of the Philippines v. Civil Code). treated a joint venture arrangement as a partnership. v. thus An examination of the “Power of Attorney” reveals that a partnership or joint venture was indeed intended by the parties. a sharing of risks. This observation is not entirely accurate in this jurisdiction. Commissioner of Internal Revenue. of the New Civil Code provides specifically that the partnership has a juridical personality seprate and distinct from that of each of the partners even in case of failure to comply with the registration requirements of law. 1816. the Court observed that a joint venture is akin to a particular partnership. Other reasons as to why a joint venture must be considered a species of partnerships is that the Law on Partnerships provides that “A partnership may be constituted in any form. v. thereto. 180 SCRA 130 (1989). Article 1768. it would have the following characteristics of a partnership. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine. (Ibid. is necessary to give rise to a partnership. where it held that: . except where immovable property or real rights are contributed.. Lazatin-Magat. . . 1774. 1817. (Arts.

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. Later. a partnership since their elements are similar.. 278. allows the board to fully bind the corporation to matters essentially within the boards business appreciation and anticipation. 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. SEC FOLIO 1960-1976. retirement. Bolaños.e. The previous ruling of the SEC on the matter is that a corporation cannot enter into a contract of partnership with an individual or another corporation on the premise that if a corporation enters into a partnership agreement. it must obtain a license to transact business in the country in accordance with the Philippine Corporation Code. Weston. and allowed corporations to enter into partnership arrangements. it necessarily followed that a partnership of corporations should be organized as a “general partnership”. In one opinion. the SEC provided for a clear exception to the foregoing ruling. 1082) Although Tuason does not elaborate on why a corporation may become a co-venturer or partner in a joint venture arrangement.. 1818 to 1823. citing Fletcher Cyc. insolvency. and the nature of the business venture to be undertaken by the partnership is in line with the business authorized by the charter or articles of incorporation. SEC Opinion.. to assume that their directors will conduct the corporate business without sharing that duty and responsibility with others. This is in consonance with the delectus personae principle applicable to partnerships. (SEC Opinion. Sec. it would seem that the policy behind the prohibition on why a corporation cannot be made a partner does not apply in a joint venture arrangement. and the articles of partnership must stipulate that all the partners shall be jointly and severally liable for all the obligations of the partners. 22 December 1966. v. XXVIII SEC Quarterly Bulletin 18 [No. Civil Code) (d) Generally. Civil Code) In Litonjua. and may be likened to. The basis for such prohibition on corporations is that in entering into a partnership. Ed. of Corp.. Philippine jurisprudence had adopted the prevailing rule in the United States that a corporation cannot ordinarily enter into partnerships with other corporations or with individuals. civil interdiction or dissolution of a co-venturer dissolves the joint venture. Under Sec. Litonjua. when the Board of Directors of a corporation evaluate the risks and responsibilities involved. however. a joint venture is generally governed by the law on partnership. 477 SCRA 576 (2005). (SEC Opinion. (Arts. Sept. Corp. 23 February 1994. 80 A. v.. 1830. the Court held that a joint venture is hardly distinguishable from. Repl. which is entirely inconsistent with the policy in Corporate Law that the corporation shall be managed by its Board of Directors. 95 Phil. 1950. they can more or less exercise their own business judgment is determining the extent by which the corporation would be involved in the project and the likely liabilities to be incurred. Being only a particular project or undertaking.venture unless all the other co-venturers consent. 1803. 29 February 1980. Perm. Treatise on Philippine Partnership Law. Jr. in the absence of any notice to the contrary in the articles of incorporation.” Nevertheless. (Art. (Arts. 1994] ) . The situation therefore in a joint venture arrangement. Civil Code) and (e) Death. “where the nature of that venture is in line with the business authorized by its charter. at p. and (c) If it is a foreign corporation. 9) As discussed previously. Rev. documentary stamps of P15. has tended to give joint ventures special treatment not accorded to ordinary partnerships. 3. Special Treatments Given to Joint Ventures Jurisprudence.00 must be affixed on each proxy) (a) The authority to enter into a partnership relation is expressly conferred by the charter or the articles of incorporation of the corporation. 1978 Ed. (b) The agreement on the articles of partnership must provide that all the partners shall manage the partnership. 1804 and 1813. 1043. dated 3 September 1984.. Sr. (Bautista. c. 106 (1954). the co-venturers acting on behalf of the joint venture are agents of joint venture and of each other. 192 of the National Internal Revenue Code. the SEC clarified that the conditions imposed meant that since the partners in a partnership of corporations are required to stipulate that all of them shall manage the partnership and they shall be jointly and severally liable for all the obligations of the partnership. at p.L. and that being a form of partnership. quoting from Wyoming-Indiana Oil Gas Co. citing 6 Fletcher Cyc. 2520). community of interests in the business and sharing of profits and losses. recognized in Philippine jurisdiction the doctrine in AngloAmerican jurisprudence that “a corporation has no power to enter into a partnership. The doctrine is grounded on the theory that the stockholders of a corporation are entitled.” (Ibid.R. Tuason ruled that a corporation may validly enter into a joint venture agreement. provided the following conditions are met: (SEC Opinion. i. it would be bound by the acts of the persons who are not its duly appointed and authorized agents and officers. Tuason v.

the Supreme Court discussed background of the use of joint ventures when it comes to Filipino investors inviting foreign participation in a local project. although the business of pursuing to a successful termination may continue for a number of years. there has been in implicit recognition that such a venture can be pursued merely as a private enterprise with no intention to present a new or separate “firm” or “company”. 753. New Civil Code). the usual rules as regards the . Sanitary Wares Manufacturing Corp. there is a always the danger from such arrangements. the foreign group undermines the local majority ownership and actively tries to completely or predominantly take over the entire company. would necessarily give rise to a partnership (Article 1767. Aurbach v. intend to establish its own sole or monopolistic operations and merely uses the joint venture arrangement to gain a foothold or test the Philippine waters. citing V. New Civil Code). The foreign group may. No separate company office is set-up. 180 SCRA 130 (1989). no formal registration of the enterprise is made with the appropriate government agencies. has affirmed the principle that joint venture arrangements must primarily be viewed as binding contractual commitments. (at p. thus: “Moreover. the SEC dropped the second condition imposed previously. realizing that the second condition actually prevented a corporation from entering into a limited partnership.E. Thus. but the business enterprise will be pursued in the names of the co-venturers through their duly authorized representatives. and would therefore not be held liable (beyond its investment) for debts arising from the acts of the general partners. to the public. or (c) through a joint venture corporation. June 1996]) 3...e. The co-venturers therefore intend their relationship to be primarily governed by the contractual terms agreement upon them in the joint venture agreement. 17 August 1995. Arrangements are formalized where a foreign group becomes a minority owner of a firm in exchange for its manufacturing expertise. Court of Appeals. a. since “there is no existing Philippine law that expressly prohibits a corporation from becoming a limited partner in a partnership. a “Joint Venture Agreement” or a “Memorandum of Agreement” is executed by the co-venturers to provide for the terms of arrangement.. use of its brand names. so to speak. and other such assistance. which it allowed to do so would then be more congruent with the policy that the corporation would then not be held liable for its venture beyond the investments made and determined by its Board of Directors. but not necessarily a joint adventure is limited to a SINGLE TRANSACTION. after the Court held that a joint venture is akin to a particular partnership. XXX SEC Quarterly Bulletin 8 [No. CIVIL CODE OF THE PHILIPPINES ANNOTATED 546 [13th ed. and can be individually liable therefore. underscoring supplied) In such an instance.” In effect. in cases of corporations which come together in co-venture over a particular project. Or the covetousness may come later. a partnership generally relates to a continuing business of various transactions of a certain kind. As the Philippine firm enlarges its operations and becomes profitable. 341 SCRA 740 (2000). (At p. and much less a new juridical person. 1995]. and they can pursue the same through the following formats: (a) informal or contractual joint venture arrangement. (b) by partnership arrangement. the participating merchants can transact business under their own name. Alternative Forms in Structuring a Joint Venture In Aurbach v. to pursue a business enterprise) with the intention of dividing the profits among themselves. with no firm name and no legal personality. Informal or Contractual Joint Venture Arrangement In spite of the peremptory provisions under the Law of Partnerships that any agreement by which two or more persons bind themselves to contribute money. and the risks involved. the SEC. nonetheless. 142) Parties have varied choices of legal forms in planning a joint venture arrangement. and thereby a partnership juridical personality arises “separate and distinct from that of the partners.Lately. However. In a joint account. from the start. 180 SCRA 130 (1989). reconsidered its position and ruled that a corporation may become a limited partner in a limited partnership.. the courts should extend protection especially in industries where constitutional and legal requirements reserve controlling ownership to Filipino citizens. thus — Quite often. (b) Usually. Filipino entrepreneurs in their desire to develop the industrial and manufacturing capacities of a local firm are constrained to seek the technology and marketing assistance of huge multinational corporations of the developed world. PARAS. property or industry to a common fund (i. Sanitary Wares Manufacturing Corp. (SEC Opinion. no separate books of accounts are kept.” (Article 1768. This undermining of joint ventures is not consistent with fair dealing to say the least. in Heirs of Tan Eng Kee v. it distinguished one from the other as follows: (a) A joint adventure (an American concept similar to our joint accounts) is a sort of informal partnership. To the extent that such subversive actions can be lawfully prevented. 1.

provided it will not result in the formation of a new partnership or corporation. where in the operation of a mining concession between two corporations. Act No. as amended by B. they executed merely a “Power of Attorney” and designated one another “principal” (the owner of the concession) and “manager” (the entity that would directly manage development and operations).” (At p. 1169. PCSO entered into a “Contract of Lease” with the Philippine Gaming Management Corporation (PGMC). purported for PCSO to lease the lottery facilities of the latter in order to operate nationally the on-line lottery system known as “lotto”. 42) In order not to be violate such prohibition. in that it actually covered a joint venture arrangement between PCSO and PGMC. under a “contractual joint-venture format. 3. whether domestic or foreign. company or entity. 438-439) It is clear from the ruling in Philex Mining. Commissioner of Internal Revenue. it has been held that it may enter into a joint venture which is akin to a particular partnership relationship: x x x Perusal of the agreement denominated as the ‘Power of Attorney’ indicates that the parties had intended to create a partnership and establish a common fund for the purpose. caused the mining companies the obligation to pay unpaid income taxes in the several millions of pesos. However. Sept. Guingona.. like petitioner. Jr. Blng. at pp. the courts would have no choice by to impute the legal relationship of a partnership or joint venture arrangement when the essential elements of a partnership are present. The Court refused to consider the relationship between the parties as debtor-creditor. holding that advances made by a co-venturer in the joint venture business which cannot be recovered cannot be treated as bad debts and deducted for income tax purposes. 551 SCRA 428 (2008). a joint venture agreement of two corporations need not be registered with the SEC. While a corporation. or as principal-manager. 14 App. at p. the purported lease arrangement violated the statutory prohibition. with the intention of dividing the profits among themselves. They also had a joint interest in the profits of the business as shown by a 50-50 sharing in the income of the mine. principal-agent. Under a contract of partnership. but when controversy arises by which rights and obligations have to be determined. citing O’Hara v. 1995]) The SEC has also ruled that two or more corporations may enter into a joint venture through a contract or agreement (contractual joint venture) if the nature of the venture is authorized by their charters. the Court held – . This was the sort of arrangement sought to be pursued in Philex Mining Corp. property. Dev. (Ibid. the relationship between co-venturers in a joint venture arrangement cannot be considered a creditor-debtor relationship with respect to their advances and contributions to the business enterprise. And the hard lesson that was learned was that since a joint venture arrangement is a species of partnership. that the parties to a business venture may choose to treat one another as not being bound by a partnership relationship. SEC Annual Opinions 1985. It has ruled that generally. Ultimately. (SEC Opinion. 29 April 1985. 1. since by the terms of the arrangement the essential elements of a partnership existed. v.P. 147. the Court refused to allow the parties to treat the advances made to the venture as loans or advances to one another. the Philippine Charity and Sweepstakes Office (PCSO) was prohibited by its charter from holding and conducting lotteries “in collaboration. 232 SCRA 110 (1994). choosing not to represent to third parties or to the public a separate firm undertaking the project. association. which contract need not be registered with the SEC. the relationship of the co-venturers. In finding that “notwithstanding its denomination or designation as a Contract of Lease” (at p.” (Sec. Harman. two or more persons bind themselves to contribute money. thus – An examination of the “Power of Attorney” reveals that a partnership or joint venture was indeed intended by the parties. 143). should there be an intention to acquire a separate Tax Identification Number (TIN) from the Bureau of Internal Revenue for the business venture. cannot generally enter into a contract of partnership unless authorized by law or its charter. In Philex Mining. then the peremptory provisions and principles under the Law on Partnerships will be the once employed by the courts to smoke out whether the underlying agreement was a joint venture arrangement. Incorporated v. 30 March 1995.” the co-venturers pursue the joint venture arrangement by a private contract between them. the failed attempt in Philex Mining to veil the arrangement as one as not being a joint venture arrangement. or industry to a common fund. In that case. their rights and liabilities. however that the joint venture will not result in the formation of a new partnership or corporation. 89) Thus. A more graphical example of an attempt to hide the joint venture arrangement can be found in Kilosbayan.construction and operation of contracts generally apply to a contract of joint venture. XXIX SEC Quarterly Bulletin 32 [No. Rep. association or joint venture with any person. (167) 43 NYS 556) Even the SEC itself has recognized such an informal arrangement. (SEC Opinion. provided. are governed by the joint venture contract executed among them. Under such an arrangement. the same requires registration with the SEC in order to have a separate legal personality to obtain a separate TIN.

Yet. 147). operation. which may cover the formation of a new joint venture company. conduct. As contrasted from the informal joint venture arrangement discussed above.The contemporaneous acts of the PCSO and the PGMC reveal that the PCSO had neither funds of its own nor the expertise to operate and manage an on-line lottery system. it would have it “at no expense or risks to the government. this lesson can best be shown in the decision in Tan Eng Kee v. c. 148-149). birth and growth of the on-line lottery. Under such an arrangement. as well. b. as well as the firm name and structure of the company that they are forming. the best evidence [of a partnership] would have been the contract of partnership itself. the only contribution the PCSO would have is its franchise or authority to operate the on-line lottery system. and management of the On-Line Lottery System.” x x x. The joint venture arrangement was found to exists under the Contract of Lease with finding by the Court of the essential element of participating in the profits of the on-line lottery system. It is outstanding for its careful and meticulous drafting designed to given an immediate impression that it is a contract of lease. Its denomination as such is a crafty device. A review of the record persuades us that the Court of Appeals correctly reversed the decision of the trial court. however. what is purports to be. (1) Corporate Principles versus JVA Provisions . woven therein are provisions which negate its title and betray the true intention of the parties to be in or to have a joint venture for a period of eight years in the operation and maintenance of the on-line lottery system . . . carefully conceived. with the rest. Apart from the lessons learned from the decisions in Kilosbayan and Philex Mining already discussed above. plus the inability of the heirs to indicate by clear evidence the essential elements of a partnership. (at p. or sold shares from those already issued in the names of the other co-venturers. because of its confessed unwillingness to bear expenses and risks. Joint Venture Arrangement Pursued Through a Joint Venture Corporation Equity joint ventures are also available in Philippine setting. and the PCSO the lease. (at pp. and that although it wished to have the system. Although the trial court found that there was a joint venture arrangement. . to provide a built-in defense in the event that the agreement is questioned as violate of the exception in Section 1(b) of the PCSO’s charter. a formal joint venture pursued under formal partnership arrangements provides better protection for the parties in the sense that they have a set of laws by which they can base their rights and claims. x x x. in the losses–with the PGMC bearing the greatest burden because of its assumption of expenses and risks. the Supreme Court affirmed the ruling of the Court of Appeals that in the absence of a contract of partnership. either from new issuances of the capital stock of the existing corporation. which may also be denominated as a “Joint Venture Agreement. They exhibit and demonstrate the parties’ indivisible community of interest in the conception. being borne by the proponent or bidder. or the articles of partnership. thus — Undoubtedly.” (at p.” embodying their arrangements. (at pp. therefore. The so-called Contract of Lease is not. In short. and be governed by the legal rules and principles pertaining to. The Court observed: All of the foregoing unmistakably confirm the indispensable role of the PGMC in the pursuit. the co-venturers execute formal Articles of Partnership. including the risks of the business. Joint Venture Pursued under Formal Partnership Arrangements A second type of joint venture arrangement is to formally operate the joint venture set-up as a partnership. The acuity or skill of its draftsmen to accomplish that purpose easily manifest itself in the Contract of lease. Court of Appeals. but inherent in a joint venture. and at the same time bearing the risks of loss. with a separate and distinct juridical personality. particular partnerships. and. above all. is that we are asked to determine whether a partnership existed based purely on circumstantial evidence. 144146. where the heirs of the purported co-venturer in a lumber and construction supply business sought to recover the decedents share in the enterprise and accumulated profits. 341 SCRA 740 (2000). An equity joint venture may also be pursued where a co-venturer is allocated the agreed shares of stock in an existing corporation. underscoring supplied). no joint venture arrangement can be imputed into the business enterprise. Such a joint venture arrangement would then be operated as. The evidence presented by petitioners falls short of the quantum of proof required to establish a partnership. and register the same with the SEC. with each co-venturer being allocated proportionate shareholdings in the outstanding capital stock of the joint venture corporation. 754). The Court held that “This risk-bearing provision is unusual in a lessor-lessee relationship. in its profits. with each having a right in the formulation and implementation of policies related to the business and sharing. The net effect.

(b) between the stockholders and the State. Management (a) The management of the Corporation shall be vested in a Board of Directors. The articles of incorporation is characterized as a contract between and among three parties: (a) between the State and the corporation. Sanitary Wares Manufacturing Corp. it does not authorize the co-venturers.. The joint venture company was registered. with the business successes. best illustrates the strength and weakness of a joint venture arrangement pursued through the medium of a joint venture corporation. a Delaware corporation. the resolutions of issues arising therefrom ought to be as follows: (a) In case of conflicts between the provisions of the joint venture agreement and the charter of the joint venture corporation. The parties agreed that the business operations in the Philippines shall be carried on by an incorporated enterprise and that the name of the corporation shall initially be ‘Sanitary Wares Manufacturing Corporation. and Filipino group taking 60% equity in the venture.’” (at p. but do not bind the joint venture corporation or other parties not signatories thereto. The foregoing rules of resolution are based on the well-established doctrine under Philippine Corporate Law that the articles of incorporation form a basic contract document defining the charter of the corporation. and “The joint enterprise thus entered into by the Filipino investors and the American corporation [ASI] prospered. a basic disagreement was due to their desire to expand the export operations of the company to which ASI objected as it apparently had other subsidiaries of joint venture groups in the .” (at pp. 134). 134). In a situation where a corporate vehicle is formed in pursuance of the joint venture arrangements. but also implemented by certain provisions of the articles of incorporation and by-laws of the joint venture corporation. the provisions of the latter shall prevail. the Agreement contained the following provision on the Management of the joint venture corporation. they are bound Corporate Law principles under which the entity must operate. thus: 5. entered into an Agreement with Filipino group “to participate in the ownership of an enterprise which would engage primarily in the business of manufacturing in the Philippines and selling abroad vitreous china and sanitary wares. as equity owners. Jurisprudence does not support the outright primacy of Corporate Law principles in a joint venture scheme pursued through a joint venture company. ideally the joint ventures should be able to fit into the various terms and clauses of the articles of incorporation and by-laws (known as the “charter”) of the joint venture company the salient features of their joint venture agreements. v. such provisions and clauses remain binding contracts among the joint venture parties signatory to the agreement. the rights and obligations of the parties among themselves are covered not only in a separate joint venture agreement.I. As long as American-Standard [ASI] shall own at least 30% of the outstanding stock of the Corporation. to override the business management of the corporate affairs of the joint venture corporation by its board of directors.In equity joint ventures. (at p. provided for the particulars covering the articles of incorporation of the joint venture company to be formed. and the manner by which the two groups would elected the Board of Directors. 699 [1929]). as well as “provisions designed to protect [ASI] as a minority group. which shall consist of nine [9] individuals.. 134-135). (2) Jurisprudential Rulings on the Scheme of JV Corporation The decision in Aurbach v. including the grant of veto powers over a number of corporate acts and the right to designate certain officers. (Government of the P. by having adopted the corporate entity as the medium by which the co-venturers have sought to pursue the joint venture enterprise. 180 SCRA 130 (1989). (ASI). In short. and (c) between the corporation and its stockholders. The Agreement executed between the American group taking 40% equity in the venture. (b) In case there are provisions or clauses in the joint venture agreement not found in the charter of the joint venture corporation. the manner of management thereof. there came a deterioration of the initially harmonious relations between the two groups. Considering that the co-venturers have chosen the corporate vehicle by which to pursue their business enterprise. three [3] of the nine directors shall be designated by American-Standard [ASI]. and the other six [6] shall be designated by the other stockholders of the Corporation. American Standards Inc. In particular. Manila Railroad Co. In addition. Unfortunately. According to the Filipino group. such as a member of the Executive Committee whose vote was required for important corporate transactions. then it would be posited that in situations where joint venture agreements contain provisions not covered by the charter of the joint venture corporation or vice-versa. although the joint venture agreement may contain rules on management and control of the joint venture corporation. 52 Phil. Any stipulation therefore in the joint venture agreement that seeks to arrogate unto the stockholders thereof the management prerogatives of its board of directors would be null and void.

140-141). Section 100 of the Corporation Code provides that: . x x x . The Court resolved that – In the instant cases. 139). which like any partnership arrangement. California Press Mfg. 139.. since a particular provision in the Agreement provided that nothing herein contained shall be construed to constitute any of the parties hereto partners or joint venturers in respect of any transaction hereunder. . x x x. Corporation Code). In particular. thus: The rule is that whether the parties to a particular contract have thereby established among themselves a joint venture or some other relation depends upon the actual intention which is determined in accordance with the rules governing the interpretation and construction of contracts. are primarily contractual in character. and held: To allow the ASI Group to vote their additional equity to help elect even a Filipino director who would be beholden to them would obliterate their minority status as agreed upon by the parties. but also on the nominees of the Filipino group on the ground that under Section 24 of the Corporation Code. citing Terminal Shares. a result which is clearly contrary to the contractual intent of the parties.” and (c) the corporation shall not list in any stock exchange or make any public offering of any of its stock of any class (Section 96. not only on their three (3) nominees. and the officers and employees may be elected or appointed directly by the stockholders (Section 97. 139). Otherwise.” (at p. Co. not exceeding twenty (20). however. Inc.R. Co. In the annual stockholders’ meeting in 1983. . 65 F. the Court gave the basic doctrine when it comes to joint venture arrangement. and may even be able to get a majority of the board seats. ASI would be able to designate more than the three directors it is allowed to designate under the Agreement. Suppl 678. (b) all of the issued stock of all classes shall be subject to one or more specified restrictions on transfer in the nature of a “right of first refusal.” In resolving the issues. the friction between the two groups came to a head. a close corporation is one which provides in its articles of incorporation the following three requisites: (a) all of the corporation’s issued stock of all classes. it may be provided in the articles of incorporation that the business of the corporation shall be managed by the stockholders of the corporation rather than by a board of directors. (at p. 2nd 751. v. should not be allowed to interfere in the voting within the Filipino group. The Court resolved to apply the mandatory provisions of the Corporation Code within the contractual intentions of the parties provided in the joint venture Agreement. (DC MO). v. they had a right to cast their votes on all nominees for the Board of Directors. Corporation Code). Aurbach emphasizes that joint venture arrangements are first and foremost contractual agreements. (at p. and affirmed the formula adopted by the Court of Appeals that the American group can cumulate their votes only within the nominees allotted to them. Under a close corporation setting. shall be held on record by not more than a specified number of persons. which provided for cumulative voting for stock corporations. when the American group wanted to cast their vote. our examination of important provisions of the Agreement as well as the testimonial evidence presented by the [witnesses] shows that the parties agreed to establish a joint venture and not a corporation. exclusive of treasury shares. wherein it is clearly stated that the parties’ intention was to form a corporation and not a joint venture” (at p. 135). and not just on their allotted three nominees. 20 Cal. and Q. 128 P. The Court was asked to decide the issue on “the nature of the business established by the parties—whether it was a joint venture or a corporation” (at p. In essence. As aptly stated by the appellate court: x x x ASI. The history of the organization of Saniwares and the unusual arrangements which govern its policy making body are all consistent with a joint venture and not with an ordinary corporation. Equally important as the consideration of the contractual intent of the parties is the consideration as regards the possible domination by the foreign investors of the enterprise in violation of the nationalization requirements enshrined in the Constitution and circumvention of the Anti-Dummy Act.Aurbach recognized that such a principle is not alien to Corporate Law when it quoted arguments that Section 100 of the Corporation Code expressly makes binding written agreements between the stockholders in a close corporation. and as much as possible the contractual intent of the co-venturers should be given realization within the corporate medium by which they pursued the business enterprise. 2nd 668). Universal Sales Corp. Chicago. 148)..countries where Philippine exports were contemplated. (3) JV Company Organized as a Close Corporation Under the Corporation Code. since it was the contention of ASI that “the actual intention of the parties should be viewed strict on the ‘Agreement’ . (at pp. B.

. These American cases dealt with legal questions as to the extent to which the requirements arising from the corporate form of joint venture corporations should control. “In the United States. The right of first refusal is meant to protect the original or remaining joint venturer(s) or shareholder(s) from the entry of third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s). Agreements by stockholders. The Court matter-of-factly recognized the “partnership” arrangement between the original parties in the joint venture company. 142-144). signed by all stockholders. and provided a “right of first refusal” on the equity shares should either of the co-venturer decide to sell. many courts have taken a realistic approach to joint venture corporations and have not rigidly applied principles of corporation law designed primarily for public issue corporation. should also apply to equally closely-held corporation. thus – The Lagdameo Group stated in their appellees’ brief in the Court of Appeals: “x x x. . No one can become a member of the partnership association without the consent of all the other associates. the same principles applicable to formal close corporations. Inc. . The provisions of the Corporation Code on close corporations. unlike an ordinary corporation. which provides for informal management of its affairs.” (at p. nonetheless. it seems to have given its imprimatur to the proposition that even when a corporation does not comply with the definition of a close corporation under the Corporation Code because the three requisites are not expressly provided for in its articles of incorporation. the non-selling partner may acquire all these shares and terminate the partnership. . and the right of first refusal was not found expressed in any provision of the articles of incorporation and by-laws.– 1. . . in said articles of incorporation. . Should the selling partner decide to dispose all its shares. such as those organized pursuant to a formal joint venture agreement. The right of first refusal thus ensures that the parties are given control over who may become a new partner in substitution of or in addition to the original partners. forming the Philippine Shipyard and Engineering Corporation (PHILSECO) to engage in operation and management of shipyard. What one notices clearly extant in JG Summit Holdings is that although what was bidded were shares of stock is a duly registered corporation. Court of Appeals. The joint venture between the Philippine Government and KAWASAKI is in the nature of a partnership which.Sec. where the National Investment and Development Corporation (NIDC). The JVA provided for a 60% Filipino-40% Japanese equity. of Kobe. No person or corporation can be compelled to remain or to continue the partnership . (at p. irrespective of whether the provisions of such agreements are contained. 412 SCRA 10 (2003). and characterized the right of first refusal clause in the JVA as a “protective mechanisms to preserve their respective interests in the partnership in the event that (a) one party decides to sell its shares to third parties.” (at pp. is based on delectus personae. assign or transfer its interest in the joint venture. Japan. except those required by this Title [on close corporations] to be embodied. should be deemed to be available to resolve issues pertaining to joint venture corporations. . entered into a Joint Venture Agreement (JVA) with Kawasaki Heavy Industries. Ltd. Although the Court in Aurbuch did not make a formal ruling on the matter. When later on the government shares in PHILSECO were bidded out. to the extent that such agreements are not inconsistent with the articles of incorporation. appellants cannot honestly claim that Saniwares is a public issue or a widely held corporation. 29). even assuming that Saniwares is technically not a close corporation because it has more than 20 stockholders. The Court further held – . 100. etc. and the courts ruled that substantial justice lay with those litigants who relied on the joint venture agreement rather than the litigants who relied on the orthodox principles of corporation law. Surely. binding effect of written agreements among stockholders. a government corporation. v. the undeniable fact is that it is a close-held corporation.. Theses courts have indicated that express arrangements between corporate joint ventures should be construed with less emphasis on the ordinary rules of law usually applied to corporate entities and with more consideration given to the nature of the agreement between the joint venturers. shall survive the incorporation of such corporation and shall continue to be valid and binding between and among such stockholders. “x x x. (4) Right of First Refusal as a Delectus Personae Feature in JV Company Scheme Another reported case of a joint venture company arrangement would be inJG Summit Holdings. Agreements by and among stockholders executed before the formation and organization of a close corporation. if such be their intent. and (b) new Philseco shares are issued. x x x. one of the issues that had to be resolved was the validity of the right of first refusal clause found in the JVA. 31). “Secondly.

Limited Liability Feature Whether it be the contractual joint venture arrangement or the partnership arrangement. 14 April 1993. 3. March 1990]). and C of the negative lists. Sept.nonetheless. when it involves foreign investment. It is the basic law that provides the conditions. the use of the joint venture company as the format to pursue the joint venture arrangement allows the co-venturers to take full advantage of the limited liability features of the corporate vehicle especially in projects and undertakings which embody certain risks. exclusion of new parties and non-dilution of equity considerations. 3. 23 March 1993. Exclusions of New Parties. (1) Application of the Grandfather Rule The ‘grandfather rule’ is the method by which the percentage of Filipino equity in a corporation engaged in nationalized and/or partly nationalized areas of activities. the capital or ownership of which under the constitution or other special laws are limited to Filipino citizens only. 2. the SEC has adopted the formula of the Secretary of Justice (DOJ Opinion No. partners (except limited partner in formally registered limited partnership) and con-venturers are liable for partnership debts beyond their contributions to the parternship or joint venture arrangements. XXIV Sec Quarterly Bulletin 56 [No. Under Philippine Partnership Law. a. 6 November 1989. It must be stressed however. XXIV Sec Quarterly Bulletin 7 [No. March 1994]. Sec Quarterly Bulletin 44 [No. Sept. The SEC was quick to add: “However. the FIA ‘91 provides for foreign investment negative list which spells out the activities reserved for Philippine national. and procedures where foreign enterprises may invest and do business in the Philippines. 14 December 1989. the Court applied its enforceability to a third party bidder who was not privy to the terms of the private JVA between the Government and the foreign investor. 14 December 1989. 7042. while a corporation with 60% Filipino and 40% Foreign equity ownership is considered a Philippine national for purposes of investment. 4. c. A joint venture arrangement would mean that such corporation has become a partner and is deemed then to be acting or involving itself in the operations of a nationalized activity by the acts of the local partners by virtue of the principle of mutual agency b. in cases where corporate shareholders are present in the situation. In recognizing and applying the grandfather rule. but if the percentage of Filipino ownership in the corporation or partnership is less than 60% only the number of shares corresponding to such percentage shall be counted as of Philippine nationality. may enter all activities not restricted by Lists A. June 1990]). SEC Opinion. s. 1. provided for under the Constitution and other nationalization laws. It also applies to joint venture arrangements in the Philippines. 1993]. Export enterprises may enter all activities not restricted by Lists A and B of the negative list. with foreign equity. that the afore-quoted SEC rule applies for purposes of resolving issues on investments. XXVII Sec Quarterly Bulletin 15 (No. XXIV Sec Quarterly Bulletin 7 [No. was enacted to promote foreign investments. 30 May 1990. 1. SEC Opinion. By the negative list scheme. Non-Dilution of Equity . 18. 4. by attributing the nationality of the second or even subsequent tier of ownership to determine the nationality of the corporate shareholder. activities. XXVII Sec Quarterly Bulletin 29 [No. and prescribes the procedures for registering enterprises doing business in the Philippines. the Act simply established the restricted areas. 3. Dec. SEC Opinion. XXVIII Sec Quarterly Bulletin 39 [No. 23 November 1993. (SEC Opinion. XXIV Sec Quarterly Bulletin 52 [No. 6 August 1991.” (SEC Opinion. 1989) to the effect that: Shares belonging to corporations or partnerships at least 60% of the capital of which is owned by Filipino citizens shall be considered as of Philippine nationality. B. Aspects which Influence Choice of JV Scheme The important aspects in choosing the format or scheme by which to pursue the joint venture arrangement would be the issues relating to limited liability considerations. June 1990]. of restrictions on foreign equity and foreign management and control on certain restricted areas or activities. tax consequences. Therefore. and declared all other areas as open to unlimited foreign equity participation. Essentially. it is nor qualified to invest in or enter into a joint venture agreement with corporation or partnerships. 1991]. These areas must involve foreign investments as defined under Republic Act No. SEC Opinion. and domestic enterprises. Defining Joint Ventures Scope of Business Activity The principal consideration in defining the scope of business to be undertaken by joint venture in the Philippines basically revolves around the issue. 1993). Sept. known as the Foreign Investments Act of 1991. SEC Opinion. 1990]. the co-ventures would be faced with prospects of “unlimited liability” pervading in such arrangement. is computed. and limitation of foreign equity. ”FIA ‘91”. 2. SEC Opinion.

The corporate entity route also allows the co-venturers to take advantage of zero rate taxability of dividends declared by corporations in instances provided under the National Internal Revenue Code. 37 [1986]). d. Act 9337. since formal joint ventures are taxed as corporate taxpayer. and those formed to engage in petroleum operations pursuant to an operating agreement under a service contract with the Government (Pres. . [because] The joint venture . . unlike an ordinary corporation. NIRC of 1997). under the reforms embodied in the NIRC of 1997. joint ventures formed for the purpose of undertaking construction projects (Pres. the corporation has traditionally been subjected to heavier taxation than other forms of business organization. Inc. .” shall not be taxed separately as a corporate taxpayer (Section 22(B).” (JG Summit Holdings. a final tax of 10% has been re-imposed on dividends received by residents and citizens declared from corporate earnings after 1 January 1998 (Section 24(B)(2). except that under the National Internal Revenue Code of 1997. (Per amendment to NIRC of 1997 introduced by Rep. 29-31 [2003]). The right of first refusal thus ensures that the parties are given control over who may become a new partner in substitution of or in addition to the original partners. The income tax rate will go down to 30% beginning 01 January 2009. NIRC of 1997). Court of Appeals. as in undertakings that require privacy. “a joint venture or consortium formed for the purpose of undertaking construction projects or engaging in petroleum. and the tax on improperly accumulated earnings has likewise been re-imposed (Section 29. and to entice the use of the corporation as the vehicle for such investment. NIRC of 1977). since partnerships are subject to the 35% net income tax for corporations. were subject to zero-rate of income taxation. Except for dividends declared by domestic corporation in favor of foreign corporation (Section 25(a) and (b). Decree 1682) are exempt from corporate taxation. NIRC of 1997). The pursuit of joint venture arrangements under a formal partnership arrangement has the disadvantage of inviting into the arrangement the features of unlimited liability for partnership debts to the co-venturers. v. The contractual joint venture has the advantage of limiting the extent of the arrangement between and among the co-venturers. the contractual joint venture lessens the need to have to register the project as a separate corporate taxpayer. many of the previous tax laws that tended to make corporate vehicles expensive had been abolished.The ability of the co-venturers to present the venture among the original parties through a “right of first refusal clause” has been recognized as valid by the Supreme Court as a means to protect the original or remaining joint venturer(s) or shareholder(s) from the entry of third persons who are not acceptable to it as co-venturer(s) or co-shareholder(s) . . dividends received by individuals from corporation (Section 21. however. Lately. NIRC of 1977). a final tax of 20% on dividends received by a nonresident alien individual has been re-imposed from corporate earnings after 1 January 1998 (Section 25(A)(1). With the trust of Government to encourage both local and foreign investments in the country. and both are subject to corporate income tax. since the private arrangements should allow the co-venturers to continue reporting separately their participation in the project in their own tax returns. The aspect of double taxation looms largely in a partnership joint venture arrangement. No one can become a member of the partnership association without the consent of all the other associates. In addition. 412 SCRA 10. is based on delectus personae. Tax Issues In the field of Taxation. when the partnership declares and distributes profits. and also the inability to take advantage of the zero-rate of dividends for corporation. . NIRC of 1997). Decree 929 [1976]). both a partnership and a joint venture are treated as corporate taxpayers. is in the nature of a partnership which.) Nevertheless. as well as inter-corporate dividends between domestic corporations (Section 24. There had also been an abolition of the personal holding companies tax and tax on unreasonably accumulated surplus of corporations (Executive Order No. NIRC of 1977). In the Philippines. geothermal and other energy operations pursuant to an operating or consortium agreement under a service contract with the Government. dividends distributed are subject to another tax when received by the stockholders. coal.

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