2021 BAR REVIEW COMMERCIAL LAW

PARTNERSHIP Handout No. 22

There are two essential elements in a contract of partnership.

Under Article 1767 of the Civil Code, there are two essential elements in a contract of
partnership: (a) an agreement to contribute money, property or industry to a common fund; and
(b) intent to divide the profits among the contracting parties. Jarantilla, Jr. vs. Jarantilla, 636
SCRA 299, G.R. No. 154486 December 1, 2010

Partnership by Estoppel

While an unregistered commercial partnership has no juridical personality, nevertheless, where

two or more persons, attempt to create a partnership failing to comply with all the legal
formalities, the law considers them as partners and the association is a partnership in so far as it
is favorable to third persons, by reason of the equitable principle of estoppel. MacDonald, et al.
vs. Nat. City Bank of N.Y., 99 Phil. 156, No. L-7991 May 21, 1956

Mere failure to register the contract of partnership with the Securities and Exchange
Commission does not invalidate a contract that has the essential requisites of partnership—a
partnership may exist even if the partners do not use the words “partner” or “partnership.

The Angeles spouses’ position that there is no partnership because of the lack of a public
instrument indicating the same and a lack of registration with the Securities and Exchange
Commission (“SEC”) holds no water. First, the Angeles spouses contributed money to the
partnership and not immovable property. Second, mere failure to register the contract of
partnership with the SEC does not invalidate a contract that has the essential requisites of a
partnership. Angeles vs. Secretary of Justice, 465 SCRA 106, G.R. No. 142612 July 29, 2005

The purpose of registration of the contract of partnership is to give notice to third parties.
Failure to register the contract of partnership does not affect the liability of the partnership and
of the partners to third persons. Neither does such failure to register affect the partnership’s
juridical personality.

Indeed, the Angeles spouses admit to facts that prove the existence of a partnership: a contract
showing a “sosyo industrial” or industrial partnership, contribution of money and industry to a
common fund, and division of profits between the Angeles spouses and Mercado. Angeles vs.
Secretary of Justice, 465 SCRA 106, G.R. No. 142612 July 29, 2005

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Article 1767 of the Civil Code provides that by a contract of partnership, two or more persons
bind themselves to contribute money, property, or industry to a common fund, with the
intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession. Under Article
1771, a partnership may be constituted in any form, except where immovable property or real
rights are contributed thereto, in which case a public instrument shall be necessary. Article 1784,
on the other hand, provides that a partnership begins from the moment of the execution of the
contract, unless it is otherwise stipulated. Saludo vs. PNB, G.R. No. 193138, August 20, 2018

Here, absent evidence of an earlier agreement, SAFA Law Office was constituted as a
partnership at the time its partners signed the Articles of Partnership wherein they bound
themselves to establish a partnership for the practice of law, contribute capital and industry
for the purpose, and receive compensation and benefits in the course of its operation.

Having settled that SAFA Law Office is a partnership, we hold that it acquired juridical personality
by operation of law. The perfection and validity of a contract of partnership brings about the
creation of a juridical person separate and distinct from the individuals comprising the
partnership. Saludo vs. PNB, G.R. No. 193138, August 20, 2018

In view of the above, we see nothing to support the position of the RTC and the CA, as well as
Saludo, that SAFA Law Office is not a partnership and a legal entity.

Saludo's claims that SAFA Law Office is his sole proprietorship and not a legal entity fail in light of
the clear provisions of the law on partnership. To reiterate, SAFA Law Office was created as a
partnership, and as such, acquired juridical personality by operation of law. Hence, its rights and
obligations, as well as those of its partners, are determined by law and not by what the partners
purport them to be. Saludo vs. PNB, G.R. No. 193138, August 20, 2018

Our law on partnership does not exclude partnerships for the practice of law from its coverage.
Article 1767 of the Civil Code provides that "[t]wo or more persons may also form a partnership
for the exercise of a profession."

Article 1783, on the other hand, states that "[a] particular partnership has for its object
determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession

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PARTNERSHIP Handout No. 22

or vocation." Since the law uses the word "profession" in the general sense, and does not
distinguish which professional partnerships are covered by its provisions and which are not, then
no valid distinction may be made. Saludo vs. PNB, G.R. No. 193138, August 20, 2018

Article 1816 provides that the partners’ obligation to third persons with respect to the
partnership liability is pro rata or joint. Liability is joint when a debtor is liable only for the
payment of only a proportionate part of the debt.

In contrast, a solidary liability makes a debtor liable for the payment of the entire debt. In the
same vein, Article 1207 does not presume solidary liability unless: 1) the obligation expressly so
states; or 2) the law or nature requires solidarity. With regard to partnerships, ordinarily, the
liability of the partners is not solidary. The joint liability of the partners is a defense that can be
raised by a partner impleaded in a complaint against the partnership. Guy vs. Gacott, 780 SCRA
579, G.R. No. 206147 January 13, 2016

The partners’ obligation with respect to the partnership liabilities is subsidiary in nature. It
provides that the partners shall only be liable with their property after all the partnership assets
have been exhausted.

To say that one’s liability is subsidiary means that it merely becomes secondary and only arises if
the one primarily liable fails to sufficiently satisfy the obligation. Resort to the properties of a
partner may be made only after efforts in exhausting partnership assets have failed or that such
partnership assets are insufficient to cover the entire obligation. The subsidiary nature of the
partners’ liability with the partnership is one of the valid defenses against a premature execution
of judgment directed to a partner. Guy vs. Gacott, 780 SCRA 579, G.R. No. 206147 January 13,
2016

Although a partnership is based on delectus personae or mutual agency, whereby any partner
can generally represent the partnership in its business affairs, it is non sequitur that a suit
against the partnership is necessarily a suit impleading each and every partner.

It must be remembered that a partnership is a juridical entity that has a distinct and separate
personality from the persons composing it. In relation to the rules of civil procedure, it is
elementary that a judgment of a court is conclusive and binding only upon the parties and their
successors-in-interest after the commencement of the action in court. A decision rendered on a

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PARTNERSHIP Handout No. 22

complaint in a civil action or proceeding does not bind or prejudice a person not impleaded
therein, for no person shall be adversely affected by the outcome of a civil action or proceeding
in which he is not a party. The principle that a person cannot be prejudiced by a ruling rendered
in an action or proceeding in which he has not been made a party conforms to the constitutional
guarantee of due process of law. Guy vs. Gacott, 780 SCRA 579, G.R. No. 206147 January 13,
2016

Since a contract of partnership is consensual, an oral contract of partnership is as good as a

written one. Where no immovable property or real rights are involved, what matters is that the
parties have complied with the requisites of a partnership.

It may be constituted in any form; a public instrument is necessary only where immovable
property or real rights are contributed thereto. This implies that since a contract of partnership
is consensual, an oral contract of partnership is as good as a written one. Where no immovable
property or real rights are involved, what matters is that the parties have complied with the
requisites of a partnership. The fact that there appears to be no record in the Securities and
Exchange Commission of a public instrument embodying the partnership agreement pursuant to
Article 1772 of the Civil Code did not cause the nullification of the partnership. The pertinent
provision of the Civil Code on the matter states: 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 1772, first paragraph. Tocao vs. Court of Appeals, 342
SCRA 20, G.R. No. 127405 October 4, 2000

In the present case, there is no evidence that petitioners entered into an agreement to
contribute money, property, or industry to a common fund, and that they intended to divide
the profits among themselves.

Respondent commissioner and/or his representative just assumed these conditions to be present
on the basis of the fact that petitioners purchased certain parcels of land and became co-owners
thereof. In Evangelista, there was a series of transactions where petitioners purchased twenty-
four (24) lots showing that the purpose was not limited to the conservation or preservation of
the common fund or even the properties acquired by them. The character of habituality peculiar
to business transactions engaged in for the purpose of gain was present. Pascual vs.
Commissioner of Internal Revenue, 166 SCRA 560, No. L-78133 October 18, 1988

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In order to constitute a partnership inter sese, there must be: (a) An intent to form the same;
(b) generally participating in both profits and losses; (c) and such a community of interest, as
far as third persons are concerned as enables each party to make contract, manage the
business, and dispose of the whole property.’—(Municipal Paving Co. vs. Herring, 150 P. 1067,
50 111 470.)

The common ownership of property does not itself create a partnership between the owners,
though they may use it for purpose of making gains; and they may, without becoming partners,
agree among themselves as to the management and use of such property and the application of
the proceeds therefrom. (Spurlock vs. Wilson, 142 S. W. 363, 160 No. App. 14.) The sharing of
returns does not in itself establish a partnership whether or not the persons sharing therein have
a joint or common right of interest in the property. There must be clear intent to form a
partnership, the existence of a juridical personality different from the individual partners, and
the freedom of each party to transfer or assign the whole property. Pascual vs. Commissioner of
Internal Revenue, 166 SCRA 560, No. L-78133 October 18, 1988

Where a check issued to a partner, to evidence only his share or interest in the partnership, is
to be funded from receivables to be collected and goods to be sold by the partnership, and only
when such collection and sale are realized, the same does not involve a debt of or any account
due and payable by the drawer.

In the present case, with regard to the first issue, evidence on record would show that the subject
check was to be funded from receivables to be collected and goods to be sold by the partnership,
and only when such collection and sale were realized. Thus, there is sufficient basis for the
assertion that the petitioner issued the subject check (Metrobank Check No. 103115490 dated
October 30, 1986, in the amount of P135,828.87) to evidence only complainant’s share or interest
in the partnership, or at best, to show her commitment that when receivables are collected and
goods are sold, she would give to private complainant the net amount due him representing his
interest in the partnership. It did not involve a debt of or any account due and payable by the
petitioner. Idos vs. Court of Appeals, 296 SCRA 194, G.R. No. 110782 September 25, 1998

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The business venture operated under Geminesse Enterprise did not result in an employer-
employee relationship between petitioners and private respondent. While it is true that the
receipt of a percentage of net profits constitutes only prima facie evidence that the recipient is
a partner in the business, the evidence in the case at bar controverts an employer-employee
relationship between the parties.

In the first place, private respondent had a voice in the management of the affairs of the
cookware distributorship, including selection of people who would constitute the administrative
staff and the sales force. Secondly, petitioner Tocao’s admissions militate against an employer-
employee relationship. She admitted that, like her who owned Geminesse Enterprise, private
respondent received only commissions and transportation and representation allowances and
not a fixed salary. Tocao vs. Court of Appeals, 342 SCRA 20, G.R. No. 127405 October 4, 2000

Petitioners underscore the fact that the Court of Appeals did not return the “unaccounted and
unremitted stocks of Geminesse Enterprise amounting to P208,250.00.” Obviously a ploy to
offset the damages awarded to private respondent, that claim, more than anything else, proves
the existence of a partnership between them.

In Idos v. Court of Appeals, this Court said: “The best evidence of the existence of the partnership,
which was not yet terminated (though in the winding up stage), were the unsold goods and
uncollected receivables, which were presented to the trial court. Since the partnership has not
been terminated, the petitioner and private complainant remained as co-partners. xxx.” Tocao
vs. Court of Appeals, 342 SCRA 20, G.R. No. 127405 October 4, 2000

Industrial partner’s profit

For the purpose of determining the profit that should go to an industrial partner (who shares in
the profits but is not liable for the losses), the gross income from all the transactions carried on
by the firm must be added together, and from this sum must be subtracted the expenses or the
losses sustained in the business. Only in the difference representing the net profits does the
industrial partner share. But if, on the contrary, the losses exceed the income, the industrial
partner does not share in the losses. Santos vs. Reyes, 368 SCRA 261, G.R. No. 135813 October
25, 2001

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A mere falling out or misunderstanding between partners does not convert the partnership into
a sham organization—the partnership exists until dissolved under the law.

Undoubtedly, petitioner Tocao unilaterally excluded private respondent 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. Thus, as petitioner Tocao became adept in the
business operation, she started to assert herself to the extent that she would even shout at
private respondent in front of other people. Her instruction to Lina Torda Cruz, marketing
manager, not to allow private respondent to hold office in both the Makati and Cubao sales
offices concretely spoke of her perception that private respondent was no longer necessary in
the business operation, and resulted in a falling out between the two. However, a mere falling
out or misunderstanding between partners does not convert the partnership into a sham
organization. The partnership exists until dissolved under the law. Tocao vs. Court of Appeals,
342 SCRA 20, G.R. No. 127405 October 4, 2000

Since the partnership created by petitioners and private respondent has no fixed term and is
therefore a partnership at will predicated on their mutual desire and consent, it may be
dissolved by the will of a partner.

Thus: “The right to choose with whom a person wishes to associate himself is the very foundation
and essence of that partnership. Its continued existence is, in turn, dependent on the constancy
of that mutual resolve, along with each partner’s capability to give it, and the absence of cause
for dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a
liability for damages.”

An unjustified dissolution by a partner can subject him to action for damages because by the
mutual agency that arises in a partnership, the doctrine of delectus personae allows the partners
to have the power, although not necessarily the right to dissolve the partnership. Tocao vs. Court
of Appeals, 342 SCRA 20, G.R. No. 127405 October 4, 2000

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PARTNERSHIP Handout No. 22

Final Stages of a Partnership

Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up;
and (3) termination. These stages are distinguished, to wit:

1) Dissolution: Defined—Dissolution is the change in the relation of the partners caused by

any partner ceasing to be associated in the carrying on of the business (Art. 1828). It is
that point of time the partners cease to carry on the business together. [Citation omitted];

2) Winding Up: Defined—Winding up is the process of settling business affairs after

dissolution. (NOTE: Examples of winding up: the paying of previous obligations; the
collecting of assets previously demandable; even new business if needed to wind up, as
the contracting with a demolition company for the demolition of the garage used in a
‘used car’ partnership.);

3) Termination: Defined—Termination is the point in time after all the partnership affairs
have been wound up.” Idos vs. Court of Appeals, 296 SCRA 194, G.R. No. 110782
September 25, 1998

For as long as the partnership exists, any of the partners may demand an accounting of the
partnership’s business.

Prescription of the said right starts to run only upon the dissolution of the partnership when the
final accounting is done. Contrary to petitioner’s protestations that respondents’ right to inquire
into the business affairs of the partnership accrued in 1986, prescribing four (4) years thereafter,
prescription had not even begun to run in the absence of a final accounting. Emnace vs. Court of
Appeals, 370 SCRA 431, G.R. No. 126334 November 23, 2001

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