2023 BAR REVIEW COMMERCIAL LAW
Handout No. 43
PARTNERSHIP
Contract of Partnership
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. Article 1767, New Civil Code
There are two essential elements in a contract of partnership.
Under Article 1767 of the Civil Code, there are two essential elements in a contract of
partnership: (a) an agreement to contribute money, property or industry to a common fund; and
(b) intent to divide the profits among the contracting parties. Jarantilla, Jr. vs. Jarantilla, 636
SCRA 299, G.R. No. 154486 December 1, 2010
Since a contract of partnership is consensual, an oral contract of partnership is as good as a
written one. Where no immovable property or real rights are involved, what matters is that the
parties have complied with the requisites of a partnership.
It may be constituted in any form; a public instrument is necessary only where immovable
property or real rights are contributed thereto. This implies that since a contract of partnership
is consensual, an oral contract of partnership is as good as a written one.
The fact that there appears to be no record in the Securities and Exchange Commission of a public
instrument embodying the partnership agreement pursuant to Article 1772 of the Civil Code did
not cause the nullification of the partnership.
The pertinent provision of the Civil Code on the matter states: Art. 1768. The partnership has a
juridical personality separate and distinct from that of each of the partners, even in case of failure
to comply with the requirements of article 1772, first paragraph. Tocao vs. Court of Appeals, 342
SCRA 20, G.R. No. 127405 October 4, 2000
Partnership by Estoppel
While an unregistered commercial partnership has no juridical personality, nevertheless, where
two or more persons, attempt to create a partnership failing to comply with all the legal
formalities, the law considers them as partners and the association is a partnership in so far as it
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2023 BAR REVIEW COMMERCIAL LAW
Handout No. 43
PARTNERSHIP
is favorable to third persons, by reason of the equitable principle of estoppel. MacDonald, et al.
vs. Nat. City Bank of N.Y., 99 Phil. 156, No. L-7991 May 21, 1956
SEC registration of partnerships
Every contract of partnership having a capital of Three thousand pesos or more, in money or
property, shall appear in a public instrument, which must be recorded in the Office of the
Securities and Exchange Commission. Article 1772, New Civil Code
Mere failure to register the contract of partnership with the Securities and Exchange
Commission does not invalidate a contract that has the essential requisites of partnership – a
partnership may exist even if the partners do not use the words “partner” or “partnership.
The Angeles spouses’ position that there is no partnership because of the lack of a public
instrument indicating the same and a lack of registration with the Securities and Exchange
Commission (“SEC”) holds no water. First, the Angeles spouses contributed money to the
partnership and not immovable property. Second, mere failure to register the contract of
partnership with the SEC does not invalidate a contract that has the essential requisites of a
partnership. Angeles vs. Secretary of Justice, 465 SCRA 106, G.R. No. 142612 July 29, 2005
The purpose of registration of the contract of partnership is to give notice to third parties.
Failure to register the contract of partnership does not affect the liability of the partnership and
of the partners to third persons. Neither does such failure to register affect the partnership’s
juridical personality.
Indeed, the Angeles spouses admit to facts that prove the existence of a partnership: a contract
showing a sosyo industrial or industrial partnership, contribution of money and industry to a
common fund, and division of profits between the Angeles spouses and Mercado. Angeles vs.
Secretary of Justice, 465 SCRA 106, G.R. No. 142612 July 29, 2005
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PARTNERSHIP
Two or more persons may also form a partnership for the exercise of a profession.
Under Article 1771, a partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument shall be
necessary. Article 1784, on the other hand, provides that a partnership begins from the moment
of the execution of the contract, unless it is otherwise stipulated. Here, absent evidence of an
earlier agreement, SAFA Law Office was constituted as a partnership at the time its partners
signed the Articles of Partnership wherein they bound themselves to establish a partnership for
the practice of law, contribute capital and industry for the purpose, and receive compensation
and benefits in the course of its operation. Aniceto Saludo vs. Philippine National Bank, G.R. No.
193138, August 20, 2018
Our law on partnership does not exclude partnerships for the practice of law from its coverage.
Article 1767 of the Civil Code provides that "[t]wo or more persons may also form a partnership
for the exercise of a profession." Article 1783, on the other hand, states that "[a] particular
partnership has for its object determinate things, their use or fruits, or a specific undertaking, or
the exercise of a profession or vocation." Since the law uses the word "profession" in the general
sense, and does not distinguish which professional partnerships are covered by its provisions and
which are not, then no valid distinction may be made. Aniceto Saludo vs. Philippine National
Bank, G.R. No. 193138, August 20, 2018
The law, in its wisdom, recognized the possibility that partners in a partnership may decide to
place a limit on their individual accountability.
Consequently, to protect third persons dealing with the partnership, the law provides a rule,
embodied in Article 1816 of the Civil Code, which states:
Art. 1816. 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 contract which may be entered
into in the name and for the account of the partnership, under its signature and by a person
authorized to act for the partnership. However, any partner may enter into a separate obligation
to perform a partnership contract.
The foregoing provision does not prevent partners from agreeing to limit their liability, but such
agreement may only be valid as among them. Thus, Article 1817 of the Civil Code provides:
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Art. 1817. Any stipulation against the liability laid down in the preceding article shall be void,
except as among the partners. Aniceto Saludo vs. Philippine National Bank, G.R. No. 193138,
August 20, 2018
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, there is likewise no showing that SAFA Law Office, as a separate juridical entity, is
being used for fraudulent, unfair, or illegal purposes. Hence, its partners cannot be held primarily
liable for the obligations of the partnership. As it was SAFA Law Office that entered into a contract
of lease with respondent PNB, it should also be impleaded in any litigation concerning that
contract. Aniceto Saludo vs. Philippine National Bank, G.R. No. 193138, August 20, 2018
The sharing of returns does not in itself establish a partnership whether or not the persons
sharing therein have a joint or common right or interest in the property.
There must be a clear intent to form a partnership, the existence of a juridical personality
different from the individual partners, and the freedom of each party to transfer or assign the
whole property.
In the present case, there is clear evidence of co-ownership between the petitioners. There is no
adequate basis to support the proposition that they thereby formed an unregistered partnership.
The two isolated transactions whereby they purchased properties and sold the same a few years
thereafter did not thereby make them partners. They shared in the gross profits as co- owners
and paid their capital gains taxes on their net profits and availed of the tax amnesty thereby.
Under the circumstances, they cannot be considered to have formed an unregistered partnership
which is thereby liable for corporate income tax, as the respondent commissioner proposes.
Even assuming for the sake of argument that such unregistered partnership appears to have been
formed, since there is no such existing unregistered partnership with a distinct personality nor
with assets that can be held liable for said deficiency corporate income tax, then petitioners can
be held individually liable as partners for this unpaid obligation of the partnership. Pascual vs.
CIR, G.R. No. 78133 October 18, 1988
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Article 1816 provides that the partners’ obligation to third persons with respect to the
partnership liability is pro rata or joint. Liability is joint when a debtor is liable only for the
payment of only a proportionate part of the debt.
In contrast, a solidary liability makes a debtor liable for the payment of the entire debt. In the
same vein, Article 1207 does not presume solidary liability unless: 1) the obligation expressly so
states; or 2) the law or nature requires solidarity. With regard to partnerships, ordinarily, the
liability of the partners is not solidary. The joint liability of the partners is a defense that can be
raised by a partner impleaded in a complaint against the partnership. Guy vs. Gacott, 780 SCRA
579, G.R. No. 206147 January 13, 2016
The partners’ obligation with respect to the partnership liabilities is subsidiary in nature. It
provides that the partners shall only be liable with their property after all the partnership assets
have been exhausted.
To say that one’s liability is subsidiary means that it merely becomes secondary and only arises if
the one primarily liable fails to sufficiently satisfy the obligation. Resort to the properties of a
partner may be made only after efforts in exhausting partnership assets have failed or that such
partnership assets are insufficient to cover the entire obligation. The subsidiary nature of the
partners’ liability with the partnership is one of the valid defenses against a premature execution
of judgment directed to a partner. Guy vs. Gacott, 780 SCRA 579, G.R. No. 206147 January 13,
2016
Although a partnership is based on delectus personae or mutual agency, whereby any partner
can generally represent the partnership in its business affairs, it is non sequitur that a suit
against the partnership is necessarily a suit impleading each and every partner.
It must be remembered that a partnership is a juridical entity that has a distinct and separate
personality from the persons composing it. In relation to the rules of civil procedure, it is
elementary that a judgment of a court is conclusive and binding only upon the parties and their
successors-in-interest after the commencement of the action in court. A decision rendered on a
complaint in a civil action or proceeding does not bind or prejudice a person not impleaded
therein, for no person shall be adversely affected by the outcome of a civil action or proceeding
in which he is not a party. The principle that a person cannot be prejudiced by a ruling rendered
in an action or proceeding in which he has not been made a party conforms to the constitutional
guarantee of due process of law. Guy vs. Gacott, 780 SCRA 579, G.R. No. 206147 January 13,
2016
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2023 BAR REVIEW COMMERCIAL LAW
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Final Stages of a Partnership
Under the Civil Code, the three final stages of a partnership are (1) dissolution; (2) winding-up;
and (3) termination. These stages are distinguished, to wit: “(1) Dissolution Defined—Dissolution
is the change in the relation of the partners caused by any partner ceasing to be associated in the
carrying on of the business (Art. 1828). It is that point of time the partners cease to carry on the
business together; (2) Winding Up Defined—Winding up is the process of settling business affairs
after dissolution. (NOTE: Examples of winding up: the paying of previous obligations; the
collecting of assets previously demandable; even new business if needed to wind up, as the
contracting with a demolition company for the demolition of the garage used in a ‘used car’
partnership.); (3) Termination Defined—Termination is the point in time after all the partnership
affairs have been wound up.” Idos vs. Court of Appeals, 296 SCRA 194, G.R. No. 110782
September 25, 1998
For as long as the partnership exists, any of the partners may demand an accounting of the
partnership’s business.
Prescription of the said right starts to run only upon the dissolution of the partnership when the
final accounting is done. Contrary to petitioner’s protestations that respondents’ right to inquire
into the business affairs of the partnership accrued in 1986, prescribing four (4) years thereafter,
prescription had not even begun to run in the absence of a final accounting. Emnace vs. Court of
Appeals, 370 SCRA 431, G.R. No. 126334 November 23, 2001
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.
The right to choose with whom a person wishes to associate himself is the very foundation and
essence of that partnership. Its continued existence is, in turn, dependent on the constancy of
that mutual resolve, along with each partner’s capability to give it, and the absence of cause for
dissolution provided by the law itself. Verily, any one of the partners may, at his sole pleasure,
dictate a dissolution of the partnership at will. He must, however, act in good faith, not that the
attendance of bad faith can prevent the dissolution of the partnership but that it can result in a
liability for damages. xxx An unjustified dissolution by a partner can subject him to action for
damages because by the mutual agency that arises in a partnership, the doctrine of delectus
personae allows the partners to have the power, although not necessarily the right to dissolve
the partnership. Tocao vs. Court of Appeals, 342 SCRA 20, G.R. No. 127405 October 4, 2000
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