V.
PARTNERSHIP AS A MENAS OF DOING BUSINESS, conformity with the laws and regulations of their
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)   certain ends, and often they are business or
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
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
commercial ends.
That a partnership is really a creature of the law as a
means by which society may pursue certain business
or commercial ends means therefore that it is
regulated under the Law on Partnerships for the
benefit of those who employ it as their medium (the
partners) and those who are authorized to deal with
said medium (the creditors, the clients and
customers). This philosophical understanding of the
essence and purpose of the partnership “juridical
person” is best exemplified by the provisions of
Article 1775 of the Civil Code which denies juridical
personality to “Associations and societies, whose
articles are kept secret among the members, and
wherein any one of the members may contract in his
own name with third persons.” In other words, if an
aggregation of individuals is not meant to undertake a
business or commercial venture that is supposed to
deal with the public at large, then it is not intended to
be a medium of doing business, and there is not
purpose of granting it a separate juridical personality.
a. The Case for “Secret Associations”
Art. 1775. Associations and societies, whose articles
are kept secret among the members, and wherein any
one of the members may contract in his own name
with third persons, shall have no juridical personality,
and shall be governed by the provisions relating to co-
ownership. (1669)
Under Article 1775 of the New Civil Code,
“Associations and societies, whose articles are kept
secret among the members, and wherein any one of
the members may contract in his own name with third
persons, shall have no juridical personality, and shall
be govenred by the provisions relating to co-
ownership. (1669).  Bautista discussed the rationale
and effects of Article 1775 as follows:
Not every contract intended to create a partnership
produces a juridical personality. The Code [Article
1775] withholds the attribute of juridical personality to
“associations and societies whose articles are kept
secret among the members, and wherein any one of
the members may contract in his own name with third
persons.” And applies to such associations or societies
only the rules governing co-ownership. The phrase
“kept secret among the members,” according to
Manresa, does not mean that the articles are known
to all the members but withheld from third persons. It
contemplates a situation where the articles, which
allow any one of the members to contract in his own
name with third persons, are known to some
members only and kept secret from the rest. In other
words, the secrecy is not directed to third persons but
to some of the partners.
This rule is intended to preserve the equality which
must exist among the partners and to prevent any of
them from defrauding the partnership or the other
members. This being the case it does not prohibit
secret stipulations which are not designed to produce
this result. It would not, for instance, have the effect
of rendering invalid a separate agreement between
two members of a partnership pursuant to which one
guarantees the other against loss of his capital
contribution or assures him of profit. Neither can the
rule be invoked as against third persons by the
partners entering into the secret stipulations, in
consonance with the general principle that a party
should not be allowed to take advantage of a nullity
which he himself has caused.” (BAUTISTA, at pp. 58-
59, citing 11 Manresa 289 to 291)
b.   Jurisprudential Application of the Doctrine of
Separate Juridical Personality of the Partnership
In Vargas & Co. v. Chan, 29 Phil. 446 (1915), in denying
the contention that since the defendant sued was a
partnership that summons must be served upon each
of the partners, the Court held –
[I]t has been the universal practice in the Philippine
Islands since American occupation, and was the
practice prior to that time, to treat companies of the
class to which the plaintiff belongs as legal or juridical
entities and to permit them to sue and be sued in the
name of the company, the summons being served
solely on the managing agent or other official of the
company by the section of the Code of Civil
Procedure.” (Ibid, at p. 448)
The decision in Campos Rueda & Co. v. Pacific
Commercial Co., 44 Phil. 916 (1923), demonstrates how
the separate juridical personality accorded to a
partnership arrangement makes certain rules on
insolvency work differently as compared to American
jurisprudence on the same matter. InCampos Rueda a
petition for involuntary insolvency was filed by the
creditors of the limited partnership for an act of
insolvency provided under the Insolvency Act
(i.e., having failed to its obligations with three
creditors for more than thirty days). The trial court
denied the petition on the ground that it was not
proven, nor alleged, that the partners of the firm were
insolvent at the time the application was filed; and
that as said partners are personally and solidary liable
for the consequences of the transactions of the
partnership, it cannot be adjudged insolvent so long
as the partners are not alleged and proven to be
insolvent. In ruling that the denial of the petition for
insolvency was in error, the Court held –
Unlike the common law, the Philippine statutes
consider a limited partnership as a juridical entity for
all intents and purposes, which personality is
recognized in all its acts and contracts (art. 116, Code
of Commerce). This being so and the juridical
personality of a limited partnership being different
from that of its members, it must, on general
principle, answer for, and suffer, the consequence of
its acts as such an entity capable of being the subject
of rights and obligations. If, as in the instant case, the
limited partnership of Campos Rueda & Co. failed to
pay its obligations with three creditors for a period of
more than thirty days, which failure constitutes, under
our Insolvency Law, one of the acts of bankruptcy
upon which an adjudication of involuntary insolvency
can be predicted, this partnership must suffer the
consequences of such failure, and must be adjudged
insolvent. We are not unmindful of the fact that some
courts of the United States have held that a
partnership may not be adjudged insolvent in an
involuntary insolvency proceeding unless all of its
members are insolvent, while others have maintained
a contrary view. But it must be borne in mind that
under the American common law, partnership have
no juridical personality independent from that of its
members; and if now they have such personality for
the purposes of the insolvency law. (Ibid, at pp. 918-
919.)
In Ngo Tian Tek v. Phil. Education Co., 78 Phil. 275
(1947), the Court held that the death of either of the
two partners is not a ground for the dismissal of a
pending suit against the partnership, as a partnership
possesses a personality distinct from any of the
partners.
In Tai Tong Chuache & Co. v. Insurance Commission, 158
SCRA 366 (1988), the Court held that a partnership
may sue and be sued in its name or by its duly
authorized representative, and when it has a
designated managing partner, he may execute all acts
of administration including the right to sue debtors of
the partnership.
3.  Application of the Doctrine of Piercing the Veil of
Separate Juridical Fiction
The “doctrine of piercing the veil of corporate fiction”
finds relevance in Corporate Law because it is the
means by which to by-pass the effects of the doctrine
of “limited liability,” and through piercing acting
stockholders and/or officers may be held personally
liable for corporate debts.
In spite of the partnership being accorded also a
separate juridical partnership, the piercing doctrine
has less application in Partnership Law because the
partners are unlimitedly liable (i.e., personally liable
with their separate properties) for partnership debts.
And yet, the doctrine found application to
partnerships in Commissioner of Internal Revenue v.
Suter, 27 SCRA 152 (1969), where the Court addressed
the legal position of the Tax Commissioner seeking to
make the individual partners liable for income tax for
the income earned by the limited partnership, thus:
It being a basic tenet of the Spanish and Philippine law
that the partnership has a juridical personality of its
own, distinct and separate from that of its partners
(unlike American and English law that does not
recognize such separate juridical personality). The
bypassing of the existence of the limited partnership
as a taxpayer can only be done by ignoring or
disregarding clear statutory mandates and basic
principles of our law. The limited partnership’s
separate individuality makes it impossible to equate
its income with that of the component
members. . . (Ibid, at pp. 158-157.)
x x x.
. . . In the cited cases, the corporations were already
subject to tax when the fiction of their corporate
personality was pierced; in the present case, to do so
would exempt the limited partnership from income
taxation but would throw the tax burden upon the
partners-spouses in their individual capacities. The
corporations, in the cases cited, merely served as
business conduits or alter egos of the stockholders, a
factor that justified a disregard of their corporate
personalities for tax purposes. This is not true in the
present case. Here, the limited partnership is not a
mere business conduit of the partner- spouses; it was
organized for legitimate business purposes; it
conducted its own dealings with its customers prior to
appellee’s marriage; and had been filing its own
income tax returns as such independent entity. . . . As
far as the records show, the partners did not enter
into matrimony and thereafter buy the interests of
the remaining partner with the premeditated scheme
or design to use the partnership as a business conduit
to dodge the tax laws. Regularity, not otherwise, is
presumed. (at p. 159.)
In other words, Suter holds that when the facts show
that the juridical personality of the partnership is but a
means to evade the law or a sham, then the courts
will pierce the veil of its separate juridical personality
to treat the partners as directly liable or accountable
for the consequences of the acts or contracts done in
the partnership name.
The piercing doctrine also found recognition, albeit by
way of obiter, inAguila, Jr. v. Court of Appeals, 319
SCRA 246 (1999), but only in the limited area of
determining standing in a suit brought against claims
pertaining to the partnership. In Aguila, Jr. the
complaint was filed against the partners and officers
to enforce essentially a partnership obligation. In
ruling that the judgment rendered by the trial court
(affirmed by the Court of Appeals) against the
individual defendants was void, the Court held –
Under Art. 1768 of the Civil Code, a partnership ‘has a
juridical personality separate and distinct from that of
each of the partners.’ The partners cannot be held
liable for the obligations of the partnership unless it is
shown that the legal fiction of a different juridical
personality is being used for fraudulent, unfair, or
illegal purposes. In this case, private respondent has
not shown that A.C. Aguila & Sons, Co., as a separate
juridical entity, is being used for fraudulent, unfair or
illegal purposes. Moreover, the title to the subject
property is in the name of A.C. Aguila & Sons, Co. and
the Memorandum of Agreement was executed
between private respondent with the consent of her
late husband, and A.C. Aguila & Sons, Co., represented
by petitioner. Hence, it is the partnership, not its
officers, or agents, which should be impleaded in any
litigation involving property registered in its name. A
violation of this rule will result to dismissal of the
complaint. We cannot understand why both the
Regional Trial Court and the Court of Appeals
sidestepped this issue when it was squarely raised
before them by petitioner. (At p. *)
4.  Entitlement to Constitutional Rights and
Guarantees
The more interesting topic under the “juridical
personality” doctrine pertaining to partnerships is
whether they are entitled to the constitutional rights
of due process, equal protection, unreasonable
searches and seizures and the right against self-
incrimination.
It is well established in Philippine Corporate Law, that
corporations as “persons before the law” are entitled
to the constitutional guarantee to due process and
equal protection, (Smith, Bell & Co. v. Natividad, 40
Phil. 136 [1919]; Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA
823 [1971]) the rights against unreasonable searches
and seizure; (Stonehill v. Diokno, 20 SCRA 383 [1967])
but not to the right against self-incrimination.
(BataanShipyard and Engineering Co., Inc.. v. PCGG, 150
SCRA 181 [1987]).
In Smith, Bell & Co. v. Natividad, 40 Phil. 136 (1919),
discusses the rationale why corporations would be
entitled to constitutional guarantees accorded to
individuals, thus:
The guarantees of the Fourteenth Amendment and so
of the first paragraph of the Philippine Bill of Rights,
are universal in their application to all persons within
the territorial jurisdiction, without regard to any
differences of race, color, or nationality. The word
‘person’ includes aliens . . . Private corporations,
likewise, are ‘persons’ within the scope of the
guaranties in so far as their property is concerned. .  .
(Ibid, at p. 144) The Smith, Bell & Co. rationale has
equal application to partnerships which are accorded
as separate persons under the Partnership Law. The
better rationale applicable to partnership would be
the ruling in Bache & Co. (Phil.), Inc. v. Ruiz, 37 SCRA
823 (1971), where the Court held that a corporation is
entitled to immunity against unreasonable searches
and seizures because “A corporation is, after all, but
an association of individuals under an assumed name
and with a distinct legal entity. In organizing itself as a
collective body it waives no constitutional immunities
appropriate for such body. Its property cannot be
taken without compensation. It can only be
proceeded against by due process of law, and is
protected, under the 14th Amendment, against
unlawful discrimination.” (Ibid, at p. 837, quoting
from Hale v. Henkel, 201 U.S. 43, 50 L.Ed. 652).
In fact, in the partnership setting there is closer
identity between the partners and the partnership in
the sense that the partners not only own the
partnership and its affairs and they directly manage
the affairs of the partnership, but more so that the
separate juridical personality is closely identified with
the personality of the partners under delectus
personae considerations.
On the other hand, the Court’s ruling on why
corporations are not entitled to the rights against self-
incrimination, has less vigor to the partnership
setting. Consider the decision in Bataan Shipyard &
Engineering Co., Inc. v. PCGG, 150 SCRA 181 (1987),
where the Court held that the right against self-
incrimination has no application to corporations,
extensively quoted in Bataan Shipyard from Wilson v.
United States, (55 L.Ed. 771, 780) thus:
* * * The corporation is a creature of the state. It is
presumed to be incorporated for the benefit of the
public. It receives certain special privileges and
franchises, and holds them subject to the laws of the
state and the limitations of its charter. Its power are
limited by law. It can make no contract not authorized
by its charter. Its right to act as a corporation are only
preserved to it so long as it obeys the laws of its
creation. There is a reserve right in the legislature to
investigate its contracts and find out whether it has
exceeded its powers. It would be a strange anomaly
to hold that a state, having chartered a corporation to
make use of certain franchises, could not, in the
exercise of sovereignty, inquire how these franchises
had been employed, and whether they had been
abused, and demand the production of the corporate
books and papers for that purpose. The defense
amounts to this, that an officer of the corporation
which is charged with a criminal violation of the
statute may plead the criminality of such corporation
as a refusal to produce its books. To state this
proposition is to answer it. While an individual may
lawfully refuse to answer incriminating questions
unless protected by an immunity statute, it does not
follow that a corporation, vested with special
privileges, and franchise may refuse to show its hand
when charged with an abuse of such privileges. . . (150
SCRA 181, 234-235, quoting from Wilson v. United
States, 55 Law Ed. 771, 780.)
Every corporation is a direct creature of the law and
receives an individual franchise from the State. But a
partnership, although is deemed to be a juridical
person by grant of the State, becomes a juridical
person through a private contract of partnership
between and among the partners, without needing to
register its existence with the State or any of its
organs. More importantly, the partnership “person” is
a fiction of law given more for the convenience of the
partners, and thus can be dissolved by the will of the
partners or by the happening of an event that would
constitute the termination of the contractual
relationship, whereas, no corporation can be
dissolved without the consent of the State, and only
after due notice and hearing. Likewise, the other
features of the partnership, mainly mutual
agency, delectus personae and unlimited liability on
the part of the partners, that places a close identity
between the persons of the partners and that of the
partnership. This is unlike in corporate setting, where
the stockholders do not own corporate properties,
have no participation in management of corporate
affairs, and enjoy personal immunity from the debts
and liabilities of the corporation, and where basically
the corporation “is its own person,” and acts through
a professional group of managers and agents called
the Board of Directors.
While therefore it is understandable that a
corporation, that has no heart, feels pain, and has no
soul that can be damned, cannot be expected to be
entitled to the constitutional right against self-
incrimination, it is quite different in the case of the
partnership, since its person is merely an extension of
the group of partners, who having come together in
business, and acting still for such business enterprise,
could not be presumed to have waived their individual
rights against self-incrimination.
As the author has observed in his writing on Philippine
Corporate Law, when it comes to the constitutional
right against self-incrimination, the Court would rely
upon old American doctrine which views the
corporation as a mere creature of the law and with
separate juridical personality apart from its
stockholders or members. In the partnership setting,
the difference in the Court’s stance may lie in the fact
that the right against self-incrimination does not really
result in physical intrusion into the premises of the
partnership, because it would require only that the
partnership, through its agents, produce records and
books before the courts. The denial of the right
against self-incrimination from corporations and
partnerships does not really invite state authorities
into the premises or physical privacy of the
stockholders, members or partners who compose the
juridical entity; but would deny acting individuals the
right to abuse the medium of separate juridical
personality as a means to do folly.
On the other hand, to deny the due process rights or
right against unreasonable searches and seizures to
corporations and partnerships would actually be to
invite state authorities to physically intrude into
business premises, and therefore also intrude into the
personal and business privacy of the stockholders,
members or partners who compose the juridical
person. Perhaps that is the basis for the difference in
stance by the Court between two sets of
constitutional rights with respect to corporations, and
also in the case of partnerships. Another view is that
the constitutional guarantees of due process, equal
protection clause and against unreasonable searches
and seizures are all meant to curb the abuse that the
State and its representatives may employ upon the
citizenry, including the modes upon which they
conduct their lives and businesses. On the other hand,
the constitutional protection against self-
incrimination is not meant to prevent an actual State
abuse but to avoid pressuring the individual from
having to tell a lie. “The main purpose of the provision
. . . is to prohibit compulsory oral examination of
prisoners before the trial, or upon trial, for the
purpose of extorting unwilling confessions or
declarations implicating them in the commission of a
crime.” (U.S. v. Tan Teng, 23 Phil. 145, 152 [1912]) A
corporation owes full allegiance and subject to the
unrestricted jurisdiction of the courts of the State
under which it has been organized. (Tayag v. Benguet
Consolidated, Inc., 26 SCRA 242, 248 [1968]) Likewise,
it has no soul that can be damned by a lie.
VI. PARTNERSHIP AS A BUSINESS ENTERPRISE
Although not explicitly stated in the provisions of the
Civil Code, the partnership may constitute also a
“business enterprise” or what is known in the
disciplines of Economics and Accounting, as “a going
concern” — that is separately valued and accounted
for from the individual value of the assets and
properties constituting it and from the medium or
means by which it is operated (in the case of
partnership, the juridical person created by express
provision of law).
Recognition of the existence and operation of the
partnership’s business enterprise, as distinguished
from the legal effects and consequences of the
contract of partnership among the partners and the
partnership juridical person, gives rise to legal
relationships, rights and obligations, and
doctrines, that can only be accounted for from that
level.
For example, the right of the partners to specific
partnership property and to share in the profits and
losses, as well as the right to manage, are legal
matters that necessarily refer to the partnership
business enterprise.
This understanding of the business enterprise of a
partnership is applicable even to a professional
partnership. Our Supreme Court has defined the
term ”profession” as “a group of men pursuing a
learned art as a common calling in the spirit of public
service–no less a public service because it may
incidentally be a means of livelihood.” (In the Matter
of the Petition for Authority to Continue Use of Firm
Name Sycip, Salazar, et. al. Ozaeta, Romulo, etc., 92
SCRA 1 (1979).)
The recognition of the inherent relationship between
and among the partners to be bound by the results of
operations from the business enterprise has been
well-explained by the Court in Villareal v. Ramirez, 406
SCRA 145 (2003), thus:
First, it seems that the appellate court was under the
misapprehension that the total capital contribution
was equivalent to the gross assets to be distributed to
the partners at the time of the dissolution of the
partnership. We cannot sustain the underlying idea
that the capital contribution at the beginning of the
partnership remains intact, unimpaired and available
for distribution or return to the partners. Such idea is
speculative, conjectural and totally without factual or
legal support.
Generally, in the pursuit of a partnership business, its
capital is either increased by profits earned or
decreased by losses sustained. It does not remain
static and unaffected by the changing fortunes of the
business. In the present case, the financial statements
presented before the trial court showed that the
business had made meager profits. However, notable
therefrom is the omission of any provision for the
depreciation of the furniture and the equipment. The
amortization of the goodwill (initially valued at
P500,000) is not reflected either. Properly taking
these non-cash items into account will show that the
partnership was actually sustaining substantial losses,
which consequently decreased the capital of the
partnership. Both the trial and the appellate courts in
fact recognized the decrease of the partnership assets
to almost nil, but the latter failed to recognize the
consequent corresponding decrease of the capital.
(Ibid, at p. 153.)
x x x.
Because of the above-mentioned transactions, the
partnership capital was actually reduced. When
petitioners and respondents ventured into business
together, they should have prepared for the fact that
their investment would either grow or shrink. In the
present case, the investment of respondents
substantially dwindled. The original amount of
P250,000 which they had invested could no longer be
returned to them, because one third of the
partnership properties at the time of dissolution did
not amount to that much.
It is a long established doctrine that the law does not
relieve parties from the effects of unwise, foolish or
disastrous contracts they have entered into with all
the required formalities and with full awareness of
what they were doing. Courts have no power to
relieve them from obligations they have voluntarily
assumed, simply because their contracts turn out to
be disastrous deals or unwise investments. (Ibid, at p.
154.)
In fact, it is only from the “partnership business
enterprise” level that we can fully appreciate the
concept that essentially the partners are “owners” of
the business, or that they take the position of
“equity” holders, as distinguished from creditors who
advance money to the partnership as “debt” holders.
Thus, it is an essential element to the existence of the
partnership under Article 1767 of the Civil Code, the
obligation assumed by each partner “to contribute
money, property or industry to a common fund”,
which essentially represents the “business
enterprise” to be pursued, to thereby assume the
position of being “owners” or “equity holders,” and
thereby to be entitled to the profits made from the
pursuit of the business enterprise, and logically to
assume the risks connected with it, including
absorbing the losses sustained. This critical position of
“equity holders” of partners is confirmed under
Article 1770 Civil Code which requires that a
partnership “must be established for the common
benefit or interest of the partners,” which aptly
describes their positions as owners of the partnership
business enterprise.
The importance of being aware that the partnership
would eventually constitute a business enterprise is
important in applying certain doctrines of succession
of liability that apply peculiarly to business enterprise.
Likewise, the rules on dissolution and liquidation
clearly appreciate the difference between the
contract relationship and juridical person constituting
the partnership, from the underlying business
enterprise that may remain operating even when the
first two levels are legally dissolved or extinguished.
10 – SPECIAL ISSUES OF WHO MAY QUALIFY TO
BECOME PARTNERS
[Updated: 12 October 2009]
1.  May Spouses Validly Enter into a Partnership
Relation?
a.   Spouses Cannot Enter into a Universal Partnership
The main statutory provision invoked when it comes
to the issue of whether spouses can enter between
themselves into a partnership agreement is Article
1782 of the Civil Code which provides that “Persons
who are prohibited from giving each other any
donation or advantage cannot enter into universal
partnership.” It has thus been opined that since under
Article 133 of the Civil Code “Every donation between
the spouses during the marriage shall be void,” then
spouses are prohibited from entering into a universal
partnership, but not necessarily a particular or limited
partnership. Article 133 of the Civil Code has now been
replaced by Article 87 of the Family Code, which
reads:
Art. 87. Every donation or grant of gratuitous
advantage, direct or indirect, between the spouses,
during the marriage should be void, except moderate
gifts which the spouse may give each other on the
occasion of any family rejoicing. The prohibition shall
also apply to persons living together as husband and
wife without a valid marriage.
Bautista discussed the rationale of Article 1782 in this
manner:
The prohibition is founded on the theory that a
contract of universal partnership is for all purposes a
donation. Its purpose, therefore, is to prevent
persons disqualified from making donations each
other from doing indirectly what the law prohibits
them from doing directly. (BAUTISTA, at p. 62).
From the placement of Article 1782 (coming after the
two articles covering the definition, nature and effects
of universal partnerships, and immediately before the
article defining particular partnerships), it seems
pretty well implied that spouses, whatever the regime
of property relations prevails in their marriage, are
disqualified from entering into any sort of universal
partnership; and consequently, spouses may validly
become partners to one another in a particular
partnership, which would include a professional
partnership, and both general and limited
partnerships. The critical question must be asked: Can
spouses just between themselves or with third parties
validly enter into a contract of partnership for gain
provided the resulting partnership is not a universal
partnership?
If one refers only to the provision of Article 1782, the
answer would be in the affirmative. In Commissioner
of Internal Revenue v. Suter, 27 SCRA 152 (1969), which
currently is the only decision to deal with the issue,
the Supreme Court affirmed this particular view,
relying only on the provisions of Article 1677 of the old
Civil Code (now Article 1782), that since the
prohibition for spouses covers expressly only
universal partnerships, then they can validly be
partners in a limited partnership, with the husband
being the general partner and the wife being the
limited partner.
On this particular issue, Bautista limited his comment
to the effect that the provisions of Article 1782
disqualifies “spouses, with respect to any contract of
universal partnership made between them during the
marriage,” and other than reporting the relevant
portions of the decision in Suter, he did not comment
on whether spouses can validly enter into other forms
of partnership for gains. Tolentino does not comment
on the provisions of Article 1782, although his
discussion on the matter under his old work under the
Code of Commerce was quoted in Suter.
To the writer, it seems that in addressing the issue
raised, it would be error to base the resolution only
on of Article 1782 of the Civil Code. Certainly Article
1782 constitutes an important statutory provision to
resolve that issue, but there are other statutory
provisions more primordial in addressing the issue.
Suter, which was decided under the terms of the old
Civil Code and the Code of Commerce, is quite peculiar
in its facts because the contract of partnership started
out where there was no legal obstacle with the
parties entering into a duly registered limited
partnership: Suter as the general partner, with Spirig
and Carlson, as limited partners. Eventually, Suter and
Spirig were married, and bought out the interest of
Carlson. Under the provisions of the Tax Code, the
Commissioner of Internal Revenue then sought to
recover income taxes individually against Suter for
partnership income under the theory that the
separate juridical personality of the partnership by
which it was taxed separately as a corporate taxpayer,
was extinguished with the marriage of Suter and
Spirig, who ended up as the only partners in the
venture. The Court held: “The theory of the petitioner,
Commissioner of Internal Revenue, is that the
marriage of Suter and Spirig and their subsequent
acquisition of the interests of remaining partner
Carlson in the partnership dissolved the limited
partnership, and if they did not, the fiction of juridical
personality of the partnership should be disregarded
for income tax purposes because the spouses have
exclusive ownership and control of the business.” (27
SCRA 152, at p. 156).
The Court found no merit in the position of
the Commissioner, and quoted from the
commentaries of Tolentino, thus:
A husband and a wife may not enter into a contract of
general copartnership, because under the Civil Code,
which applies in the absence of express provision in
the Code of Commerce, persons prohibited from
making donations to each other are prohibited from
entering into universal partnerships. (2 Echaverri, 196)
It follows that the marriage of partners necessarily
brings about the dissolution of a pre-existing
partnership (1 Guy de Montella 58). (Ibid, at p. 157,
quoted from Tolentino, Commentaries and
Jurisprudence on Commercial Laws of the Philippines,
Vol. 1, 4th ed., at p. 58).
Thus, the Court held that the partnership at issue
“was not a universal partnership, but a particular
one. . . since the contributions of the partners were
fixed sums of money, . . . and neither one of them was
an industrial partner. It follows that [it] . . . was not a
partnership that [the] spouses were forbidden to
enter under Article 1677  of the Civil Code of 1889
[now Article 1782].” In essence, Suter holds that
spouses are not disqualified from becoming partners
in a limited partnership, provided one of them (or at
least both of them) is a limited partner.
b.  Spouses Are Not Qualified to Enter into Other
Forms of Partnership for Gain
It is the writer’s position that apart from a
professional partnership, spouses cannot enter into
any form of partnership, be it universal or particular,
general or limited partnership, as a separate property
arrangement apart from the property regime
prevailing in their marriage, for the reasons discussed
below.
Firstly, apart from a universal partnership, every form
of partnership, including a limited partnership,
effectively makes partners “donors” to one another
of their contributions in the partnership. Although a
partnership would have a personality separate and
distinct from each of the partners, so that it can hold
contributed property in its name, nonetheless,
partners are expressly granted by Partnership Law co-
ownership interest in the partnership property as to
then have a direct co-ownership interest therein.
(Articles 1810 and 1811, Civil Code).  Effectively, even in
a limited partnership, such as the Suter situation, the
contribution of the limited partner wife belonged to
the partnership which would then be under the
control and management of the general partner
husband. A partnership arrangement between
spouses would thereby be an indirect violation of the
provisions of Article 87 of the Family Code which
provides that “Every donation or grant of gratuitous
advantage, direct or indirect, between the spouses
during the marriage shall be void.”
Although it can be argued that contributions to a
partnership are not in the nature of “donations” or
“gratuitous advantage,” because a contract of
partnership is essentially an onerous and
commutative contract, whereby the contributions
comes with a cost (e.g., becoming unlimitedly liable
for partnership obligations), nevertheless, such
contributions would then violate the provisions of
Article 1490 of the Civil Code, which prohibits sales or
any other form of onerous dispositions, between
spouses not governed by the complete separation of
property regime .
Secondly, there is clear implication under the Family
Code, that the property regime that must govern
spouses must be in accordance with the provisions of
said Code, and cannot be the subject of regular
partnership rules under the Partnership Law of the
New Civil Code.
(1)  Spouses Governed by the Absolute Community of
Property Regime
To begin with, the Family Code sets the absolute
community of property regime as the default rule for
marriages, and consequently, it cannot exist
consistently with another set of rules governing
partnerships for gains under the Partnership Law of
the Civil Code. Although Article 1782 provides that –
Persons who are prohibited from giving each other
any donation or advantages cannot enter into a
universal partnership,” which beyond doubt should
include spouses, yet under Article 75 of the Family
Code, “In the absence of marriage settlements, or
when the regime agreed upon is void, the system of
absolute community of property as established in this
Code shall govern,” and which under Article 88 of the
Family Code, “shall commence at the precise moment
that the marriage is celebrated [and that any]
stipulation, express or implied, for the
commencement of the community regime at any
other time shall be void.
The absolute community of property regime actually
establishes a sort of “universal partnership” between
the spouses, in that it includes “all property owned by
the spouses at the time of the celebration of the
marriage or acquired thereafter.” (Article 91, Family
Code).  Can spouses governed by the absolute
community of property regime, vary the effects
between them on certain community property, by
contributing them into a particular partnership for
gain? The answer ought to be in the negative, and
such partnership agreement would be void, since
under Article 89 of the Family Code “No waiver of
rights, interest, shares and effects of the absolute
community of property during the marriage can be
made except in case of judicial separation of
property.” In other words, Article 1782 in Partnership
Law is not the main rule on regulating property rights
between spouses, but merely suppletory to the
primary rules set out by the Family Code.
(2)  Spouses Governed by the Conjugal Partnership of
Gains
Take then the cases of spouses governed by the
conjugal partnership of gains, which under Article 105
of the Family Code, can come into play between
spouses only when it has been so stipulated in the
marriage settlements. May spouses therefore enter
into a contract of particular partnership for gain by
contributing thereto either conjugal property, or their
separate properties? When it comes to conjugal
property, the answer ought to be in the negative,
since the effect is that spouses would be donating to
one another, as discussed below, contrary to the
provisions of Article 87 of the Family Code. In
addition, by entering into a contract of particular
partnership and thereby invoking the provisions of
the Partnership Law of the Civil Code on the conjugal
property contributed, would that not in effect be
amending, or perhaps even contravening, the
provisions of the marriage settlements invoking the
Family Code rules covering conjugal partnership of
gains? Article 108 of the Family Code provides that
“The conjugal partnership shall be governed by the
rules on the contract of partnership in all that is not in
conflict with what is expressly determined in this
Chapter or by the spouses in their marriage
settlements.” This shows the primacy of the Family
Code provisions on governing the conjugal
partnership between the spouses, and any attempt to
govern conjugal properties under a contract of
particular partnership would undermine such primacy
and therefore void.
For the same reasons, spouses governed by the
conjugal partnership of gains cannot also validly enter
into a contract of particular partnership for gain, even
when they contribute thereto their separate
properties, because that would in effect constitute
donations to one another as discussed below, and
would undermine the rules of the Family Code on how
such separate properties should answer for the
charges on family affairs.
(3)  Spouses Governed by the Complete Separation of
Property Regime
May spouses governed by the complete separation of
property regime validly enter into a contract of
particular partnership? The answer ought to be in the
negative, for the contribution of any of their separate
properties into the partnership for gain would amount
to donation, and under Article 87 of the Family Code,
which prohibits any form of donation or gratuitous
advantage between spouses during marriage, makes
no distinction, much less an exception, for spouses
governed by the complete separation of property
regime.
c. Contract of Partnership May Offend Against the
Provisions of the Family Code
A contract of partnership between spouses entered
into during marriage would be void because it would
contravene the rules under Articles 76 and 77 of the
Family Code that prohibit “any modification in the
marriage settlements” after the “celebration of the
marriage,” and which provide that “The marriage
settlement and any modification thereof shall be in
writing, signed by the parties and executed before the
celebration of the marriage.”
In essence, the Partnership Law under the New Civil
Code, which should be considered general provisions,
cannot overcome the more specific provisions on the
Law on Marriages under the Family Code, which
govern specifically the property regime that should
prevail between spouses. The provisions of
Partnership Law are geared towards providing for the
a contractual relationship that seeks to undertake a
business venture; whereas, the Family Code
provisions governing the property regime prevailing
between spouses have considerations that transcend
profit motives, and seek to strengthen the institutions
of marriage and the family. Consequently, a contract
of partnership between spouses should be held void
in that it seeks to overcome or undermine the
mandatory provisions of the Family Code.
There are several areas where there arises real conflict
between doctrines under Partnership Law and those
under the Family Code.
(1)  Issue on Control and Binding Effects of Acts of
Partners
We take the area of control and binding effect of the
acts of partners against other partners and the
partnership itself. Under Partnership Law, every
partner is an agent of the partnership and for the
other partners when it comes to transactions that
pertain to partnership affairs; thus, the act of one
partner binds the other partners and the partnership
property (Articles 1803[1] and 1818, Civil Code). On the
other, the general rule under the Family Code, when it
comes to absolute community of property regime
(Article 96, Family Code)  and conjugal partnership of
gains (Article 124, Family Code), is that both spouses
are co-administrators of the conjugal properties; and
any contract, especially an act of disposition or
encumbrance of the community or the conjugal
property, done by one without the consent of the
other partner, would be void. (Guiang v. Court of
Appeals, 291 SCRA 372 [1998]; Cirelos v. Hernandez,
490 SCRA 625 [2006]; Bautista v. Silva, 502 SCRA 334
[2006]).  Take the case of allowing the spouses to
enter into a particular partnership, and they both
contribute community or conjugal properties thereto,
would the rules under Partnership Law therefore
allow one spouse, without the consent of the other
spouse, to dispose of such property pursuant to
partnership affairs?
Article 145, Family Code provides that “Each spouse
shall own, dispose of, possess, administer and enjoy
his or her own separate estate, without need of the
consent of the other. To each spouse shall belong all
earnings from his or her profession, business or
industry and all fruits, natural, industrial or civil, due or
received during the marriage from his or her separate
property.” Under a complete separation of property
regime, spouses separately manage and control their
separate properties. http://www.blogger.com/post-
create.g?blogID=6336731883560557810 - _ftn10Can
spouses who are governed by the regime of
separation of property, thereby partially overcome
the governing provisions of the Family Code, by being
allowed to validly enter into a particular partnership
agreement?
(2) Charges to Partnership Properties
We should look also into the areas of charges against
the partnership properties and the effects of
dissolution. Under Partnership Law, partnership
properties would be chargeable against any claim or
contract entered into pursuant to partnership affairs.
On the other hand, under both the absolute
community of property regime and the conjugal
partnership of gains, there are specific listings of what
should first be chargeable against the community
property (Articles 94 and 95, Family Code),  or the
conjugal property (Articles 121 to 123, Family Code), 
like support and debts contracted for the benefit of
the marriage. Under a regime of separate property,
both spouses shall bear the family expenses in
proportion to their income, or, in case of insufficiency
or default thereof, to the current market value of their
separate properties (Article 146, Family Code).
When community, conjugal or separate property is
allowed to be contributed into the partnership for
gain, the rules of first preference of partnership
creditors to partnership property would undermine
the claims of personal creditors of spouses, as well as
the ability of marriage properties to properly provide
for the family support and upkeep. In addition,
contributions by spouses of marriage property into a
partnership for gain would certainly allow a means by
which spouses may defraud their marriage creditors,
by making certain marriage properties subject to
greater claims outside of marriage affairs.
d.   Professional Partnerships
May spouses by themselves, or together with other
professionals, enter validly into a contract of
professional partnership, which by definition of Article
1783 of the Civil Code is always a particular
partnership? The answer seems to be in the
affirmative. The reason is that a professional
partnership essentially covering the contribution of
service by the spouses, does not primarily bind actual
community or conjugal properties, and therefore thus
not operate in violation of the property rules
governing marriage property regimes.
More importantly, professional partnership are not
really pursued for profit, but more for civic or
vocational ends and therefore do not address
proprietary ends; but rather, the exercise of a
profession, even in the partnership medium, has more
to do with the expression of ideals held by an
individual or towards achieving a fruitful life in the
mundane world. This fact is recognized even under
the Family Code, where Article 73 provides that
“Either spouse may exercise any legitimate
profession, occupation, business or activity without
the consent of the other.
2.  May Corporations Validly Qualify to Become
Partners?
The prevailing rule in the United States is that –
“Unless it is expressly authorized by statute or
charter, a corporation cannot ordinarily enter into
partnerships with other corporations or with
individuals, for, in entering into a partnership, the
identity of the corporation is lost or merged with that
of another and the direction of the affairs is placed in
other hands than those provided by law of its
creation. . . A corporation can act only through its duly
authorized officers and agents and is not bound by
the acts of anyone else, while in a partnership each
member binds the firm when acting within the scope
of the partnership.” (FLETCHER CYC. CORPORATIONS
(Perm. Ed.) 2520).
The doctrine is grounded on the theory that the
stockholders of a corporation are entitled, in the
absence of any notice to the contrary in the articles of
incorporation, to assume that their directors will
conduct the corporate business without sharing that
duty and responsibility with others. (BAUTISTA, at p.
9).
a.  Jurisprudential Rule
Tuason v. Bolanos, 95 Phil. 106 (1954),   recognized at
that time in Philippine jurisdiction the doctrine in
Anglo-American jurisprudence that “a corporation has
no power to enter into a partnership.” (Ibid, at p. 109).
Nevertheless, Tuason ruled that a corporation may
validly enter into a joint venture agreement, “where
the nature of that venture is in line with the business
authorized by its charter.” (Ibid, quoting from
Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R.,
1043, citing Fletcher Cyc. of Corp., Sec. 1082).
A joint venture is essentially a partnership
arrangement, although of a special type, since it
pertains to a particular project or undertaking
(BAUTISTA, supra, at p. 50). In Torres v. Court of
Appeals, 278 SCRA 793, the Supreme Court held
unequivocally that a joint venture agreement for the
development and sale of a subdivision project would
constitute a partnership pursuant to the elements
thereof under Article 1767 of the Civil Code that
defines when a partnership exists). 
Although Tuason does not elaborate on why a
corporation may become a co-venturer or partner in a partnership, and the articles of partnership must
joint venture arrangement, it would seem that the stipulate that all the partners shall be jointly and
policy behind the prohibition on why a corporation severally liable for all the obligations of the
cannot be made a partner do not apply in a joint partnership. (Ibid)
venture arrangement. Being for a particular project or
The second condition set by the SEC would have the
undertaking, when the Board of Directors of a
effect of allowing a corporation to enter as a general
corporation evaluate the risks and responsibilities
partner in general partnership, which would still have
involved, they can more or less exercise their own
contravened the doctrine of making the corporation
business judgment is determining the extent by which
unlimitedly liable for the acts of the other partners
the corporation would be involved in the project and
who are not its authorized officers or agents. This
the likely liabilities to be incurred. Unlike in an
interpretation of the second condition was confirmed
ordinarily partnership arrangement which may expose
by the SEC in 1994, to mean that a partnership of
the corporation to any and various liabilities and risks
corporations should be organized as a “general
which cannot be evaluated and anticipated by the
partnership” wherein all the partners are “general
Board, the situation therefore in a joint venture
partners so that all corporate partners shall take part
arrangement, allows the Board to fully bind the
in the management and thus be jointly and severally
corporation to matters essentially within the Board’s
liable with the other partners.” (SEC Opinion, dated 23
business appreciation and anticipation.
February 1994, XXVII SEC Quarterly Bulletin 18 (No. 3,
It is clear therefore that what makes a project or Sept. 1994).
undertaking a “joint venture” to authorize a
The rationale given by the SEC for the second
corporation to be a co-venturer therein is not the
condition was that if the corporation is allowed to be
name or nomenclature given to the undertaking, but
a limited partner only, there is no assurance that the
the very nature and essence of the undertaking that
corporate partner shall participate in management of
limits it to a particular project which allows the Board
the partnership which may create a situation wherein
of Directors of the participating corporation to
the corporation may not be bound by the acts of the
properly evaluate all the consequences and likely
partnership in the event that, as a limited partner, the
liabilities to which the corporation would be held
corporation chooses not to participate in the
liable for.
management. (Ibid).
b. SEC Rules
However, in 1995, the SEC reversed such
The SEC, in a number of opinions, has recognized the interpretation and practically dropped the second
general rule that a corporation cannot enter into a requirement, when it admitted the following
contract of partnership with an individual or another reasoning for allowing a corporation to invest in a
corporation on the premise that it would be bound by limited partnership, thus:
the acts of the persons who are not its duly appointed
1. Just as a corporate investor has the power to make
and authorized agents and officers, which is
passive investments in other corporations by
inconsistent with the policy of the law that the
purchasing stock, a corporate investor should also be
corporation shall manage its own affairs separately
allowed to make passive investments in partnerships
and exclusively. (SEC Opinion, 22 December 1966, SEC
as a limited partner, who would then not be bound
FOLIO 1960-1976, at p. 278; citing 13 Am. Jr. Sec. 823
beyond the amount of its investment by the acts of
(1938); 6 Fletcher Cyc. Corp., Perm. Ed. Rev. Repl.
the other partners who are not its duly appointed and
1950, at p. 2520).
authorized agents and officers. Hence, the very
However, the SEC has on special occasions allowed reason why as a general rule, a corporation cannot
exceptions to the general rule when the following enter into a contract of partnership, as stated in the
conditions are complied with: 1966 SEC opinion, would no longer be present, as the
corporation, which is merely a limited partner, will
(a)   The authority to enter into a partnership relation
now be protected from the unlimited liability of the
is expressly conferred by the charter or the articles of
other partners who are not agents or officers of the
incorporation of the corporation, and  the nature of
corporation;
the business venture to be undertaken by the
partnership is in line with the business authorized by 2. Section 42 of the Corporation Code which permits a
the charter or articles of incorporation of the corporation to invest its funds in another corporation
corporation involved (SEC Opinion, 29 February 1980); or business, does not require that the investing
corporation be involved in the management of the
(b)   The agreement on the articles of partnership
investee corporation with a view to protect its
must provide that all the partners shall manage the
investment therein. By entering into a contract of
limited partnership, a corporation would continue to
manage its own corporate affairs while validly
abstaining from participation in the management of
the entity in which it has invested. Accordingly, as
there is generally no threat that a corporate limited
partner would be solidarily liable with the partnership,
there would be no reason for requiring a corporate
partner to actually manage the partnership, if it makes
the business decision no to do so and opts to become
a limited partner; and
3. The SEC policy that a corporation cannot enter into
a limited partnership, is an offshoot of the outdated
view in the U.S., that, as a general rule, corporations
could not form a partnership; that corporations
cannot become limited partners, is based on an
assumption which is no longer current. Jurisprudence
and common commercial practice in the U.S., indicate
that corporations are not barred from acting as
limited partners. Current American laws support the
position that a corporation can enter into a contract
of limited partnership. For example, the Revised
Uniform Limited Partnership Act of 1976 (as amended
in 1985), specifically confirms, that corporations may
act as limited partners. Almost all states in the U.S.
have adopted limited partnership laws which provide,
in the same manner as the Revised Uniform Limited
Partnership Act, that corporations may act as limited
partners. This indicates that many other jurisdictions
simply follow the broad language of the Revised
Model Business Corporations Act which suggests that
corporations may act as limited partners and in no
event prohibits that activity. These statutes reaffirm
what is indicated by the commercial practice in the
U.S., that corporations can act as limited partners. The
proliferation of statutes reversing the doctrine
forbidding corporations to become partners is proof
of the unsoundness of and dissatisfaction with such
doctrine. (SEC Opinion, 17 August 1995, XXX SEC
Quarterly Bulletin 8-9 (No. 1, June 1996).
In that opinion, the SEC conceded on the points raised
by confirming that “inasmuch as there is no existing
Philippine law that expressly prohibits a corporation
from becoming a limited partner in a partnership, the
Commission is inclined to adopt your view on the
matter,” (Ibid) provided that the power to enter into
a partnership is provided for in the corporation’s
charter.  The SEC went on to say:
“We agree with your statements that a
reconsideration of the present policy of the
Commission on the matter is timely in order to permit
the Philippine commercial environment to maintain its
pace in terms of legal infrastructure with similar
developments in the international arena with a view
to encouraging and facilitating greater domestic and
foreign investments in Philippine business
enterprise.” (Ibid)
12 – RIGHTS AND POWERS OF PARTNERS
Article 1810 of the Civil Code provides that the
property rights of every partner in the partnership set-
up to be as follows:
(a) Right to Participate in the Management of the
Partnership;
(b) Right in Specific Partnership Property; and
(c) Equity Interest in the Partnership.
The enumeration under Article 1810 of the “property
rights” of a partner defines the three-fold role that
every partner assumes under a contract of
partnership: as an equity holder (investor), a manager
of the business enterprise (a co-proprietor of the
business enterprise), and as an agent of the
partnership juridical person and of the other partners.
The multi-level positions assumed by partners under a
partnership arrangement are potentially wrought
with conflict-of-interests situations. Consequently,
two important doctrinal approaches animate the Law
on Partnerships as a consequence of such multi-level
positions of partners.
First is to characterize the contract of partnership and
the contractual relationships between and among the
partners as of the highest fiduciary and personal level
(delectus personae), which therefore ensures that
partners share the partnership bed only with parties
with whom they contracted and there is no occasion
in the future for a third party to be allowed to join the
group without their unanimous consent; and that
every partner is afforded the ability to withdraw from
the contractual relationship whenever he becomes
uncomfortable with any or all of the other partners.
Second is that each of the “property rights” of each of
the partners, as enumerated under Article 1810, are
treated separately, to ensure that those rights that
pertain to agency and personal relations are not
affected by dealings on those which are strictly
proprietary in nature. In other words, the bundle of
“property rights” of a partner is not indivisible, and in
fact the philosophy under Philippine Partnership Law
is to consider them divisible, and capable of being
treated and transacted separately.
The foregoing doctrinal approaches shall animate the
discussions hereunder on the rights and obligations of
partners in the partnership arrangement.
1. Partner’s Right to Manage the Partnership
a. General Rule on Partnership Management
Article 1818 of the Civil Code provides that “Every
partner is an agent of the partnership for the purpose
of its business, and the act of every partner, including
the execution in the partnership name of any
instrument, for apparently carrying on in the usual
way the business of the partnership of which he is a
member binds the partnership.” This principle is
supported by Article 1803 which provides “When the
manner of management has not been agreed upon . . .
All the partners shall be considered agents and
whatever any one of them may do alone shall bind the
partnership.” Article 1818 goes on to provide that “An
act of a partner which is not apparently for the
carrying on of the business of the partnership in the
usual way does not bind the partnership unless
authorized by the other partners.”
Embodied clearly with the language of Article 1818 is
the “doctrine of apparent authority” which allows a
third party dealing with a juridical entity to rely upon
the validity and enforceable of contracts entered into
with an officer or representative who has been by
practice endowed with apparent authority to act for
the juridical person. In every partnership, there is a
presumption of apparent authority for every partner
to act for and thereby bind the partnership in all that
is “apparently for the carrying on of the business of
the partnership in the usual way.” Thus, the
Court held in Munasque v. Court of Appeals, 139 SCRA
533 (1985), that a presumption exists that each
partner is an authorized agent for the firm and that he
has authority to bind it in carrying on the partnership
transaction.
We should therefore consider the old ruling in Council
of Red Men v. Veterans Army, 7 Phil. 685 (1907), where
the Court interpreted the original provision of Article
1803 of the Civil Code (then Article 1695 of the old Civil
Code), that allowed one partner to act to bind the
partnership, to apply only when there has been no
provision at all in the articles of partnership on the
exercise of power or management, thus:
One partner, therefore, is empowered to contract in
the name of the partnership only when the articles of
partnership make no provision for the management
of the partnership business. In the case at bar we
think that the articles of the Veteran Army of the
Philippines do so provide. It is true that an express
disposition to that effect is not found therein, but we
think one may be fairly deduced from the contents of
those articles. They declare what the duties of the
several officers are. In these various provisions there
is nothing said about the power of making contracts,
and that faculty is not expressly given to any officer.
We think that it was, therefore, reserved to the
department as a whole; that is, that in any case not
covered expressly by the rules prescribing the duties
of the officers, the department were present. It is
hardly conceivable that the members who formed this
organization should have had the intention of giving
to any one of the sixteen or more persons who
composed the department the power to make any
contract relating to the society which that particular
officer saw fit to make, or that a contract when so
made without consultation with, or knowledge of the
other members of the department should bind it. We
therefore, hold that no contract, such as the one in
question, is binding on the Veteran Army of the
Philippines unless it was authorized at a meeting of
the department. No evidence was offered to show
that the department had never taken any such action.
In fact, the proof shows that the transaction in
question was entirely between Apache Tribe, No. 1,
and the Lawton Post, and there is nothing to show
that any member of the department ever knew
anything about it, or had anything to do with it. The
liability of the Lawton Post is not presented in this
appeal.
We are of the strong position that the doctrine
in Council of Red Men,rendered at a time when our
legal jurisdiction was still deciding the proper
formulation of the doctrines in Philippine Partnership
Law, no longer applies.
Firstly, the prevailing doctrine now embodied in
Articles 1803[1] and 1818 of the Civil Code is that every
partner has the apparent authority to act for and in
behalf of the partnership in carrying on the ordinary
or  usual business of the partnership.
Secondly, the ruling in Council of Red Men was based
on the principal that the special rules of management
of partnership affairs provided for in the articles of
partnership is binding on the public, or at least on
every person dealing with the partnership.  This is not
the rule under Philippine Partnership Law which
characterizes the contract of partnership and the
arising of the partnership juridical person, as being
merely consensual with no specific formalities being
required in general. Thus, even when the articles of
partnership has been formally executed and
registered with the SEC, the same is not considered to
be a public document binding on the public.
Therefore, notwithstanding what specific provisions
may be found in the articles of partnership on the
management of the partnership business, the same is
binding inter se among the partners, but does not
prejudice the rights of a third party who deals in good
faith with the partners without actual knowledge of
the content of the articles of partnership.
Although special management arrangements may be
made among partners, and even when so formalized
within the terms of the articles of partnership,
generally such special arrangements do not bind or
prejudice third parties who deal with the partnership
business without knowledge of such special
arrangement, and who are not mandated to seek
formal authority and that in fact are deemed to have a
right to expect, unless otherwise indicated, that their
dealings with the managing partner should bind the
partnership.
This situation is best exemplified in the decision
in Litton v. Hill & Ceron, 67 Phil. 509 (1935), where an
obligation in a sum of money was sought to be
recovered from the partnership Hill & Ceron in whose
name it was entered into by one of the managing
partners, when in fact the articles of partnership
provided expressly that: “Sixth. That the management
of the business affairs of the copartnership shall be
entrusted to both copartners who shall jointly
administer the business affairs, transactions and
activities of the copartnership.” In ruling that the act
of just one of the managing partners should properly
make the partnership liable for the payment of the
debt, the Court held –
It follows from the sixth paragraph of the articles
partnership of Hill & Ceron above quoted that the
management of the business of the partnership has
been entrusted to both partners thereof, but we
dissent from the view of the Court of Appeals that for
one of the partners to bind the partnership the
consent of the other is necessary. Third persons, like
the plaintiff, are not bound in entering into a contract
with any of the two partners, to ascertain whether or
not this partner with whom the transaction is made
has the consent of the other partner. The public need
not make inquiries as to the agreements had between
the partners. Its knowledge is enough that it is
contracting with the partnership which is represented
by one of the managing partners. (Ibid, at p. 513).
Litton held that there is a general presumption that
each individual partner is an authorized agent for the
firm and that he has authority to bind the firm in
carrying on the partnership transaction, and that the
presumption is sufficient to permit third persons to
hold the firm liable on transactions entered into by
one of the members of the firm acting apparently in
its behalf and within the scope of his authority. This
was especially true under the circumstances
in Litton where the transaction which gave rise to the
partnership obligation was in the ordinary course of
the partnership’s business.
Litton also supports the legal position that even with
the registrations of the article of partnership with the
SEC, the same does not constitute a public document
that binds those who deal with the partnership
enterprise. In other words, even a registered articles
of partnership constitutes first and foremost a intra-
partnership document that is binding upon the
partners, and a third party acting in good faith
without actual knowledge of the contents thereof is
not bound by the terms of the articles of partnerships.
In Smith, Bell & Co. v. Aznar, 40 O.G. 1881 (1941), the
Court held that in a transaction covering the purchase
and delivery of merchandise within the ordinary
course of the partnership business effected by the
industrial partner without the consent of the capitalist
partner, the provisions in the articles of partnership
that the industrial partner “shall manage, operate and
direct the affairs, businesses and activities of the
partnership,” constitute sufficient authority to make
such transaction binding against the partnership, as
against another provision of the articles by which the
industrial partner is authorized “To make, sign, seal,
execute and deliver contracts . . upon terms and
conditions acceptable to him duly approved in writing
by the capitalist partner,” which must cover only the
execution of formal contracts in writing and not
necessarily to routine transactions such as ordinary
purchases and sale of merchandise.
In addition, Aznar applied the “doctrine of apparent
authority” and the “estoppel doctrine” when it held
that “The evidence also shows that previous
purchases made by [the industrial partner] in the
name of the Aznar & Company from the same plaintiff
were honored and paid for by the said firm, and we
may well also assume that the goods herein in
question which were delivered to defendant firm
were made use of by the latter. It is, therefore, but
just that the firm answer for their value.” (at p. *).
In Goquiolay v. Sycip, 108 Phil. 947 (1960), the Court
even took into consideration the provisions of Article
129 of the Code of Commerce to the effect that “If the
management of the general partnership has not been
limited by special agreement to any of the members,
all shall have the power to take part in the direction
and management of the common business, and the
members present shall come to an agreement for all
contracts or obligations which may concern the
association.” It laid down the rule that is relevant
under the current provisions of the Civil Code that
defines the necessity of concurrence of partners’ vote
on any partnership act or contract, thus:
but this obligation is one imposed by law on the
partners among themselves, that does not necessarily
affect the validity of the acts of a partner, while acting
within the scope of the ordinary course of business of
the partnership, as regards third persons without
notice. The latter may rightfully assume that the
contracting partner was duly authorized to contract
for and in behalf of the firm and that, furthermore, he
would not ordinarily act to the prejudice of his co-
partners. The regular course of business procedure
does not require that each time a third person
contracts with one of the managing partners, he
should inquire as to the latter’s authority to do so, or
that he should first ascertain whether or not the other
partners had given their consent thereto. In fact,
Article 130 of the same Code of Commerce provides
that even if a new obligation was contracted against
the express will of one of the managing partners, “it
shall not be annulled for such reason, and it shall
produce its effects without prejudice to the
responsibility of the member or members who
contracted it, for the damages they may have caused
to the common fund.” (Ibid, at p. 957)
The right of a partner to manage the affairs of the
partnership or to act as an agent of the partnership is
expressly affirmed by the following statutory
provisions:
(a)   Article 1820, which provides that an admission or
representation made by any partner concerning
partnership affairs within the scope of his authority is
evidence against the partnership;
(b)    Article 1821, which provides that notice to
any partner of any matter relating to partnership
affairs, and the knowledge of partner acting in the
particular matter, acquired while a partner or then
present to his mind, and the knowledge of any other
partner who reasonably could and should have
communicated it to the acting partner, operate as
notice or knowledge of the partnership (except in
case of a fraud on the partnership);
(c)    Article 1822, which provides that any loss or injury
caused to any third person or any penalty incurred by
reason of any wrongful act or omission of a partner
acting in the ordinary course of the business of the
partnership or with the authority of his co-partners,
shall make the partnership liable therefore; and
(d)    Article 1823, which provides that the partnership
is bound to make good the loss caused by the
misapplication by a partner acting within the scope
of his apparent authority of money or property
belonging to, or received by the partnership from, a
third person.
In the cases of items (c) and (d) above-enumerated,
Article 1824 of the Civil Code provides expressly that
“All partners are liable solidary with the partnership
for everything chargeable to the partnership.”
b.   Transactions Not in the Ordinary Course of
Partnership Business
Article 1818 of the Civil Code enumerates what are
certainly not“apparently for the carrying on of the
business of the partnership in the usual way,” and will
not therefore be valid transactions unless done by or
approved by all the partners, thus:
(a)  Assigning of partnership property in trust for
creditors or on the assignee’s promise to pay the
debts of the partnership;
(b)  Disposition of the goodwill of the business;
(c)  Confession of a judgment;
(d)  Entering into a compromise concerning
a partnership claim or liability;
(e)  Submitting a partnership claim or liability to
arbitration; or
(f)  Renouncing a partnership claim.
The foregoing cases are considered to be not merely
acts of administration, but rather acts of ownership
which can only be effected by the concurrence of all
the partners who are collectively deemed to be the
“owners” of the partnership and its business
enterprise.
One would consider therefore that when the
transaction involves the sale, transfer or encumbrance
of the entire partnership business enterprise, it would
constitute an act of strict ownership or an act of
alteration, which cannot be considered as within the
ordinary course of business that would come within
the apparent authority of one partner. And yet in the
early case of Goquiolay v. Sycip, 108 Phil. 947 (1960),
the Court held that the sale of the partnership’s
business enterprise can be considered to be within
the power of the managing partner, thus:
Appellants also question the validity of the sale
covering the entire firm realty, on the ground that it,
in effect, threw the partnership into dissolution, which
requires consent of all the partners. This view is
untenable. That the partnership was left without the
real property it originally had will not work its
dissolution, since the firm was not organized to
exploit these precise lots but to engage in buying and
selling real estate, and “in general real estate agency
and brokerage business”. Incidentally, it is to be noted
that the payment of the solidary obligation of both
the partnership and the late Tan Sin An, leaves open
the question of accounting and contribution between
the co-debtors, that should be ventilated separately.
(Ibid, at p. 960).
Perhaps Goquiolay was decided at an earlier time in
our jurisdiction when the concept and doctrines
pertaining to “business enterprise transfers” were
not yet developed, much less appreciated. On ruling
on the motion for reconsideration, the resolution
of Goquiolay v. Sycip, 9 SCRA 663 (1969), returned on
this point and clarified the applicable doctrine as
follows:
It is next urged that the widow, even as a partner, had
no authority to sell the real estate of the firm. This
argument is lamentably superficial because it fails to
differentiate between real estate acquired and held as
stock-in-trade and real estate held merely as business
site (Vivante’s “taller o banco social”) for the
partnership. Where the partnership business is to deal
in merchandise and goods, i.e., movable property, the
sale of its real property (immovables) is not within the
ordinary powers of a partner, because it is not in line
with the normal business of the firm. But where the
express and avowed purpose of the partnership is to
buy and sell real estate (as in the present case), the
immovables thus acquired by the firm from part of its
stock-in-trade, and the sale thereof is in pursuance of
partnership purposes, hence within the ordinary
powers of the partner. . . (Ibid, at pp. 671-672).
The foregoing discussions in Goquiolay certainly began
to appreciate an act or transaction in the ordinary
course of business, which basically may involve only a
sale of assets, from an extraordinary act or contract,
which either disposes of the business enterprise or
has the effect of preventing the pursuit of the
business enteprise.
c.   Specific Modification on the Power of
Management
It is a policy in Partnership Law for the partners to be
allowed to expressly contract around the default
principle of “mutual agency” (i.e., that the partners
are all managers of the partnership enterprise). Thus,
under Article 1800 of the Civil Code it is possible to
appoint only one managing partner in the articles of
partnership, in which case the managing partner “may
execute all acts of administration despite the
opposition of his partners,” and his powers are
irrevocable without just or lawful cause. The same
rule would apply when a partner is designated as
managing partner outside of the articles of
incorporation, but in such case his designation as
managing partner is essentially revocable.
Thus, the Supreme Court has held that: a manager of
a partnership can execute acts of administration
without need of consent of the partners, including the
power to purchase goods in the ordinary course of
business (Smith, Bell & Co. v. Aznar, 40 O.G. 1882
[1941]); to hire employees (Garcia Ron v. La Compania
de Minas de Batau, 12 Phil. 130 [1908]), as well to
dismiss employees (Martinez v. Cordoba & Conde, 5
Phil. 545 [1906]); to secure a loan to finish the
construction of the boat of the partnership (Agustia v.
Mocencio, 9 Phil. 135 [1907]); to employ a
bookkeeper by his sole authority (Fortis v. Gutierrez
Hermanos, 6 Phil. 100 [1906]); and to commence a suit
in the name of the partnership against partnership
debtors (Tai Tong Chuache & Co. v. Insurance
Commission, 158 SCRA 366 (1988). Curiously though,
the Court has also held that the managing partner has
no power to purchase “barge, a truck and an adding
machine” in the name of the partnership inasmuch as
none of the properties were considered to be
“supplies for partnership business.” (Teague v. Martin,
53 Phil. 504 [1929]) The old ruling is contrary to the
doctrine of apparent authority in the usual or normal
pursuit of the business of the partnership embodied in
Article 1818 of the Civil Code, especially when it comes
to the adding machine.
Under Article 1801 of the Civil Code, if two or more
partners have bee entrusted with the management of
the partnership affairs without specification of their
respective duties, or without stipulation that one of
them shall not act without the consent of all the
others, each one may separately execute all acts of
administration, but if any of them should oppose the
acts of the others, the decision of the majority shall
prevail; and in case of a tie, the matter shall be
decided by the partner owning the controlling
interest.
On the other hand, under Article 1802, if it has been
stipulated that none of the managing partners shall
act without the consent of the others, the
concurrence of all shall be necessary for the validity of
the acts, and the absence or disability of any one of
them cannot be alleged, unless there is imminent
danger of grave or irreparable injury to the
partnership.
It should be emphasized though that the provisions of
Articles 1800 to 1802 should be considered to be
intramural rules that govern the relationship between
and among the partners, and the breach of which can
bring about a cause of action against the breaching
partners. The rules provided therein do not bind nor
apply to invalidate the contract and transactions had
with third parties acting in good faith and under the
doctrine of apparent authority provided under Article
1818.
d. Power of Alteration
The power of management of the partnership
business, should be distinguished from the power of
ownership and control which is subject to a higher
level of requirements. Under Article 1803(2) of the
Civil Code, none of the partners may, without the
consent of the others, make any important alteration
in the immovable property of the partnership, even if
it may be useful to the partnership. But if the refusal
of consent by the other partners is manifestly
prejudicial to the interest of the partnership, the
court’s intervention may be sought.
e. Power Over Real Properties of the Partnership
Although Article 1774 of the Civil Code provides that
immovable property or an interest therein may be
acquired in the partnership name, the partnership title
is not rendered void if the registration thereof is not in
the name of the partnership but in one or more, or all,
of the partners’ names (or for that matter in the name
of a third-party who holds it in trust for the
partnership).
Article 1819 of the Civil Code sets specific rules on how
partners may bind real properties pertaining to the
partnership, depending on the manner by which such
title was registered, thus:
(1) Where Title Is in the Partnership Name:
(i)   Any partner may convey title to such property by a
conveyance executed in the partnership name; the
partnership may recover such property only when the
partner so conveying has no such power to so convey,
but not against a transferee in good faith and for
value;
(ii)  A partner who conveys the property but in
his own name passes the equitable interest of the
partnership only when the partner so conveying acted
with authority; otherwise, no title at all to
the immovable property passes to the transferee.
The immediately preceding rule is consistent with the
provision of Article 1774 which states that title to
immovable property acquired in the partnership name
can be conveyed only in the partnership name.
(2)  Where Title Is Not in Partnership Name (i.e., in the
Name of One or More, or All the Partners, or a Third
Person in Trust for the Partnership):
(i)  A conveyance executed by a partner in the name
of the partnership or in his own name only
passes equitable interest of the partnership,
only when the partner conveying acted with
authority;
(ii)  A conveyance executed by a partner in the name
of the partnership or in his own name does not even
pass anything (not even equitable interest of the
partnership) when the partner so conveying acted
without authority;
(3) Where Title Is in the Name of One or More But Not
All the Partners:
(i)  When the records disclose partnership
interests, the partners in whose name the title stands
may convey title to such property; and
the partnership may recover only when the partners
so conveying acted without authority, but not against
a purchaser in good faith and for value;
(ii)  When the records do not disclose the right of
the  partnership, the partners in whose name the
title stands may convey title to such property, and the
partnership may recover against any
transferee when the partners so conveying acted
without authority;
(4) Where Title Is in the Name of All of the Partners:
(i)  Conveyance executed by all the partners (in whose
ever name so conveyed) passes all their rights in
such property. In this case the will of all the partners is
the will of the partnership.
2. Partner’s Right to Specific Partnership Property
Although Article 1811 of the Civil Code defines or
explains a partner’s “right in specific partnership
property” to mean that “A partner is [merely a] co-
owner with his partners of specific partnership
property,” and the enumeration of the “incidents of
this co-ownership” would show that what is being
defined is merely an implementation of the principle
of mutual agency, thus:
(a)  “A partner . . . has an equal right with his partners
to possess specific partnership property for
partnership purposes;”
(b)  “A partner’s right in specific partnership property
is not assignable except in connection with the
assignment of rights of all the partners in the same
property;”
(c)  “A partner’s right in specific partnership property
is not subject to attachment or execution, except on
a claim against the partnership;” and
(d)  “A partner’s right in specific partnership property
is not subject to legal support.”
Unlike the proprietary right of an ordinary co-owner
to “use the thing owned in common, provided he
does so in accordance with the purpose for which it is
intended and in such a way as not to injure the
interest of the co-ownership or prevent the other co-
owners from using it according to their rights” (Article
1486, Civil Code),  the right of every partner in specific
partnership property is merely an extension of his
right to participate in the management of the
partnership affairs, and bears no proprietary title to
himself personally apart from pursuing the
partnership affairs.
It may also be observed that the recognition by the
Law on Partnerships of the partners’ purported co-
ownership interests in specific partnership property
would be in defiance of the grant of a separate
juridical personality to every partnership organized
under the Civil Code. Nonetheless, the purported co-
ownership interest of partners is essentially for the
furtherance of the partnership affairs, and emphasizes
the fact that in the partnership setting equity
ownership is merged with management prerogatives,
equivalent to the recognition of the full-ownership by
the partners, as collective sole-proprietors so-to-
speak, of the partnership enterprise and its assets.
A better way of looking at the purported co-
ownership rights of partners to specific partnership
property is to consider that the law constitute the
partners as trustees of the corporate properties,
whereby they hold naked title to the partnership
properties, with full power to manage and control the
same for the benefit of the partnership venture, thus,
“A partner . . . has equal right with his partners to
possess specific partnership property for partnership
purposes.”
Thus, in Catlan v. Gatchalian, 105 Phil. 1270 (1959), it
was held that when partnership real property had
been mortgaged and foreclosed, the redemptio by
any of the partners, even when using his separate
funds, does not allow such redemption to be in his
sole favor: “Under the general principle of law, a
partners is an agent of the partnership (Art. 1818, new
Civil Code). Furthermore, every partner becomes a
trustee for his copartner with regard to any benefits
or profits derived from his act as a partner (Article
1807, new Civil Code). Consequently, when Catalan
redeemed the properties in question be became a
trustee and held the same in trust for his copartner
Gatchalian, subject of course to his right to demand
from the latter his contribution to the amount of
redemption.” (at p. 1271).
This is also the reason why paragraph numbered (2) of
Article 1811 of the Civil Code provides expressly that
“A partner’s right in specific partnership property is
not assignable except in connection with the
assignment of rights of all the partners in the same
property.” Bautista had written that the reasons why
a partner’s right in partnership property is non-
assignable are as follows:
(a) it would effectively allow a third party (the
assignee) to participate in the affairs of the
partnership, and would basically have a stranger
become a partner without the consent of all the other
partners; and
(b) it would interfere with the rights of the other
partners and the partnership creditors to have all
partnership properties applied directly to the
payment of partnership debts; and
(c) it would indirectly go against the principle that
partner’s right in specific partnership property cannot
be attached or levied upon,” (BAUTISTA, at p. 162),  as
provided in paragraph (3) of Article 1811. In line with
the same rationale, paragraph numbered (4) of Article
1811 also provides that a partner’s right in specific
partnership property is also not subject to support.
Bautista reminded us in his treatise that the whole of
Article 1811 of the Civil Code was taken from the
Uniform Partnership Act which, based on common
law, adheres to the “aggregate theory of partnership
under which, because it is not considered an entity or
a legal person, a partnership cannot hold title and
hence partnership property is deemed held or owned
in common by the partners for the benefit of the
partnership,” (BAUTISTA, at pp. 147-148)  as opposed
to the civil law doctrine that affords the partnership a
separate juridical personality,
3. Equity Rights of Partners
Article 1812 of the Civil Code defines a “partner’s
interest in the partnership” essentially as his equity
interest, thus: “his share of the profits and surplus.” A
partner’s interest in the partnership defines his equity
position as a co-proprietor of the partnership
enterprise, which entitles him ipso facto to share in
the profits and to share in the losses of the venture.
“Profits” represent the excess of receipts over
expenses or the excess of the value of returns over
the value of advances (Citizens National Bank v. Corl.
33 S.E.2d 613, 616 (1945); Fairchild v. Gray, 242 N.Y.S.
192 [1930];Crawford v. Surety Insurance Co., 139 P. 481,
484 [1970]);  whereas; “surplus” has been defined as
the excess of assets over liabilities. (Tupper v. Kroc,
492 P. 2d 1275 [1972]; Anderson v. U.S., 131 F.Supp. 501
(1955);Balaban v. Bank of Nevada, 477 P.2d 860 [1970]).
Bautista wrote that “The interest of the partner in the
partnership has thus been otherwise described as the
net balance remaining to him; after all partnership
debts or claims against it have been paid and the
equities and accounts between such partner and his
copartners have been adjusted.” (BAUTISTA, at p.
176, citing Claude v. Claude, 228 P.2d 776 [1951]; Preton
v. State Industrial Accident Commission, 149 P.2d 275
[1944]; Swirsky v. Horwich, 47 N.E.2d 452
[1943]; Cunningham v. Cunningham, 135 N.E. 21 [1922]).
a. Assignability of a Partner’s Equity Right
A partner’s equity interest in the partnership truly
represents a proprietary interest for his exclusive
benefit as an owner of such intangible right.
Therefore, like any other property right, a partner’s
equity is generally transferable or assignable.
Nonetheless under Article 1813 of the Civil Code, the
transfer or assignment of a partner’s equity does not
make the transferee or assignee step into the shoes Bautista wrote that Article 1814 was taken from the
of the partner in his personal capacity as such in Uniform Partnership Act, and patterned after the
relation to the other partners, thus: English Partnership Act of 1890, and it was adopted
formally to a decided purpose of providing a means by
A conveyance by a partner of his whole interest in the
which the separate creditors of a partner may seize
partnership does not of itself dissolve the partnership,
upon his property rights without having to disrupt the
or, as against the other partners in the absence of
operations of the partnership enterprise or effectively
agreement, entitle the assignee, during the
force the dissolution of the partnership. (BAUTISTA,
continuance of the partnership, to interfere in the
at pp. 184-185).  Thus, Article 1814, which allows the
management or administration of the partnership
attachment or execution of a partner’s equity rights in
business or affairs, or to require any information or
a partnership is the remedy given to a partner’s
account of partnership transactions, or to inspect the
separate creditors in lieu of the express prohibition of
partnership books.
seeking an attachment or levy upon the partnership
In other words, under Article 1813, the only thing that assets and properties themselves to cover the
can be conveyed by a partner as an equity holder, is partner’s right to specific partnership property.
the sole right to receive profits and surplus assets
Under Article 1827, the separate creditors of each
upon the dissolution of the partnership, thus: “i
partner may ask for the attachment and public sale of
merely entitles the assignee to receive in accordance
the share of the partner in the partnership assets,
with his contract the profits to which the assigning
which must be upon dissolution and only after the
partners would otherwise be entitled.” The only
partnership creditors have been fully satisfied. To
instance under said provision that the transferee or
construe the provision of Article 1827 literally would
assignee may avail himself of the usual remedies is “in
mean that it would run counter to the provision under
case of fraud in the management of the partnership.
Article 1811(3) which provides that “A partner’s right
Unlike in Corporate Law where the rule on equity is in specific partnership property is not subject to
that they are essentially transferable, in Partnership attachment or execution.”
Law, equity interests of partners are not essentially
Under American jurisprudence, since an equity right in
transferable. This statement is not even accurate
partnership is a present, existing, and not a mere
because if you look at the language of Article 1813 the
contingent, right, it can be assigned, nevertheless, the
proper rule would be, every partner shall have an
partners may agree that one of them cannot sell or
absolute right to transfer or assign his equity interest,
assign his interest without the consent of the other or
but such transaction will not transfer his other rights
others (Pokrzywnicki v. Kozak, 47 A.2d 144 [1946]), or
as a partner. The article also recognizes that just
they may enter into an agreement prohibiting such
because a partner “cashes in” on his equity rights in
assignment altogether (Chaiken v. Employment Security
the partnership, which he has every right to do, the
Commission, 274 A.2d 707 [1971]). Why is a right of
same does not mean that he ceases to be a party to
refusal or right of first refusal generally valid for
the partnership contract nor does it trigger the
partnership equity and not for shares of stock in a
dissolution of the partnership, which means that with
corporation?
respect to his other right to management the
partnership affairs and act as agent of the other A good illustration of the sheer divisibility between
partners, these remain in tact. the property rights of a partner is shown in the
decision in Goquiolay v. Sycip, 108 Phil. 947 (1960),
So separate and divisible is a partner’s equity rights
where the particular provision on succession in the
from his other rights as a partner that even during the
articles of partnership specifically provided as follows:
term of the partnership Article 1814 of the Civil Code
“In the event of the death of any of the partners at
allow the personal judgment creditors of a partner to
any time before the expiration of said term, the
have his equity right in a partnership to “charge the
copartnership shall not be dissolved but will have to
interest of the debtor partner with payment of the
be continued and the deceased partner shall be
unsatisfied amount of such judgment debt with
represented by his heirs or assigns in said
interest thereon; and may then or later appoint a
copartnership.” When the duly designated sole
receiver of his share of the profits, and of any other
managing partner under the articles died and was
money due or to fall due to him in respect of the
succeeded by his widow, it was contended that under
partnership.” The article allows of the partners or the
the terms of the articles she also succeeded to the
partnership itself to either to redeem or to purchase
sole management of the partnership. In ruling against
the equity executed “without thereby causing a
such a conclusion, the Court held –
dissolution” of the partnership.
. . . While, as we previously stated in our narration of
facts, the Articles of Copartnership and the power of
attorney . . . conferred upon the [the sole managing
partner] the exclusive management of the business,
such power, premised as it is upon trust and
confidence, was a mere personal right that
terminated upon [the sole managing partner’s]
demise. The provision in the articles stating that “in
the event of death of any one of the partners within
the 10-year term of the partnership, the deceased
partner shall be represented by his heirs”, could not
have referred to the managerial right given to [the
deceased husband]; more appropriately, it related to
the succession in the proprietary interest of each
partner. (Ibid, at pp. 954-955).
b.   Right to Participate in Profits; the Obligation to
Participate in Losses
The rights of an equity holder are essentially linked to
the operations of the business enterprise, and as he
takes the risk connected with business down-turn,
then to him would also accrue the profits of the
enterprise. One who merely participates in the sharing
of gross returns of an enterprise, as indicated in
Article 1769(3) of the Civil Code does not necessarily
mean that he is an equity holder, for he does not
expose him to the expenses and losses of the
business, in contrast to one who shares in the net
profits, who under Article 1769(4) is prima
facie evidence that he is a partner in the business, if
such participation is not linked to some other clear
contractual arrangement.
Under Article 1767 of the Civil Code, the essence of a
partnership arrangement is the existence of a
common fund or a business enterprise, and which
under Article 1770 must be “established for the
common benefit or interest of the partners;” and
which is the reason why under Article 1799, a
stipulation in the contract of partnership which
excludes one or more of the partners from any share
in the profits or losses is void, but the partnership
arrangement remains subsisting.
Article 1797 of the Civil Code provides for the rules
governing the distribution of profits and losses in the
partnership business, thus:
(a)  Profits and losses shall be distributed in
conformity with the agreement between the
partners;
(b)  If only the share of each partner in the profits has
been agreed upon, the share of each in the
losses shall be in the same proportion;
(c)  In the absence of any such agreement, the share
of each partner in the profits and losses shall be
in proportion to what he may have contributed,
except that the industrial partner shall not be liable
for the losses; as to the profits, the industrial partner
shall receive such share as may be just and equitable
under the circumstances; and if he contributed also
capital,  the shall also receive a share in the profits in
proportion to his capital.
Article 1798 of the Civil Code provides that if the
partners have entrusted to a third person the
designation of profits and losses, such designation
may be impugned only when it is manifestly
inequitable; and in no case may a partnership who has
begun to execute the decision of third person, or who
has not impugned the same within three (3) months
from the time he had knowledge thereof, complain of
such decision. The article also provides that the
designation of losses and profits cannot be entrusted
to one of the partners.
What happens when one or more of the partners are
designated to distribute profits and losses? It would
have to mean that the designation and the exercise
thereof would both be void.
4. Other Rights of a Partner
a. Right to Inspect
Article 1805 of the Civil Code expressly provides that
every partner shall at any reasonable hour have
access to and may inspect and copy the partnership
books which shall be kept at the principal place of
business of the partnership.
In Corporate Law, the right of a stockholder or
member to inspect and copy corporate records is
considered to be a common law right, and a right of
such importance that its enforcement can be by an
action mandamus. The right to inspect is critical to
safeguarding all other rights of stockholders
or members in the corporation.
The same principles are applicable to a partner’s right
to inspect and to demand true and full information on
partnership matters.
b. Right to Demand True and Full Information
Article 1806 of the Civil Code provides that every
partner or his legal representative may demand true
and full information from other partners of all things
affecting the partnership.
Consequently, in consonance with the fiduciary
relationship existing between and among partners,
every partner has the obligations to render true and
full information to other partners of all things
affecting the partnership.
c. Right to Demand Accounting
Under Article 1807 of the Civil Code, every partner
may demand from every other partner an accounting
to the partnership for any benefit, and hold as trustee
for it any profits derived by him without the consent
of the other partners from any transaction connected
with the formation, conduct, or liquidation of the
partnership or from any use by him of its property.
Under Article 1809 of the Civil Code, any partner shall
have the right to a formal account as to partnership
affairs, when he is wrongfully excluded from the
partnership business or possession of its property, if
the right exists under the terms of the partnership
agreement, whenever circumstances render it just
and reasonable.
In Fue Leung v. Intermediate Appellate Court, 169 SCRA
746 (1989), the Court held that a partner’s right to
accounting exists as long as the partnership exists,
and that prescription begins to run only upon the
dissolution of the partnership and final accounting is
done.
On the other hand, iIn Hanlon v. Haussermann and
Beam, 40 Phil. 796 (1920), the Court ruled that former
partners in a joint undertaking to rehabilitate a mining
plant have no right to demand accounting for the
profits of such undertaking when the partnership
arrangement had been terminated with the failure of
the claiming partners to raise the promised
investments into the enterprise, and that the other
two partners pursued the venture on their own
account and only after the partnership arrangement
had terminated.
In Lim Tanhu v. Ramolete, 66 SCRA 425 (1975), the
Court held that a partner’s right to accounting for
properties of the partnership that are within the
custody or control of the other partners shall apply
only when there is proof that such properties,
registered in the individual names of the other
partners, have been acquired from the use of
partnership funds, thus:
“Accordingly, the defendants have no obligation to
account to anyone for such acquisitions in the
absence of clear proof that they had violated the trust
of [one of the partners] during the existence of the
partnership.” (Ibid, at p. 477).
d. Right to Dissolve the Partnership
The near-absolute legal power of any partnership in a
partnership to demand the dissolution of the
partnership is in consonance with the doctrine
of delectus personae that establishes a fiduciary
relationship between and among the partners.
In Rojas v. Maglana, 192 SCRA 110 (1990), the Court
confirmed the right of a partner to “unilaterally
dissolve the partnership,” by a notice of dissolution,
which in effect is a notice of withdrawal from the
partnership, thus: “Under Article 1830(2) of the Civil
Code, even if there is a specified term, one partner
can cause its dissolution by expressly withdrawing
even before the expiration of the period, with or
without justifiable cause. Of course, if the cause is not
justified or no cause was given, the withdrawing
partner is liable for damages but in no case can he be
compelled to remain in the firm. With his withdrawal,
the number of members is decreased, hence, the
dissolution.” (Ibid, at pp. 118-
119).http://www.blogger.com/post-create.g?
blogID=6336731883560557810 - _ftn2
The right of a partner to dissolve the partnership will
be discussed in more details on the chapter on
Dissolution, Winding-up and Termination.
5. Obligations of the Partnership
a. Obligations to the Partners
Partnership Law lays down specific provisions to
govern the obligation of the partnership to the
partners arising from the management of partnership
affairs, thus:
(1)  Amounts disbursed for and in Behalf of the
Partnership
Article 1796 of the Civil Code provides that the
partnership shall be responsible to every partner for
the amounts he may have disbursed on behalf of the
partnership and for the corresponding interest, from
the time the expenses are made;
(2)  Contracts Entered into for and In Behalf of the
Partnership
Article 1797 of the Civil Code provides that the
partnership shall also answer to each partner for the
obligations such partner may have contracted in good
faith in the interest of the partnership business, and
for the risks and consequence of its management.
(3) Keeping of the Books
Under Article 1805 of the Civil Code, the partnership
books shall be kept, subject to any agreement
between the partners, at the principal place of
business of the partnerships, and every partner shall
at any reasonable hour have access to and may
inspect and copy any of them.
b. Obligations to Third Persons
Partnership Law, particularly under Article 1768,
accords to the partnership venture a separate juridical
personality, primarily to allow a more feasible and
efficient manner by which to deal with the public and
to organize the venture into a enterprise that
provides for a clear delineation of liability and a
hierarchy of claims against its assets.
(1)  Liability Arising from the Firm Name
The name of a partnership venture becomes essential
in its commercial dealings because it identifies the
person of the partnership which is deemed to be
party bound in each of the contracts entered into.
Thus, under Article 1815 of the Civil Code, “Every
partnership shall operate under a firm name, which
may or may not include the name of one or more of
the partners.” The inclusion of the name of a person
in the partnership name becomes a conclusive
presumption to the public who deals in good faith
with the firm that he is a partner thereto.
Consequently, under said article, “[t]hose who, not
being members of the partnership, include their
names in the firm name, shall be subject to the liability
of a partner.”
(2)  Liability Arising from the Acts of the Agent
Since the corporate venture is accorded a separate
juridical personality, then the liability that it incurs
with the public that it deals with can only arise from
the acts of the partnership’s authorized agent or
agents, which by default rule would be every partner
(Article 1818, Civil Code).
The liability that the partnership must bear from the
acts of the partners pursuant to partnership business
applies only to a third person who deals in good faith
with the partnership; Thus, a third person who knows
of the lack of authority of the partner acting in a
partnership transactions generally cannot claim
against the partnership, thus:
(a)  When “the partner so acting has in fact no
authority to act for the partnership in the particular
matter, and the person with whom he is dealing has
knowledge of the fact that he has no such
authority” (Article 1818, Civil Code); and
(b)  “An act of a partner which is not apparently
for the carrying on of the business of the partnership
in the usual way does not bind the partnership
unless authorized by the other partners” (Article 1818,
Civil Code); and
(c)  “No act of a partner in contravention of a
restriction on authority shall bind the partnership to
persons having knowledge of the restriction” (Article
1818, Civil Code)
13 – DUTIES AND OBLIGATIONS OF PARTNERS
1. Obligation to Contribute to the Common Fund
Since the agreement to contribute to a common fund
is an essential element for a valid contract of
partnership to arise, Philippine Partnership Law
provides for clear statutory provisions governing such
obligations.
In Corporate Law, equity obligations (i.e., the
obligation to pay subscriptions to capital stock) are
not treated as debt obligations, and the receivables
arising therefrom are not considered as forming part
of the ordinary assets of the corporation. The rule
takes it rationale from the “trust fund doctrine,” that
the assets of the corporation corresponding to
its capital stock are treated as a trust fund preserved
for the protection of the claims of the corporate
creditors who can, are under the corporate “limited
liability” rule, recover on their liabilities to the assets
of the corporation and the investments and promised
investments of the stockholders. (Ong Yong v. Tiu, 401
SCRA 1 [2003]; NTC v. Court of Appeals, 311 SCRA 508
[1999]; Commissioner of Internal Revenue v. Court of
Appeals, 301 SCRA 152 [1999]; Boman Environmental
Dev. Corp. v. Court of Appeals, 167 SCRA 540 [1988]).
Consequently, capital contributions and obligations to
contribute capital (i.e., subscription contracts and
subscription receivables) cannot be treated like
ordinary contracts and debts, and are not subject to
rescission, set-off, or condonation, in order to ensure
their collectibility for the benefit of the corporate
creditors.
In Partnership Law, the rule is quite different in that
Article 1786 of the Civil Code provides that “Every
partner is a debtor of the partnership for whatever he
may have promised to contribute thereto.” The
reason for this rule is that in Partnership Law, the
prevailing doctrine is “unlimited liability” on the part
of the partners, and there is no need to consider their
capital accounts and promised contribution as a “trust
fund” for the protection of the partnership creditors,
who have the legal right to seek satisfaction of their
claims even against the separate properties of each of
the partners not contributed or promised to the
partnership.
This is not to say that some of the elements of the
trust fund doctrine do not apply to the partnership
setting, for they do, such as the rule that creditors
have preference over partners against the partnership
properties. Thus, Article 1826 of the Civil
Code provides that “The creditors of the partnership
shall be preferred to those of each partner as regards
the partnership property.”
Why is it then necessary for Partnership Law to declare
expressly that a partner is a debtor of the partnership
for whatever he may have promised to contribute
thereto? The answer lies in the primary principle which
Partnership Law seeks to promote, which is that the
promise or obligation to contribute to the common
fund is of the essence of the contract of partnership
and binds the partners to one another as the very
privity of their relationship, and the breach of which
would break the contractual bond (delectus
personae). The point is best illustrated by the
following doctrines:
(a) Under Article 1788 of the Civil Code, when a
partner fails to deliver his promised contribution to
the partnership, he becomes liable for interests and
damages from the time he should have complied with
his obligation;
(b) Under Article 1790 of the Civil Code, “Unless there
is a stipulation to the contrary, the partners shall
contribute equal shares to the capital of the
partnership.” Under Article 1830(4), the partnership is
automatically dissolved “When a specific thing, which
a partner had promised to contribute to the
partnership, perishes before the delivery;”
(c)  The remedies available to the partnership and the
other partners with respect to the failure or refusal to
comply with contribution obligation takes the normal
remedies of interest and damages, including
compensatory damages constituting his shares of the
profits (Uy v. Puzon, 79 SCRA 598 [1977]; Moran, Jr. v.
Court of Appeals, 133 SCRA 88 [1986]);
(d) When a partner fails to comply with his obligation
to deliver what he promised to contribute to the
partnership, and there is no desire to dissolve the
partnership, the remedy that is available to the other
partners cannot be rescission, but rather one for
specific performance. (Sancho v. Lizarraga, 55 Phil. 601
[1930]); and
(e) The property contributed by a partner becomes
the property of the partnership and cannot be
disposed of without the consent of the other
partners. Lozana v. Depakakibo, 107 Phil. 728 [1960]).
a.   When Promised Contribution Is a Sum of Money
Under Article 1788 of the Civil Code it is provided that
“A partner who has undertaken to contribute a sum
of money to the partnership venture [and fails to do
so,] becomes a debtor for the interest and damages
from the time he should have complied with his
obligation.”
The article therefore allows the partners and the
partnership to recover from the defaulting partner
not only interest due (at the rate stipulated or in
default thereof, the legal interest), but damages,
including loss opportunity, shown to have been
sustained by the partnership by reason of the failure
of the partner to pay in his contribution.
b.   When Promised Contribution Is Property—In
General
Whenever a partner has bound himself to contribute a
specific or determinate thing to the partnership, he
thereby assumes the position of being a seller of
determinate property contributed into the
partnership in that he is liable for:
(a)  A breach of the warranty against eviction;
(b)  The fruits thereof from the time he obliged
himself to deliver the determinate thing, and without
need of demand.
In addition, Article 1795 of the Civil Code establishes
the rules on who assumes “[t]he risk of specific and
determinate things . . . contributed to the
partnership,” thus:
(a)  “If they are not fungible, so that only their use and
fruits may be for the common benefit, the risk shall
be borne by the partner who owns them;
(b)  “If the things contributed, (i) are fungible, or (ii)
cannot be kept without deteriorating, or (iii) if they
were contributed to be sold: the risk shall be borne by
the partnership.
(c)  “In the absence of stipulation, the risk of things
brought and appraised in the inventory, shall also be
borne by the partnership, and in such case the claim
shall be limited to the  value at which they
were appraised.”
As to who bears the risk of loss of determinate things
promised to be contributed but prior to actual
delivery to the partnership, the prevailing view seems
to be that it would be the partner who before actual
delivery retains ownership thereof. (BAUTISTA, at p.
91, citing Francisco, Partnership at p. 150 [1958]) But in
such case, under Article 1829(4), “[w]hen a specific
thing which a partner had promised to contribute to
the partnership, perishes before the delivery,”
dissolves the partnership.
c. Contribution is Goods
Under Article 1787 of the Civil Code, “When the capital
or a part thereof which a partner is bound to
contribute consists of goods, their appraisal must be
made in the manner prescribed in the contract of
partnership, and in the absence of stipulation, it shall
be made by experts chosen by the partners, and
according to the current prices, the subsequent
changes thereof being for the account of the
partnership.”
The requirements of the provision are made to ensure
that the capital account of a partner is properly
credited with the correct value of a property
contributed.
d. Contribution is Real Property
Under Article 1773 of the Civil Code, a contract of
partnership would be void, whenever immovable
property is contributed, if an inventory of said
property is not made, signed by the parties, and
attached to the public instrument mandated under
Article 1771 of the Civil Code, which requires in such
case that the contract of partnership must be in a
public instrument, and which under Article 1772  of the
Civil Code would have to be filed with the Securities
and Exchange Commission (SEC) because it would
almost always mean a capital of more than P3,000.00.
A more detailed discussion of the effects on the non-
fulfillment with the requirements mandated by law
can be found on the chapter on Formalities Required
for Partnerships.
e.   Contribution of Service or Industry; the Industrial
Partner
There can be no doubt that once the contract of
partnership is constituted, the industrial partner is
from then bound to devote his time towards fulfilling
the nature of the service he has contracted himself to
contribute. The difficulty arises from the fact that the
obligation essentially involves the personal obligation
“to do”, and generally an industrial partner who does
not contribute the services promised cannot be
compelled to do so, otherwise specific performance
on the matter would violate the public policy against
involuntary servitude. The other difficulty that arises is
that even non-industrial partners, being mutual
agents with one another and generally empowered to
jointly manage the partnership affairs, also contribute
their services to the partnership for which they do not
also obtain, as in the case of the industrial partner, a
compensation therefor, unless otherwise stipulated.
The American case of Marsh’s’ Appeal, (69 Pa. St.
30, quoted in Bautista, at pp. 92-94) discusses the
points as follows:
. . . The only question in this case is whether a partner
who neglects and refuses, without reasonable cause,
to perform the personal services which he has
stipulated to render the partnership, is liable to
account to the firm for the value of the services in the
settlement of the partnership accounts. . . . It is
undoubtedly true, as a general rule, that partners are
not entitled to charge each other, or the firm of which
they are members for their services in the
copartnership business, unless there is a special
agreement to that effect, or such agreement can be
implied from the course of dealing between them. By
the well-settled law of partnership, every partner is
bound to work to the extent of his ability for the
benefit of the whole, without regard to the services of
his copartners, and without comparison of value; for
services to the firm cannot, from their very nature, be
estimated and equalized by compensation of
differences. . .
. . . The plaintiffs are not seeking compensation for the
services they rendered the partnership. They are
simply seeking to charge the defendant with the loss
occasioned the partnership by this refusal to render
the services which he agreed to perform. If the
partnership has suffered loss by his breach of the
agreement, why should he not make good the loss,
and put the firm in the same condition it would have
been if he had not broken the agreement? . . . If, says
Mr. Justice Story, the partnership suffers any loss
from the gross negligence, unskillfulness, fraud, or
wanton misconduct of any partner in the court of
partnership business, he will ordinarily be responsible
over to the other partners for all the losses and
injuries, and damages sustained thereby, whether
directly or through their own liability to third
persons. . . If this be the law, why should not the
defendant be answerable to the partnership for
breach of the agreement to perform the services
stipulated?
It is clear therefore, that when an industrial partner
has failed to render the proper service he is obliged to
render to the business of the firm, he can be made
liable for the damages sustained by the firm for such
failure. In addition, the breach by an industrial partner
of his primary obligation to render service to the
partnership would have repercussion on his share in
the net profits of the company. Under Article 1797 of
the Civil Code, “As for profits, the industrial partner
shall receive such share as may be just and equitable
under the circumstances.”
The fiduciary duties of an industrial partner are
discussed more in detail hereunder.
f. Obligation for “Additional Contribution”
Since the nexus of the obligation of a partner arises
from the contract of partnership, there is generally no
obligation for any partner to contribute beyond what
was originally stipulated in the articles of partnership,
unless there is a stipulation providing for additional
contributions. Even in the case where additional
contribution to capital becomes necessary “in case of
an imminent loss of the business of the partnership,”
no partner can be compelled to give additional
contribution, but the legal consequence under Article
1791, is that “any partner who refuses to contribute an
additional share to the capital, except an industrial
partner, to save the venture, shall be obliged to sell
his interest to the other partners.” Even such a
penalty cannot be applied according to Article 1791 “if
there is an agreement to the contrary,” that is a
stipulation in the contract of partnership that even in
case of necessity to the save the venture, partners
cannot be compelled to make additional contribution,
in which case the forfeiture of their interest cannot
even be enforced.
g.  Remedies When There is Default in Obligation to
Contribute
Normally, the contract of partnership being one
constituted of bilateral (multilateral) obligations, the
remedy to the other partners when one of them fails
to comply with his obligation to contribute, would
either be specific performance or rescission. Under
the provisions of the old Civil Code, the Court held
in Sancho v. Lizarraga, 55 Phil. 601 (1931), that the
remedy of rescission of the contract of partnership
which would mean the return of the contribution of
the complaining partner with interest and damages
proven, is not available because then Articles 1681 and
1682 [now Articles 1786 and 1788] provided for
specific remedies to the contract of partnership, thus:
Owing to the defendant’s failure to pay to the
partnership the whole amount which he bound
himself to pay, he became indebted to it for the
remainder, with interest and any damages occasioned
thereby, but the plaintiff did not thereby acquire the
right to demand rescission of the partnership contract
according to article 1124 of the Code. This article
cannot be applied to the case in question, because it
refers to the resolution of obligations in general,
whereas articles 1681 and 1682 specifically refer to the
contract of partnership in particular. And it is a well
known principle that special provisions prevail over
general provisions. (Ibid, at pp. 603-604).
In Sancho the Court affirmed the decision of the lower
court which effectively denied the prayer for
rescission, and instead directed the dissolution of the
partnership, the accounting and liquidation of its
affairs. In other words, the remedy of rescission,
which seeks to extinguish the contractual relationship
and effect mutual restitution, is not allowed under the
contract of partnership. The proper remedies would
be to seek a collection of the promised contribution,
with recovery of interests and damages as provided
for in Articles 1786 and 1788, or ask for dissolution of
the partnership under Article 1831.
It may be said that dissolution is a form of rescission
unique to partnerships (also for corporations,
especially close corporations), which only has a
prospective effect of terminating the contractual
relationship, and thus not produce the retroactive
effect of extinguishing the contract as though it never
existed and providing for mutual restitution.
This special type of remedies is indicative of the
essential nature of the contract of partnership as (for
lack of a better term) a preparatory orprogressive
contract in that it is entered into to pursue a
transaction or series of transactions (i.e., to operate a
business enterprise) that changes the nature and
content of the things that have been contributed
thereto, such that it becomes nearly impossible to
return the parties back to their original position.
The ruling is also consistent with the rule that once a
partner gives a contribution to the partnership, he
loses direct ownership over said property which is
now owned by the partnership as a separate juridical
person, and that it is integrated into the partnership
business enterprise, which upon application of the
trust fund doctrine, means that it shall be the
partnership creditors who shall first have priority over
the partnership assets before any partner can be
entitled to recover from the net assets.
h.   Personal Obligations for Partnership Debts;
Doctrine of Unlimited Liability
The “unlimited liability” feature in the partnership
setting makes partners personally liable for
partnership debts, notwithstanding the separate
juridical entity of the partnership. However, such
liabilities of partners are better covered in the
chapter on Dissolution, Winding Up and
Termination, because the triggering mechanism
would in effect be only if the partnership becomes
insolvent. But this is not to mean that the insolvency
of the partnership necessarily would trigger its
dissolution, for it may happen that the partners
continue to pursue the business venture in the hope
that there may still be a turn-around.
Under Article 1816 of the Civil Code provides that ”All
partners, including industrial ones, shall be liable pro
rata with all their property and after all the
partnership assets have been exhausted, for the
contracts which may be entered into in the name and
for the account of the partnership.” Article 1817
provides that “Any stipulation against the liability laid
down in [Article 1816] shall be void, except as among
the partners.” Rightly stated, it is the exhaustion of
partnership assets to answer for partnership liabilities
that triggers the enforcement of the unlimited liability
mechanism as against partners and their separate
assets. And the pro-rata obligation of the partners
does not mean that they become personally liable
proportionately in relation to their contributions in
the partnership, but actually means they are liable
jointly.
The subsidiary and pro rata liability feature under the
old Civil Code was retained under the new Civil Code,
which does not adopt the primary and solidary liability
feature for commercial partners under the Code of
Commerce.
2. Fiduciary Duties of Partners
The fiduciary duties of the partners among one
another and to the partnership subsists only while the
partnership subsists; consequently the termination of
the partnership relation (as distinguished from mere
dissolution) also terminates the fiduciary obligations
of the partners to one another and to the partnership.
In Hanlon v. Haussermann, 40 Phil. 796 (1920), four
contracting parties agreed to a joint enterprise to
rehabilitate a mining plant, where the engagement of
the three of them was limited to raising money within
a stated period by subscribing to or selling shares of
the mining company. One of the parties who had
undertaken thus to raise money defaulted, and under
the express resolutory conditions of the contract the
two other parties were discharged. Subsequently, the
two parties thus discharged, who were at the same
time stockholders and officials of the mining
company, procured a contract from the mining
company by which they proceeded to restore the
mining plant upon their own account. The other two
members of the original enterprise sued to recover
shares in the mining company and dividends declared
upon such shares on the ground that they were
earned pursuant to the joint enterprise to which they
were entitled to receive their shares. In denying the
claims, the Court held –
After the termination of an agency, partnership, or
joint adventure, each of the parties is free to act in his
own interest, provided he has done nothing during
the continuance of the relation to lay a foundation for
an undue advantage to himself. To act as agent for
another does not necessarily imply the creation of a
permanent disability in the agent to act for himself in
regard to the same subject-matter; and certainly no
case has been called to our attention in which the
equitable doctrine above referred to has been so
applied as to prevent an owner of property from
doing what he pleased with his own after such a
contract [of partnership] between the parties to this
lawsuit had lapsed. (Ibid, at p. 818) .
Likewise, in Lim Tanhu v. Remolete, 66 SCRA 425
(1975), the Court held that former partners have no
obligation to account on how they acquired
properties in their names, when such acquisition were
effected “long after the partnership had been
automatically dissolved as a result of the death of Po
Chuan [the primary managing partner]. Accordingly,
defendants have no obligation to account to anyone
for such acquisitions in the absence of clear proof that
they had violated the trust of Po Chuan during the
existence of the partnership.” (Ibid, at p. 476)
a. Duty to Account
Since the partners are mutual agents to one another
and to the partnership, then necessarily they are
obliged by such fiduciary relationship to render a full
accounting on matters they undertake for the
partnership affairs, and are prohibited from obtaining
secret benefits for themselves therefrom. The duty is
closely linked to the duty of loyalty.
Under Article 1806 of the Civil Code, partners shall
render on demand true and full information of all
things affecting the partnerships to any partner or the
legal representative of any deceased partner or of any
partner under disability.
Under Article 1807 of the Civil Code , “Every partner
must account to the partnership for any benefit, and
hold as trustee for it any profits derived by him
without the consent of the other partners from any
transaction connected with the formation, conduct,
or liquidation of the partnership or from any use by
him of its property.”
Aside from the remedy of recovering the profits
derived by a partner from partnership affairs, the
same may be a ground to seek judicial dissolution of
the partnership under Article 1831 of the Civil Code.
b. Duty of Diligence
Article 1794 of the Civil Code covers a partner’s duty of
diligence to the partnership affairs:
Every partner is responsible to the partnership for
damages suffered by it through his fault, and he
cannot compensate them with the profits and
benefits which he may have earned for the
partnership by his industry. However, the courts may
equitable lessen this responsibility if through the
partner’s extraordinary efforts in other activities of
the partnership, unusual profits have been realized.
Under Article 1800 of the Civil Code, a duly designated
managing partner who acts in bad faith, his particular
exercise of power administration may effectively be
opposed by the other partners. When he acts without
just or lawful cause, then his power may be revoked,
except of course when he has been appointed the
managing partner under the terms of the articles of
partnership.
c. Duty of Loyalty
Although the term is more properly associated to
officers and directors of corporations, partners, being
managers of the partnership, and agents to one
another, owe both the partnership and one another
the duly of loyalty, which includes the avoiding of
entering into transactions or situations that present a
conflict-of-interests. The duty of loyalty in the
partnership setting arises necessarily as a
consequence of the mutual agency relationship
existing between and among the partners.
In the event a partner takes any amount from the
partnership funds for himself, he becomes a debtor of
the partnership, as well for the interests and
damages, which liability under Article 1789 of the Civil
Code “shall begin from the time he converted the
amount to his own use.”
An aspect of a partner’s duty of loyalty arising from
the fact that he acts as an agent of the partnership is
manifested in Article 1792 of the Civil Code, which
provides that when a partner authorized to manage
collects a demandable sum which was owed to him in
his own name, but from a person who owned the
partnership another sum also demandable, the sum
thus collected shall be applied to the two credits in
proportion to their amounts, even though he may
have given a receipt for his own credit only; but
should the partner have given it for the account of the
partnership credit, the amount shall be fully applied
for the account of the partnership. The article
provides for an exception to its application: “The
provisions of this article are understood to be without
prejudice to the right granted to the debtor by Article
1252 [on right of debtor to stipulate the application of
payment], but only if the personal credit of the
partner should be more onerous to him.”
Another aspect of a partner’s duty of loyalty is shown
in Article 1793, which provides that a partner who has
received in whole or in part, his share of a partnership
credit, when the other partners have not collected
theirs, shall be obliged, if the debtor should thereafter
become insolvent, to bring to the partnership capital
what he received even though he may have given a
receipt for his share only.
In Catalan v. Gatchalian, 105 Phil. 1270 (1959), the Court
ruled that when partnership real property had been
mortgage and foreclosed, the redemption by any of
the partners, even when using his separate funds,
does not allow such redemption to be in his sole
favor. The summary reported reads in part as follows:
. . . Under the general principle of law, a partner is an
agent of the partnership (Art. 1818, new Civil Code).
Furthermore, every partner becomes a trustee for his
copartner with regard to any benefits or profits
derived from his act as a partner (Article 1807, new
Civil Code). Consequently, when Catalan redeemed
the properties in question he became a trustee and
held the same in trust for his copartner Gatchalian,
subject of course to his right to demand from the
latter his contribution to the amount of redemption.
(Ibid, at p. 1271)
d. Specific Fiduciary Duties of Industrial Partner
Under Article 1789 of the Civil Code, an industrial
partner is prohibited from engaging in business for
himself, unless the partnership expressly permits him
to do so. Since even capitalist partners are expected
(although not obliged) to contribute service to the
partnership enterprise, and when they do so they are
not entitled to separate compensation (unless
otherwise stipulated), then in order to make the
contribution of service an industrial partner more
meaningful and truly an obligation, it must mean that
is saddled with more burden or prohibitions. The
coverage of Article 1789 should mean also that:
(a)  Since his main contribution to the partnership is
his industry, then an industrial partner owes to the
venture and his fellow partners the obligation to
devote his industry towards the partnership business.
(b)  Even if the partnership is engaged in a particular
form of business, an industrial partner cannot devote
his industry to another type of undertaking for profit
even when it is in a different line of business not
in competition with that of the partnership.
If an industrial partner breaches this duty, Article 1789
provides that the capitalist partners may either:
(a) exclude him from the firm; or
(b) avail themselves of the benefits which the
industrial partner may have obtained in violation of
such duty, with a right to damages in either case.
It seems clear from jurisprudence that in order for an
industrial to be held liable for breach of duty under
Article 1789, he must have engaged during the term of
the partnership into another business or an activity
that is essentially for profit.
In Evangelista & Co. v. Abad Santos, 51 SCRA 416 (1973),
an article of co-partnership was executed between
three capitalist partners on one hand, and Judge Abad
Santos, as an industrial partner on the other hand,
with the capitalist partners being entitled to 70% of
the profits, while the industrial partner was entitled to
30% thereof. Several years into the partnership term,
Judge Abad Santos sought to have an accounting of
the partnership affairs and to be given her share of
the profits of the company which had been
distributed only among the capitalist partners. The
capitalist partners sought to have the relationship
declared as not a true partnership on the ground that
the articles were drawn-up merely to cover the special
arrangement entitlement by which Judge Abad
Santos had arranged for a loan financing for the
company to be paid only after the loan has been fully
paid; and that in fact being an incumbent judge she
rendered to service to the company, thus:
It is an admitted fact that since before the execution
of the amended articles of partnership . . . the
appellee Estrella Abad Santos has been, and up to the
present time still is, one of the judges of the City Court
of Manila, devoting all her time to the performance of
the duties of her public office. This fact proves beyond
peradventure that it was never contemplated
between the parties, for she could not lawfully
contribute her full time and industry which is the
obligation of an industrial partner pursuant to Art.
1789 of the Civil Code.
The Court ruled as follows:
One cannot read appellee’s testimony just quoted
without gaining the very definite impression that,
even as she was and still is a Judge of the City Court of
Manila, she has rendered services for appellants
without which they would not have had the
wherewithal to operate the business for which
appellant company was organized. . .
xxx.
It is not disputed that the prohibition against an
industrial partner engaging in business for himself
seeks to prevent any conflict of interest between the
industrial partner and the partnership, and to insure
faithful compliance by said partner with his
prestation. There is no pretense, however, even on
the part of appellants that appellee is engaged in any
business antagonistic to that of appellant company,
since being a Judge of one of the branches of the City
Court of Manila can hardly be characterized as a
business. That appellee has faithfully complied with
her prestation with respect to appellants is clearly
shown by the fact that it was only after the filing of
the complaint in this case and the answer thereto that
appellants exercised their right of exclusion under
[Article 1789] . . . after around nine (9) years from
June 7, 1955 . . .
That subsequent to the filing of defendants’ answer
to the complaint, the defendants reached an
agreement whereby the herein plaintiff has been
excluded from, and deprived of, her alleged share,
interest or participation, as an alleged industrial
partner, in the defendant partnership and/or in its net
profits or income, on the ground that plaintiff has
never contributed her industry to the partnership, and
instead she has been and still is a judge of the City
Court (formerly Municipal Court) of the City of Manila,
devoting her time to the performance of her duties as
such judge and enjoying the privileges and
emoluments appertaining to the said office, aside
from teaching in law school in Manila, without the
express consent of the herein defendants’ (Record On
Appeal, pp. 24-25). Having always known appellee as a
City Judge even before she joined appellant company
on June 7, 1955 as an industrial partner, why did it take
appellants so many years before excluding her from
said company as per aforequoted allegations? And
‘how can they reconcile such exclusion with their main
theory that appellee has never been such a partner
because ‘The real agreement evidenced by Exhibit ‘A’
was to grant the appellee a share of 30% of the net
profits which the appellant partnership may realize
from June 7, 1955, until the mortgage loan of
P30,000.00 obtained from the Rehabilitation Finance
Corporation shall have been fully paid. . .
The language of the decision in Evangelista & Co. leads
to several observations on the nature of the
obligation of an industrial partner.
Firstly, unless otherwise stipulated, an industrial
partner need not devote his entire working hours to
the partnership affairs, and he is in fact not prohibited
from engaging in other activities which must be non-
business in character.
Secondly, it is possible that the personal
circumstances that a would-be industrial partner as
known to the capitalist partners at the time they
entered into the contract of partnership, would
prevent the industrial partner from devoting full-time
to the partnership affairs, would constitute an integral
part of the manner and nature of what type of service
or industry he should devote to partnership affairs.
Finally, even when an industrial partner fails to live-up
to the commitment of service he obliged himself, the
matter must be raised within a reasonable period by
the other partners as the basis for the remedies of
exclusion or forfeiture of benefits as provided in
Article 1789; otherwise, such grounds are deemed
waived by reason by estoppel by laches.
e.   Specific Fiduciary Duties of Capitalist Partners
Under Article 1808 of the Civil Code, “The capitalist
partners cannot engage for their own account in any
operation which is of the kind of business in which the
partnership is engaged, unless there is a stipulation to
the contrary.” If a capitalist partner breaches this duty
of loyalty, then ”he shall bring to the common funds
any profits accruing to him from his transactions, and
shall personally bear all the losses.”
3. Obligation of Subsequently Admitted Partners
Under Article 1826 of the Civil Code, a person
admitted as a partner into an existing partnership is
liable for all the obligations of the partnership arising
before his admission as though he had been a partner
when such obligations were incurred, except that this
liability shall be satisfied only out of the partnership
property, unless there is a stipulation to the contrary.
This is the only aspect of “limited liability” in a
general partnership setting.
4. Obligations of Non-Partners
Under Partnership Law in the Civil Code, the only time
when non-partners become liable for the partner
debts and obligation is when there is estoppel, or
when the public is made to believe that one person is
a partner of the partnership when in fact he is not,
thus:
(a)   Under Article 1815, those who, not being
members of the partnership, include their names in
the firm name, shall be subject to the liability of a
partner;
(b)   Under Article 1825, when a person by word or
conduct, represents himself, or consents to another
representing him  to anyone, as a partner in an
existing partnership or with one or more persons
not actual partners, he is liable to any such persons to
whom such representation has been made, who  has,
on the faith of such representation, given credit to
the actual or apparent partnership;
(c)   Under Article 1825, when such a person has made
such representation or consent to its being made in a
public manner he is liable to such person, whether the
representation has or has not been made or
communicated to such person so giving credit by or
with the knowledge of the apparent partner making
the representation or consenting to its being made;
(d)   Under Article 1825, when a person has been thus
represented  to be a partner in an existing
partnership, or with one or more  persons not actual
partners, he is an agent of the persons consenting to
such representation to bind them to the same extent
and in the same manner as though he were a partner
in fact; and
(e)   Under Article 1825, when all the members of the
existing partnership consent to the representation, a
partnership act or obligation results; but in all other
cases it is the joint act or obligation of the
person acting and persons consenting to
the representation.
14 – DISSOLUTION, WINDING-UP AND TERMINATION
OF THE PARTNERSHIP
1. Introduction and Definition of Terms
An understanding under Partnership Law in the new
Civil Code, of the three terms, namely “dissolution”,
“winding-up” and “termination”, would help clarify
the multi-faceted legal relationships that exist in the
partnership arrangement.
Article 1828 of the Civil Code, defines “dissolution” as
“the change in the relation of the partners caused by
any partner ceasing to be associated in the carrying
on as distinguished from the winding up of the
business.” “Dissolution” is the term that pertains
primarily to the contract of partnership, the breaking
of the vinculum juris, so to speak, between and
among the partners in the partnership arrangement.
It is in Partnership Law equivalent to the terms
“rescission” and “extinguishment” of contract of
partnership under the general provisions of the Law
on Contracts.
Article 1829 of the Civil Code implicitly distinguishes
“dissolution” from “termination” and “winding-up”
when it provides that “On dissolution the partnership
is not terminated, but continues until the winding up
of the partnership affairs is completed.”
“Termination” therefore pertains essentially to the
partnership as a business enterprise, and defines the
time when all matters pertaining to the business
enterprises, essentially the completion of pending
contracts, the payment of all obligations and the
distribution, if any, of the net assets of the
partnership to the partners, have been completed.
The Court has defined “termination” of a partnership
as the “point in time after all the partnership affairs
have been wound up.” (Idos v. Court of Appeals, 296
SCRA 194, 206 [1998], quoting from Paras, Civil Code
of the Philippines, Vol. V, 7th ed., p. 516)
”Winding-up of partnership affairs” is therefore the
process which is commenced by the dissolution of
the contract of partnership between and among the
partners, and is concluded upon the termination or
complete liquidation of the partnership business
enterprise. The Court has defined “winding-up” as
“the process of settling business affairs after
dissolution,” (Idos v. Court of Appeals, 296 SCRA 194,
205 [1998], quoting from Paras, Civil Code of the
Philippines, Vol. V, 7th ed., p. 516), and it cites as
examples of the winding-up process, the following:
“the paying of previous obligations; the collecting of
assets previously demandable; even new business if
needed to wind up, as the contracting with a
demolition company for the demolition of the garage
used in a ‘used car’ partnership.” (Ibid.)
As will be seen from the discussions hereunder,
dissolution which breaks the contractual privity
between and among the partners, does not
necessarily give rise to winding-up or termination of
the partnership business enterprise, as the dissolution
of an “existing partnership contract” may actually
lead to the “constitution of a new partnership
contract.” What may therefore “break” the
contractual relationship between and among the
partners, may not affect at all the underlying
partnership business enterprise, as when the
remaining partners choose to continue the
partnership business.
2. Legal Effects of Dissolution
a.   Effect on the Partnership Contract and Juridical
Personality
In Corporate Law, “dissolution” is the termination of
the juridical personality of the corporation which was
originally constituted to pursue new business, and
that in fact and in law, the corporate juridical
personality continues to exist for three years with
only the capacity to wind-down the corporate affairs.
(Republic v. Tancinco, 394 SCRA 386 [2002]) The
dissolution of a corporation affects directly the
underlying corporate business enterprise in that it
ceases to pursue business as a going concern, and any
contract entered into as “new business” would be
considered void as having been entered into with a
non-existing corporate party. (Alhambra Cigar v. SEC,
24 SCRA 269 [1968]; Philippine National Bank v. Court
of First Instance of Rizal, Pasig, Br. XXI, 209 SCRA 294
[1992]).
In stark contrast, the concept of “dissolution” in
Partnership Law focuses in the change of the
contractual relationship between and among the
partners (the rescission of the partnership contract),
as the termination of their association in carrying the
business venture as a going concern. The contract of
partnership remains but only in the concept as an
association to pursue liquidation process.
A direct effect of the dissolution of the partnership is
provided in Article 1832 of the Civil Code, which
extinguishes the right and power of the partners to
represent one another to pursue the partnership as a
going concern: “Except so far as may be necessary to
wind up partnership affairs or to complete
transactions begun but not then finished, terminates
all authority of any partner to act for the partnership.”
Dissolution of a partnership does not therefore
undermine existing contracts, nor modify or
extinguish the then existing obligations of the
partnership and the partners, and that the completion
or performance of existing contracts and the
settlement of partnership obligations are in fact
integral parts in the winding-up process.
Since the juridical personality of a partnership is
inextricably linked to the underlying contract of
partnership, it should mean that the dissolution of the
partnership would bring about the impairment of the
partnership juridical person in whose name the
business is pursued remains hovering.
b.   Effect on the Partnership Business Enterprise
Likewise, in a partnership setting the underlying
partnership business enterprise should cease to exist
as “as a going concern”, but only if the partners
remaining do not wish to continue the partnership
business, whenever they are entitled under the law
the option to so continue. Dissolution therefore
focuses mainly on the breaking-up of the contractual
relationship of the partners among one another, and
when Article 1832 provides that “Except so far as may
be necessary to wind up partnership affairs or to
complete transactions begun but not then finished,
dissolution terminates all authority of any partner to
act for the partnership,” it means that the force of the
original contract of partnership between them as to
being mutual agents, as well as the enforceability of
the doctrine ofdelectus personae, are terminated,
without prejudice to a new partnership arrangement
being constituted among the remaining partners.
c. Effects on Contracts Entered into With Third
Parties
In Corporate Law, after dissolution all contracts
entered into that pursue new business for the
corporate venture are void even as to persons who
deal with the corporation in good faith. The reason for
this is that the public policy behind the capacity of the
corporate juridical personality pre-empts the
consideration of protecting the public that deal in
good faith with a purportedly validly existing
corporation. Is this the same policy when it comes to
contracts on new business entered into for and in
behalf partnership after dissolution has occurred?
In covering the general legal effects of the dissolution
of a partnership, Bautista cited American decisions,
showing that upon dissolution the partnership
continues to exist only for a limited purpose of
winding it affairs, and that no new business can be
pursued. (BAUTISTA, at p. 319). We feel that under the
Partnership Law provisions of our Civil Code, which
expressly recognize that the non-defaulting partners
can choose to continue the business enterprise, the
answer to the question raised should be in the
negative, because there is no over-arching public
policy of State supervision and control over the
juridical personalities of partnerships. Under
Philippine Partnership Law, the partnership juridical
personality is merely an “added feature” to the
partnership arrangement to improve the efficiency of
partnership transactions, and cannot overcome the
more important public policy considerations, such as
the imperative need to protect the contractual
expectations of the public that deals in good faith
with the partnership venture.
We see the demonstration of this principle in Singson
v. Isabela Sawmill, 88 SCRA 623 (1979), where the
Court held —
It is true that the dissolution of a partnership is caused
by any partner ceasing to be associated in the carrying
on of the business. However, on dissolution, the
partnership is not terminated but continuous until the
winding up of the business.
The remaining partners did not terminate the business
of the partnership ‘Isabela Sawmill’. Instead of
winding up the business of the partnership, they
continued the business still in the name of said
partnership. It is expressly stipulated in the
memorandum-agreement that the remaining partners
had constituted themselves as the partnership entity,
the “Isabela Sawmill”.
There was no liquidation of the assets of the
partnership. The remaining partners . . . used the
properties of said partnership.
xxx.
It does not appear that the withdrawal of [a partner]
from the partnership was published in the
newspapers. . . the public in general had a right to
expect that whatever credit they extended to [the
remaining partners] doing the business in the name of
the partnership “Isabela Sawmill” could be enforced
against the properties of said partnership. . .” (Ibid, at
p. 642)
In Tocao v. Court of Appeals, 342 SCRA 20 (2000), the
Court held that the fact that the managing partner
excludes the industrial partner from participation in
the partnership business did not mean that the
partnership was extinguished automatically:
However, a mere falling out or misunderstanding
between partners does not convert the partnership
into a sham organization. The partnership exists until
dissolved under the law. Since the partnership created
by petitioners and private respondent has no fixed
term and is therefore a partnership at will predicated
on their mutual desire and consent, it may be
dissolved by the will of a partner. x x x In this case,
petitioner Tocao’s unilateral exclusion of private
respondent from the partnership effected her own
withdrawal from the partnership and considered
herself as having ceased to be associated with the
partnership in the carrying on of the business.
Nevertheless, the partnership is not terminated
thereby; it continues until the winding up of the
business. (Ibid, at pp. 37-38).
d. Effects on Determining Liability of Partners for
Damages to One Another
In Soncuya v. De Luna, 67 Phil. 646 (1939), that for
purposes of determining whether a partner is entitled
to damages allegedly suffered by reason of the
supposed fraudulent managment of the partnership
by the managing partner, it is first necessary that a
liquidation of the partnership business must be made
“to the end that the profit and losses may be known
and the causes of the latter and the responsibility of
the defnedant as well as the damages which each
partner may have suffered, may be determined.” (at
p. 647; citing Po Yeng Cheo v. Lim Ka Yam, 44 Phil. 172
[1922]).
3. Causes of Dissolution
Partnership Law classifies the causes of dissolution of
partnerships into the following categories:
I. Causes Which Legally Dissolve Ipso Jure Without
Need of Court Decree:
(a)  Dissolution Effected Without Violation of
the Partnership Agreement
 Termination of the term of the partnership
 Termination of the specific undertaking for
which the partnership was constituted
 In a partnership at will, dissolution effected by
the will of any partner exercised in good faith
 By mutual withdrawal by all the partners
 Expulsion of a partner bona fide under powers
granted in the partnership agreement
(b)  Dissolution Effected in Contravention of the
Partnership Agreement, Effected by the Will of Any
Partner:
 When the partnership term has not expired
 When the particular undertaking for which the
partnership has been constituted has not yet
terminated
 At any time, in a partnership at will
(c) Dissolution Caused by Force Majeure or Outside
the Will of the Partners
 Loss of the specific thing promised to be
contributed
 Partnership business becoming unlawful
 Death, insolvency or civil Interdiction of any
partner
 Insolvency of the partnership
II. Dissolution Caused by Court Decree:
(a)  When a partner has been declared insane in any
judicial proceeding or is shown to be of unsound
mind;
(b)  When a partner becomes incapacitated in
performing his part of the partnership contract;
(c)  When a partner has been guilty of such conduct as
tends to affect prejudicially the carrying on of the
partnership business;
(d)  When a partner willfully or persistently commits a
breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the
partnership business that it is not reasonably
practicable to carry on the business in the partnership
with him;
(e) When the partnership business can only be carried
on at a loss;
(f)   Other circumstances that render dissolution
equitable;
(g)  On the application of the purchaser of a partner’s
interest in the partnership:
a.   Understanding of the Causes of Partnership
Dissolution in the Light of the Partnership Being
Primarily a Contractual Relationship
Notice that Articles 1830 and 1831 of the Civil Code
clearly separate the causes of partnership dissolution
between those which may be effected extrajudicially,
and those which require a court decree in order to be
effective.
Partnership being primarily a contractual relationship
between and among the partners, the various modes
of dissolution are akin to the general principles
covering the extinguishment of contracts.
When it comes to the first category of causes of
partnership dissolution, namely, those that are
effected ipso jure or without need of any court decree,
perhaps a good way of understanding those causes
of dissolution dynamics for partnerships is to think of
dissolution in relation to terms very closely linked to
principles of “obligatory force” and “relativity”
pertaining to contracts, namely, the remedy of
“rescission”,  the legal concepts of “breach of
contract” and the “happening of resolutory condition
or term,” as well as the other modes of
extinguishment of contracts.
Take the first two causes for dissolution, namely, the
termination of the term or the termination or
fulfillment of the particular undertaking for which the
partnership has been constituted, which basically take
the character of either full performance or fulfillment
of the resolutory condition or term. Whether it be full
performance or the happening of the resolutory
condition or term, a contract is deemed
extinguished ipso jure, and there need not be any
particular act by which the legal effect comes about.
The same legal effect would be the act of any partner
declaring the termination of a partnership in a
partnership at will.
When all the partners in a partnership comes to a
unanimous agreement to terminate the partnership,
this is the same legal effect as in another other
contract which is extinguished by mutual withdrawal.
Finally, when a partner is expelled bona fide from the
partnership pursuant to the provisions granting such
power in the contract of partnership, then this is in
accordance with exercising an extrajudicial right to
rescind or cancel a contract, which conforms to the
spirit of, and is not in breach, of the contractual
commitment.
On the other hand, when a partner, without any legal
or contractual basis, seeks the dissolution of the
partnership, the same would indeed constitute a
“breach of contract” for which he become personally
liable for damages, and for which he loses the right to
wind-up its affairs, but nevertheless the dissolution
would take legal effect, in the same manner as in all
contracts that embody personal obligations to do (like
agency), i.e., that they are essentially revocable in
spite of contractual stipulations to the contrary. In
this case, there is the application of the doctrine
of delectus personae in the partnership relationships.
As has been discussed previously, the principle
of delectus personae, which treat of the contractual
relationship between and among the partners of the
most extreme personal nature (i.e., the principle of
“relativity” in Contract Law applied at it most extreme
norm), would override the principle of “obligatory
force” of contractual provisions. Thus, even when the
contracting parties agree that their partnership
contract would be irrevocable for say ten years, under
the principle of delectus personae, any partner even
without cause may seek to terminate his relationship
by withdrawing from the partnership and thereby
cause its dissolution; there is no legal remedy allowed
to the other partners to compel the withdrawing
partner to remain with the partnership arrangement
within the remaining term of the partnership provided
in its articles of partnership. Nevertheless, the
withdrawal from the partnership before the
expiration of the agreed term of existence would be
in breach of a contractual agreement, and would
subject the withdrawing partnership to liability for
damages.
When it comes to dissolutions caused by force
majeure or outside the will of the partners, their
importance lies in the spirit of Contract Law that says
that force majeure excuses a contracting party from
his obligations, and would not make him liable for
damages for the occasion does not constitute a
breach of contract.
Finally, the causes of dissolution which require a court
decree for their effectivity, usually cover causes of
action which either go into “breach of contract” or
“radical change in the conditions or circumstances
upon which the contract was entered into”
(i.e., principal of rebus sic stantibus). In either case, the
intervention of the courts if required to establish the
factual basis of the breach of contract, or the radical
change of the circumstances binding the partners
together into the contract of partnership.
The termination of the partnership at will by the act of
any partner or when there is a mutual withdrawal by
all the partners. Under either characterization
of (namely, contract partners) the legal basis upon
which dissolution would come into effect is
when there is a “breach of contract” or when there
has been the happening of the resolutory condition or
term, which then effects a rescission or termination of
the contract of partnership. The concepts of
“rescission”, “breach of contract” and “happening of
the resolutory condition or term,” as the effective
criteria for dissolution to come into play in a
partnership setting, go into the application of the
doctrine of delectus personae in the partnership
relationships.
In essence, Philippine Partnership Law is careful to
classify the various causes of dissolution because of
the varying legal consequences of dissolution as an
act of rescission or cancellation of the partnership
agreement.
b.   Dissolution Effected with No Violation the
Partnership Contract
Article 1830 of the Civil Code, in enumerating the
causes for partnership dissolution distinguishes first
between causes “without violation of the
agreement,” and those causes that are “In
contravention of the agreement.” Those classified as
causes “without violation of the agreement,” are
consistent with the agreed terms of the contract of
partnership, thus:
(a)  Termination of the term or particular undertaking
specified in the partnership agreement;
(b)  By the exercise in good faith by any partner of
the power to withdraw in a partnership at will (no
definite term or particular undertaking specified in
the agreement);
(c)  By the mutual withdrawal by all the partners from
the partnership; and
(d)  By the bona fide expulsion of any partner in
accordance with the power provided for in the
partnership agreement.
In any of the foregoing enumerated causes, there is
no breach or contravention of the partnership
agreement, and the dissolution of the partnership
does not give rise to a liability for damages for breach
of contract. When it comes to the first three causes,
there being no “partner at fault” means that none of
the partners would be disqualified from participating
in the winding-up of the affairs of the partnership.
Whereas, in the case of expulsion of a partner in
accordance with the power provided in the
partnership agreement, since it can only be
exercised bona fide, it could only mean that the
partner was expelled “for cause” and consequently,
he would be disqualified from participating in the
winding-up of the affairs of the partnership business,
and electing to continue to pursue the partnership
business.
c.   Dissolution Causes In Violation of the Partnership
Contract
In contrast, although any partner is recognized with
the power to withdraw from the partnership at any
time, it would be “[i]n contravention of the
agreement between the partners, where the
circumstances do not permit a dissolution under the
provisions” of Article 1830. In that case, the partner
seeking the dissolution would be liable for damages,
and he is without right to continue to pursue the
partnership business.
An example of the consequences of an expulsion of a
partner effected in bad faith is demonstrated in Tocao
v. Court of Appeals, 342 SCRA 20 (2000), where in an
oral partnership, the capitalist partner Tocao had
excluded the industrial partner Anay from entrance
into any of the business premises of the company or
and severed any further dealings she may have with
the business venture. In ruling that the excluded
partner had a right to recover damages, to have a
formal accounting of the business, and to receive her
shares in the net profits, the Court ruled:
Undoubtedly, the petitioner Tocao unilaterally
excluded private respondent [Anay] from the
partnership to reap for herself and/or for petitioner
Belo financial gains resulting from private
respondent’s efforts to make the business venture a
success . . . Her instruction . . . not to allow private
respondent to hold office in both the Makati and
Cubao sales offices concretely spoke of her
perception that private respondent was no longer
necessary in the business operation, and resulted in a
falling out between the two. However, a mere falling
out or misunderstanding between partners does not
convert the partnership into a sham organization. The
partnership exists until dissolved under the law. The
partnership . . . has no fixed term and is therefore a
partnership at will predicated on their mutual desire
and consent, it may be dissolved by the will of a
partner . . . An unjustified dissolution by a partner can
subject him to action for damages because by the
mutual agency that arises in a partnership, the
doctrine of delectus personae allows the partners to
have the power, although not necessarily the right to
dissolve the partnership.
In this case, petitioner Tocao’s unilateral exclusion of
private respondent from the partnership . . . effected
her own withdrawal from the partnership and
considered herself as having ceased to be associated
with the partnership in the carrying on of the
business. Nevertheless, the partnership was not
terminated thereby; it continued until the winding up
of the business. (Ibid, at pp. 36-38)
Essentially, the Court agreed with the decision of the
trial court that “a partner who is excluded wrongfully
from a partnership is an innocent partner. Hence, the
guilty partner must give him his due upon the
dissolution of the partnership as well as damages or
share in the profits ‘realized from the appropriation of
the partnership business and goodwill.’ An innocent
partner thus possesses ‘pecuniary interest in every
existing contract that was incomplete and in the trade
name of the co-partnership and assets at the time he
was wrongfully expelled.’” (Ibid, at p. 29)
d. Force Majeure and Other Similar Causes
A third general category for causes of dissolution are
recognized by Article 1830 which occur by force
majeure or events that are outside of the will of the
partners:
(a)  Events which makes unlawful the partnership
business;
(b)  Loss of the specific thing promised to be
contributed to the partnership; and
(c) Death, insolvency or civil interdiction of any
partner.
None of such causes of dissolution constitute a type
of breach of the partnership agreement.
An interesting issue would be if the loss of the specific
thing promised to be contributed to the partnership
would cause the dissolution of the partnership, then
would the return back to a partner of his contribution
be deemed to have dissolved the partnership?
The decision in Fernandez v. Dela Rosa, 1 Phil. 671
(1902), covered the issue of whether the receiving
back by a partner of his contribution to the
partnership amount to withdrawal from the
partnership to have effected a dissolution thereof.
The resolution of this issue was essential
in Fernandezbecause it determined whether the
partner so receiving his contribution had a right to
participate in the profits of the venture earned after
he had allegedly withdrawn. Thus, the Court asked
specifically in Fernandez: “Did the defendant waive his
right to such interest as remained to him in the
partnership property by receiving the money? Did he
by so doing waive his right to an accounting of the
profits already realized, if any, and a participation in
them in proportion to the amount he had originally
contributed to the common fund? Was the
partnership dissolved by the will or withdrawal of one
of the partners’ under article 1705 of the Civil Code?”
(Ibid, at pp. 677-678)   The Court held –
. . . We think these questions must be answered in the
negative.
There was no intention on the part of the plaintiff in
accepting the money to relinquish his rights as a
partner, nor is there any evidence that by anything
that he said or by anything that he omitted to say he
gave the defendant any ground whatever to believe
that he intended to relinquish them. On the contrary
he notified the defendant that he waived none of his
rights in the partnership. Nor was the acceptance of
the money an act which was in itself inconsistent with
the continuance of the partnership relation, as would
have been the case had the plaintiff withdrawn his
entire interest in the partnership. There is, therefore,
nothing upon which a waiver, either express or
implied, can be predicated. The defendant might have
himself terminated the partnership relation at any
time, if he had chosen to do so, by recognizing the
plaintiff’s right in the partnership property and in the
profits. Having failed to do this he can not be
permitted to force a dissolution upon his copartner
upon terms which the latter is unwilling to accept. We
see nothing in the case which can give the transaction
in question any other aspect than that of the
withdrawal by one partner with the consent of the
other of a portion of the common capital.” (Ibid, at p.
678)
e.  Causes Equivalent to Rescission or Declaration
That the Central Basis Upon Which the Contract of
Partnership Has Been Constituted Is Lost
The fourth general category covers the grounds
whereby a partner may seek court order for the
dissolution of the partners under Article 1831 of the
Civil Code, thus:
(a)  When a partner has been declared insane in
any judicial proceeding or is shown to be of unsound
mind;
(b)  When a partner becomes in any other way
incapable of performing his part of the partnership
contract;
(c)  When a partner has been guilty of conduct as
tends to affect prejudicially the carrying on of the
business;
(d)  When a partner willfully or persistently commits
a breach of the partnership agreement, or otherwise
so conducts himself in matters relating to the
partnership business that is not reasonably
practicable to carry on the business in partnership
with him;
(e)  When the business of the partnership can only be
carried on at a loss;
(f)   Other circumstances that render dissolution
equitable.
In addition, Article 1831 of the Civil Code recognizes
the standing of the assignee of a partner’s interest to
seek judicial dissolution of the partnership when:
(a)  Termination of the period upon which the
partnership is expressly constituted;
(b)  Termination of the particular undertaking upon
which the partnership is expressly constituted; or
(c)  At any time, in a partnership at will.
The foregoing grounds enumerated in Article 1831 for
which a court order of dissolution may be sought
need to be considered carefully, for each represent a
public policy which understands that the business
purpose of a partnership which cannot be placed in a
relatively clear vision at the time the contract of
partnership is entered into. The article recognizes the
inherent risk that business undertakings are exposed
to, many of which cannot be anticipated at the time
the partnership agreement is entered into. Therefore,
a mechanism is set (i.e., an appropriate court
proceeding for dissolution) by which the parties may
ask a tribunal to determine that the circumstances has
rendered the rationale of the partnership agreement
inutile. Likewise, each of the grounds provided under
Article 1831 would constitute “substantial breach” of
the obligations assumed by the partners, as the basis
by which an action for rescission may be pursued;
consequently, the factual basis upon which the
substantial breach may arise must be determined to
exist by the courts, and cannot be left to the sole
determination of any of the partners.
One would think that when a partner has been
judicially declared insane, it would thereby ipso
jure cause the dissolution of the partnership, as in the
case of death, insolvency or civil interdiction of a
partner. And yet under Article 1831, it would require a
formal petition in court to have the partnership
dissolved. The legal implication is that the partnership
remains unaffected by the judicial declaration of
insanity of a partner, and the discretion is given to the
other partners to seek its dissolution. Judicial
declaration of insanity, like civil interdiction, would
render the partner without legal capacity to contract,
and yet the former does not result in automatic
dissolution of the partnership. Perhaps it is because,
judicial declaration of insanity does not proceed from
a criminal conviction as in the case of civil interdiction,
and that the law recognizes that the insane partner
still has an estate that has a right to benefit from the
properties and rights to which a partner is entitled to,
and the other partners are given the option to remain
in partnership with him to allow his estate to continue
to benefit from the partnership business. After all, a
partner who turns out to be insane, may be a better
partner to remain with, rather than another partner
who turns out to be a boor. This is the same rationale
under the second group for judicial dissolution: when
a partner becomes in any other way incapable of
performing his part of the partnership contract.
The last four grounds to seek judicial dissolution
(when a partner has been guilty of conduct as tends
to affect prejudicially the carrying on of the business;
when a partner willfully or persistently commits a
breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the
partnership business that is not reasonably
practicable to carry on the business in partnership
with him; when the business of the partnership can
only be carried on at a loss; and other circumstances
that render a dissolution equitable), look at the
primary rationale for the partnership agreement: to
operate a business venture for the benefit of all the
partners. When there are circumstances prevailing in
the partnership that endanger or undermine the
viability of the partnership enterprise, any of the
partners is given standing to seek for court
determination of the existence of such situation and
decree the dissolution of the partnership.
For example, in Rojas v. Maglana, 192 SCRA 110 (1990),
the Court held that when a partner engages in a
separate business enterprise that is competitive with
that of the partnership and even withdraws
equipment contributed into the partnership
enterprise, the other partner’s withdrawal from the
partnership becomes thereby justified and for which
the latter cannot be held liable for damages. In such
an instance, a partner has violated his duty of loyalty,
which under the principle of delectus personaeshould
allow the other partners to break any further ties with
him.
4.       Effects of Dissolution Among the Partners Inter
Se
We will now discuss the legal consequences, and the
rights and obligations that would govern the
relationship of the partners under the various causes
of partnership dissolution.
a.   When Dissolution Is Caused in Any Way, Except in
Contravention of the Partnership Agreement
Under Article 1837 of the Civil Code, unless otherwise
agreed, each partner, as against his co-partners and all
persons claiming through them in respect of their
interests in the partnership, may have the partnership
property applied to discharge its liability, and the
surplus applied to pay in cash the net amount owing
to the respective partners. In other words, when
there has been no breach of the partnership
agreement upon the dissolution of a partnership,
every partner has a right to insist upon the winding-
down of partnership affairs.
When dissolution of the partnership is caused other
than by a breach of the contract of partnership, the
“remaining partners” have no option to continue the
partnership business enterprise when the
“withdrawing” partner insists on winding-up the
partnership affairs. Consequently, the only way by
which the “remaining partners” can hope to continue
the partnership business is to come into a settlement
of the liquidation of the “withdrawing partner’s”
equity interests in the partnership. The tendency
therefore is that the “withdrawing partner” may
receive a premium or a higher price than the actual
liquidation value of his share in the net assets of the
partnership in exchange for his not agreeing not to
demand the formal winding-up and termination of the
partnership business.
b. When Dissolution Is Caused by the Bona
Fide Expulsion of a Partner
Under Article 1837 of the Civil Code, when dissolution
is caused by thebona fide expulsion of a partner
pursuant to the terms of the partnership agreement,
and if the expelled partner is discharged from all
partnership liabilities, either by payment or by express
agreement to that effect between himself, the
creditor and the remaining partners (as provided
under the second paragraph of Article 1835 of the Civil
Code), then such expelled partner shall receive in cash
only the net amount due him from the partnership.
In other words, the expelled partner is without power
or authority to insist upon the formal winding-up and
liquidation of the partnership business enterprise; and
that the choice whether to continue with the business
enterprise or to formally wind-up and terminate the
partnership is with the remaining partners.
c. When Dissolution Is Caused in Contravention of the
Partnership Agreement
In the event the dissolution of the partnership is in
contravention of the partnership agreement, there
exists legally a formal “breach of contract,” and the
rights and/or liabilities of the partners shall be as
follows:
(1)  Each partner who has not caused the dissolution
wrongfully shall have the right:
(i)   to participate in the net assets of the partnership
after discharge of all partnership liabilities;
(ii)  to damages for breach of the agreement, as
against each partner  who caused the
dissolution wrongfully;
(2)  The partners who have not caused the dissolution
wrongfully, may, if they so desire:
(i)  continue the business in the same name either by
themselves or jointly with others, during the rest of
the agreed term for the partnership;
(ii)  and for that purpose may possess the
partnership property, provided they secure the
payment by bond approved by the court, or pay
to any partner who has caused the dissolution
wrongfully,  the value of his interest in the partnership
at the dissolution, less any damages for breach of  the
agreement and in like manner indemnify  him against
all present or  future partnership liabilities;
(3)  A partner who has caused the dissolution
wrongfully shall only have:
(i)  If the business is not continued, all the rights of a
partner for share in the net assets of the partnership
after payment of all its liabilities, subject to liability for
damages incurred due to such wrongful dissolution;
(ii)  If the business is continued, the right as against his
co-partners and all claiming through them in respect
of their interests in the partnership, to have the value
of his interest in the partnership, less any damage
caused to his co-partners by the dissolution,
ascertained and paid to him in cash, or the payment
secured by a bond approved by the court, and to be
release from all existing liabilities of the partnership;
But in ascertaining the value of the partner’s interest,
the value of the goodwill of the business shall not
be considered.
d. When Dissolution Is Caused by the Rescission of
the Partnership Agreement Because of Fraud or
Misrepresentation (i.e., By Judicial Decree)
Under Article 1838 of the Civil Code, without prejudice
to any other right, the party entitled to rescind or seek
the dissolution of the partnership shall be entitled:
(1)  To a lien on, or right of retention of, the surplus of
the partnership property after satisfying the
partnership liabilities to third persons, for any sum of
money paid by him for the purchase of an interest in
the partnership and for any capital or advances
contributed by him;
(2)  To stand, after all liabilities to third persons have
been satisfied, in the place of  the creditors of
the partnership for any payment made by him in
respect of the partnership liabilities; and
(3)  To be indemnified by the person guilty of the
fraud or making the representation against all debts
and liabilities of the partnership.
5.  Effects of Dissolution on Partnership Liabilities
Existing or Accrued at the That Time
Discussions on dissolution of the partnership must
center around the fourth attribute of partnership of
“unlimited liability”, i.e., that a partner shall be liable
jointly with the other partners, for partnership debts
which cannot be settled from the partnership
assets. In fact, it is the point of dissolution, that
application of the attribute of unlimited liability
because most critical.
a.   General Rule on Existing Partnership Liabilities
Under Article 1835 of the Civil Code, the general rule is
that the dissolution of the partnership does not of
itself discharge the existing liability of any of the
partners.
When it comes to a deceased partner, it provides that
“The individual property of a deceased partner shall
be liable for all obligations of the partnership incurred
while he was a partner, but subject to the prior
payment of his separate debts.”
b.   Discharge of a Partner from Existing Partnership
Liabilities
Article 1835 provides that the only manner by which a
partner may be discharged from any existing liability
upon dissolution of the partnership, is by an
agreement to that effect between himself, the
partnership creditor and the person or partnership
continuing the business.
Such an agreement may be inferred from the course
of dealing between the creditor having knowledge of
the dissolution and the person or partnership
continuing the business.
6.       Effects of Dissolution on Partnership Liabilities
Contracted or Incurred After Dissolution
The rules when it comes to liabilities contracted or
incurred on behalf of the partnership after dissolution
has come in should be divided into the following
categories:
(a)  Those that were incurred pursuant to winding-up
proceedings;
(b)  Those that were incurred in the nature of “new
business” in spite of the fact that the partnership is in
winding-up process; and
(c)  Those that were incurred when the partnership
enterprise has been continued and no winding-up
process have been pursued.
a.  Liabilities Incurred Pursuant to Winding-up
Proceedings
Article 1832 of the Civil Code clearly implies that even
with the dissolution of the partnership, the partners
not at fault have full authority to act for the
partnership in all matters that “may be necessary to
wind up partnership afffairs or to complete
transactions begun but not then finished.”
Therefore, despite the dissolution of the partnership,
it is clear under Article 1829 that the partnership is not
terminated on dissolution, and that the partnership
continues to exist “until the winding up of the
partnership affairs is completed.” During winding-up
stage, every partner authorized to wind-up
partnership affairs has full authority to enter into any
contract or transaction that is consistent with the
winding-up of partnership affairs, and such contracts
and transactions shall be valid and binding upon the
partnership and those of the partners.
Whether considered from the inter-partnership
relationship, or viewed in relationship with third
parties, all contracts and transactions entered into
after dissolution of the partnership, which are in
pursuit of the winding-up of partnership affairs, are
valid and binding. Thus, Article 1834 provides that
“After dissolution, a partner can bind the partnership
x x x (1) By any transaction appropriate for winding up
partnership affairs or completing transactions
unfinished at dissolution.”
(i)   Where Partnership Not Bound Even for Winding-
Up Liabilities
Under Article 1834, even when the liability incurred in
behalf of the partnership is incurred for  winding-up
purpose, nevertheless “[t]he partnership is in no case
bound by any act of a partner after dissolution x x x
(3) Where the partner has no authority to wind up
partnership affairs; except by a transaction with one
who” –
(a)  Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the
acting partner’s want of authority; or
(b)  Had not extended credit to the partnership prior
to dissolution, and, having no knowledge or notice of
his want of authority, the fact of his want of authority
has not been advertised in the a newspaper of
general circulation in the place (or in each place if
more than one) at which the partnership business was
regularly carried on.
b.   Liabilities Incurred Constituting “New Business”
During the Winding-Up Process
Article 1832 of the Civil Code is also clear that after
dissolution, and winding-up stage has been reached,
and there is no intention to continue the partnership
enterprise, then it terminates all authority of any
partner to act for and in behalf of the partnership
and/or the other partners involving “new business” or
that which is not in pursuit of the winding-up of
partnership affairs.
The general rule applicable in Partnership Law would
then be equivalent to the Agency Law principal that
would come into play is that equivalent to an agent
who acts without or outside the scope of his
authority, which renders the contract entered into
unenforceable against the principal, but valid against
the agent in his personal capacity. From the inter-
partnership relationship, every contract entered into
or every liability incurred in the name of the
partnership as “new business”, is done without lawful
authority, and is non-binding on the partnership and
the other partners. As and between the partners, the
liability incurred by the acting partner shall then be for
his sole account.
But the foregoing general rule applies only when the
acting partner acts with knowledge of the fact of
dissolution of the partnership; for a partner acting for
and in behalf of the partnership after dissolution, but
acting in good faith, binds the partnership. Therefore,
in determining whether the acting partner acted in
good faith or not, distinguishes among the causes of
dissolution.
(1)  When Dissolution Is By the Act, Insolvency or Death
of a Partner
Under Article 1833 of the Civil Code, where the
dissolution is caused by the act, death or insolvency of
a partner, the acting partner who acts without
knowledge of the act, death or insolvency of another
partner (i.e., without knowledge that dissolution has
come about), will legally bind the partners to any
liability created “for the partnership as if the
partnership had not been dissolved.” On the other
hand, only the acting partner shall be liable for the
liability entered into in behalf of the partnership,
when he knew at that time of the fact of dissolution
of the partnership.
(2) When Dissolution Is NOT By the Act, Insolvency or
Death of a Partner
Under Articles 1832 and 1833 of the Civil Code, when
the dissolution of the partnership is other than “by
the act, insolvency or death of a partner,” then
knowledge of the fact of dissolution is presume to
have reached every partner and therefore, as
between and among them, a partner who incurs a
liability in the name of the partnership, is deemed to
be acting without authority or in bad faith, and only
such acting partner shall be liable for the liability
incurred.
(3) As To Third Party Creditors
Whatever may have been the cause of the dissolution
of the partnership, third parties who in good faith
(i.e., unaware of the dissolution of the
partnership) enter into any contract or transaction
with the partnership through any of the partners, are
protected in their contractual expectations that the
contract is valid and binding against the partnership.
The central principal in Partnership Law is that any
third party who enters into a contract with the
purported partnership in good faith, shall have the
validity and enforceability of such contract protected.
Thus, Article 1834 of the Civil Code provides that
“After dissolution, a partner can bind the partnership
x x x (2) By any transaction which would bind the
partnership if dissolution had not taken place,
provided the other party to the transaction:
(a) Had extended credit to the partnership prior to
dissolution and had no knowledge or notice of the
dissolution; or
(b) Though head not so extended credit, had
nevertheless known of the partnership prior to
dissolution, and, having no knowledge or  notice of
dissolution, the fact of dissolution had not been
advertised in a newspaper of general circulation in the
place (or in each place if more than one) at which the
partnership business was regularly carried on.
Notice how the law treats differently third parties
who have previously extended credit to the
partnership prior to dissolution, and those who have
only known of the partnership before dissolution: in
the former it is onlyactual knowledge or notice of the
dissolution that would place him in bad faith;
whereas, in the latter mere notice of dissolution
published in the newspapers would transform him
into a third party acting in bad faith.
When it comes to the effects of dissolution, especially
on the power of any partner to bind the partnership
and other partners in “new business” contracts and
transactions, jurisprudence has ruled that unless
otherwise published or made known personally, third
parties dealing with a partnership in good faith have a
right to expect that the partnership relation exist and
that the partners are authorized to pursue
partnership business as a going concern.
Thus, in Singson v. Isabela, 88 SCRA 623 (1979), the
Court held since it did not appear that the withdrawal
of a partner from the partnership was published in the
newspapers, then “the public in general had a right to
expect that whatever, credit they extended to [the
remaining partners] doing the business in the
[original] name of the partnership ‘Isabela Sawmill’
could be enforced against the properties of said
partnership,” (Ibid, at p. 642) as well as against the
properties of the withdrawing partner.
(i) Particular Rule of “Limited Liability”
Although a partner may be bound personally to the
liabilities incurred with third parties who act in good
faith, nonetheless, Article 1834 makes it clear that
such liability is “limited liability”, that is that “The
liability of a partner x x x shall be satisfied out of
partnership assets alone when such partner had been
prior to dissolution:”
(a)  Unknown as a partner to the person with whom
the contract is made; and
(b) So far unknown and inactive in partnership affairs
that the business reputation of the partnership could
not be said to have been in any degree due to his
connection with it.
(ii) When Creditors Not Deemed to Be In Good Faith
It should be noted that Article 1834 provides that even
when third parties enter into a “new business”
contract or transaction with the partnership without
actual knowledge or notice of the fact of its
dissolution, nonetheless, they will not be considered
to be third parties acting in good faith, and that “[t]he
partnership is in no case bound by any act of a partner
after dissolution,” in the following cases:
(a)  Where the partnership is dissolved because it is
unlawful to carry on the business, unless the act is
appropriate for winding up partnership affairs; or
(b) Where the partner has become insolvent.
(iii) Particular Rule on Partner by Estoppel
Notwithstanding any of the foregoing rules, Article
1834 provides that the liability of any person who
after dissolution represents himself or consents to
another representing him as a partner in a partnership
engaged in carrying on business, shall be the same as
that provided under Article 1825 on partnership by
estoppel.
7. Winding-Up of Partnership Affairs
a. Who Has Authority to Wind-up?
Under Article 1836 of the Civil Code, the person or
persons who have the power and authority to wind
up the partnership affairs as a consequence of its
formal dissolution, is determined by the following
rules:
(a)  If there is an agreement on this matter, it is the
partner or partners so provided to have such
authority, shall wind-up partnership affairs;
(b)  In the absence of any such agreement:
(i)  The partners who have not wrongfully dissolved
the partnership or the legal representative of the last
surviving partner, not insolvent, has the right to
wind up the partnership affairs;
(ii)  However, any partner or his legal representative
or assignee, upon cause shown, may obtain winding-
up by the courts.
b.   Rules and Procedures for Winding-up and
Liquidation of Partnership Affairs
Since winding-up and liquidation of the partnership
affairs must apply the rules and principles relating to
the partnership doctrine of “unlimited liability”, the
partners’ right to the benefit of excussion, and the
priority rules among conflicting claims, the Law on
Partnership under Article 1839 of the Civil Code lays
down the following tenets, subject to any agreement
to the contrary:
(a) What Constitutes Partnership Property?
The assets of the partnership which shall be applied to
pay partnership liabilities are:
(i)      The partnership property,
(ii)     The contributions of the partners necessary for
the payment of all the liabilities of the partnership.
(b)  What Are the Priority Rules Against Partnership
Property?
The liabilities of the partnership shall rank in order of
payment as follows:
(i)  Those owing to creditors other than partners;
(ii)  Those owning to partners other than for capital
and profits;
(iii)  Those owning to partners in respect of capital;
and
(iv) Those owing to partners in respect of profits.
(1) Enforcing Contributions from Partners to Cover
Partnership Debts
Article 1839 specifically provides that the partners
shall contribute “as provided by Article 1797, the
amount necessary to satisfy the liabilities,” and that
the individual property of a deceased partner shall be
liable for such contribution.
It also provides that an assignee for the benefit of the
creditors or any person duly appointed by the court
shall have the right to enforce the contribution
specified.
In addition, any partner or his legal representative
shall have the right to enforce the contributions to
the extent of the amount which he has paid in excess
of his share of the liability.
(2)  Priority Rules Between Partners’ Creditors and
Partnership Creditors
Under Article 1829(8), when partnership property and
the individual properties of the partners are in
possession of a court for distribution, partnership
creditors shall have priority on partnership property
and separate creditors on individual property, saving
the right of lien of secured creditors.
(3)  Priority Rules When Partner Is Insolvent
Where a partner has become insolvent or his estate is
insolvent, the claims against his separate property
shall rank in the following order:
(a) Those owing to separate creditors;
(b) Those owing to partnership creditors;
(c) Those owing to partners by way of contribution.
(4)  Partner May Demand Share in Net Assets Only
After Liquidation and Settlement of Claims
of Partnership Creditors
In Villareal v. Ramirez, 406 SCRA 145 (2003), the Court
ruled that “A share in a partnership can be returned
only after the completion of the latter’s dissolution,
liquidation and winding up of the business.” But even
upon dissolution of the partnership, a partner has no
right to demand from the other partners for them to
be personally liable for the return of his contribution,
especially when the partnership operations have been
at a loss, thus:
We hold that respondents have no right to demand
from petitioners the return of their equity share.
Except as managers of the partnership, petitioners did
not personally hold its equity or assets. “The
partnership has a juridical personality separate and
distinct from that of each of the partners.” Since the
capital was contributed to the partnership, not to
petitioners, it is the partnership that must refund the
equity of the retiring partners.
x x x.
Since it is the partnership, as a separate and distinct
entity, that must refund the shares of the partners,
the amount to be refunded is necessarily limited to its
total resources. In other words, it can only pay out
what it has in its coffers, which consists of all its
assets. However, before the partners can be paid their
shares, the creditors of the partnership must first be
compensated. After all the creditors have been paid,
whatever is left of the partnership assets becomes
available for the payment of the partners’ shares.
(Ibid, at pp. 151-152)
The Villareal ruling reiterates the decision in Magdusa
v. Albaran, 5 SCRA 511 (1962). It should be noted that
in Magdusa the Supreme Court did not accept the
theory of the Court of Appeals that partners have a
personal cause of action against the managing
partner for the latter to return their capital on the
basis that “Plaintiffs’ action was based on the
allegation, substantiated in evidence, that Gregorion
Magdusa, having taken delivery of their shares, failed
and refused and still fails and refuses to pay them
their claims. The liability, therefore, is personal to
Gregorio Magdusa, and the judgment should be
against his sole interest, not against the
partnership’s.” (Ibid, at p. 513) This shows that even
when the cause for dissolution is fraud, the action to
recover must still be by way of dissolution and
liquidation of the partnership affairs, and cannot be in
the form of a personal action against the allegedly
defaulting partner.
Note must be taken of the decision in Martinez v. Ong
Pong Co., 14 Phil. 726 (1910), where two persons
received from a capitalist partner the latter’s
contribution for the establishment of a business with
clear agreement on the sharing of profits and losses
from such venture. When the managing partners
refused to render an accounting of the operations of
the venture although they admitted there were small
profits made, the trial court rendered judgment
directing the managing partners to return the
investment of the capitalist partner. The Court, in
affirming the return of contribution, rather than
directing the dissolution and liquidation of the
partnership and determining the share of the partners
in the net assets, held –
Inasmuch as in this case nothing appears other than
the failure to fulfill an obligation on the part of a
partner who acted as agent in receiving money for a
given purpose, for which he has rendered no
accounting, such agent is responsible only for the
losses which, by a violation of the provisions of the
law, he incurred. This being an obligation to pay in
cash, there are no other losses than the legal interest,
which interest is not due except from the time of the
judicial demand, or, in the present case from the filing
of the complaint. . . We do not consider that article
1688 is applicable in this case, in so far as it proves
“that the partnership is liable to every partner for the
amounts he may have disbursed on account of the
same and for the proper interests,” for the reason
that no other money that the contributed as capital is
involved. (Ibid, at p. 729)
We believe that the decision in Martinez is wrong, for
a contemporaneously held in Villareal, a partner the dissolved partnership shall also be creditors of the
cannot seek recovery of his contribution, much less person or partnership continuing the business:
share in the net assets of the partnership, unless it be
(a) When any new partner is admitted into an existing
part of the dissolution and liquidation of the
partnership, or when any partner retires and assign
partnership, whereby the claims of partnership
(or the representative of the deceased partner
creditors have priority payment rights.
assigns) his rights in partnership property to two or
And yet the Supreme Court in Uy v. Puzon, 79 SCRA more of the partners and one or more third persons, if
598 (1977), also ordered the primary partner to the business is continued without liquidation of
reimburse his co-partner the latter’s investment and the partnership affairs;
unrealized profits. In Uy, the Court found that the
(b)  When all but one partner retires and assigns (or
primary partner in a construction venture did not
the representative of a deceased partner
comply with his obligation to devote the project for
assigns) their rights in partnership property to
the benefit of the partnership:
the remaining partner, who continues the business
Had the appellant not been remiss in his obligations as without liquidation of partnership affairs, either alone
partner and as prime contractor of the construction or with others;
projects in question as he was bound to perform
(c)  When any partner retires or dies and the business
pursuant to the partnership and sub-contract
of the dissolved partnership is continued, with the
agreements . . . it is reasonable to expect that the
consent of the retired partners or the representative
partnership would have earned much more than the
of the deceased partner, without any assignment of
P334,255.61. . . The award, therefore, made by the trial
his right in partnership property;
court of the amount of P200,000.00, as compensatory
damages, is not speculative, but based on reasonable (d)  When all the partners or their representatives
estimate. (Ibid, at p. 615). assigns their rights in partnership property to one or
more third persons who promise to pay the debts and
8.  Continuance of Partnership Business Instead of
who continue the business of the dissolved
Winding-Up
partnership;
Article 1840 recognizes that a partnership may be
(e)  When any partner wrongfully causes a dissolution
dissolved, but the underlying partnership business
and the remaining partners continue the business,
enterprise would not be wound-up, and in fact may be
either alone or with others, and without liquidation of
continued as a going concern.
the partnership affairs;
a.  Who May Continue Partnership Business and
(f)   When a partner is expelled and the remaining
Obligations Assumed?
partners continue the business either alone or with
Article 1837 of the Civil Code recognizes the right of others without liquidation of the partnership affairs.
the “partners who have not caused the dissolution
Article 1840 of the Civil Code provides also that the
wrongfully,” if they so desire, to continue the
liability of a third person becoming a partner in the
business in the same name either by themselves or
partnership continuing the business, to the creditors
jointly with others during the agreed term for the
of the dissolved partnership shall be satisfied out of
partnership.
the partnership property only, unless there is a
If such right to continue the partnership business is so stipulation to the contrary. This is a form of “limited
exercised, then such exercising partners must secure liability” on the part of a new partner coming into an
the payment by bond approved by the court, or pay to existing partnership.
any partner who has caused the dissolution
The article likewise provides that when the business
wrongfully, the value of his interest in the partnership
of a partnership after dissolution is continued under
at the point of dissolution, less any damages
any conditions set forth therein, the creditors of the
recoverable from said defaulting partner, as well as
dissolved partnership, as against the separate
indemnify him against all present or future
creditors of the retiring or deceased partner or the
partnership liabilities.
representative of the deceased partner, have a prior
b.   Disposition of Liabilities When Partnership right to any claim of the retired partner or the
Business Continued representative of the deceased partner against the
person or partnership continuing the business, on
Article 1840 provides that if the dissolved partnership
account of the retired or deceased partner’s interest
is not wounded-up and instead the partners so
in the dissolved partnership or on account of any
qualified have chosen to continue the partnership
consideration promised for such interest or for his
enterprise as a going concern, then the creditors of
right in partnership property. Nothing in the article
shall be held to modify any right of creditors to set
aside any assignment on the ground of fraud.
Finally, the article provides that the use by the person
or partnership continuing the business of the
partnership name, or the name of a deceased partner
as part thereof, shall not of itself make the individual
property of the deceased partner liable for any debts
contracted by such person or partnership.
The foregoing rules of liabilities must always be
construed in consonance with the primary doctrine of
protecting creditors who deal in good faith with the
partnership business and who cannot be expected to
be aware of the inner workings of the partnership and
the intramural dealings of the partners. Thus,
in Singson v. Isabela Sawmill, 88 SCRA 623 (1979),
where the partnership executed a chattel mortgage
over its properties in favor of a withdrawing partner,
and the withdrawal was not published to bind the
partnership creditors, the Court ruled that the failure
of a partner to have published her withdrawal from
the partnership, and her agreeing to have the
remaining partners proceed with running the
partnership business instead of insisting on the
liquidation of the partnership, did not relieve such
withdrawing partner from her liability to the
partnership creditors. Even if the withdrawing
partner acted in good faith, it could not overcome
the position of partnership creditors who also acted
in good faith, without knowledge of her withdrawal
from the partnership. Thus, the Court affirmed the
standing of the partnership creditors to seek the
annulment of the chattel mortgage for having been
entered into adverse to their interests.
e.   Disposition of Liabilities When Dissolution Is
Caused by the Retirement or Death of a Partner
Under Article 1841 of the Civil Code, when any partner
retires or dies, and the business is continued under
any of the conditions set forth in Article 1840, or in
Article 1837(2), without any settlement of accounts as
between him or his estate and the person or
partnership continuing the business, unless otherwise
agreed, then the following rules shall apply:
(a)  The partner or his legal representative as against
such person or partnership may have the value of his
interest at the date of dissolution ascertained; and
(b)  The partner or his legal representative shall
receive as an ordinary creditor an amount equal to the
value of his interest in the dissolved partnership, with
option:
(i)   to receive interest; or
(ii)  in lieu of interest, the profits attributable to the
use of his right in the property of  the dissolved
partnership.
Nonetheless, the article expressly provides that the
creditors of the dissolved partnership as against the
separate creditors, or the representative of the
retired or deceased partner, shall have priority on any
claim arising under said article, as provided by Article
1840, third paragraph.
9.       Partner’s Right to Demand an Accounting
Under Articled 1842 of the Civil Code, in the absence
of any agreement to the contrary, the right to receive
an accounting of his interest shall accrue to any
partner, or his legal representative, as against the
winding-up partners, or the surviving partners, or the
person or partnership continuing the business, at the
date of dissolution.
In Fue Leung v. Intermediate Appellate Court, 169 SCRA
746 (1989), the Court held that the right to accounting
does not prescribe during the life of the partnership,
and that prescription begins to run only upon the
dissolution of the partnership and final accounting is
done, under the rationale that:
. . . As stated by the respondent, a partner shares not
only in profits but also in the losses of the firm. If
excellent relations exist among the partners at the
start of business and all the partners are more
interested in seeing the firm grow rather than get
immediate returns, a deferment of sharing in the
profits is perfectly plausible. It would be incorrect to
state that if a partner does not assert his rights
anytime within ten years from the start of operations,
such rights are irretrievably lost. The private
respondent’s cause of action is premised upon the
failure of the petitioner to give him the agreed profits
in the operation of Sun Wah Panciteria. In effect the
private respondent was asking for an accounting of
his interests in the partnership. (Ibid, at p. 754).
15 – LIMITED PARTNERSHIPS
[Updated: 14 October 2009]
1. Nature, Formation and Registration
According to Tolentino, the provisions of the Civil
Code on limited partnerships were taken from the
Uniform Limited Partnership Act of the United States
of America. (See annotations in TOLENTINO, CIVIL
CODE OF THE PHILIPPINES, Vol V, pp. 382 to 395 [1992
ed.]; See also Report of the Code Commission, p. 149).
In essence, therefore, American decisions relating to
explaining the effects of the provisions of the Uniform
Limited Partnership Act should be taken as quite
instructive in considering the provisions of the new
Civil Code on limited partnerships.
The De Leons give a more descriptive historical
background of the limited partnership as “an
outgrowth of the Roman Law, which provided that
one or more persons might turn over property to a
slave and avoid personal liability by trading through
him.” (De Leons, p. 295). They describe how the
institution of limited partnership “grew up in the civil
law, rules governing this form of business,
substituting, of course, for the slaves, free persons
who become general partners with unlimited
liability,” and it development into the United States,
thus –
Louisiana, which uses the civil instead of the common
law, recognized this form of organization. In 1822, the
principal rules on limited partnership which grew up in
the civil law were codified and enacted into a statute
by the State of New York. New York’s lead has been
followed by most common law jurisdictions though
England did not fall into line until 1907. (Charles W.
Gertenberg, “Organization and Control, “ [1919], 3
Modern Business, p. 50). (Ibid)
Bautista quoted from the New York decision in Ames
v. Downing, 1 Brad. (N.Y. Surr. Cit.) 321, (BAUTISTA
acknowledges that the American decision is
“reproduced in CRANE AND MCGRUDER, CASES ON
PARTNERSHIP, 674-675.”) to describe the origin and
development of limited partnerships, thus —
The system of limited partnership, which was
introduced by statute into this state, and
subsequently very generally adopted in many other
states of the Union, was borrowed from the French
Code. (3 Kent. 36; Code de Commerce, 12, 23, 24.)
Under the name of la societe en commandite, it has
existed in France from most authentic commercial
records, and in the early mercantile regulations of
Maseilles and Montpelier. In the vulgar latinity of the
middle ages it was styled commanda, and in
Italyaccomenda. In the states of Pisa and Florence, it is
recognized so far back as the year 1166; also in the
ordinance of Louise-le Hutin, of 1315; the statutes of
Marseilles, 1253; of Geneva, of 1588. In the middle
ages it was one of the most frequent combinations of
trade, and was the basis of the active and widely
extended commerce of the opulent maritime cities of
Italy. It contributed largely to the support of the great
and prosperous trade carried on along the shores of
the Mediterranean, was known in Laguedoc,
Provence, and Lombardy, entered into most of the
industrial occupations and pursuits of the age, and
even traveled under the protection of the arms of the
Crusaders to the city of Jerusalem. At a period when
capital was in the hands of nobles and clergy, who,
from pride of caste, or cannonical regulations, could
not engage directly in trade, it afforded the means of
secretly embarking in commercial enterprises, and
reaping the profits of such lucrative pursuits, without
personal risk; and thus the vast wealth, which
otherwise could have lain dormant in the coffers of
the rich, became the foundation, by means of this
ingenious idea, of the great commerce which made
princes of the merchants, elevated to the trading
class, and brought the Commons into position as an
influential estate in the Commonwealth. Independent
of the interest naturally attaching to the history of a
mercantile contract, of such ancient origin, but so
recently introduced where the general partnership,
known to the common law has hitherto existed alone,
I have been led to refer to the facts just stated, for the
purpose of showing that the special partnership is, in
fact, no novelty, but an institution of considerable
antiquity, well known, understood and regulated.
Ducange defines it to be: “Societas mercatorem qua
uni sociorum tota negotiationis cura commendatur,
certis conditionibus.” It was always considered a
proper partnership, societas, with certain reserves and
restrictions; and in the ordinance of Louis XIV., of
1793, it is ranked as a regular partnership. In the Code
of Commerce it is classed in the same manner. I may
add, as an important fact, for the explanation of the
distinction to which I shall shortly advert, that the
French Code permits a special partnership, of which
the capital may be divided into shares, or stock,
transmissible from hand to hand. In such a case, the
death of the special partner does not dissolve the
firm, the creation of transmissible shares being a
proof that the association is formed respectu negotii,
and not respectu peronsarum; but even in such a
partnership the death of the general partner effects a
dissolution, unless it is expressly stipulated otherwise.
But, says M. Troplong, in would be wrong to extend
the rule that a partnership, of which the capital is
divided into transmissible shares, is not dissolved by
the death of a stockholder, to a special partnership,
the capital of which is not so divided. The statute of
New York recognizes only the latter kind of
partnership, the names of the parties being required
to be registered, and any change in the name working
a dissolution, and turning the firm into a general
partnership. Such a partnership has always been held
to be dissolved by the death of the special partner.
*** The partnership remains under the dominion of
the common law. It has created between the special
and general partner a tie, which is not subjected to
the caprice of unforseen changes; it has produced
mutual relations of confidence, which the general
partner cannot be forced to extend to strangers.
(BAUTISTA, at pp. 399-400) no limited partnership is formed unless the formalities
provided for under Article 1844 of the Civil Code are
It should be recognized that prior to the New Civil
complied with; and failure to so comply with the
Code provisions on limited partnerships, such
formalities only brings about the creation of a general
institution was covered by the Spanish Code of
partnership. Having complied with the formalities
Commerce. In Jo Chung Cang v. Pacific Commercial Co.,
mandated by Partnership Law to form such a medium
45 Phil. 142 (1923), our Supreme Court recognized that
of doing business, the distinguishing feature of a
there existed provisions in the Code of Commerce
limited partnership is that it has through the limited
governing limited partners: “To establish a limited
partners been able to institute a form of “limited
partnership there must be, at least one general
liability,” in that the limited partner as such shall not
partner and the name of at least one of the general
be bound by the obligations of the partnership.
partners must appear in the firm name. (Code of
Commerce, Arts. 122(2), 146, 148).” (Ibid, at pp. 150- The language used in the last sentence of Article 1843
151) of the Civil Code (“The limited partners as such shall
not be bound by the obligations of the partnership.”)
What seems clear from all the foregoing is that the
carries more the doctrine of “no liability” for limited
institution of limited partnership had its origin from
partners, and perhaps more accurately reflects that in
civil law, was adopted into the American common law
civil law, the debts and obligations of the partnership
system, from whence it found its current adoption
pertain to it as a separate juridical person, and that
into the Philippine legal system through the provisions
generally non-contracting parties, such as the limited
of the new Civil Code of the Philippines. Likewise,
partners, are not bound by said contractual debts and
limited partnerships originated and grew primarily
obligations under the principle of “privity” or
from commercial partnership practices. Its origin in
“relativity” under general contract law. But frankly,
“antiquity” may be basis to say that under modern
the use of the term “limited liability” for limited
setting, the limited partnership may be an inadequate
partners is more appropriate since, as will be
medium of doing business, for its main features and
discussed hereunder, limited partners do assume
objectives could be achieved by the modern
limited liability pertaining to their contributions and
corporation, especially the close corporation vehicle.
partnership assets held them under Article 1858.
a.   Essence of the Medium of Limited Partnership
As will also be shown in the discussions hereunder,
Article 1843 of the Civil Code defines a limited the limited liability feature of the limited partnership is
partnership as “one formed by two or more persons achieved by taking away from the persons of the
under the provisions of the following article, having as limited partners most of the key features of
members one or more general partner and one or partnerships in general, namely, mutual
more limited partners. The limited partners as such agency, delectus personae, and the right to manage
shall not be bound by the obligations of the partnership affairs.
partnership.”
b. Requirements for the Formation of a Limited
The American decision in Hoefer v. Hall, 411 P.2d 230 Partnership
(1966), describes the purpose and essence of the
Article 1844 lays down the rules by which two or more
limited partnership under the terms of the Uniform
persons desiring to form a limited partnership need to
Limited Partnership Act, thus—
comply with, thus:
x x x. A limited partnership is strictly a creature of
(1)  Sign and swear to a Certificate of Limited
statute, its object being to enable persons not
Partnership, which shall contain the following
desiring to engage in a particular business, to invest
provisions describing or designating the:
capital in it and to share in the profits which might be
expected to result from its use, without becoming  partnership name, adding thereto “Limited”;
liable as general partners for all partnership debts. In
 character of the business;
other words, it is a form of partnership in which the
liability to third persons of one or more of its  principal place of business;
members is limited to a fixed amount. . . (Citing Vol 2,
 the term of existence;
ROWLEY ON PARTNERSHIP, 2d Ed., sec. 53.0, pp. 549-
552; Vol. 8, U.L.A., p. 2; Lanier v. Bowdoin, 282 N.Y. 32,  name and residence of each of the partners, with
24 N.E. 2d 732; Ruzicka v. Rager, 305 N.Y. 191, 111 N.E. clear designation of who are the general and
2d 878, 39 A.L.R. 2d 288). limited partners; and the right, if given, of
partners to admit additional limited partners;
As a species of contract, a limited partnership may be
characterized as a formal or solemn contract, in that  contributions to the partnership; and the terms
 under which additional contribution are to be
made by the limited partners;
 right, if given, of a limited partner to substitute
an assignee as contributor in his place;
 time, if agreed upon, when the contributions of
limited partners shall be returned; and the right,
if given, to demand and receive property other
than cash in return for such contribution;
 share of the profits or the other compensation
by way of income which each limited partner
shall receive by reason of his contribution; and
the right, if given, of one or more of the limited
partners to priority over other limited partners,
as to contributions or as to compensation by way
of income and the nature of such priority;
 right, if given, of the remaining general partner
or partners to continue the business on the
death, retirement, civil interdiction, insanity or
insolvency of a general partner; and
(2) File such Certificate with the SEC
Hoefer v. Hall, 411 P.2d 230 (1966), explains the
rationale in American jurisdiction, on the formalities
required of limited partnership under the Uniform
Limited Partnership Act, thus—
x x x. The main purpose of the statutory regulation is
to ensure the limitation on the liability of limited
partners. It naturally follows that in order to obtain
the privilege of limited liability, one must conform to
the statutory requirements. . . (Citing Gilman Pain &
Varnish Co., v. Legum, 197 Md. 665, 80 A.2d 906; R.S.
Oglesby Co. v. Lindsay, 112 Va. 767, 72 S.E. 672; Mud
Control Laboratories v. Covey, 2 Utah 2d 85, 269 P. 2d
854;Bisno v. Hyde, 290 F.2d 560 [9th Cir. 1961]; 68
C.J.S. Partnership Sec. 450, p. 1006; and 40 Am.Jur.,
Partnership, Sec. 506, p. 475) Obviously, the purpose
of the requirement that the certificate shall be
recorded is to acquaint third persons dealing with the
partnership with the essential features of the
partnership arrangement. . . Under the circumstances
of this case, where neither the rights of third parties
nor a partner’s claim of limited liability is involved, we
cannot se how the failure to record the certificate
could affect the existence of a limited partnership
insofar as the parties, inter se, are concerned . . .
The indicated provisions under Article 1846 which
would provide for a right “if given,” must yield to the
legal conclusion that in effect the right alluded to does
not exist if not expressly provided for in the
Certificate of Limited Partnership or by another
provision in the New Civil Code.
With respect to the contents, swearing and SEC-filing
of the Certificate of Limited Partnership, Article 1846
recognizes the doctrine of “substantial compliance”:
“A limited partnership is formed if there has been
substantial compliance in good faith with the
foregoing requirements.” While there is no doubt that
the execution of a sworn Certificate of Limited
Partnership and its filing with the SEC are essential
elements to establish a limited partnership, the
question that arises is that which of the enumerated
contents of the Certificate under Article 1844 are a
“must” to reach the level of “substantial
compliance”?
Thus, under the Code of Commerce then in place, Jo
Chung Cang v. Pacific Commercial Co., 45 Phil. 142
(1923), held:
To establish a limited partnership there must be, at
least one general partner and the name of at least one
of the general partners must appear in the firm name.
(Code of Commerce, arts. 122[2], 146, 148.) But neither
of these requirements have been fulfilled. The general
rule is, that those who seek to avail themselves of the
protection of laws permitting the creation of limited
partnerships must show a substantially full
compliance with such laws. A limited partnership that
has not complied with the law of its creation is not
considered a limited partnership at all, but a general
partnership in which all the members are liable. (Ibid,
at pp. 150-151, citing MECHEM, ELEMENTS OF
PARTNERSHIP, p. 412; GILMORE, PARTNERSHIP, pp.
499, 595; 20 R. C. L., 1064)
It can thus be concluded, that the institution of who is
or are the general partners, and who is or are the
limited partners, including the amount or nature of
their contributions, are essential contents of the
Certificate of Limited Partnership. In other words,
limited partners cannot claim the benefits of limited
liability unless they find themselves expressly
classified as such in the duly filed and registered
Certificate of Limited Partnership. (Same ruling in
Lowe v. Arizona Power & Light Co.,427 P.2d 366
[1967]).
Nonetheless, the formal requirements to establish a
limited partnership are relevant only insofar as
establishing the limited liability rights against third
parties. Under American jurisprudence, particularly
under the Hoefer v. Halldecision, the issue as to
“substantial compliance” has no relevance in
resolving issues inter se among the partners, and
general partners are bound by the contractual
commitment under the partnership agreement to
hold the limited partners liable for partnership debts
and obligations only to the extent of their
contributions. To the same effect is the ruling in Jo
Chung Cang v. Pacific Commercial Co., (45 Phil. 142
[1923])http://www.blogger.com/post-create.g?
blogID=6336731883560557810 - _ftn2 under the terms
of the Code of Commerce which also required
execution of public document and formal registration
of the certificate of limited partnership, thus –
The supreme court of Spain has repeatedly held that
notwithstanding the obligation of the members to
register the articles of association in the commercial
registry, agreements containing all the essential
requisites are valid as between the contracting
parties, whatever the form adopted, and that, while
the failure to register in the commercial registry
necessarily precludes the members from enforcing
rights acquired by them against third persons, such
failure cannot prejudice the rights of third persons. . .
(Ibid, at p. 153).
The mandatory requirement of the filing of the
certificate with the SEC constitute the registration or
notice that binds the public to the essential nature of
the partnership as one constituting a limited liability
on the part of the limited partners. This is consistent
with the commercial law practice that a diminution of
rights or the limitation of remedies brought about by
a commercial medium shall come about only when
there has be registration that can bind the dealing
public.
American jurisprudence requires that the filing of the
Certificate of Limited Partnership with the proper
government agency (the SEC in our case), must be
done within a reasonable time. (Stowe v. Marrilees, 44
P.2d 368;Solomont v. Polk Development Co., 54 Cal.
Rptr. 22, 27 [1966]) In our jurisdiction, the fact of non-
filing of the certificate of limited partnership does not
bring about a limited partnership, and what is deemed
constituted is a general partnership.
c. False Statement in the SEC Certificate
Under Article 1847 of the Civil Code, if the Certificate
contains a false statement, one who suffers loss by
reliance on such statement may hold liable “any party
to the certificate who knew the statement to be
false” at the time he signed the certificate or
subsequently failed to cancel or amend the certificate
or to file a petition for such cancellation or
amendment.
The language covering liability under Article 1847
would indicate that a limited partner who signs the
Certificate knowing provisions therein to be false, may
thus become unlimitedly liable to a person who
suffers loss by reason of such false statement. But it
does not create general unlimited liability, because
only third parties who relied upon such false
statements, and have suffered loss thereby, can hold
the limited partner liable beyond his contribution.
Thus, in the American decision in Gilman Paint &
Varnish Co. v. Legum, 80 A.2d 906, 29 A.L.R. 2d 286
(1951), it was held that falsely indicating in the articles
of limited partnership the contribution of the limited
partner at lower amount than what was actually
contributed cannot be a basis to hold such limited
partner liable beyond his contribution, since it would
be inconceivable that a creditor could suffer loss by
relying on an investment stated in the certificate of
partnership which was smaller than the amount
actually contributed; and that it is when the actual
contribution is less than amount stated in the
certificate that reliance upon it may cause loss to a
creditor.
d. Name of Limited Partnership
Like in the ordinary partnership, the determination of
the liabilities assumed by partners and non-partners, is
very much tied-up with the name given to the
partnership venture; in other words, the name which
a partnership employs to deal with the public may
allow a member of the dealing public basis upon
which to enforce the personal liabilities against the
partners that arise from partnership dealings.
Under Article 1844, among the contents of the
Certificate of Limited Partnership should be “The
name of the partnership, adding thereto the word
‘Limited’.” In contrast, under Articles 122(2), 146 and
148 of the Code of Commerce, as found by Jo Chung
Cang v. Pacific Commercial Co.,(45 Phil. 142 [1923]) “To
establish a limited partnership, there must be, at least,
one general partner and the name of at least one of
the general partners must appear in the firm name.”
Today, it is not critical under the terms of Article 1844
that the firm name should contain the names of the
general partners, or any of them, and what is imposed
is to add the word “Limited”. In fact, under Article
1815 (which is the first article under the section
denominated as “Obligations of the Partners with
Regard to Third Persons”), “Every partner shall
operate under a firm name, which may or may not
include the name of one or more of the partners.” This
can only lead to the conclusion that under our present
Law on Partnerships, it is not required as an essential
element to establish a limited partnership, that the
firm name should contain the names of the general
partners, or any of them.
One of the key elements under Partnership Law by
which limited partners are to be accorded their limited
liability rights, is that they practically must become
invisible to the public when it comes to partnership
dealings: they are mere passive investors in the
partnership business, and they do not participate in its
management nor are they agents of the partners and
of the partnership. And every indication that would
lead the dealing public to believe or presume that a
limited partner participates in management or control
of the firm becomes a basis by which such limited
partners shall, insofar as the dealing public is
concerned, be stripped of their limited liability right.
Thus, under Article 1846, it is provided that the
“surname of a limited partner shall not appear in the
partnership name, unless it happens to be the
surname of a general partner or that prior to the time
when the limited partner became such, the business
had been carried or under a name in which such
surname appeared. As a consequence of the breach
of such prohibition, “[a] limited partner whose
surname appears in a partnership name . . . shall be
liable as a general partner to partnership creditors
who extend credit to the partnership without actual
knowledge that he is not a general partner. Estoppel
is therefore the legal basis upon which a limited
partner becomes liable to a creditor who acted on the
belief that by the inclusion of his surname, the partner
was a general partner.
The problem with this rule of estoppel is that it would
be difficult to imagine how such a partnership creditor
could claim good faith, since with the filing the SEC of
the Certificate of Limited Partnership indicating
therein a partner as a limited partner, would amount
to constructive knowledge of such fact binding on the
whole world. Does Partnership Law not intend that
compliance with the mandatory requirements of
execution, swearing and SEC-filing of the Certificate of
Limited Partnership shall amount to registration on a
public document binding on the whole world? In any
event, Article 1846 relies upon the principal of
“without actual knowledge,” to the exclusion of the
principle of constructive knowledge.
It would seem therefore that the default rule in
Philippine Partnership Law is that articles of
partnership and certificates of limited partnership,
even when formally registered with the SEC, do not
constitute a form of constructive notice to the public
dealing with such partnerships, and there is no
obligation on the part of the dealing public to
determine the legal status of the partnership, and the
intramural arrangements between and among the
partners, much less to determine the extent of the
sharing and division of powers among the partners.
What happens if the firm name adopted by limited
partnership formally in the Certificate of Limited
Partnership does not contain the word “Limited”,
does it qualify to be a limited partnership? We believe
this is only a formal and not a substantial requirement,
which cannot strip the limited partners of their right
to claim limited liability, for a member of the dealing
public cannot claim to have sustained loss by reason
of the non-inclusion of the word “Limited” in the firm
name, since the Certificate clearly indicates who are
the limited partners. Again, the drawback of this
position is that it places the burden on the dealing
public to know the contents of the Certificate filed
with the SEC.
What happens if the sworn Certificate on file with the
SEC does not provide at all for a firm name, would it
break the limited liability rights of the expressly
designated limited partners therein. We believe that
in such a case, there is no “substantial compliance”
with the requirements under Article 1846. The firm
name of every partnership is the very means by which
its existence as a juridical person, separate and
distinct from its members, and distinguishable from
other firms and juridical persons, constitutes the
essence of the “person” of the partnership and
thereby the nexus upon which the obligatory force of
its contracts and transactions are fastened. The firm
name of a partnership is the essence by which to
enforce its standing in its contractual relationship, and
the legal basis upon which its creditors can enforce its
obligations and other contractual commitments. As
the firm name is critical to partnerships in general,
then it becomes more so in the case of a limited
partnership, where the named limited partners can
fasten their limited liability within the four corners of
the partnership business enterpriser duly constituted
within the person of the created limited partnership.
Without the firm name, it is nearly impossible to
determine where those four corners lie, and may be a
basis by which partnership creditors may be
defrauded.
e. Contributions to the Limited Partnership
Article 1846 of the Civil Code expressly provides that
the contributions of a limited partner may be cash or
other property, but not service. Contribution of
service by a limited partner is not allowed because to
allow otherwise would be to place a limited partner
into the management of the firm, and thereby
constitute a breach of the fundamental reason for
being accorded limited liability privileges.
When the contribution of a limited partner is service
or industry, then he not only becomes unlimitedly
liable, but really becomes a general partner.
The contribution of service by a limited partner should
be distinguished from being allowed under Article
1855 of the Civil Code to receive “compensation by
way of income stipulated for in the certificate.” This
may seem to be a contradictory feature under the
Law on Partnership; for to allow a limited partner to
assume management or employment position in the
partnership business would lead a member of the
dealing public to assume that he is a regular partner.
In other words, such “employment arrangements,”
although allowed under the law, may prove costly to a
limited partner. Actually “compensation by way of
income,” should be interpreted to mean that by the
very position of being a limited partner, and not
because of any service or industry he will perform, he
will be accorded under the terms of the Certificate of
Limited Partnership, periodic payments whether or
not the firm is making profits. Nevertheless, in
maintaining the preference of creditors to partnership
assets, such payments shall be considered as part of
profit distribution.
The language of Article 1844(1)(f) which requires that
the Certificate of Limited Partnership should indicate
“The amount of cash and a description of and the
agreed value of the other property contributed by
each limited partner,” has been taken to mean that it
is imperative that the contributions of limited partners
must be given prior to or at the time of the execution
of the Certificate of Limited Partnership, and that the
indication of the obligation to give the contribution is
not sufficient, and would at least constitute a false
statement in the Certificate which would give rise to
an obligation to pay the loss suffered by any person
who relied upon such statement as provided under
Article 1847. (DE LEONS, at p. 308)
This position is not supported by the language of
Article 1858 which makes the limited partner liable to
the partnership for the difference between his
contribution “as having been made” and “[f]or any
unpaid contribution which he agreed in the certificate
to make in the future at the time and on the
conditions stated in the certificate.” The unmistakable
language of Article 1858 show that it is valid for the
partners to agree under the terms of the Certificate of
Limited Partnership, for the limited partner or
partners to pay their contributions at some future
time.
Does the failure of a limited partner to give his
contribution to the limited partnership at the time of
the execution and registration of the Certificate of
Limited Partnership, when it is indicated therein that it
has in fact been given, make him assume the liability
of a general partner? We do not think so, for the
penalty for such false statement is a special one
provided under Article 1847 which does not convert
him into a general partner, but merely makes him
personally liable (beyond his promised contribution),
and only to a person who suffers loss by reliance on
such false statement.
f. When Certificate Cancelled or Amended
(1) When Certificate Cancelled
Under Article 1864, the Certificate shall be cancelled
when the partnership is dissolved or all limited
partners cease to be such. In these two cases, the
partnership has ceased to be a limited partnership,
and may proceed but only as a general partnership. In
all other cases covered below, the Certificate need
only be amended.
Article 1865 of the Civil Code provides that the writing
to cancel the Certificate shall be signed by all
members in order to be effective.
What happens in the two covered cases (dissolution
and no more limited partner remaining), if the
Certificate of Limited Partnership is formally
cancelled? In the case of dissolution, usually caused by
the
(2) When Certificate Amended
Under Article 1864, the Certificate must be amended
when:
(a)   There is a change in the name of the partnership
or in the amount or character of the contribution of
any limited partner;
(b)   A person is substituted as a limited partner;
(c)   An additional limited partner is admitted;
(d)   A person is admitted as a general partner;
(e)   A general partner retires, dies, becomes insolvent
or insane, or is sentenced to civil interdiction and the
business is continued;
(f)     There is a change in the character of the business
of the partnership;
(g)   There is a false or erroneous statement in the
certificate;
(h)   There is a change in the time as stated in the
certificate for the dissolution of the partnership or for
the return of a contribution;
(i)      A time is fixed for the dissolution of the
partnership, or
(j)      the return of a contribution, no time having been
specified in the certificate; or
(k)    The members desire to make a change in any
other statement in the certificate in order that it shall
accurately represent the agreement among them.
Except for the return of contributions of limited
partners, the foregoing provisions must be
interpreted to mean that if the certificate is not
amended to cover the instances enumerated, then
such changes cannot be given legal affect as between
and among the partners and the public.
(3) Procedure to Amend Certificate
Article 1865 provides that the writing to amend a
certificate shall:
(a)   Conform to the requirements of Article 1844 as
far as necessary to set forth clearly the change in the
certificate which it is desired to make; and
(b)   Be signed and sworn to by all members, and an
amendment substituting a limited partner or adding a
limited or general partner shall be signed also by the
member to be substituted or added, and when
a limited partner is to be substituted, the amendment
shall also be signed by the assigning limited partner.
The article also provides that when a person desiring
the cancellation or amendment of a certificate may
petition the courts to order such cancellation or
amendment whenever any person designated to
execute the writing refuses to do so.
A certificate is amended or cancelled when there is
filed for record with the SEC:
(a)  A writing accomplished in accordance with the
provisions for cancellation or amendment of the
certificate;
(b)  A certified copy of the order of court ordering
such cancellation or amendment; and
(c)  After the certificate is duly amended, the
amended certificate shall thereafter be for all
purposes the certificate provided in the provisions
of the Law on Partnership.
2. The General and Limited Partners
a. The General Partners
(1) Who Is a General Partner in a Limited Partnership?
When a limited partnership is duly constituted, then
every partner who does not qualify as a limited
partner by compliance with the formal requirements
mandated under Article 1844, is deemed to be a
general partner and subject to the unlimited liability
for partnership obligations.
(2) Rights and Powers of General Partners in a Limited
Partnership
Under Article 1850, a general partner shall have the
rights and powers and be subject to all the restrictions
and liabilities of partner in a partnership without
limited partners, except that such general partner or
all of the general partners in a limited partnership
have no power nor authority to do any of the
following acts, without the written consent or
ratification of the specific act by all the limited
partners, thus:
(a)  Do any act in contravention of the Certificate;
(b)  Do any act which would make it impossible to
carry on the ordinary business of the partnership;
(c) Confess a judgment against the partnership;
(d)  Possess partnership property, or assign their
rights in specific partnership property, for other than
a partnership purpose;
(e) Admit a person as a general partner;
(f)  Admit a person as a limited partner, unless the
right so to do is given in the certificate.
Article 1850 therefore enumerates six (6) instances
when the acts of the general partners on behalf of the
partnership would not be valid without the written
consent of, or ratification in each transaction by, all
the limited partners. In other words, outside of the
enumerated instances under Article 1850, limited
partners have no voice in partnership affairs.
Notice that the nature of the six (6) instances
enumerated under Article 1850 would require
unanimous written consent or ratification by all the
limited partners because they go into either of two
matters:
(a) would contravene the contractual stipulations
with the limited partners (“limited partners must be
protected in their contractual rights”);
(b) would affect the very commercial reason by which
they agreed to become passive investors: undermines
the partnership business venture; or
(c) would undermine the fiduciary duties of the
general partners to manage the partnership
enterprise themselves for the limited partners.
Therefore, anything that affects the terms of the
solemn contract, which the Certificate of Limited
Partnership is, would require limited partnership
approval because it would amount to a novation of
contract, and easily the following fall into that
category: do any act in contravention of the
Certificate; admit a general partner, admit an
additional limited partner. The rest of the enumerated
instances under Article 1850 affect substantially the
partnership business enterprise, and therefore would
require unanimous consent or ratification by the
limited partners.
Three things must be noted carefully from the
provisions of Article 1850.
Firstly, although Article 1850 provides that the written
consent or ratification of all the limited partners is
required for the admission of a new limited partner,
“unless the right to do so is given in the certificate,”
the same cannot be interpreted to mean that when
the right to do so is given in the certificate, the
admission of a new limited partner no longer requires
the consent of all the limited partners. For even when
such right is granted, the provisions of Article 1865 in
laying down the procedure for the amendment of the
Certificate provides within its coverage the admission
of a limited partner, which requires the written
consent of all the partners. Otherwise, if the
Certificate is not amended to include formally the
additional limited partner, he or she does not become
a limited partner, and would be exposed to the
unlimited liability of a general partner.
The real advantage granted by having a specific
provision in the Certificate allowing the admission or
substitution of limited partners is that the same can
be done even against the wishes of the limited and
general partners, and if their signature to the
amendment of the Certificate cannot be obtained,
then there is basis to go to court to obtain an order
granting such amendment of the Certificate.
Secondly, although the act of the general partners in
relation to any of the six instances covered by Article
1850 would be void without the written consent or
ratification of all the limited partners, the declaration
refers to intra-partnership issues, because insofar as
third persons dealing in good faith with the
partnership, the lack of consent or ratification by the
limited partners, cannot be a basis by which they
cannot treat their contracts with the partnership as
valid, binding and enforceable.
Thirdly, the enumeration of the instances under
Article 1850 which would require written consent or
ratification of all the limited partnership to be valid, is
apart from the enumerated “act of ownership” or
“acts of strict dominion” under Article 1818 which
cannot be effected by “less than all partners,” which
includes two of the instances enumerated in Article
1850, thus –
(a)  Assign a partnership property in trust for creditors
or on the assignee’s promise to pay the debts of the
partnership;
(b) Dispose of the goodwill of the business;
(c) Confess a judgment;
(d)  Enter into a compromise concerning a partnership
claim or liability;
(e)  Submit a partnership claim or liability to
arbitration; and
(f)  Renounce a claim of the partnership.
Only two (2) instances are common to both Articles
1818 and 1850, namely:
(a) Do any other act which would make it impossible
to carry on the ordinary business of a partnership; and
(b) Confess a judgment against the partnership.
Do we take it to mean that in a limited partnership,
but expressly enumerating the six (6) instances under
Article 1850 of when the written consent or
ratification of all the limited partners is required, that
all the other instances granted under Article 1818
would only need the consent of “all the general
partners” and do not require the consent of the
limited partners, to be valid and binding? The
difference in the matters pertaining to Article 1818 is
that without the requisite unanimous consent, the
acts done would be void, not only against the
partnership and the other partners who did not
consent, but even as to third parties who dealt on the
other side of the transactions, because such acts or
transactions are not deemed to be in the ordinary
course of partnership business, and third parties have
no right to expect that the same is within the power
of any one or more, but not all of the partners, to
enter into.
(3) Duties and Obligations of General Partner
Article 1850 provides that “A general partner shall . . .
be subject to all the restrictions and liabilities of a
partnership without limited partners.” Must we
therefore presume that every general partner in a
partnership is saddled with the same obligations, and
has the same duties and fiduciary obligations, to the
limited partnership and to all the partners, whether
general or limited, as those prevailing in a non-limited
partnership arrangement?
Thus, a general partner who is a capitalist partner is
saddled with the same fiduciary duty of loyalty, in that
he cannot engage in any business that conflicts with
that of the limited partnership. (Article 1789, Civil
Code of the Philippines) A general partner who is such
as an industrial partner is also saddled with the same
fiduciary duty of loyalty, of being disqualified from
engaging in any business venture. (Article 1789, Civil
Code of the Philippines)
While there is no doubt that the general partners,
individually and collectively, owe fiduciary duties to
the limited partners in a partnership setting, is the
legal basis of such fiduciary relationship that of
principal and agency? There seems to be little doubt
that the limited partners do not have any rights of
management, and consequently do not act as agents
to one another, of the partnership itself, and of the
general partners. On the other hand, although the
general partners are mutual agents to one another, as
well as being agents of the partnership, can we
consider them agents of the limited partners? The
author’s position on this matter is that there can be
no legal way by which the general partners can be
treated as agents of the limited partnership, for that
legal relationship would violate the rule under Article
1848 that limited partners cannot involve themselves
in the management of the partnership affairs, since
the act of the agents (the general partners) would be
equivalent to the act of the principal (the limited
partners).
It is our proposition that the fiduciary relationship that
arises between the limited partners on one hand, and
the general partner or partners on the other hand,
rather than being borne out by an agency
relationship, actually arises more from that of
business trust: that the general partners become in
effect the trustee for the limited partners, who
assume the role of being beneficiaries to the corpus,
which can be considered to be the properties and the
business enterprise of the partnership itself. Not only
does the trustee-beneficiary not only support the
existence of a fiduciary relationship between the
general partners and the limited partners, but
validates the structure of management and limited
liability existing in the limited partnership setting: that
as trustees, the management over the corpus (the
properties and business enterprise of the partnership)
are placed in the hands of the general partners, with
an obligation to run the partnership affairs to serve
the beneficial interests of the limited partners (to
receive their share in the profits as stipulated under
the Certificate of Limited Partnership), and thereby
make the limited partners, as mere passive
beneficiaries in a trust arrangement, thereby not
personally liable for the resulting debts and liabilities
of the partnership venture.
The foregoing thesis explains the reason why, being
merely a beneficiary in the partnership trust, limited
partners do not thereby owe any fiduciary obligations
to one another, must less to the general partners, and
thereby can engaged in a business that may even
compete with that of the limited partnership’s
business. Likewise, the thesis would explain why in
areas covered under Article 1818 which do not fall
within the enumerations under Article 1850, which are
acts of ownership, it may be presumed that in a
limited partnership setting, the requirement that they
may be done validly only with the agreement of “all
the partners” would only cover the general partners
since they are deemed to be endowed with the power
to do acts of ownership as trustees having naked title
to the partnership assets and business enterprise.
b. The Limited Partner
(1) Who is a Limited Partner?
Under Article 1844, no member of a partnership shall
be considered a limited partner, unless he is so
designated in the Certificate of Limited Partnership
duly filed with the SEC, and under Article 1846, his
surname cannot be part of the firm name, and under
Article 1845, he does not have the right or option to
contribute service to the partnership.
(2) Erroneous But in Good Faith Limited Partner
Under Article 1852, a person who has contributed to
the capital of a business conducted by a person or
partnership erroneously believing that he has become
a limited partner in a limited partnership, does not by
his exercise of the rights of a limited partner:
(a)  become a general partner with the person or in
the partnership carrying on the business; nor
(b)  be bound by the obligations of such person or
partnership;
provided that on ascertaining the mistake he
promptly renounces his interest in the profits of the
business or other compensation by way of income.
The situations contemplated under Article 1852 must
cover a situation when although there exist a
partnership business, it is conducted not within the
medium of a limited partner. Therefore, if one
becomes a member of the partnership with the
intention that he becomes a limited partner, and
sticks only to exercising the rights of a limited partner,
he does not incur liability of a general partner even as
to the partnership creditors, provided he undertakes
the “acts of good faith” mandated by law. It is only
when he takes part in the control of the business (as
provided in Article 1848), that he then becomes liable
as a general partner, or when having realized the
mistake in affiliating with the partnership he does not
renounce his interests in the partnership profits, and
severe his relationship with the partnership venture.
Why is it an essential feature of the “acts of good
faith” of such limited partner that he must renounce
“his interest in the profits of the business or other
compensation by way of income”? The answer to this
question lies in the fact that the contract of limited
partnership is considered to be a solemn contract, and
thereby void if the solemnities mandated by law have
not been complied. Therefore, in a situation where
the party acts in good faith believing himself to be a
limited partner, when he learns that he has not been
duly instituted as such, then it can be considered to be
a situation where there is a void contract resulting,
and if he is not to be bound by the unlimited liability
obligations of an ordinary partner in general, then he
must not also partake of any benefits or advantage
arising from the purported contractual relationship.
(3) When Limited and General Partner at the Same
Time
Article 1853 provides that a person may be a general
partner and a limited partner in the same partnership
at the same time, provided that this fact shall be
stated in the certificate of limited partnership. Why
would a general partner want to be a limited partner
at the same time, and vice versa? It pertains to availing
of the rights of a limited partner with respect to his
contribution as such.
Under Article 1853, even when a limited partner is at
the same time a general partner, nonetheless “in
respect to his contribution, he shall have the rights
against the other members which he would have had
if he were not also a general partner.” What would
those rights be peculiar to him as a limited partner,
which are not available to him as a general partner?
Certainly it cannot be “limited liability” rights, for
being a general partner at the same time, he cannot
have any claim for limited liability against partnership
debts and claims. The only viable rights of a limited
partner which are not undermined by the fact that he
is also a general partner at the same time, may pertain
only to the priority right to the return of his
contributions, share in the profits as it pertains to him
as a limited partner.
c.   The Rights and Powers of the Limited Partner
The provisions of the Civil Code provide the following
rights to every limited partner in a duly constituted
limited partnership:
(a) Right to limited liability (Arts. 1843 and 1848);
(b) Right to the return of his contribution (Art. 1851);
(c)  Right to receive his share in the profits and
compensation by way of income (Art. 1851);
(d) Right to assign his equity interest (Art. 1851);
(e)  Right to have the partnership books kept at the
principal place of business of the partnership, and at a
reasonable hour to inspect and copy any of them (Art.
1851[1]);
(f)  Right to have on demand true and full information
of all things affecting the partnership, and a formal
account of partnership affairs
whenever circumstances render it just and reasonable
(Art. 1851[2]); and
(g)  Right to have the dissolution and winding-up by
decree of court (Arts. 1851[3] and 1857).
Perhaps the best way to describe the rights of limited
partners, the nature and extent, even to those
granted expressly by law, is the way Bautista had
summarized the ruling in the American case of Millard
v. Newmark & Co.,266 N.Y.S.2d 254 (1966), thus: “In
broad terms, it may be stated that a limited partner
has such rights and only such rights as the law and his
contract afford.” (BAUTISTA, at p. 425)
(1) Right to Limited Liability
The essence of the doctrine of “limited liability” is
that limited partners who are entitled thereto “shall
not be bound by the obligations of the partnership”
(Art. 1843) beyond what they contributed or legally
bound to contribute to the partnership’s common
fund.
The essence of the medium of limited partnership is to
allow a group of investors-the limited partners-to be
able to participate in the profits and losses of the
partnership venture without having to be liable to
partnership creditors for the separate properties, or
more properly speaking, beyond the value of their
contributions in the partnership venture. Thus, Article
1843, as it defines a limited partnership provides that
[t]he limited partners as such shall not be bound by
the obligations of the partnership.
The grant of the limited liability status to limited
partners comes at a price, in that: (a) they cannot
have their surnames form part of the partnership
name (Art. 1846); (b) they cannot participate in the
control of the partnership business (Art. 1848); and (c)
therefore they are prohibited from contributing
service or industry into the partnership (Art. 1845). If a
limited partner violates any of these restrictions, he
becomes unlimitedly liable as in the case of general
partners.
It should be noted that the feature of limited liability
is poised primarily in relationship to the creditors of
the partnership venture in that they have a right to
expect that all partners are unlimited liable for
partnership debts, unless they are so indicated in the
Certificate as being limited partners who assume the
role of mere passive investors; and that partnership
creditors have a right to expect that a partner who
participates in partnership affair is a general partner,
and cannot claim the rights to limited liability. Since it
is a limitation on the cause of action that partnership
creditors would ordinarily have against the partners,
then matters relating to the application or non-
application of the principle of “limited liability” can be
raised only by partnership creditors. It is a matter that
is not within the right of partners to raise.
The operative norm of this doctrine is best
exemplified in two American decisions: limited
partners by definition of law and by the terms of the
certificate of limited partnership have no right to
participate or interfere in the affairs of the partnership
business enterprise, and if they do so,Donroy, Ltd. v.
United States, 196 F.Supp. 54, 57 (1961), holds that
general partners can seek dissolution of the
partnership (since the actuations of the limited
partners would tantanmount to a breach of the
contract of partnership); but although the partnership
creditors can now hold the limited partners who
interefere in partnership affairs as unlimited liable,
nontheless, Weil v. Diversified Properties, 319 Supp.
778 (1970), holds that the general partners cannot, on
account of such intereference, seek to enlarge the
liability of the limited partners by having ghem
declared as general partners with obligations to
account.
(2) Right to Return of Contributions
Article 1844(1)(h) provides that one of the provisions
that should be found in the Certificate of Limited
Partnership is “[t]he time, if agreed upon, when the
contribution of each limited partner is to be
returned.” Does that mean that when there is no
agreement or provision in the Certificate on this
matter, limited partners, like general partners, do not
have a right to demand return of contributions during
the life of the partnership? The answer is in the
negative, since the nexus of a limited partner’s
relationship in the partnership arrangement is his
contribution and the profits that he is entitled by
reason of such contribution, then the ability of the
limited partner, as really a mere passive investor, must
commercially be linked to his ability to be able to
liquidate his investment within a reasonable time that
cannot be linked to the entire “going concern” life of
the partnership business venture.
Article 1856 provides that where there are several
limited partners the entire members may agree that
one or more of the limited partners shall have a
priority over other limited partners as to the return of
their contributions, as to their compensation by way
of income, or as to any other matter, but that “[i]f
such an agreement is made it shall be stated in the
certificate of limited partnership, and in the absence
of such a statement all the limited partners shall stand
upon equal footing.”
It seems clear that priority in return of contributions
or share in income to the limited partners must not
only be agreed upon by all the partners, but must find
itself expressed in the Certificate of Limited
Partnership, either as originally indicated or by way of
amendment thereto. In the absence of such provision
in the Certificate, there is no priority between and
among the limited partners, and they shall be treated
to be at equal footing. Return of contributions of the
limited partners, therefore, is not necessarily
associated with the dissolution of the partnership.
Under Article 1857, a limited partner shall not receive
from a general partner or out of partnership property
any part of his contribution until:
(a)  All liabilities of the partnership, except liabilities to
general partners and to limited partners on account of
their contributions, have been paid, or there remains
property of the partnership sufficient to pay them;
(b)  The consent of all members is had, unless the
return of the contribution may be rightfully
demanded under the law;
(c)  The certificate is cancelled or so amended as to
set forth the withdrawal or reduction.
On the other hand, when all liabilities to third party
creditors have been paid or there will remain enough
assets to cover them, a limited partner may rightfully
demand the return of his contribution:
(a)  On the dissolution of the partnership; or
(b)  When the date specified in the certificate for its
return has arrived; or
(c)  After he has given six months notice in writing to
all other members, if no time is specified in the
certificate, either for the return of the contribution or
for the dissolution of the partnership.
Article 1857 also provides that “[i]n the absence of
any statement in the certificate to the contrary or the
consent of all members, a limited partner, irrespective
of the nature of his contribution, has only the right to
demand and receive cash in return for his
contributions.”
When the partnership creditors’ preference is
respected (either because they will first be all paid, or
assets would be provided for their settlement), do
limited partners have the right to demand for the
return of their contributions even when it is only in
cash, even when no such right is provided for in the
Certificate of Limited Partnership or outside of
dissolution scenario? The answers seems to be in the
affirmative because of the separate ground for return
provided under Article 1857 “[a]fter he has given six
months notice in writing to all other members, if no
time is specified in the certificate, . . . for the return of
the contribution,” and this may seem even when the
demand for return does not obtain the unanimous
vote of the other partners.
It is true that one of the conditions for the valid return
of a limited partner’s contribution is that there has to
be the proper amendment of the Certificate of
Limited Partnership, which under the specific
provisions governing the same can only be done with
the written consent of all the partners. Nonetheless,
the ackwnowledgment of the right of limited partners
to have the return of their contribution upon
compliance with the 6-month notice rule, would mean
that in the event the other partners oppose such a
return and they refuse to sign on the amendment to
the Certificate of Limited Partnership, nonetheless, it
would authorize the withdrawing limited partner to
seek court order for the proper amendment thereof.
What needs to be emphasized is that the law
recognized that limited partners are mere passive
investors in the partnership venture, and in the end
they must have a way of offing-out of the venture
either by the ability to assign their equity interests or
to demand properly the return thereof.
(3) Right to Profit or Compensation by Way of Income
Under Article 1856, a limited partner may receive from
the partner the share of the profits or the
compensation by way of income stipulated for in the
certificate, provided that after such payment,
whether from the partner property or property of a
general partner, the partnership assets are in excess
of all liabilities of the partnership, except liabilities to
limited partners on account of their contributions and
to general partners. Even in a limited partnership, the
law recognizes the priority standing of partnership
creditors to those of the limited and general partners
in terms of payment from the partnership property.
It must be understood that the meaning of
“compensation by way of income,” should not mean
that the limited partner is entitlted to be employed or
to participate in the management of or in the
operations of the partnership, for which he can be
paid “compensation.” For even when a limited
partner is hired as an employee of the firm, this may
be treated as participating in the partnership affairs as
to make them unlimitedly liable for partnership debts
and obligations. The term “compensation by way of
income,” means any arrangement by which the
distribution of profits is termed “compensation” or
“salary” done on a regular or periodic basis as may be
agreed upon in the Certificate of Limited Partnership,
and paid to the partner by reason of his simply being a
partner, and not by virtue of the services or industry
he renders to the firm.
(4)  Right to Assign Limited Partners Interest
Under Article 1859, a limited partner’s interest in the
limited partnership is assignable, and like in an
ordinary partnership, the assignee steps into the
shoes of the assigning limited partner only when
admitted by the other members: “A substituted
limited partner is a person admitted to all the rights of
a limited partner who had died or has assigned his
interest in a partnership.” The article also provides
that “An assignee shall have the right to become a
substituted limited partner if all the members consent
thereto or if the assignor, being thereunto
empowered by the certificate, gives the assignee that
right.” But in the end Article 1859 provides expressly
that there is a need to amend the certificate, thus:
“An assignee becomes a substituted limited partner
when the certificate is appropriately amended.”
Article 1859 provides that the substituted limited
partner has all the rights and powers, and is subject to
all the restrictions and liabilities of his assignor, except
those liabilities which he was ignorant of at the time
he became a limited partner and which could not be
ascertained from the certificate.
The article also provides that the substitution of the
assignee as a limited partner does not release the
assignor from liability to the partnership for false
statement in the certificate under Article 1847, and for
his contributions liabilities under Article 1858.
Finally, Article 1859 provides that an assignee who
does not become a substituted limited partner, has no
right to require any information or account of the
partnership transactions or to inspect the partnership
books; he is only entitled to receive the share of the
profits or other compensation by way of income, or
the return of his contributions, to which his assignor
would otherwise be entitled.
On the other hand, under Article 1849, after the
formation of a limited partnership, additional limited
partners may be admitted only upon filing an
amendment to the original certificate in accordance
with the procedure of amendments provided under
Article 1865. Since Article 1849 does not provide a
particular procedure or voting threshold by which
additional limited partners may be admitted into the
partnership, then the requirements would have to
track the procedure mandated under Article 1865 on
the amendment of the Certificate of Limited
Partnership, which provides that the amending
certificate “Be signed and sworn to by all members,
and an amendment substituting a limited partner or
adding a limited or general partner shall be signed
also by the member to be substituted or added, and
when a limited partner is to be substituted, the
amendment shall also be signed by the assigning
limited partner.” If existing limited partners are more
of passive investors in the partnership venture, why
would their consent be essential in a decision by the
general partners to admit additional limited partners,
whenever that power is not expressly provided for in
the Certificate of Limited Partnership?
The first reason is that the institution of any limited
partner (whether original or additional) requires a
formal indication in the Certificate, otherwise such
partners are not deemed to be limited partners, and
they will be treated as general partners.
Consequently, the admission of a new limited partner
is really equivalent to an amendment or novation of
the original or existing limited partnership agreement,
which under the principle of mutuality in Contract
Law, cannot be done without the consent of all
contracting parties, including the limited partners.
This point emphasizes the legal truism that limited
partners must be treated in two levels of legal
relationship in the partnership arrangement: as
passive investors in the partnership venture, and as
parties to the contract of limited partnership.
Secondly, the admission of a new limited partner into
the partnership venture must necessarily “eat up” on
the proportional share of the existing limited partners
in the partnership profits, and therefore like the
principle governing pre-emptive rights of stockholders
under Corporate Law, limited partners must give their
consent to the admission of a new limited partner
which would have the effect of diluting their
proportional right to the partnership profits.
Finally, the admission of a new limited partner into the
partnership also dilutes the proportional share that
each of the existing limited partners are to have in the
distribution of the net assets of the partnership upon
dissolution and winding-up.
If the equity holdings of limited partners in the
partnership are impersonal in nature, because they do
not entitle the limited partners to participate in the
management of the partnership affairs, much less to
act as agents of one another, the partnership or the
general partners, then it becomes a little difficult
understanding why the substitution by a limited
partner of another person in his place cannot happen
as a matter of commercial right, without having to
obtain the consent of all the other partners. Perhaps
the free-transferability of the equity units of limited
partners should be instituted as a better feature of
the institution of limited partners in our jurisdiction.
We can understand the rationale for the need to
formally amend the Certificate of Limited Partnership
whenever a limited partner is substituted by another
person as compliance with the solemn nature of the
limited partners’ position vis-a-vis to formally bind the
public to the fact that they are only limitedly liable.
However, the same solemnity and notice to the public
can be achieved simply by registering with the SEC the
sale or assignment by a limited partner of his equity to
another person. Requiring the formal amendment of
the Certificate of Limited Partnership unnecessary
involves the participation of all the other partners (by
their written consent or ratification), which makes the
process entirely cumbersome and needlessly costly,
when such consent can be presumed to have been
part of the original perfection of the contract of
partnership among the parties, and, more
importantly, the process of sale and substitution
cannot amount to a diminution or prejudice of the
rights of any of the other partners, whether general
or limited, since limited partners, whoever they may
be, practically have no right or power except as it
pertains to their proprietary interest in the
partnership. In short, the entire rationale of delectus
personae is completely irrelevant to limited partners
among themselves, and even in their contractual
relationship with the general partners.
(5)  Heirs of Deceased General Partner Succeed
Generally as Limited Partners
Although there is no direct statutory provision that
governs this particular situation, the position has been
taken that when the heir of the general partner
succeeds to his equity in the limited partnership
pursuant to an express provision in the Certificate of
Limited Partnership, the presumption is that he
succeeds only to his investments, and thereby
becomes only a limited partner, unless the succeeding
heir expressly manifest that he is succeeding as a
general partner, (DE LEONS, at pp. 298 and 300-301)
“because he would normally prefer to avoid any
liability in excess of the value of the estate inherited
so as not to jeopardize his personal assets.” (DE
LEONS, at p. 319) The decision in Goquiolay v. Sycip, 9
SCRA 663 (1963), seems to support such position,
thus –
Besides, as we pointed out in our main decision, the
heir ordinarily (and we did not say “necessarily”)
becomes a limited partner for his own protection,
because he would normally prefer to avoid any
liability in excess of the value of the estate inherited
so as not to jeopardize hid personal assets. But this
statutory limitation of responsibility being designed to
protect the heir, the latter may disregard it and
instead elect to become a collective or general
partner, with all the rights and privileges of one, and
answering for the debts of the firm not only with the
inheritance but also with the heir’s personal fortune.
This choice pertains exclusively to the heir, and does
not require the assent of the surviving partner. (Ibid)
We do not agree with such position.
The institution of limited partnership is solemn or
formal under our Partnership Law, and no person
becomes a limited partner, whether by the power of
assignment provided under the Certificate, or by the
power of substitution, unless the Certificate is
formally amended to so name the assignee or the
substitute, as a limited partnership.
Consequently, in a general partnership, when the
articles of partnership provide expressly that a
deceased partner shall be substituted by his heirs, the
heirs do not become partners, unless formally
accepted into the partnership arrangement under the
doctrine of privity or relativity applicable to
partnerships as embodying contractual relationship.
Only when the succeeding heirs confirms that he
takes more than just the equity rights of the deceased
partner and actually steps into the shoes of the
deceased partner thus he even become a partner, and
in that case a general partner. In order for him to
come in as a limited partnership, there is a need to
formally adopt a Certificate of Limited Partnership as
provided by Article 1844.
On the other hand, in a limited partnership scenario,
where the Certificate of Limited Partnership provides
for substitution of a general partner by his heir in the
event of death, it is hard to see how the automatic
application of such provision would thereby make the
heir a partner at all, whether limited or general
partner. Since partnership relationship is essentially
contractual in nature where consent is the essence to
make one a partner, then an heir succeeds only to the
equity rights of the deceased general partner and
unless he formally consents to become a partner,
then he does not become one, whether general or
limited partner. In addition, if such consent is
obtained, whether expressly or impliedly, from such
heir, in the absence of expressly choosing to become
a limited partner, the general rule should be that he
becomes a general partner by his acceptance into the
partnership. To become a limited partner, by
succeeding a general partner, requires not only
indication that one chooses to join only as a limited
partner, but actually requires compliance with the
formalities covering the amendment of the Certificate
of Limited Partnership, without which one becomes a
general partner subject to unlimited liability.
This position is bolstered by Article 1859 which
provides that even when there is a specific provision
in the Certificate allowing a limited partner to
substitute another person in his stead, such
substitution does not become valid (i.e., the
substituted partner does not become a limited
partner), unless there is a formal amendment to the
Certificate. When such solemnities are required when
a limited partner is substituted in his stead, it is hard
to see why when a general partner dies and is
substituted by an heir; the ipso jure effect is for the
substitute to be a limited partner.
(6) Limited Right as to Partnership Affairs
Article 1851 provides that a limited partner shall have
the same rights as a general partner only to:
(a)  have the partnership books kept at the principal
place of business; and to inspect and copy them at
reasonable hours;
(b)  have on demand true and full information of all
things affecting the partnership, and a formal account
of partnership affairs whenever circumstances render
it just and reasonable;
Under Article 1854, a limited partner may loan money
to, and transact other business with, the partnership
without adverse consequences to his standing as a
limited partner and his right to demand only limited
liability exposure. When he is not also a general
partner, a limited partner may receive on account of
resulting claims against the partnership with general
creditors a pro rata share of the assets. Nonetheless,
in all these cases, a limited partner shall not:
(a)  receive or hold as collateral security any
partnership property; or
(b)  receive from a general partner or the partnership
any payment,  conveyance, or release from liability, if
at the time the assets of the partnership are not
sufficient to discharge partnership liabilities to
persons as general or limited partners.
The violation of any of the immediately foregoing
prohibitions shall constitute fraud on the creditors of
the partnership.
(7) Right to Dissolve the Limited Partnership
Under Article 1857, a limited partner may have the
partnership dissolved and its affairs wound up when:
(a)  he rightfully but unsuccessfully demands the
return of his contribution; or
(b)  The other liabilities of the partnership have not
been paid, or the partnership property is insufficient
for their payment, and the limited partner would
otherwise be entitled to the return of his
contributions.
c. Obligations of Limited Partners
(1)  On Original Contributions to the Partnership
Aside from the prohibition against giving service as
contribution to the limited partnership (Art. 1845), a
limited partner is liable to the partnership for the
difference between his contribution as having been
made and for any unpaid contribution which he
agreed in the certificate to make in the future at the
time and on the conditions stated therein (Art. 1858).
(2) On Additional Contributions
Under Article 1844(1)(g), a limited partner may be
obliged during the life of the partnership to give
additional contribution if such obligation is provided
for in the Certificate of Limited Partnership. The
default rule therefore is that in the absence of a
provision in the Certificate, limited partners cannot be
compelled to give additional contribution to the
partnership.
Do the provisions of Article 1791, which obliges a
partner to sell his interest to the other partners in the
event such selling partner refuses to contribute
additional share to the capital to save the partnership
from the imminent loss of its business? The author’s
position is that the provisions of Article 1791 cannot
apply to limited partners for their suppletory
application to limited partners would ran contrary the
basic principle that limited partners are assured, so
long as their remain within their passive role of
investors, be made to assume greater risk or
additional loss arising from the operations of the
partnership business, beyond what they have
contractually committed to contribute.
(3) On Returned Contributions
Article 1858 provides that “[w]hen a contributor has
rightfully received the return in whole or in part of the
capital of his contribution; he is nevertheless liable to
the partnership for any sum, not in excess of such
return with interest, necessary to discharge its
liabilities to all creditors who extended credit or
whose claims arose before such return.”
(4) Liable as Trustee of the Partnership
Under Article 1858, aside from the fact that a limited
partner is liable to the partnership for his unpaid
contributions when it has become due under the
terms of the certificate, he would become liable as a
trustee for the partnership for:
(a) specific property stated in the certificate as
contributed by him, which was not been delivered or
wrongfully returned to him;
(b) money or other property wrongfully paid or
conveyed to him on account of his contribution.
The foregoing liabilities of a limited partner can be
waived or compromised only by the consent of all
members, and provided it shall not affect the right of
a creditor of the partnership who extended credit or
whose claim arose after the filing and before a
cancellation or amendment of the certificate, to
enforce such liabilities.
d. Fiduciary Duties of Limited Partners
Are limited partners, being merely passive investors
into the partnership business enterprise, bound by
any fiduciary obligations and duties to the limited
partnership and to the other partners? There is no
doubt that general partners owe fiduciary duties not
only to one another under the principle of mutual
agency, and to the limited partners on the
consideration that general partners act as agents (i.e.,
trustees) for the limited partners. On the other hand,
by definition, limited partners do not, and cannot
participate in the management of the partnership
affairs, and therefore do not act as agents for one
another, for the general partners, nor for the limited
partnership itself. Not assuming the position of
agents in the partnership arrangement, limited
partners are not bound by fiduciary obligations.
Therefore, it has been posited by writers, such as the
De Leons, that while a capitalist general partner
cannot engage in competitive business with the
partnership business, a limited partner is not
prohibited from engaging in such competitive
business, thus: “In the absence of statutory
restrictions, a limited partnership may carry on any
business which could be carried on by a general
partnership.” (DE LEONS, at p. 301).
The SEC has ruled that limited partners that are
foreign corporations are not deemed to be doing
business in the Philippines (SEC Opinion, 06 August
1998), which supports the position that limited
partners are not deemed to participate in
management of the business enterprise, nor do they
constitute mutual agents to one another or are they
deemed agents representing the limited partnership.
e. General Lack Standing for Partnership Suits
Under Article 1866, a contributor, unless he is a
general partner (which means that “contributor”
covers a limited partner), is not a proper party to
proceedings by or against a partnership, except
where the object is to enforce a limited partner’s right
against or liability to the partnership.
3. Dissolution and Winding up of Limited Partnership
a. Causes of Dissolution
Under Article 1860, the retirement, death, insolvency,
insanity or civil interdiction of a general partner
dissolves the partnership, but not that in the case of a
limited partner. But even in those cases the
partnership is not dissolved if the business is
continued by the remaining general partners:
(a) under a right so to do stated in the certificate; or
(b) with the consent of all members.
Under Article 1861, in case of death of a limited
partner, his executor or administrator shall have all
the rights of a limited partner for the purpose of
settling his estate, and such power as the deceased
had to constitute his assignee a substituted limited
partner. In turn, the estate of the deceased limited
partner shall be liable for all his liabilities as a limited
partner.
Under Article 1862, on due application by any creditor
of a limited partner, and without prejudice to other
existing remedies, the courts may charge the interest
of the indebted limited partner with payment of the
unsatisfied amount of such claim, and may appoint a
receiver, and make all other orders, directions, and
inquiries which the circumstances of the case may
require. Such interest may be redeemed with the
separate property of any general partner, but may not
be redeemed with partnership property. Why is this
so?
It should also be noted that upon the declaration of
insanity of the general partner, it would constitute a
cause for the dissolution of the limited partnership.
This is in contrast to the rule for non-limited
partnerships, particular under Article 1831 which
provides that the insanity of a partner becomes only a
basis by which to go to court for a judicial declaration
of dissolution of the partnership. Why is the rule
different when it comes to a limited partnership?
b. Settling of Accounts
Under Article 1863, in settling accounts after
dissolution, the liabilities of the partnership shall be
entitled to payment in the following order:
(a)  Those to creditors, in the order of priority as
provided by law, except those to limited partners on
account of their contributions, and to general
partners;
(b)  Those to limited partners in respect to their share
of the profits and other compensation by way of
income on their contributions;
(c)  Those to limited partners in respect to the capital
of their contributions;
(d) Those to general partners other than for capital
and profits;
(e) Those to general partners in respect to profits;
(f) Those to general partners in respect to capital.
Article 1863 specifically provides that “[s]ubject to any
statement in the certificate or to subsequent
agreement, limited partners share in the partnership
assets in respect to their claims for capital, and in
respect to their claims for profits or for compensation
by way of income on their contribution respectively, in
proportion to the respective amounts of such claims.
Note should be taken that the order of priority in the
distribution of the assets of the limited partnership in
the event of dissolution and winding-up provides
priority to the claims of partners “as to their share in
the profits and compensation by way of income,”
over their claims “in respect to capital.” This actually
is the reverse order in the general rules on distribution
of partnership assets upon dissolution under Article
1839(2), which in its ranking of the liabilities of the
partnership in order of payment, give preference
ranking to “(c) Those owning to partners in respect of
capital,” than to “(d) Those owing to partners in
respect of profits.” Why the difference in preference
when it comes to dissolution of a limited partnership?
The difference in liquidation priority among partners
in a limited partnership shows that the primary reason
for the institution of a class of limited partners is that
of “investment”, rather than management, of the
partnership business enterprise. Whereas, the ability
to participate in profits is also a main focus in non-
limited partnership set-up, nonetheless, the partners
come together as a group of contractually bound
“sole proprietors,” where the right to manage and
participate in the affairs of the partnership business
enterprise is the main focus. In a limited partnership
scenario, in order to be entitled to the feature of
“limited liability”, the limited partners do not
participate in the management of the affairs of the
business enterprise; they come in only as passive
investors; and therefore, the main nexus of the
relationship between the general partners on one
hand, and the limited partners on the other hand,
mainly focuses on the profits that would be earned
from the capital contribution of the limited partners.
The return of capital itself is not the priority, for
indeed under the limited liability rule, the capital
contribution is intended to be the main source of
claim of partnership creditors as against the limited
partners. That is perhaps the main reason why upon
dissolution and winding-up of a limited partnership,
after having paid all claims of partnership creditors,
the priority for the remaining assets of the limited
partnership would have to go to “[t]hose to limited
partners in respect to their share of the profits and
other compensation by way of income on their
contributions,” before“[t]hose to limited partners in
respect to the capital of their contributions.”
JOINT VENTURES
1.   Introduction
It is fitting that a course in Philippine Partnership Law
should end with the section on joint ventures, for it is
in this field where Supreme Court decisions have
become truly transcendent when it comes to
protection of national interests or upholding the
sanctity of contractual commitments, and
consequently where the essence of partnership
principles has become more lucent.
Discussions on joint ventures first appeared as a sort-
of esoteric medium of doing business in Philippine
jurisprudence, with an original impression that they
were a commercial association different from
partnerships. The tendency has therefore been to
ascribe to joint venture arrangements certain legal
allowances that would never been accepted in the
case of “strict” partnership arrangements. This
“partiality” for joint venture arrangements, which still
has remnants in sprinkling statutory provisions, may
be attributed to the perception that the joint venture
is a more project-oriented medium when compared to
the partnership which tends to be branded with the
attributes of primarily being contractual relationship
bounded by the doctrine of delectus personae, and
thereby being more “party-oriented”, “person-
oriented” or even “personality-oriented.”
Although it may not be readily apparent, but joint
venture arrangements have become fairly common
medium for doing business or undertaking projects in
the Philippines, both covering local transactions,
when it comes to large infra-structure undertakings
involving the resources of big corporations; or
structuring partnership arrangements between
foreign investors and their local partners in the
pursuit of local projects in the Philippines.
The Philippine Government encourages the pursuit of
construction projects and petroleum, coal,
geothermal, and other energy operations under joint
venture arrangements. Under the National Internal
Revenue Code of 1997 (NIRC), joint ventures formed
for the purpose of engaging in petroleum, coal,
geothermal, and other energy operations under an
operating or service contract with the Government, or
those formed for the purpose of undertaking
construction projects, are exempt from corporate
income tax.
Joint venture arrangements have particularly been
the more popular medium when foreign participation
is involved in local projects, since the contractual
nature of the arrangement allows the parties
flexibility in adopting special rules and procedures
covering their situations, which would otherwise not
be applicable in a purely corporate vehicle
arrangement because of the restrictive rules of the
Corporation Code and jurisprudence on Philippine
Corporate Law.
2.   Nature of Joint Venture in Philippine Setting
a. Joint Venture Arrangements Primarily Governed by
Partnership Law Principles
There was a time when joint ventures were treated
separately from partnerships. Take the 1954 decision
of Tuason v. Bolaños, 95 Phil. 106 (1954), where the
Supreme Court upheld as applicable the old adage in
American Corporate Law that “though a corporation
has no power to enter into a partnership, it may
nevertheless enter into a joint venture with another
where the nature of that venture is in line with the
business authorized by its charter.” (at p. 109, quoting
from Wyoming-Indiana Oil Gas Co., v. Weston, 80
A.L.R., 1043, citing 2 Fletcher Cyc. of Corp.,
1082).Tuason does not explain why there was a
difference in treatment of corporate involvement in
partnerships as compared to that when it come
to joint ventures.
If we pursue the position that joint ventures must be
treated differently from partnerships then it can be
said that apart from specific reference in the National
Internal Revenue Code, there is no statutory provision
that formally governs directly joint ventures, although
they have been recognized in jurisprudence and
commonplace in commercial ventures. Consequently,
joint venture agreements fall generally within the
realm of Contract Law.
Since the prevailing contract rule in the Philippines is
that parties to a contract may establish such
stipulations, clauses, terms and conditions, as they
may deem convenient, provided that they are not
contrary to laws, morals, good customs, public order,
or public policy (Article 1306, New Civil Code), no
model joint venture agreements have been published
by the Securities and Exchange Commission (SEC),
Board of Investments (BOI), nor any other authority.
b. Joint Ventures Are a Species of Partnerships
The treatment of joint ventures today has come full
circle, in that the prevailing school of thought in the
Philippines is that joint ventures are a species of the
partnerships falling within the definition under Article
1767 of the New Civil Code, which provides that when
“two or more persons bind themselves to contribute
money, property, or industry to a common fund, with
the intention of dividing the profits among
themselves,” then a partnership is created.
In Kilosbayan, Inc. v. Guingona, 232 SCRA 110 (1994),
the Court adopted Black’s definition of a joint venture,
thus:
Joint venture is defined as an association of persons
or companies jointly undertaking some commercial
enterprise–generally all contribute assets and share
risks. It requires a community of interest in the
performance of the subject matter, a right to direct
and govern the policy connected therewith, and duty,
which may be altered by agreement to share both in
profit and losses; the acts of working together in a
joint project. (At pp. 143-44, citing Black’s Law
Dictionary. Reiterated in Information Technology
Foundation of the Philippines v. Commission on
Elections, 419 SCRA 141 [2004])
The foregoing definition of a joint venture essentially
falls within the statutory definition of what
constitutes a partnership. Other reasons as to why a
joint venture must be considered a species of
partnerships is that the Law on Partnerships provides
that “A partnership may be constituted in any form,
except where immovable property or real rights are
contributed, thereto, in which case a public
instrument shall be necessary.” (Article 1771, Civil
Code). That means that no special form, even one
seeking to establish a joint venture arrangement, is
necessary to give rise to a partnership.
Following-up on the Kilosbayan’s definition of a joint
venture, the Court inInformation Technology
Foundation of the Philippines v. Commission of
Elections, 419 SCRA 141 (2004), considered a
“consortium” to be an association of corporations
bound in a joint venture arrangement, and held that
the involvement of several companies in a large
project would not constitute them into a consortium
nor a joint venture when nothing shows a community
of interest, a sharing of risks, profits and losses, or
even a representation by them that they have come
together in common venture. The Court found in that
case that apart from a short and unsupported
statement by one of the companies that it was
representing a consortium, no evidence was adduced
covering a joint venture agreement, or authority given
by the other companies authorizing the declaring
company that to represent or bind them in a collective
basis.
The position that a joint venture is a species of
partnerships has been upheld by the Court in Aurbach
v. Sanitary Wares Manufacturing Corp., 180 SCRA 130
(1989), where it held that:
. . . The main distinction cited by most opinions in
common law jurisdiction is that the partnership
contemplates a general business with some degree of
continuity, while the joint venture is formed for the
execution of a single transaction, and is thus of a
temporary nature. . . This observation is not entirely
accurate in this jurisdiction, since under the Civil Code,
a partnership may be particular or universal, and a
particular partnership may have for its object a
specific undertaking. (Art. 1783, Civil Code) It would
seem therefore that under Philippine law, a joint
venture is a form of partnership and should thus be
governed by the laws of partnership. (Ibid; emphasis
supplied)
Without qualms or equivocation, the Court in JG
Summit Holdings, Inc. v. Court of Appeals, 412 SCRA 10
(2003), treated a joint venture arrangement as a
partnership.
In Heirs of Tan Eng Kee v. Court of Appeals, 341 SCRA
740 (2000), the Court observed that a joint venture is
akin to a particular partnership. InPrimelink Properties
and Dev. Corp. v. Lazatin-Magat, 493 SCRA 444 (2006),
the Court ruled –
“When the parties have entered into a Joint Venture
Agreement, they have entered into a joint venture
arrangement which is a form of partnership, and as
such is to be governed by the laws on partnership.”
(at p. 467)
With joint venture arrangements being clearly
classified as a form of particular partnership, there is
no doubt that the incidents imposed by the Law on
Partnerships on every kind of partnership must befall
every joint venture arrangement. Only recently,
in Philex Mining Corp. v. Commissioner of Internal
Revenue, 551 SCRA 428 (2008), although the corporate
parties executed the instrument as a “Power of
Attorney” and referred to themselves as “principal”
and “manager,” the Court held that when the
essential elements of a partnership are present, then
it would be a joint venture arrangement, governed by
the Law on Partnership, thus -
An examination of the “Power of Attorney” reveals
that a partnership or joint venture was indeed
intended by the parties. Under a contract of
partnership, two or more persons bind themselves to
contribute money, property, or industry to a common
fund, with the intention of dividing the profits among
themselves. While a corporation, like petitioner,
cannot generally enter into a contract of partnership
unless authorized by law or its charter, it has been
held that it may enter into a joint venture which is akin
to a particular partnership relationship: x x x Perusal
of the agreement denominated as the ‘Power of
Attorney’ indicates that the parties had intended to
create a partnership and establish a common fund for
the purpose. They also had a joint interest in the
profits of the business as shown by a 50-50 sharing in
the income of the mine. (at pp. 438-439)
(1)  Partnership Characteristics of Joint Venture
Arrangements
Since a joint venture is a species of partnerships, it
would have the following characteristics of a
partnership, thus:
(a)  It constitutes a juridical personality separate and
distinct from that of each of the co-venturers. Article
1768, of the New Civil Code provides specifically that
the partnership has a juridical personality seprate and
distinct from that of each of the partners even in case
of failure to comply with the
registration requirements of law. Therefore, a joint
venture as a firm can enter into  contracts and
own properties in the firm’s name; (cf Art. 1774, Civil
Code)
(b)  Each of the co-venturers would be liable with their
private property to the creditors of the joint venture
beyond their contributions to the joint venture; (Arts.
1816, 1817, 1824 to 1826, and 1839, Civil Code)
(c)  Even if a co-venturer transfers his interest to
another, the transferee does not become a co-
venturer to the others in the joint venture unless
all the other co-venturers consent. This is in
consonance with the delectus personae principle
applicable to partnerships; (Arts. 1804 and 1813, Civil
Code)
(d)   Generally, the co-venturers acting on behalf of
the joint venture are agents of joint venture and of
each other; (Arts. 1803, 1818 to 1823, Civil Code) and
(e)  Death, retirement, insolvency, civil interdiction or
dissolution of a co-venturer dissolves the joint
venture. (Art. 1830, Civil Code)
In Litonjua, Jr. v. Litonjua, Sr., 477 SCRA 576 (2005), the
Court held that a joint venture is hardly
distinguishable from, and may be likened to, a
partnership since their elements are
similar, i.e., community of interests in the business
and sharing of profits and losses; and that being a
form of partnership, a joint venture is generally
governed by the law on partnership.
c. Special Treatments Given to Joint Ventures
Jurisprudence, however, has tended to give joint
ventures special treatment not accorded to ordinary
partnerships. Philippine jurisprudence had adopted
the prevailing rule in the United States that a
corporation cannot ordinarily enter into partnerships
with other corporations or with individuals. The basis
for such prohibition on corporations is that in entering
into a partnership, the identity of the corporation is
lost or merged with that of another and the direction
of the affairs is placed in other hands than those
provided by law of its creation.
The doctrine is grounded on the theory that the
stockholders of a corporation are entitled, in the
absence of any notice to the contrary in the articles of
incorporation, to assume that their directors will
conduct the corporate business without sharing that
duty and responsibility with others. (Bautista, Treatise
on Philippine Partnership Law, 1978 Ed., at p. 9)
As discussed previously, Tuason v. Bolaños, 95 Phil. 106
(1954), recognized in Philippine jurisdiction the
doctrine in Anglo-American jurisprudence that “a
corporation has no power to enter into a
partnership.” Nevertheless, Tuason ruled that a
corporation may validly enter into a joint venture
agreement, “where the nature of that venture is in
line with the business authorized by its charter.”
(Ibid, quoting from Wyoming-Indiana Oil Gas Co. v.
Weston, 80 A.L.R., 1043, citing Fletcher Cyc. of Corp.,
1082)
Although Tuason does not elaborate on why a
corporation may become a co-venturer or partner in a
joint venture arrangement, it would seem that the
policy behind the prohibition on why a corporation
cannot be made a partner does not apply in a joint
venture arrangement. Being only a particular project
or undertaking, when the Board of Directors of a
corporation evaluate the risks and responsibilities
involved, they can more or less exercise their own
business judgment is determining the extent by which
the corporation would be involved in the project and
the likely liabilities to be incurred. The situation
therefore in a joint venture arrangement, unlike in an
ordinarily partnership arrangement which may expose
the corporation to any and various liabilities and risks
which cannot be evaluated and anticipated by the
board, allows the board to fully bind the corporation
to matters essentially within the boards business
appreciation and anticipation.
The previous ruling of the SEC on the matter is that a
corporation cannot enter into a contract of
partnership with an individual or another corporation
on the premise that if a corporation enters into a
partnership agreement, it would be bound by the acts
of the persons who are not its duly appointed and
authorized agents and officers, which is entirely
inconsistent with the policy in Corporate Law that the
corporation shall be managed by its Board of
Directors. (SEC Opinion, 22 December 1966, SEC
FOLIO 1960-1976, at p. 278; citing 6 Fletcher Cyc.
Corp., Perm.  Ed. Rev. Repl. 1950, Sec. 2520).
Later, the SEC provided for a clear exception to the
foregoing ruling, and allowed corporations to enter
into partnership arrangements, provided the
following conditions are met: (SEC Opinion, 29
February 1980; SEC Opinion, dated 3 September 1984.
Under Sec. 192 of the National Internal Revenue Code,
documentary stamps of P15.00 must be affixed on
each proxy)
(a) The authority to enter into a partnership relation is
expressly conferred by the charter or the articles of
incorporation of the corporation, and the nature of
the business venture to be undertaken by the
partnership is in line with the business authorized by
the charter or articles of incorporation;
(b) The agreement on the articles of partnership must
provide that all the partners shall manage the
partnership, and the articles of partnership must
stipulate that all the partners shall be jointly and
severally liable for all the obligations of the partners;
and
(c) If it is a foreign corporation, it must obtain a
license to transact business in the country in
accordance with the Philippine Corporation Code.
In one opinion, the SEC clarified that the conditions
imposed meant that since the partners in a
partnership of corporations are required to stipulate
that all of them shall manage the partnership and they
shall be jointly and severally liable for all the
obligations of the partnership, it necessarily followed
that a partnership of corporations should be
organized as a “general partnership”. (SEC Opinion,
23 February 1994, XXVIII SEC Quarterly Bulletin 18 [No.
3, Sept. 1994] )
Lately, the SEC, realizing that the second condition
actually prevented a corporation from entering into a
limited partnership, which it allowed to do so would
then be more congruent with the policy that the
corporation would then not be held liable for its
venture beyond the investments made and
determined by its Board of Directors, and would
therefore not be held liable (beyond its investment)
for debts arising from the acts of the general
partners, reconsidered its position and ruled that a
corporation may become a limited partner in a limited
partnership, since “there is no existing Philippine law
that expressly prohibits a corporation from becoming
a limited partner in a partnership.” In effect, the SEC
dropped the second condition imposed previously.
(SEC Opinion, 17 August 1995, XXX SEC Quarterly
Bulletin 8 [No. 1, June 1996])
3.  Alternative Forms in Structuring a Joint Venture
In Aurbach v. Sanitary Wares Manufacturing Corp., 180
SCRA 130 (1989), the Supreme Court discussed
background of the use of joint ventures when it
comes to Filipino investors inviting foreign
participation in a local project, and the risks involved,
thus —
Quite often, Filipino entrepreneurs in their desire to
develop the industrial and manufacturing capacities of
a local firm are constrained to seek the technology
and marketing assistance of huge multinational
corporations of the developed world. Arrangements
are formalized where a foreign group becomes a
minority owner of a firm in exchange for its
manufacturing expertise, use of its brand names, and
other such assistance. However, there is a always the
danger from such arrangements. The foreign group
may, from the start, intend to establish its own sole or
monopolistic operations and merely uses the joint
venture arrangement to gain a foothold or test the
Philippine waters, so to speak. Or the covetousness
may come later. As the Philippine firm enlarges its
operations and becomes profitable, the foreign group
undermines the local majority ownership and actively
tries to completely or predominantly take over the
entire company. This undermining of joint ventures is
not consistent with fair dealing to say the least. To the
extent that such subversive actions can be lawfully
prevented, the courts should extend protection
especially in industries where constitutional and legal
requirements reserve controlling ownership to
Filipino citizens. (at p. 142)
Parties have varied choices of legal forms in planning
a joint venture arrangement, and they can pursue the
same through the following formats:
(a) informal or contractual joint venture arrangement;
(b) by partnership arrangement; or
(c) through a joint venture corporation.
a. Informal or Contractual Joint Venture
Arrangement
In spite of the peremptory provisions under the Law
of Partnerships that any agreement by which two or
more persons bind themselves to contribute money,
property or industry to a common fund (i.e., to pursue
a business enterprise) with the intention of dividing
the profits among themselves, would necessarily give
rise to a partnership (Article 1767, New Civil Code),
and thereby a partnership juridical personality arises
“separate and distinct from that of the partners,”
(Article 1768, New Civil Code), nonetheless, in cases of
corporations which come together in co-venture over
a particular project, there has been in implicit
recognition that such a venture can be pursued
merely as a private enterprise with no intention to
present a new or separate “firm” or “company”, and
much less a new juridical person, to the public.
Thus, in Heirs of Tan Eng Kee v. Court of Appeals, 341
SCRA 740 (2000), after the Court held that a joint
venture is akin to a particular partnership, it
distinguished one from the other as follows:
(a) A joint adventure (an American concept similar to
our joint accounts) is a sort of informal partnership,
with no firm name and no legal personality. In a joint
account, the participating merchants can transact
business under their own name, and can
be individually liable therefore.
(b) Usually, but not necessarily a joint adventure is
limited to a SINGLE TRANSACTION, although the
business of pursuing to a successful termination may
continue for a number of years; a
partnership generally relates to a continuing business
of various transactions of a certain kind. (At p.
753, citing V.E. PARAS, CIVIL CODE OF THE
PHILIPPINES ANNOTATED 546 [13th ed., 1995];
underscoring supplied)
In such an instance, a “Joint Venture Agreement” or a
“Memorandum of Agreement” is executed by the co-
venturers to provide for the terms of arrangement,
but the business enterprise will be pursued in the
names of the co-venturers through their duly
authorized representatives. No separate company
office is set-up, no separate books of accounts are
kept, no formal registration of the enterprise is made
with the appropriate government agencies. The co-
venturers therefore intend their relationship to be
primarily governed by the contractual terms
agreement upon them in the joint venture agreement.
Aurbach v. Sanitary Wares Manufacturing Corp., 180
SCRA 130 (1989), has affirmed the principle that joint
venture arrangements must primarily be viewed as
binding contractual commitments, thus: “Moreover,
the usual rules as regards the construction and
operation of contracts generally apply to a contract of
joint venture.” (At p. 147, citing O’Hara v. Harman, 14
App. Dev. (167) 43 NYS 556)
Even the SEC itself has recognized such an informal
arrangement. It has ruled that generally, a joint
venture agreement of two corporations need not be
registered with the SEC, provided it will not result in
the formation of a new partnership or corporation.
However, should there be an intention to acquire a
separate Tax Identification Number (TIN) from the
Bureau of Internal Revenue for the business venture;
the same requires registration with the SEC in order to
have a separate legal personality to obtain a separate
TIN. (SEC Opinion, 30 March 1995, XXIX SEC Quarterly
Bulletin 32 [No. 3, Sept. 1995])
The SEC has also ruled that two or more corporations
may enter into a joint venture through a contract or
agreement (contractual joint venture) if the nature of
the venture is authorized by their charters, which
contract need not be registered with the SEC;
provided, however that the joint venture will not
result in the formation of a new partnership or
corporation. (SEC Opinion, 29 April 1985, SEC Annual
Opinions 1985, at p. 89)
Thus, under a “contractual joint-venture format,” the
co-venturers pursue the joint venture arrangement by
a private contract between them, choosing not to
represent to third parties or to the public a separate
firm undertaking the project. Under such an
arrangement, the relationship of the co-venturers,
their rights and liabilities, are governed by the joint
venture contract executed among them.
This was the sort of arrangement sought to be
pursued in Philex Mining Corp. v. Commissioner of
Internal Revenue, 551 SCRA 428 (2008), where in the
operation of a mining concession between two
corporations, they executed merely a “Power of
Attorney” and designated one another “principal”
(the owner of the concession) and “manager” (the
entity that would directly manage development and
operations). The Court refused to consider the
relationship between the parties as debtor-creditor,
principal-agent, or as principal-manager, since by the
terms of the arrangement the essential elements of a
partnership existed, thus –
An examination of the “Power of Attorney” reveals
that a partnership or joint venture was indeed
intended by the parties. Under a contract of
partnership, two or more persons bind themselves to
contribute money, property, or industry to a common
fund, with the intention of dividing the profits among
themselves. While a corporation, like petitioner,
cannot generally enter into a contract of partnership
unless authorized by law or its charter, it has been
held that it may enter into a joint venture which is akin
to a particular partnership relationship: x x x Perusal
of the agreement denominated as the ‘Power of
Attorney’ indicates that the parties had intended to
create a partnership and establish a common fund for
the purpose. They also had a joint interest in the
profits of the business as shown by a 50-50 sharing in
the income of the mine. (Ibid, at pp. 438-439)
It is clear from the ruling in Philex Mining, that the
parties to a business venture may choose to treat one
another as not being bound by a partnership
relationship, but when controversy arises by which
rights and obligations have to be determined, the
courts would have no choice by to impute the legal
relationship of a partnership or joint venture
arrangement when the essential elements of a
partnership are present. In Philex Mining, the Court
refused to allow the parties to treat the advances
made to the venture as loans or advances to one
another, holding that advances made by a co-venturer
in the joint venture business which cannot be
recovered cannot be treated as bad debts and
deducted for income tax purposes; the relationship
between co-venturers in a joint venture arrangement
cannot be considered a creditor-debtor relationship
with respect to their advances and contributions to
the business enterprise.
Ultimately, the failed attempt in Philex Mining to veil
the arrangement as one as not being a joint venture
arrangement, caused the mining companies the
obligation to pay unpaid income taxes in the several
millions of pesos. And the hard lesson that was
learned was that since a joint venture arrangement is
a species of partnership, then the peremptory
provisions and principles under the Law on
Partnerships will be the once employed by the courts
to smoke out whether the underlying agreement was
a joint venture arrangement.
A more graphical example of an attempt to hide the
joint venture arrangement can be found in Kilosbayan,
Incorporated v. Guingona, Jr., 232 SCRA 110 (1994). In
that case, the Philippine Charity and Sweepstakes
Office (PCSO) was prohibited by its charter from
holding and conducting lotteries “in collaboration,
association or joint venture with any person,
association, company or entity, whether domestic or
foreign.” (Sec. 1, Rep. Act No. 1169, as amended by
B.P. Blng. 42) In order not to be violate such
prohibition, PCSO entered into a “Contract of Lease”
with the Philippine Gaming Management Corporation
(PGMC), purported for PCSO to lease the lottery
facilities of the latter in order to operate nationally the
on-line lottery system known as “lotto”. In finding
that “notwithstanding its denomination or
designation as a Contract of Lease” (at p. 143), the
purported lease arrangement violated the statutory
prohibition, in that it actually covered a joint venture
arrangement between PCSO and PGMC, the Court
held –
The contemporaneous acts of the PCSO and the
PGMC reveal that the PCSO had neither funds of its
own nor the expertise to operate and manage an on-
line lottery system, and that although it wished to
have the system, it would have it “at no expense or
risks to the government.”  x x x.
In short, the only contribution the PCSO would have is
its franchise or authority to operate the on-line lottery
system; with the rest, including the risks of the
business, being borne by the proponent or bidder.  x x
x.
The so-called Contract of Lease is not, therefore, what
is purports to be. Its denomination as such is a crafty
device, carefully conceived, to provide a built-in
defense in the event that the agreement is questioned
as violate of the exception in Section 1(b) of the
PCSO’s charter. The acuity or skill of its draftsmen to
accomplish that purpose easily manifest itself in the
Contract of lease. It is outstanding for its careful and
meticulous drafting designed to given an immediate
impression that it is a contract of lease. Yet, woven
therein are provisions which negate its title and
betray the true intention of the parties to be in or to
have a joint venture for a period of eight years in the
operation and maintenance of the on-line lottery
system. (at pp. 144-146; underscoring supplied).
The joint venture arrangement was found to exists
under the Contract of Lease with finding by the Court
of the essential element of participating in the profits
of the on-line lottery system, and at the same time
bearing the risks of loss. The Court held that “This risk-
bearing provision is unusual in a lessor-lessee
relationship, but inherent in a joint venture.” (at p.
147).  The Court observed:
All of the foregoing unmistakably confirm the
indispensable role of the PGMC in the pursuit,
operation, conduct, and management of the On-Line
Lottery System. They exhibit and demonstrate the
parties’ indivisible community of interest in the
conception, birth and growth of the on-line lottery,
and, above all, in its profits, with each having a right in
the formulation and implementation of policies
related to the business and sharing, as well, in the
losses–with the PGMC bearing the greatest burden
because of its assumption of expenses and risks, and
the PCSO the lease, because of its confessed
unwillingness to bear expenses and risks. (at pp. 148-
149).
b.  Joint Venture Pursued under Formal Partnership
Arrangements
A second type of joint venture arrangement is to
formally operate the joint venture set-up as a
partnership, with a separate and distinct juridical
personality. Under such an arrangement, the co-
venturers execute formal Articles of Partnership,
which may also be denominated as a “Joint Venture
Agreement,” embodying their arrangements, as well
as the firm name and structure of the company that
they are forming, and register the same with the SEC.
Such a joint venture arrangement would then be
operated as, and be governed by the legal rules and
principles pertaining to, particular partnerships.
As contrasted from the informal joint venture
arrangement discussed above, a formal joint venture
pursued under formal partnership arrangements
provides better protection for the parties in the sense
that they have a set of laws by which they can base
their rights and claims. Apart from the lessons learned
from the decisions in Kilosbayan and Philex
Mining already discussed above, this lesson can best
be shown in the decision in Tan Eng Kee v. Court of
Appeals, 341 SCRA 740 (2000), where the heirs of the
purported co-venturer in a lumber and construction
supply business sought to recover the decedents
share in the enterprise and accumulated profits.
Although the trial court found that there was a joint
venture arrangement, the Supreme Court affirmed the
ruling of the Court of Appeals that in the absence of a
contract of partnership, plus the inability of the heirs
to indicate by clear evidence the essential elements of
a partnership, no joint venture arrangement can be
imputed into the business enterprise, thus —
Undoubtedly, the best evidence [of a partnership]
would have been the contract of partnership itself, or
the articles of partnership. . . . The net effect,
however, is that we are asked to determine whether a
partnership existed based purely on circumstantial
evidence. A review of the record persuades us that
the Court of Appeals correctly reversed the decision
of the trial court. The evidence presented by
petitioners falls short of the quantum of proof
required to establish a partnership. (at p. 754).
c. Joint Venture Arrangement Pursued Through a
Joint Venture Corporation
Equity joint ventures are also available in Philippine
setting, which may cover the formation of a new joint
venture company, with each co-venturer being
allocated proportionate shareholdings in the
outstanding capital stock of the joint venture
corporation.
An equity joint venture may also be pursued where a
co-venturer is allocated the agreed shares of stock in
an existing corporation, either from new issuances of
the capital stock of the existing corporation, or sold
shares from those already issued in the names of the
other co-venturers.
(1) Corporate Principles versus JVA Provisions
In equity joint ventures, the rights and obligations of
the parties among themselves are covered not only in
a separate joint venture agreement, but also
implemented by certain provisions of the articles of
incorporation and by-laws of the joint venture
corporation.
In a situation where a corporate vehicle is formed in
pursuance of the joint venture arrangements, ideally
the joint ventures should be able to fit into the various
terms and clauses of the articles of incorporation and
by-laws (known as the “charter”) of the joint venture
company the salient features of their joint venture
agreements. Considering that the co-venturers have
chosen the corporate vehicle by which to pursue their
business enterprise, then it would be posited that in
situations where joint venture agreements contain
provisions not covered by the charter of the joint
venture corporation or vice-versa, the resolutions of
issues arising therefrom ought to be as follows:
(a)  In case of conflicts between the provisions of the
joint venture agreement and the charter of the joint
venture corporation, the provisions of the latter shall
prevail;
(b) In case there are provisions or clauses in the joint
venture agreement not found in the charter of the
joint venture corporation, such provisions and clauses
remain binding contracts among the joint venture
parties signatory to the agreement, but do not bind
the joint venture corporation or other parties not
signatories thereto.
The foregoing rules of resolution are based on the
well-established doctrine under Philippine Corporate
Law that the articles of incorporation form a basic
contract document defining the charter of the
corporation. The articles of incorporation is
characterized as a contract between and among three
parties: (a) between the State and the corporation;
(b) between the stockholders and the State; and (c)
between the corporation and its stockholders.
(Government of the P.I. v. Manila Railroad Co., 52 Phil.
699 [1929]).
In addition, although the joint venture agreement may
contain rules on management and control of the joint
venture corporation, it does not authorize the co-
venturers, as equity owners, to override the business
management of the corporate affairs of the joint
venture corporation by its board of directors. Any
stipulation therefore in the joint venture agreement
that seeks to arrogate unto the stockholders thereof
the management prerogatives of its board of
directors would be null and void. In short, by having
adopted the corporate entity as the medium by which
the co-venturers have sought to pursue the joint
venture enterprise, they are bound Corporate Law
principles under which the entity must operate.
Jurisprudence does not support the outright primacy
of Corporate Law principles in a joint venture scheme
pursued through a joint venture company.
(2)  Jurisprudential Rulings on the Scheme of JV
Corporation
The decision in Aurbach v. Sanitary Wares
Manufacturing Corp., 180 SCRA 130 (1989), best
illustrates the strength and weakness of a joint
venture arrangement pursued through the medium of
a joint venture corporation.
American Standards Inc. (ASI), a Delaware
corporation, entered into an Agreement with Filipino
group “to participate in the ownership of an
enterprise which would engage primarily in the
business of manufacturing in the Philippines and
selling abroad vitreous china and sanitary wares. The
parties agreed that the business operations in the
Philippines shall be carried on by an incorporated
enterprise and that the name of the corporation shall
initially be ‘Sanitary Wares Manufacturing
Corporation.’” (at p. 134).  The Agreement executed
between the American group taking 40% equity in the
venture, and Filipino group taking 60% equity in the
venture, provided for the particulars covering the
articles of incorporation of the joint venture company
to be formed, the manner of management thereof, as
well as “provisions designed to protect [ASI] as a
minority group, including the grant of veto powers
over a number of corporate acts and the right to
designate certain officers, such as a member of the
Executive Committee whose vote was required for
important corporate transactions.” (at pp. 134-135). In
particular, the Agreement contained the following
provision on the Management of the joint venture
corporation, and the manner by which the two groups
would elected the Board of Directors, thus:
5. Management
(a) The management of the Corporation shall be
vested in a Board of Directors, which shall consist of
nine [9] individuals. As long as American-Standard
[ASI] shall own at least 30% of the outstanding stock
of the Corporation, three [3] of the nine directors shall
be designated by American-Standard [ASI], and the
other six [6] shall be designated by the other
stockholders of the Corporation. (at p. 134).
The joint venture company was registered, and “The
joint enterprise thus entered into by the Filipino
investors and the American corporation [ASI]
prospered. Unfortunately, with the business
successes, there came a deterioration of the initially
harmonious relations between the two groups.
According to the Filipino group, a basic disagreement
was due to their desire to expand the export
operations of the company to which ASI objected as it
apparently had other subsidiaries of joint venture
groups in the countries where Philippine exports were
contemplated.” (at p. 135).
In the annual stockholders’ meeting in 1983, the
friction between the two groups came to a head,
when the American group wanted to cast their vote,
not only on their three (3) nominees, but also on the
nominees of the Filipino group on the ground that
under Section 24 of the Corporation Code, which
provided for cumulative voting for stock corporations,
they had a right to cast their votes on all nominees for
the Board of Directors, and not just on their allotted
three nominees.
The Court was asked to decide the issue on “the
nature of the business established by the parties—
whether it was a joint venture or a corporation” (at p.
139),  since it was the contention of ASI that “the
actual intention of the parties should be viewed strict
on the ‘Agreement’ . . . wherein it is clearly stated that
the parties’ intention was to form a corporation and
not a joint venture” (at p. 139),  since a particular
provision in the Agreement provided that nothing
herein contained shall be construed to constitute any
of the parties hereto partners or joint venturers in
respect of any transaction hereunder.”
In resolving the issues, the Court gave the basic
doctrine when it comes to joint venture arrangement,
which like any partnership arrangement, are primarily
contractual in character, thus:
The rule is that whether the parties to a particular
contract have thereby established among themselves
a joint venture or some other relation depends upon
the actual intention which is determined in
accordance with the rules governing the
interpretation and construction of contracts. (at p.
139, citing Terminal Shares, Inc. v. Chicago, B. and Q.R.
Co. (DC MO), 65 F. Suppl 678; Universal Sales Corp. v.
California Press Mfg., Co., 20 Cal. 2nd 751, 128 P. 2nd 668).
The Court resolved that –
In the instant cases, our examination of important
provisions of the Agreement as well as the testimonial
evidence presented by the [witnesses] shows that the
parties agreed to establish a joint venture and not a
corporation. The history of the organization of
Saniwares and the unusual arrangements which
govern its policy making body are all consistent with a
joint venture and not with an ordinary corporation. (at
pp. 140-141).
The Court resolved to apply the mandatory provisions
of the Corporation Code within the contractual
intentions of the parties provided in the joint venture
Agreement, and affirmed the formula adopted by the
Court of Appeals that the American group can
cumulate their votes only within the nominees
allotted to them, and held:
To allow the ASI Group to vote their additional equity
to help elect even a Filipino director who would be
beholden to them would obliterate their minority
status as agreed upon by the parties. As aptly stated
by the appellate court: x x x ASI, however, should not
be allowed to interfere in the voting within the
Filipino group. Otherwise, ASI would be able to
designate more than the three directors it is allowed
to designate under the Agreement, and may even be
able to get a majority of the board seats, a result
which is clearly contrary to the contractual intent of
the parties. x x x .
Equally important as the consideration of the
contractual intent of the parties is the consideration
as regards the possible domination by the foreign
investors of the enterprise in violation of the
nationalization requirements enshrined in the
Constitution and circumvention of the Anti-Dummy
Act. x x x. (at p. 148).
In essence, Aurbach emphasizes that joint venture
arrangements are first and foremost contractual
agreements, and as much as possible the contractual
intent of the co-venturers should be given realization
within the corporate medium by which they pursued
the business enterprise.Aurbach recognized that such
a principle is not alien to Corporate Law when it
quoted arguments that Section 100 of the
Corporation Code expressly makes binding written
agreements between the stockholders in a close
corporation.
(3) JV Company Organized as a Close Corporation
Under the Corporation Code, a close corporation is
one which provides in its articles of incorporation the
following three requisites:
(a) all of the corporation’s issued stock of all classes,
exclusive of treasury shares, shall be held on record by
not more than a specified number of persons, not
exceeding twenty (20);
(b) all of the issued stock of all classes shall be subject
to one or more specified restrictions on transfer in the
nature of a “right of first refusal;” and
(c) the corporation shall not list in any stock exchange
or make any public offering of any of its stock of any
class (Section 96, Corporation Code).
Under a close corporation setting, it may be provided
in the articles of incorporation that the business of the
corporation shall be managed by the stockholders of
the corporation rather than by a board of directors,
and the officers and employees may be elected or
appointed directly by the stockholders (Section 97,
Corporation Code).
In particular, Section 100 of the Corporation Code
provides that:
Sec. 100. Agreements by stockholders.–
1. Agreements by and among stockholders executed
before the formation and organization of a close
corporation, signed by all stockholders, shall survive
the incorporation of such corporation and shall
continue to be valid and binding between and among
such stockholders, if such be their intent, to the
extent that such agreements are not inconsistent with
the articles of incorporation, irrespective of whether
the provisions of such agreements are contained,
except those required by this Title [on close
corporations] to be embodied, in said articles of
incorporation.
x x x.
Although the Court in Aurbuch did not make a formal
ruling on the matter, it seems to have given its
imprimatur to the proposition that even when a
corporation does not comply with the definition of a
close corporation under the Corporation Code
because the three requisites are not expressly
provided for in its articles of incorporation,
nonetheless, the same principles applicable to formal
close corporations, should also apply to equally
closely-held corporation, such as those organized
pursuant to a formal joint venture agreement, thus –
The Lagdameo Group stated in their appellees’ brief in
the Court of Appeals:
“x x x.
“Secondly, even assuming that Saniwares is
technically not a close corporation because it has
more than 20 stockholders, the undeniable fact is that
it is a close-held corporation. Surely, appellants cannot
honestly claim that Saniwares is a public issue or a
widely held corporation.
“In the United States, many courts have taken a
realistic approach to joint venture corporations and
have not rigidly applied principles of corporation law
designed primarily for public issue corporation.
Theses courts have indicated that express
arrangements between corporate joint ventures
should be construed with less emphasis on the
ordinary rules of law usually applied to corporate
entities and with more consideration given to the
nature of the agreement between the joint
venturers. . . . These American cases dealt with legal
questions as to the extent to which the requirements
arising from the corporate form of joint venture
corporations should control, and the courts ruled that
substantial justice lay with those litigants who relied
on the joint venture agreement rather than the
litigants who relied on the orthodox principles of
corporation law.
“x x x.” (at pp. 142-144).
The provisions of the Corporation Code on close
corporations, which provides for informal
management of its affairs, binding effect of written
agreements among stockholders, etc., should be
deemed to be available to resolve issues pertaining to
joint venture corporations.
(4) Right of First Refusal as a Delectus Personae
Feature in JV Company Scheme
Another reported case of a joint venture company
arrangement would be inJG Summit Holdings, Inc. v.
Court of Appeals, 412 SCRA 10 (2003), where the
National Investment and Development Corporation
(NIDC), a government corporation, entered into a
Joint Venture Agreement (JVA) with Kawasaki Heavy
Industries, Ltd. of Kobe, Japan, forming the Philippine
Shipyard and Engineering Corporation (PHILSECO) to
engage in operation and management of shipyard.
The JVA provided for a 60% Filipino-40% Japanese
equity, and provided a “right of first refusal” on the
equity shares should either of the co-venturer decide
to sell, assign or transfer its interest in the joint
venture. When later on the government shares in
PHILSECO were bidded out, one of the issues that had
to be resolved was the validity of the right of first
refusal clause found in the JVA.
The Court matter-of-factly recognized the
“partnership” arrangement between the original
parties in the joint venture company, and
characterized the right of first refusal clause in the
JVA as a “protective mechanisms to preserve their
respective interests in the partnership in the event
that (a) one party decides to sell its shares to third
parties; and (b) new Philseco shares are issued.” (at p.
29). The Court further held –
. . . The right of first refusal is meant to protect the
original or remaining joint venturer(s) or
shareholder(s) from the entry of third persons who
are not acceptable to it as co-venturer(s) or co-
shareholder(s). The joint venture between the
Philippine Government and KAWASAKI is in the nature
of a partnership which, unlike an ordinary
corporation, is based on delectus personae. No one
can become a member of the partnership association
without the consent of all the other associates. The
right of first refusal thus ensures that the parties are
given control over who may become a new partner in
substitution of or in addition to the original partners.
Should the selling partner decide to dispose all its
shares, the non-selling partner may acquire all these
shares and terminate the partnership. No person or
corporation can be compelled to remain or to
continue the partnership . . . (at p. 31).
What one notices clearly extant in JG Summit
Holdings is that although what was bidded were
shares of stock is a duly registered corporation, and
the right of first refusal was not found expressed in
any provision of the articles of incorporation and by-
laws, nonetheless, the Court applied its enforceability
to a third party bidder who was not privy to the terms
of the private JVA between the Government and the
foreign investor.
4.  Aspects which Influence Choice of JV Scheme
The important aspects in choosing the format or
scheme by which to pursue the joint venture
arrangement would be the issues relating to limited
liability considerations, exclusion of new parties and
non-dilution of equity considerations, tax
consequences, and limitation of foreign equity.
a. Defining Joint Ventures Scope of Business Activity
The principal consideration in defining the scope of
business to be undertaken by joint venture in the
Philippines basically revolves around the issue, when
it involves foreign investment, of restrictions on
foreign equity and foreign management and control
on certain restricted areas or activities. These areas
must involve foreign investments as defined under
Republic Act No. 7042, known as the Foreign
Investments Act of 1991.
”FIA ‘91”, was enacted to promote foreign
investments, and prescribes the procedures for
registering enterprises doing business in the
Philippines. It is the basic law that provides the
conditions, activities, and procedures where foreign
enterprises may invest and do business in the
Philippines. It also applies to joint venture
arrangements in the Philippines. By the negative list
scheme, the Act simply established the restricted
areas, and declared all other areas as open to
unlimited foreign equity participation.
Essentially, the FIA ‘91 provides for foreign investment
negative list which spells out the activities reserved
for Philippine national. Export enterprises may enter
all activities not restricted by Lists A and B of the
negative list, and domestic enterprises, with foreign
equity, may enter all activities not restricted by Lists
A, B, and C of the negative lists.
(1) Application of the Grandfather Rule
The ‘grandfather rule’ is the method by which the
percentage of Filipino equity in a corporation engaged
in nationalized and/or partly nationalized areas of
activities, provided for under the Constitution and
other nationalization laws, is computed, in cases
where corporate shareholders are present in the
situation, by attributing the nationality of the second
or even subsequent tier of ownership to determine
the nationality of the corporate shareholder.
In recognizing and applying the grandfather rule, the
SEC has adopted the formula of the Secretary of
Justice (DOJ Opinion No. 18, s. 1989)  to the effect
that:
Shares belonging to corporations or partnerships at
least 60% of the capital of which is owned by Filipino
citizens shall be considered as of Philippine
nationality, but if the percentage of Filipino ownership
in the corporation or partnership is less than 60% only
the number of shares corresponding to such
percentage shall be counted as of Philippine
nationality. (SEC Opinion, 23 November 1993, XXVIII
Sec Quarterly Bulletin 39 [No. 1, March 1994]; SEC
Opinion, 14 April 1993, XXVII Sec Quarterly Bulletin 29
[No. 3, Sept. 1993]; SEC Opinion, 23 March 1993, XXVII
Sec Quarterly Bulletin 15 (No. 3, Sept. 1993); SEC
Opinion, 6 August 1991, Sec Quarterly Bulletin 44 [No.
4, Dec. 1991]; SEC Opinion, 30 May 1990, XXIV Sec
Quarterly Bulletin 52 [No. 3, Sept. 1990]; SEC Opinion,
14 December 1989, XXIV Sec Quarterly Bulletin 7 [No.
2, June 1990]; SEC Opinion, 6 November 1989, XXIV
Sec Quarterly Bulletin 56 [No. 1, March 1990]).
It must be stressed however, that the afore-quoted
SEC rule applies for purposes of resolving issues
on investments. The SEC was quick to add: “However,
while a corporation with 60% Filipino and 40% Foreign
equity ownership is considered a Philippine national
for purposes of investment, it is nor qualified to invest
in or enter into a joint venture agreement with
corporation or partnerships, the capital or ownership
of which under the constitution or other special laws
are limited to Filipino citizens only.” (SEC Opinion, 14
December 1989, XXIV Sec Quarterly Bulletin 7 [No. 2,
June 1990]).  A joint venture arrangement would
mean that such corporation has become a partner and
is deemed then to be acting or involving itself in the
operations of a nationalized activity by the acts of the
local partners by virtue of the principle of mutual
agency
b. Limited Liability Feature
Whether it be the contractual joint venture
arrangement or the partnership arrangement, the co-
ventures would be faced with prospects of “unlimited
liability” pervading in such arrangement. Under
Philippine Partnership Law, partners (except limited
partner in formally registered limited partnership) and
con-venturers are liable for partnership debts beyond
their contributions to the parternship or joint venture
arrangements.
Therefore, the use of the joint venture company as
the format to pursue the joint venture arrangement
allows the co-venturers to take full advantage of the
limited liability features of the corporate vehicle
especially in projects and undertakings which embody
certain risks.
c. Exclusions of New Parties; Non-Dilution of Equity
The ability of the co-venturers to present the venture
among the original parties through a “right of first
refusal clause” has been recognized as valid by the
Supreme Court as a means to protect the original or
remaining joint venturer(s) or shareholder(s) from the
entry of third persons who are not acceptable to it as
co-venturer(s) or co-shareholder(s) . . . [because] The
joint venture . . .  is in the nature of a partnership
which, unlike an ordinary corporation, is based
on delectus personae. No one can become a member
of the partnership association without the consent of
all the other associates. The right of first refusal thus
ensures that the parties are given control over who
may become a new partner in substitution of or in
addition to the original partners.” (JG Summit
Holdings, Inc. v. Court of Appeals, 412 SCRA 10, 29-31
[2003]).
d. Tax Issues
In the field of Taxation, both a partnership and a joint
venture are treated as corporate taxpayers, and both
are subject to corporate income tax, except that
under the National Internal Revenue Code of 1997, “a
joint venture or consortium formed for the purpose of
undertaking construction projects or engaging in
petroleum, coal, geothermal and other energy
operations pursuant to an operating or consortium
agreement under a service contract with the
Government,” shall not be taxed separately as a
corporate taxpayer (Section 22(B), NIRC of 1997).
The contractual joint venture has the advantage of
limiting the extent of the arrangement between and
among the co-venturers, as in undertakings that
require privacy. In addition, since formal joint
ventures are taxed as corporate taxpayer, the
contractual joint venture lessens the need to have to
register the project as a separate corporate taxpayer,
since the private arrangements should allow the co-
venturers to continue reporting separately their
participation in the project in their own tax returns.
The corporate entity route also allows the co-
venturers to take advantage of zero rate taxability of
dividends declared by corporations in instances
provided under the National Internal Revenue Code.
In the Philippines, the corporation has traditionally
been subjected to heavier taxation than other forms
of business organization; dividends distributed are
subject to another tax when received by the
stockholders. With the trust of Government to
encourage both local and foreign investments in the
country, and to entice the use of the corporation as
the vehicle for such investment, many of the previous
tax laws that tended to make corporate vehicles
expensive had been abolished. Except for dividends
declared by domestic corporation in favor of foreign
corporation (Section 25(a) and (b), NIRC of 1977),
dividends received by individuals from corporation
(Section 21, NIRC of 1977),  as well as inter-corporate
dividends between domestic corporations (Section
24, NIRC of 1977), were subject to zero-rate of income
taxation. There had also been an abolition of the
personal holding companies tax and tax on
unreasonably accumulated surplus of corporations
(Executive Order No. 37 [1986]).
Lately, however, under the reforms embodied in the
NIRC of 1997, a final tax of 10% has been re-imposed
on dividends received by residents and citizens
declared from corporate earnings after 1 January 1998
(Section 24(B)(2), NIRC of 1997);  a final tax of 20% on
dividends received by a nonresident alien individual
has been re-imposed from corporate earnings after 1
January 1998 (Section 25(A)(1), NIRC of 1997);  and the
tax on improperly accumulated earnings has likewise
been re-imposed (Section 29, NIRC of 1997).
The pursuit of joint venture arrangements under a
formal partnership arrangement has the disadvantage
of inviting into the arrangement the features of
unlimited liability for partnership debts to the co-
venturers, and also the inability to take advantage of
the zero-rate of dividends for corporation, when the
partnership declares and distributes profits. The
aspect of double taxation looms largely in a
partnership joint venture arrangement, since
partnerships are subject to the 35% net income tax for
corporations. (Per amendment to NIRC of 1997
introduced by Rep. Act 9337. The income tax rate will
go down to 30% beginning 01 January 2009.)
Nevertheless, joint ventures formed for the purpose
of undertaking construction projects (Pres. Decree
929 [1976]), and those formed to engage in petroleum
operations pursuant to an operating agreement under
a service contract with the Government (Pres. Decree
1682)  are exempt from corporate taxation.