PARTNERSHIP NOTES

By: Atty. Cesar Villanueva

1 – HISTORICAL BACKGROUND ON PHILIPPINE PARTNERSHIP LAW

I. HISTORICAL BACKGROUND OF PHILIPPINE PARTNERSHIP LAW

1. Historical Background and Sources of Philippine Law on Partnership

a. Notion of Partnership Is of Ancient Origins

Prof. Esteban B. Bautista wrote that as a business device, the partnership “was well known among the ancients and

apparently occupied such an important place in their social and economic life that they made provision for it in their laws—

among the Babylonians from the time of Hammurabi, among the Babylonian Jews as early as the fourth century, and among

the Romans almost from the time they laid the foundation of their monumental legal system.” (BAUTISTA, ESTEBAN B.,

TREATISE ON PHILIPPINE PARTNERSHIP LAW, Rex Book Store, 1995 Ed., at p. 1, hereinafter referred to as

“BAUTISTA”; citing 12 ENCYCLOPEDIA OF SOCIAL SCIENCE 3 [1948]). He also wrote that “in medieval times, the device

was prominent among the merchant princes in the Italian cities; it also thrived in thirteenth century England where it was

regulated by guilds merchant.” (BAUTISTA, at p. 1, citing 4 COLLIERS ENCYCLOPEDIA 257 [1952] and 12 ENCYCLOPEDIA

OF SOCIAL SCIENCE 4 [1948])

Professors Hector S. de Leon and Hector M. de Leon, Jr. write that “As early as 2300 B.C., Hammurabi, the famous king of

Babylon, in his compilation of the system of laws of that time, provided for the regulation of the relation called partnership.

Commercial partnerships of that time were generally for single transactions or undertakings.” (DE LEON, HECTOR S., and DE

LEON, HECTOR M., JR., COMMENTS AND CASES ON PARTNERSHIP, AGENCY AND TRUST, Rex Book Store, Inc.,

Manila, Philippines, 2005 ed. , at p. 2, hereinafter referred to as “DE LEONS”). They also write that “Following the Babylonian

period, we find clear-cut references to partnerships in Jewish law . . . however, it must be remembered that the ancient Jews

were a pastoral people, and, therefore, the partnership as a business organization under Jewish law was concerned with the

holding of title to land by two or more persons.” (DE LEONS, at p. 2)

b. Civil and Common Law Bases of Partnership Laws

The De Leons trace the origins of the modern-day partnership through the English commercials courts which eventually was

integrated by then Chief Justice Lord Mansfield into the common law system and that it “was not until the latter years of the

18th century that the law of partnership as we know it today began to assume both form and substance.” (DE LEONS, at p. 3)

They write that eventually in the United States, in 1914 the Uniform Partnerships Act was endorsed by the National

Conference of Commissioners on Uniform State Laws, which had many points of similarity with the English Partnership Act of

1890, and that “For this reason, the practical operation of the Uniform Partnership Act has a background of application in the

workings of the English Act.” (DE LEONS, at p. 5)

Bautista suggested that “the modern world provisions on partnership of every legal system providing for and regulating this

type of business organization are based upon the Roman law, of course with several important modifications;” . . . and

that ”civil law countries or jurisdiction regard the partnership as a legal entity, while the common law ones generally do

not.” (BAUTISTA, at p. 1, citing 17 ENCYCLOPEDIA BRITANNICA 420 [1969]). The De Leons observe that “In fine, modern

partnership law may be said to contain combination of principles and concepts developed from three sources: the Roman Law,

the law [on] merchant and equity, and the common law courts.” (DE LEONS, at p. 5)

c. Particular Bases of Philippine Law on Partnerships

Before the promulgation of the New Civil Code, the Philippine partnership laws formerly distinguished between civil partnership

and commercial partnerships. Civil partnerships were governed in Title VIII of Book IV of the old Civil Code of 1889 (Articles

1665 to 1708); while commercial or mercantile partnership were governed by Title I of Book II of the Code of Commerce

(Articles 116 to 238). According to Bautista, both sets of laws “had their origin in the Roman Law.” (BAUTISTA, at p. 2)

The present Philippine Law on Partnership is provided under Title IX, Book V of the New Civil Code (Republic Act No.

386), which took effect on 30 August 1950, superseding the old Civil Code and repealed in toto the provisions of the Code of

Commerce on partnerships, which “has resulted in the abolition of the distinction between civil and commercial partnerships.”

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(BAUTISTA, at p. 2). In particular, Article 45 of the New Civil Code expressly provides that “Partnerships and associations for

private interest or purpose are governed by the provisions of this Code concerning partnerships.”

While the bulk of the present provisions in the Civil Code were taken from the old Civil Code provisions, the Code Commission

reported that “some provisions were taken from the Code of Commerce,” and other rules were adopted from the Uniform

Partnership Act and the Uniform Limited Partnership Act of the United States. Bautista assessed that “[o]n the whole, it may be

stated that the bulk of the provisions of the New Civil Code on this subject are of American origin, i.e., based on the United

States’ ‘Uniform Partnership Act and Uniform Limited Partnership Act.’” (BAUTISTA, at p. 2)

d. The Significance of Knowing the Historical Background of Philippine Partnership Law

The historical background of Philippine Law on Partnerships, finding its source from ancient times, indicate to us the relative

efficiency of the medium as it is able to survive up to the modern times. The longevity of the partnership as a medium of doing

business can be drawn from two characteristics.

Firstly, that society considers it important enough to provide a legal framework by which entrepreneurs, merchants and

businessmen may draw upon a set of rules to govern the medium by which to pursue a venture, without having to enter into

costly and time-consuming negotiations and contract drafting. The essential characteristics of partnership as governed by law

(under modern settings, they would be: juridical personality, mutual agency, delectus personae and unlimited liability of

partners); and allow would-be partners the ability to rely upon the default legal rules, with the assurance of the backings of the

State by which to enforce such default rules. This is what may be termed as the “ nominate and principal” characteristic of the

contract of partnership.

Secondly, that the partnership relationship being essentially contractual in nature, assures would-be partners of the

expedience of contractual stipulation, to be able to tailor-fit their relationships in a way that would best address their individual

needs and their working relationships with their co-partners, as well as the demands of the business enterprise they have

decided to embark upon.

Partnership Law therefore provides a stable platform by which individuals may provide an active means to pursue jointly a

business enterprise.

The other significant reason coming from the historical background of our Philippine Law on Partnerships is that it draws it

strength and its weakness from the fact that it is really an amalgam between two sets of legal traditions: the Civil Law system

upon which most of the provisions of the New Civil Code had been drawn, and from the Common Law tradition, particularly

from the Uniform Partnership Act of the United States. Properly appreciated, that means that the Philippine Law on

Partnerships can truly be molded into a framework that provides a stability from the set of rules and principles that are laid out

in the provisions of the New Civil Code, and yet be dynamic and progressive in characteristic to allow Filipino businessmen

and the legal profession to be able to evolve them effectively through application in the business world of innovative changes

and advances, confirmed and made “precedential” in decisions of our courts resolving the acceptability of such cutting-edge

innovations.

2. Old Branches of Partnership Law

a. Distinguishing Between Civil and Commercial Partnerships

Before the New Civil Code, resolution of partnership issues depended on whether it covered a civil partnership for which the

provisions of the old Civil Code were made to apply, or commercial partnership, and therefore covered by the Code of

Commerce. There was even a third type of partnerships, the industrial partnerships, which may have the characteristics of

commercial or civil partnerships, according to whether they have been established in accordance with the requirements of the

Code of Commerce or without regard to the latter. (Prautch, etc. v. Hernandez, 1 Phil. 705, 709-710 [1903]).

The essence of a commercial partnership was that it was undertaken by merchants, and essentially possessed of the

characteristic of “habitualness” (or more properly referred to as “pursued as a going concern”) to be governed under the

provisions of the Code of Commerce. Article 1 of the Code of Commerce provided that “For purposes of this Code, the

following are merchants: 1. Those who, having legal capacity to engage in commerce, habitually devote themselves

thereto. . .”

To illustrate, Evangelista v. Commissioner of Internal Revenue, 102 Phil. 140 (1957), held that there would exists the elements

of common fund and intention to divide the profits among the members of the family who borrowed money as a group, when

the facts showed that the

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1. Said common fund was not something they found already in existence. It was not a property inherited by them pro indiviso.

They created it purposely. What is more they jointly borrowed a substantial portion thereof in order to establish said common

fund.

2. They invested the same, not merely in one transaction, but in a series of transactions. x x x The number of lots (24)

acquired and transactions undertaken, as well as the brief interregnum between each, particularly the last three purchases, is

strongly indicative of a pattern or common design that was not limited to the conservation and preservation of the

aforementioned common fund or even of the property acquired . . . In other words, one cannot but perceive a character

of habituality peculiar tobusiness transactions engaged in for purposes of gain.

3. The aforesaid lots were not devoted to residential purposes, or to other personal uses, of petitioners herein. The properties

were leased separately to several persons who, from 1945 to 1948 inclusive, paid the total sum of P70,068.30 by way of

rentals. Seemingly, the lots are still being so let, for petitioners do not even suggest that there has been any change in the

utilization thereof. (Ibid, at p. 145).

Prior to the New Civil Code, the significant distinctions between civil partnerships from commercial partnerships were as

follows:

(a) Registration was essential for the coming into existence of commercial partnerships and their acquisition of juridical

personalities (Arts. 118-119, Code of Commerce; Hung-Man-Yoc v. Kieng-Chiong Seng, 6 Phil. 498 [1906]); whereas, it was

the perfection of a contract of partnership which under the old Civil Code brought about the separate juridical personality of a

civil partnership;

(b) Commercial partners were solidarily liable for partnership debts, albeit in a subsidiary manner, and therefore had the

benefit of excussion (Viuda de Chan Diaco v. Peng, 53 Phil. 906 [1928]); while civil partners were primarily but only jointly (pro-

rata) liable for partnership debts (Co-Pitco v. Yulo, 8 Phil. 544 [1907]); and

(c) Commercial partnerships were deemed to be, and subject to Code of Commerce provisions for, merchants.

As was aptly observed in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), the distinction between civil and

commercial partnerships was critical under the old set-up because it determined the applicable rules for registration, liability for

the members, and the rights and manner of dissolution.

At the onset of Philippine jurisprudential development, it was recognized in Prautch v. Hernandez, 1 Phil. 705 (1903), that a

commercial or mercantile partnership had for its object the pursuit of industry or commerce, and was then treated like a

merchant that must necessarily be governed by the Code of Commerce and had to comply with the registration requirements

thereof to lawfully come into existence.

In a commercial partnership, both the partnership and the separate partners thereof may be joined in one action, but the

private property of the partners could be taken in payment of the partnership debts only after the common property of the

partnership had been exhausted. (La Compañia Maritima v. Muñoz, 9 Phil. 326 [1907]).

The commercial partnership under the Code of Commerce tended to be a more solemn affair, and when it failed to register its

articles of partnership in the mercantile registry, it did not become a juridical person nor did it have any personality distinct from

the personality of the individuals who composed it (Hung-Man-Yoc v. Kieng-Chiong-Seng, 6 Phil. 498 [1906]; Bourns v.

Carman, 7 Phil. 117 [1906]; Ang Seng Quen v. Te Chico, 7 Phil. 541 [1907]); and therefore could not also maintain an action in

its name Prautch, etc. v. Hernandez, 1 Phil. 705 [1903]).

In Kwong-Wo-Sing v. Kieng-Chiong-Seng, 6 Phil. 498 (1906), which involved a commercial partnership, but the requirements

of the Code of Commerce for the execution of public document and registration in the mercantile registry (Art. 119, Code of

Commerce) were not complied with, the Supreme Court held that the “alleged partnership never had any legal existence nor

has it acquired any juridical personality in the acts and contracted executed and made by it,” (Ibid, at pp. 500-501) and what

was applied was Article 119 of the Code of Commerce which made liable for the debts incurred by such “partnership de facto”

the “persons in charge of the management of the association . . . together with persons not members of the association with

whom they may have transaction business in the name of the same.” (Ibid, at p. 500.) Thus, the legal consequence of failing to

comply with the registration requirements under the Code of Commerce was to make the acting partners personally and

primarily liable for all partnership debts. The doctrine is similar to the agency doctrine that an agent who enters into a

transaction on behalf of a non-existing principal becomes personally liable for the obligations incurred thereby.

In contrast, in Dietrich v. Freedman, 18 Phil. 341 (1911), where the civil partnership was engaged in the laundry business and

governed by the provisions of the Civil Code, it was held that the partnership existed as a separate juridical person even when

no formal partnership agreement was entered into and registered, and thereby the obligations of the partners for partnership

debts were held to be pro-rata.

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Nonetheless, the registration requirements under the Code of Commerce were never interpreted to undermine the obligatory

force of contracts entered into in the name of the commercial partners. Thus, it was held in Prautch, etc. v. Jones, 8 Phil. 1

(1907), and affirmed in Ang Seng Quen v. Te Chico, 12 Phil. 547 (1909), that while an unregistered commercial partnership

and association has no juridical personality, and as such cannot maintain an action in the partnership name, nevertheless, the

individual members may sue jointly as individuals, and persons dealing with them in their joint capacity will not be permitted to

deny their right to do so.

It was held in De los Reyes v. Lukban, 35 Phil. 757 (1916), and affirmed in Philippine National Bank v. Lo, 50 Phil. 802 (1927),

that under the Code of Commerce, where the partners’ liability for a partnership debt was only secondary or subsidiary, their

right of excussion was deemed already satisfied where at the time the judgment was executed against the partnership they

were unable to show that there were still partnership assets, or when a writ of execution against the partnership had been

returned not fully satisfied.

There was under the old set-up the debate of whether a partnership can choose which set of laws should govern it; or whether

a group of co-venturers can choose by the expediency of registration under the old Civil Code or under the Code of

Commerce, of whether to organize a civil or a commercial partnership. In Prautch, et. v. Hernandez, 1 Phil. 705 (1903), it was

held –

If that section includes commercial partnerships then such a partnership can be organized under it selecting from the Code of

Commerce such of its provisions as are favorable to the partners and rejecting such as are not, and even including in its

articles of agreement the right to do things which by that Code are expressly prohibited. Such a construction would allow a

commercial partnership to use or dispense with the Code of Commerce as best suited its own ends. (Ibid, at pp. 707-708)

. . . Is a commercial partnership distinguished from a civil one by the object to which it is devoted or by the machinery with

which it is organized? We think that the former distinction is the true one. The Code of Commerce of 1829 distinctly provided

that those partnership were mercantile which had for their object an operation of commerce. (Art. 264.). x x x . The Code of

Commerce declares the manner in which commercial partnerships can be organized. Such organization can be effected only

in certain well-defined ways. The provisions of this Code were well known when the Civil Code was adopted. The author of

that Code when writing article 1667, having in mind the provisions of the Code of Commerce, did not say that a partnership

may be organized in any form, which would have repealed the said provisions of the Code of Commerce, but did say instead

that a civil partnership may be organized in any form.

Subsequently, in Compania Agricola de Ultramar v. Reyes, 4 Phil. 2 (1904), what the Supreme Court held critical was proper

application of Article 1670 of the old Civil Code which provided that civil partnerships, on account of the objects to which they

are devoted, may adopt all the forms recognized by the Commercial Code, and thereby held that –

It will be seen from this provision that whether or not partnerships shall adopt the forms provided for by the Civil or Commercial

Codes is left entirely to their discretion. And furthermore, that such civil partnerships shall only be governed by the forms and

provisions of the Commercial Code when they expressly adopt them, and then only in so far as they (rules of the Commercial

Code) do not conflict with the provisions of the Civil Code. In this provision the legislature expressly indicates that there may

exist two classes of commercial associations, depending not upon the business in which they are engaged but upon the

particular form adopted in their organization. . . We are inclined to the belief that the respective codes, Civil and Commercial,

have adopted a complete system for the organization, control, continuance, liabilities, dissolutions, and juristic personalities of

associations organized under each. . . It is our opinion that associations organized under the different codes are governed by

the provisions of the respective code. (Ibid, at pp. 10-11)

b. Significance of Knowing the Historical Distinctions Between Civil and Commercial Partnerships

What may be considered as a good development in our present Law on Partnerships is the removal of the distinctions

between civil and commercial partnerships, and which are now governed by a common set of laws, i.e., the relevant provisions

of the New Civil Code. The main drawback of such a development is that even commercial partnerships (and admittedly there

may not be quite a number operating due to the availability of the corporate medium), would find themselves governed by non-

commercial doctrines, such as the non-central role of the institution of registration. And in fact, many issues have arisen under

our current Law on Partnerships arising from having adopted in the New Civil Code provisions from the Code of Commerce on

registration requirements.

In addition, the “civil-coding” of some of the provisions of the Code of Commerce which were copied into the New Civil Code,

should provide a better understanding of the legal consequences of current provisions of the Philippine Law on Partnerships,

and a better constructions of the effects they have on the commercial field, by providing a comparison with the old

jurisprudential rulings for commercial partnerships under the provisions of the Code of Commerce.

—oOo—

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2 – THREE LEVELS OF EXISTENCE OF PARTNERSHIPS

[Updated: 23 August 2010]

III. THREE LEVELS OF EXISTENCE OF PARTNERSHIPS

The Law on Partnerships under the New Civil Code treats of the partnership in three “levels of existence,” namely:

(a) As a contractual relationship between and among the partners;

(b) As a means or medium of doing business, through the structure of separate juridical personality, or as the basis of creating

multi-leveled contractual relations among various parties; and

(c) As a business enterprise, or a business venture, or what is termed in other disciplines as ”a going concern.”

Knowing the three levels at which the Law on Partnerships treats the partnership arrangement is important in determining the

legal significance of the various provisions of the New Civil Code regulating partnerships, as well as a manner of appreciating

the doctrinal value of such provisions.

1. Illustrative Interplay of the Tri-Level Existence of the Partnership

It would be important to illustrate the legal interplay between the three (3) levels of partnership existence, and the legal

doctrines that result from such interplay. For this purpose we will use the decision of the Supreme Court in Yu v. NLRC, 224

SCRA 75 (1993).

In that decision, the facts indicated that a limited partnership was duly registered with the firm name of “Jade Mountain

Products Company Limited” (“Jade Mountain”), with the partnership business consisting of exploiting a marble deposit found

on land situated in Bulacan, but with the partnership having its main office in Makati, Metropolitan Manila. Benjamin Yu was for

many years the Assistant General Manager of the partnership business, but only half of his contracted salary was paid under

the agreement that the rest would be paid when the partnership is able to source more funding. Majority of the partners

eventually sold their equity (about 82%) and the business to a new set of investors who retained the business enterprise under

the original name of Jade Mountain, but moved the head office to Mandaluyong. When Benjamin Yu learned later of the new

address he proceeded to Mandaluyong but was told that the new partnership did not wish to retain his services. He then

sought to recover from the new partnership his salary claims which accrued with the original partnership.

Benjamin Yu filed a complaint for illegal dismissal and recovery of unpaid salaries accruing from November 1984 to October

1988, moral and exemplary damages and attorney’s fees, against Jade Mountain under the new partnership. The new

partners contended that Mr. Yu was never hired as an employee by the present or new partnership. One of the issues raised

was whether the new partnership could be held liable for the claims of Yu pertaining to the old partnership which had been

dissolved due to the withdrawal of the leading partners.

The basic contention of Mr. Yu was the principle that a partnership has a juridical personality separate and distinct from that of

each of its members, which subsisted notwithstanding changes in the identities of the partners. Consequently, the employment

contract between Benjamin Yu and the partnership and the partnership Jade Mountain could not have been affected by

changes in the latter’s membership.

The Court defined the inextricable link of the contract of partnership between the original partners and the juridical personality

that arose from the nexus of that contract, and that when the contract was rescinded with the withdrawal of the majority of the

partners, then the partnership was dissolved and its separate juridical personality ceased to exists to cover the new set of

partners, thus:

Two (2) main issues are thus posed for our consideration in the case at bar:

(1) whether the partnership which had hired petitioner Yu as Assistant General Manager had been extinguished and replaced

by a new partnership composed of Willy Co and Emmanuel Zapanta; and

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(2) if indeed a new partnership had come into existence, whether petitioner Yu could nonetheless assert his rights under his

employment contract as against the new partnership.

In respect of the first issue, we agree with the result reached by the NLRC, that is, that the legal effect of the changes in the

membership of the partnership was the dissolution of the old partnership which had hired petitioner in 1984 and the

emergence of a new firm composed of Willy Co and Emmanuel Zapanta in 1987. (Ibid, at p. 80.)

The Court held that the applicable rule would be Article 1828 of the Civil Code which defines “dissolution of a partnership [as]

the change in the relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished

from the winding up of the business.” Nonetheless, the determination of the right of Mr. Yu to recover from the new partnership

which constituted its own separate juridical personality was based on the fact that it continued the old business enterprise of

the dissolved partnership, thus:

In the ordinary course of events, the legal personality of the expiring partnership persists for the limited purpose of winding up

and closing of the affairs of the partnership. In the case at bar, it is important to underscore the fact that the business of the old

partnership was simply continued by the new partners, without the old partnership undergoing the procedures relating to

dissolution and winding up of its business affairs. In other words, the new partnership simply took over the business enterprise

owned by the preceding partnership, and continued using the old name of Jade Mountain Products Company Limited, without

winding up the business affairs of the old partnership, paying off its debts, liquidating and distributing its net assets, and then

re-assembling the said assets or most of them and opening a new business enterprise. There were, no doubt, powerful tax

considerations which underlay such an informal approach to business on the part of the retiring and the incoming partners. It is

not, however, necessary to inquire into such matters.

What is important for present purposes is that, under the above described situation, not only the retiring partners (Rhodora

Bendal, et al.) but also the new partnership itself which continued the business of the old, dissolved, one, are liable for the

debts of the preceding partnership. In Singson, et al. v. Isabela Saw Mill, et al., the Court held that under facts very similar to

those in the case at bar, a withdrawing partner remains liable to a third party creditor of the old partnership. The liability of the

new partnership, upon the other hand, in the set of circumstances obtaining in the case at bar, is established in Article 1840 of

the Civil Code. . .(Ibid, at pp. 81-82)

Yu therefore recognized the applicability of the successor liability arising from business enterprise transfer (i.e., that the

creditors of the business enterprise have a right to recover payment of their claims against the transferee of the business

enterprise), and recognized that the business enterprise transfer doctrine is governed in details under Article 1840 of the Civil

Code.

Yu also recognized one of the principles in business enterprise transfers, that the new owners of the business enterprise do

have a right to choose who would be employed in their newly acquired business, and they cannot be compelled to maintain the

employment contracts of the managers and employees existing with the transferor, thus:

It is at the same time also evident to the Court that the new partnership was entitled to appoint and hire a new general or

assistant general manager to run the affairs of the business enterprise taken over. An assistant general manager belongs to

the most senior ranks of management and a new partnership is entitled to appoint a top manager of its own choice and

confidence. The non-retention of Benjamin Yu as Assistant General Manager did not therefore constitute unlawful termination,

or termination without just or authorized cause. We think that the precise authorized cause for termination in the case at bar

was redundancy. 10 The new partnership had its own new General Manager, apparently Mr. Willy Co, the principal new owner

himself, who personally ran the business of Jade Mountain. Benjamin Yu’s old position as Assistant General Manager thus

became superfluous or redundant. 11 It follows that petitioner Benjamin Yu is entitled to separation pay at the rate of one

month’s pay for each year of service that he had rendered to the old partnership, a fraction of at least six (6) months being

considered as a whole year. (Ibid, at p. 83-84.)

Another illustrative case is the decision in United States v. Clarin, 17 Phil. 84 (1910), where a partner filed estafa charges

against his co-partners for the latter’s failure to deliver to him his half of the profits from the partnership venture. In denying the

applicability of the charges of estafa the Court held –

The P172 having been received by the partnership, the business commenced and profits accrued, the action that lies with the

partner who furnished the capital for the recovery of his money is not a criminal action for estafa, but a civil one arising from

the partnership contract for a liquidation of the partnership and a levy on its assets if there should be any. x x x [Estafa] . . .

does not include money received for a partnership; otherwise the result would be that, if the partnership, instead of obtaining

profits, suffered losses, as it could not be held liable civilly for the share of the capitalist partner who reserved the ownership of

the money brought in by him, it would have to answer to the charge of estafa, for which would be sufficient to argue that the

partnership had received money under the obligation to return it. The complaint for estafa is dismissed without prejudice to the

institution of a civil action. (Ibid, at p. 86. See also People v. Alegre, (CA) 48 O.G. 5341 [1952]).

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The ruling in Clarin should be distinguished from that in People v. de la Cruz, (G.R. No. 21732 [1957], 03 September

1924, cited in People v. Campos, (CA) 54 O.G. 681 [1957]) where the industrial partner was held liable for estafa for

appropriating money that has been given to him by the capitalist partner for a particular transaction. The doctrine was

reiterated in Liwanag v. Court of Appeals, 281 SCRA 255 (1997), “Thus, even assuming that a contract of partnership was

indeed entered into by and between the parties, we have ruled that when money or property have been received by a partner

for a specific purpose (such as that obtaining in the instant case) and he later misappropriated it, such partner is guilty of

estafa.”

Perhaps the interplay of the various levels of existence of the partnership arrangement is best exemplified by the decision of

the Supreme Court in Rojas v. Maglana, 192 SCRA 110 (1990). In that case, a partnership was constituted between Rojas and

Maglana to operate timber forest products concession, and articles of co-partnership were duly executed and registered with

the SEC using the firm name “Eastcoast Development Enterprises”. Later, the partners took in an industrial partner, whereby

they executed an “Additional Agreement” which essentially adopted the registered articles but covering the acceptance of an

industrial partner, which agreement was not duly registered with the SEC, and the partnership operated under the original

registered firm name. Shortly thereafter, the original partners bought out the interest, share and participation of the industrial

partner in the firm, and the partnership was continued without the benefit of any written agreement or reconstitution of their

written articles of co-partnership.

When Rojas entered into a separate management contract with another logging enterprise and withdrew his equipment from

the partnership, Maglana made a formal demand against Rojas for the payment of his promised contribution to the partnership

and compliance with his obligation to perform the duties of logging superintendent as provided expressly in the registered

articles of co-partnership. When Rojas responded that he would not be able to comply with his promised contribution and will

not work as logging superintendent for the partnership, Maglana gave notice of the dissolution of the partnership. In the suit

that ensued between the partners, one of the issues that had to be resolved by the Court was the nature of the partnership and

the legal relationship of Rojas and Maglana after the retirement of the industrial partner from the second partnership.

On this issue, the trial court ruled that the second partnership superseded the first partnership, so that when the second

partnership was dissolved by the withdrawal of the industrial partner, there being no written contract of co-partnership when it

was continued by the two original partners, there was no reconstitution of the original partnership, and consequently the

partnership that was continued between Rojas and Maglana was a de facto partnership at will. In overruling the court a quo,

the Court held –

. . . [I]t appears evident that it was not the intention of the partners to dissolve the first partnership, upon the constitution of the

second one, which they unmistakable called an “Additional Agreement” . . . Except for the fact that they took in one industrial

partner, gave him an equal share in the profits and fixed the term of the second partnership to thirty (30) years, everything else

was the same. Thus, they adopted the same name, . . . they pursued the same purposes and the capital contributions of Rojas

and Maglana as stipulated in both partnership call for the same amounts. Just as important is the fact that all subsequent

renewal of Timber License No. 35-36 were secured in favor of the First Partnership, the original licensee. . . To all intents and

purpose therefore, the First Articles of Partnership were only amended, in the form of Supplementary Articles of Co-

Partnership . . . which was never registered . . . Otherwise stated, even during the existence of the second partnership, all

business transactions were carried out under the duly registered articles. (Ibid, at pp. 117-118)

The Court then proceeded to hold that —

On the other hand, there is no dispute that the second partnership was dissolved by common consent. Said dissolution did not

affect the first partnership which continued to exist “as shown by the subsequent acts of the original partners carrying one with

the original partnership business and confirming the obligations constituted under the original articles of partnership. The

conclusion of the Court was thus: “Under the circumstances, the relationship of Rojas and Maglana after the withdrawal of [the

industrial partner] can neither be considered as a de facto partnership, nor a partnership at will, for as stressed, there is an

existing partnership, duly registered.” (Ibid, at p. 118)

Rojas therefore affirms two important aspects in Partnership Law:Firstly, that registration of the contract of partnership with the

SEC has the legal effect of binding the partners (and perhaps even third parties dealing with the partnership), as to the

contractual obligations, the rights and duties of the partners, and which has effective force even as the partnership undergoes

changes within its constitution by the acceptance into and withdrawal of partners into the venture. Secondly, the underlying

business enterprise, the manner of its operation, has much legal influence of determining the contractual intents of the

partners in the determination of inter-partnership rights and obligations.

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3 – PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP

[Updated: 23 August 2010]

III. PARTNERSHIP IS PRIMARILY A CONTRACTUAL RELATIONSHIP

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Art. 1767. By the contract of partnership two or more persons bind themselves to contribute money, property,

or industry to a common fund, with the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession. (1665a)

Art. 1770. A partnership must have a lawfu object or purpose, and must be established for the common benefit

or interest of the partners.

Art. 1771. A partnership may be constituted in any form, except where immovable property or real rights are

contributed thereto, in which case a public instrument shall be necessary. (1667a)

Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise

stipulated. (1679)

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Article 1767 of the Civil Code defines a “contract of partnership” as one where “two or more persons bind themselves to

contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves,” and

includes in its coverage the exercise of a profession pursued in partnership form.

The fact that a partnership is first and foremost a contractual relationship, means that it is subject to the rules, principles and

doctrines pertaining to contracts in general, but modified in the sense that a partnership is at the same time a “medium of

doing business” or a device for undertaking a venture. This means that the Law on Partnerships must balance between the

principles governing the relationship of partners among themselves as contractual parties, and also their rights and obligations

with respect to the business venture or undertaking that brought them together in the first place. In other words, parties to a

partnership do not come together for the sake of coming together, but in order to achieve as a group, a business venture or

undertaking. The various provisions of the Law on Partnerships embodied in the Civil Code address either separately or

coordinately these “levels of existence” of a partnership: as contractual relationship, and as a means of doing business.

An example showing the essence of a partnership as a contract is provided under Article 1771 which bears the doctrine of

“consensuality” governing contracts in general: “A partnership may be constituted in any form, except where immovable

property or real rights are contributed thereto, in which case a public instrument shall be necessary.” Article 1770 also

embodies the principle that the provisions of law are deemed incorporated into every contract, even a contract of partnership

as it provides that “A partnership must have a lawful object or purpose.”

The primary doctrine that first and foremost the partnership must find its nexus in a contractual relationship is exemplified in

the decision inLyons v. Rosentock, 56 Phil. 632 (1932). In that case, Lyons and Elser were already partners in particular real

estate undertakings. Subsequently, Lyons became interested in purchasing for the venture the San Juan estate, and moved

forward towards negotiating its acquisition and communicating to Elser in the United States to join him in the venture. Elser

wrote back clearly indicating that he was not joining Lyons in the San Juan estate venture. The Court held that the fact that

Lyons had used as security for the acquisition of the San Juan estate one of the partnership properties in anticipation that

Elser would accept the partnership arrangement, but which Elser definitive refused and the partnership property was

substituted by Lyons separate property to secure the venture, did not make Lyons a partner in the San Juan estate venture,

since there was never any meeting of minds to constitute such partnership. Lyons demonstrate that before there can be a

partnership enterprise, it is necessary that there must having been a meeting of minds to constitute a contract of partnership.

1. Characteristics of the Partnership Contract

a. Nominate and Principal

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The contract of partnership is a nominate contract, not only because it has been given a specific name under the New Civil

Code, but it is a principal contract and can exists on its own upon the essential elements coming together at perfection; and

that once created there is a set of rules (Law on Partnerships of the New Civil Code) that govern such contract, and the parties

to such contract cannot refuse generally to be governed by such provisions. Thus, Article 45 of the Civil Code provides that

“Partnerships and associations for private interest or purpose are governed by the provisions of this Code concerning

partnerships.”

To illustrate the nominate and principal nature of the contract of partnership, Fernandez v. Dela Rosa, 1 Phil. 671 (1903), held

that –

The essential points upon which the minds of the parties must meet in a contract of partnership are, therefore, (1) mutual

contribution to a common stock, and (2) a joint interest in the profits. If the contract contains these two elements the

partnership relation results, and the law itself fixes the incidents of this relation if the parties fail to do so.” In resolving the

motion for reconsideration on in original decision, the Court even held that “It is of no importance that the parties have failed to

reach an agreement with respect to the minor details of contract. These details pertain to the accidental and not to the

essential part of the contract. (Ibid, at p. 680. Also Fue Leung v. IAC, 169 SCRA 746 [1989]).

b. Consensual

A contract of partnership is essentially consensual, it is perfected upon meeting of the minds of the parties of the subject

matter to undertake a business venture, and the consideration, which is the obligation to contribute of money, property or

service to a common fund. Whether the business enterprise is actually constituted or set-up, or whether or not the

contributions have been made into the partnership coffers, do not detract from the coming into existence of a valid partnership

contract. And failure to comply with the undertaking to deliver the promised contribution does not make a contract of

partnership void, but merely gives a ground for its dissolution.

Thus, in the early decision in Fernandez v. De la Rosa, 1 Phil. 671 (1903), the Court held that “The execution of a written

agreement was not necessary in order to give efficacy to the verbal contract of partnership as a civil contract, the contributions

of the partners not having been in the form of immovables or rights in immovables.” (Ibid, at p. 677). This feature of

consensuality of a contract of partnership is now embodied in Article 1772 which provides that “A partnership may be

constituted in any form except where immovable property or real rights are contributed thereto, in which case a public

instrument shall be necessary.”

Although Articles 1772 and 1773 provide for public instrument and registration when the capital contribution is more than

P3,000.00, and that of an inventory attached to the public instrument whenever immovable property is contributed,

nonetheless jurisprudence even discount the nullity of the resulting contract of partnership, as will be discussed hereunder.

In Estanislao, Jr. v. Court of Appeals, 160 SCRA 830 (1988), the Court held that when members of the family leased out a

parcel of land to SHELL Company, and used the advance rentals paid them to allow one of their members to capitalize the

dealership with SHELL, then a partnership has been constituted among them:

There is no doubt that the parties hereto formed a partnership when they bound themselves to contribute money to a common

fund with the intention of dividing the profits among themselves. The sole dealership by the petitioner and the issuance of all

government permits and licenses in the name of petitioner was in compliance with the [policy that a dealership can only be

granted to one person] of SHELL and the understanding of the parties of having only one dealer of the SHELL products. (Ibid,

at p. 837.)

In essence, Estanislao demonstrates that it is the true meeting of the minds of the parties (in this case, to pursue a common

venture as a family group) that shall govern the rights and obligations of the contracting parties, and not the evidence of a

purported agreement (in this case the dealership agreement being registered only in the name of a brother).

In contrast, in Yulo v. Yang Chiao Seng, 106 Phil. 111 (1959), the parties executed a “partnership agreement,” to conduct and

carry on the business of operating a theatre for the exhibition of motion and talking pictures; nonetheless, the Court held that

the real intention of the parties was to effect a sub-lease of the property and the partnership agreement was resorted to in

order to avoid the provision in the main lease agreement prohibiting a sublease of the premises. The Court took into

consideration the following actuations of the supposed Yulo partner to show that there as never a real agreement to form a

partnership, thus:

In the first place, plaintiff did not furnish the supposed P20,000 capital. In the second place, she did not furnish any help or

intervention in the management of the theatre. In the third place, it does not appear that she has ever demanded from

defendant any accounting of the expenses and earnings of the business. Were she really a partner, her first concern should

have been to find out how the business was progressing, whether the expenses were legitimate, whether the earnings were

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correct, etc. She was absolutely silent with respect to any of the acts that a partner should have done; all that she did was to

receive her share of P3,000 a month, which can not be interpreted in any manner than a payment for the use of the premises

which she had leased from the owners. Clearly, plaintiff had always acted in accordance with the original letter of defendant of

June 17, 1945 (Exh. “A”), which shows that both parties considered this offer as the real contract between them. (Ibid, at p.

117.)

Yulo demonstrates the principle that a contract of partnership is consensual in nature and is constituted by the real meeting of

the minds; such that even when formal articles of partnership are drawn-up between the parties, when it fact the evidence

shows that they never intended to enter into a partnership, the article of partnership cannot create a partnership when in fact

there has never been a meeting of minds to constitute one.

In contrast, we view the decision in Woodhouse v. Halili, 93 Phil. 526 (1953), as a little dubious when it distinguishes between

the obligation to enter into a contract of partnership, from that of executing the certificate of partnership itself. In Woodhouse,

the plaintiff and the defendant had come to an agreement to enter into a partnership business to bottle and distribute an

American brand softdrinks in the Philippines; and that defendant, who would primarily finance the business, agreed to grant

plaintiff the right to receive 30% of the profits under his obligation to secure the bottling franchise for the venture. When the

venture was eventually set-up, the defendant had refused to finalize the articles of partnership when he learned during the

negotiations in the United States that plaintiff did not have for himself the bottling franchise he promised he had secured. The

plaintiff brought action to have the articles of partnership executed and to receive his 30% share in the earnings. Prescinding

from the language of the original agreement executed between the parties that the very language of the agreement that the

parties intended that the execution of the agreement to form a partnership was to be carried out at a later date. They expressly

agreed that they shall form a partnership,” (Ibid, at p. 539) the Court held –

As the trial court correctly concluded, the defendant may not be compelled against his will to carry out the agreement nor

execute the partnership papers. Under the Spanish Civil Code, the defendant has an obligation to do, not to give. The law

recognizes the individual’s freedom or liberty to do an act he has promised to do, or not to do it, as he pleases. It falls within

what Spanish commentators call a very personal act (acto personalisimo), of which courts may not compel compliance, as it is

considered an act of violence, to do so. (Ibid, at p. 539.)

We disagree with the afore-quoted ruling of the Court in that it fails to appreciate the consensual nature of a contract of

partnership, and that the moment the parties come to an agreement which basically embodies the formation of a common fund

with the intention of dividing the profits, as was the case between the parties in Woodhouse, a contract of partnership arises,

and the incidents thereof governed by Partnership Law, even in the absence of a formal certificate or articles of co-partnership.

Only recently, Tocao v. Court of Appeals, 342 SCRA 20 (2000), summarized the prevailing doctrine on the nature of the

contract of partners, thus —

To be considered a juridical personality, a partnership must fulfill these requisites: (1) two or more persons bind themselves to

contribute money, property or industry to a common fund; and (2) intention on the part of the partners to divide the profits

among themselves. It may be constituted in any form; a public instrument is necessary only where immovable property or real

rights are contributed thereto. This implies that since a contract of partnership is consensual, an oral contract of partnership is

as good as a written one. Where no immovable property or real rights are involved, what matters is that the parties have

complied with the requisites of a partnership. The fact that there appears to be no record in the Securities and Exchange

Commission of a public instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Code did not

cause the nullification of the partnership. . . (Ibid, at pp. 30-31.)

Tocao held that so long as the two essential elements of a partnership are present, then the fact that the business was

operated under the name of a registered sole proprietorship was of no moment, especially when the registration of the

business name with the Bureau of Domestic Trade was only for purpose of being able to secure such business name. (Ibid,

at p. 36.)

c. Onerous and Bilateral

The onerous and bilateral characteristics of the contract of partnership are demonstrated by the fact that the existence of a

partnership requires an agreement for the creation of a common fund from the contributions of the partners, which may either

be in money, property or industry. Under Article 1786, a partner becomes by its very constitution, “a debtor of the partnership

for whatever he may have promised to contribute thereto.” All partners are bound to contribute to the common fund, or to the

partnership, including even the industrial partner who is bound to contribute his service.

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