CHAPTER 6

CLASSES OF PARTNERS AND PARTNERSHIPS

In order to have a better understanding of the various legal relationships created within the partnership
arrangement, and the consequent rights and obligations arising from such varied relationships, it may be helpful
to determine the classes of partners and partnerships defined under the New Civil Code.

KINDS OF PARTNERSHIPS

ART. 1776. As to its object, a partnership is either universal or particular.

As regards the liability of the partners, a partnership may be general or limited. (1671a)

ART. 1777. A universal partnership may refer to all the present property or to all the profits. (1672)

ART. 1778. A partnership of all present property is that in which the partners contribute all the property which
actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well
as all the profits which they may acquire therewith. (1673)

ART. 1779. In a universal partnership of all present property, the property which belonged to each

552

CLASSES OF PARTNERS AND PARTNERSHIPS 553

of the partners at the time of the constitution of the partnership, becomes the common property of all the
partners, as well as all the profits which they may acquire therewith.

A stipulation for the common enjoyment of any other profits may also be made; but the property which the
partners may acquire subsequently by inheritance, legacy, or donation cannot be included in such stipulation,
except the fruits thereof (1674a)

ART. 1780. A universal partnership of profits comprises all that the partners may acquire by their industry or
work during the existence of the partnership.

Movable or immovable property which each of the partners may posses at the time of the celebration of the
contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership. (1675)

ART. 1781. Articles of universal partnership, entered into without specification of its nature, only constitute a
universal partnership of profits. (1676)

ART. 1782. Persons who are prohibited from giving each other any donation or advantage cannot enter into
universal partnership. (1677)

ART. 1783. A particular partnership has for its object determinate things, their use or fruits, or specific
undertaking, orthe exercise of a profession or vocation. (1678)

1. As to Object: Universal Partnership versus Particular Partnership

When it comes to the object or purpose, or the nature of the business enterprise to be pursued, under Article
1776 of the New Civil Code, a partnership is either:

554 NON-CORPORATE MEDIA OF DOING BUSINESS

1. (a) Universal Partnership; or

2. (b) Particular Partnership.

A universal partnership is one where the contract of partnership encompasses either all the present properties
1
of the partners or to all of the profits.

A universal partnership of all present property is one where "the partners contribute all the property which
actually belongs (sic) to them to a common fund, with the intention of dividing the same among themselves, as
2
well as all the profits they may acquire therewith." This means that "the property which belonged to each of
the partners at the time of the constitution of the partnership, becomes the common property of all the
3
partners, as well as all the profits which they may acquire therewith." The New Civil Code further clarifies that
"A stipulation for the common enjoyment of any other profits may also be made; but the property which the
partners may acquire subsequently by inheritance, legacy, or donation cannot be included in such stipulations,
4
except the fruits thereof."

In a universal partnership of profits "all that the partners may acquire by their industry or work during the
existence of the partnership," as well as the usufruct of all "[mjovable or immovable property which each of the
partner may possess at the time of the celebration of the contract" of partnership, shall all pertain to the
5
partnership.

The default rule under Article 1781 of New Civil Code is that when the "Articles of universal partnership [are]
entered into without specification of its nature, [it will] only constitute a universal partnership of profits."

The essential question that must be asked is: When is a partnership agreement deemed to be even a "universal
partner

1
Art. 1777, New Civil

Code.
Art. 1778, New Civil

3
CAordte. .1779, New Civil 4

CAordt.e1. 779, New Civil 5

CAordte. .1780, New Civil Code.

CLASSES OF PARTNERS AND PARTNERSHIPS 555

ship" for the default rule under Article 1781 to apply? The issue is relevant because under Article 1782, "Persons
who are prohibited from giving each other any donation or advantage cannot enter into universal partnership."
On the other hand, Article 1783 of New Civil Code defines a particular partnership to be one that "has for its
object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or
vocation." There is no doubt then that every professional partnership and joint venture arrangement would
constitute a particular partnership.

The next question would then be: What is the practical and legal importance of distinguishing between
universal and particular partnerships? Two points must be considered in answering the question:

Firstly, statutorily, the only critical usefulness of the distinction is that persons who are disqualified from
donating to one another (like spouses under Article 187 of the Family Code), cannot enter into a universal
partnership of any sort. Is it therefore fair to conclude that spouses can validly enter into a particular partnership
between each other, when actually their property relations are governed already by a legal property regime?

In Commissioner of Internal Revenue v. Suter* the Court held that the prohibition under now Article 1782 of the
New Civil Code does not apply when the partners entered into a limited partnership, the man being the general
partner and two women being the limited partners, and a year later the man married one of the limited
partners, and the spouse bought out the interest of the limited partner.

Secondly, the rights and obligations that may arise from subsequent ventures pursued by the partners would be
determined on whether they are bound under a universal or particular type of partnership. The resolution of the
7
issue is best exemplified in the decision in Lyons v. Rosentock.

6
27 SCRA 152

7 (1969).

56 Phil. 632(1932).

556 NON-CORPORATE MEDIA OF DOING BUSINESS

In Lyons, the two partners had been together in two previous real estate projects. While one partner was
abroad, the other partner seized upon a potentially lucrative piece of property (the San Juan estate) and
although he had tried his best to convince his partner abroad to commit to be part of the new venture, the latter
declined. In any event, when the property was purchased by the local partner he had temporarily used a
partnership property in the previous venture to secure the loan drawn by the local partner in his own name, but
later released it and had his own property mortgaged when it was clear that the partner abroad did not change
his mind about not joining the venture. In any event, the San Juan estate project proved very successful, and
after the local partner died, the partner abroad sought to recover one-half of the profits of the venture on the
ground that he was a partner therein, in spite of his previous refusal to be part of it, and mainly because
partnership property was used as security for the loan obtained by the local partner to finance his acquisition of
the estate.

In resolving that the partner abroad was not entitled to any profits derived from the San Juan estate project
because he was never a partner thereto, Lyons resolution revolved around the principle that the two partners
never were part of a universal partnership, but that they were at best partners in particular partnerships for the
previous projects entered into before the San Juan estate project, thus —

In the purely legal aspect of the case, the position of the appellant is, in our opinion, untenable.... Of course, if
an actual relation of partnership had existed in the money used, the case might be different; and much
emphasis is laid in the appellant's brief upon the relation of partnership which, it is claimed, existed. But there
was clearly no general relation of partnership between the parties; and the most that can be said is that Elser
and Lyons had been coparticipants in various transactions in real estate. No objection can be made to the use of
the word partnership as a term descriptive of the relation in those particular transactions, but it must be
remembered that it was in each case a particular partnership, under Article 1678 of the Civil Code. It is clear

CLASSES OF PARTNERS AND PARTNERSHIPS 557

that Elser, in buying the San Juan Estate, was not acting for any partnership composed into a proposition which
8
would make Lyons a participant in this deal contrary to his express determination.

The other conclusion we can draw from Lyons is that a universal partnership is never presumed, not even from
various transactions or ventures concluded between the partners. The default rule therefore should be that
unless the parties so stipulate in their articles of partnership that they are entering into a universal partnership,
it would be presumed that they have existing between them merely a particular partnership.

Apart from the foregoing, the concept and medium of universal partnership serves no reasonable commercial
purpose, for legally it can only come about when it is so expressly stipulated in contract of partnership, and
practically, it is difficult to see how two or more persons not bounded by marriage, faith or vocation (which
makes the partnership a particular one), would commit to one another all that they have and all the fruits of
what they do.

The other important question that may be asked would be: By definition under Article 1776 that there can be a
valid partnership for the practice of a profession, why would Article 1783, in defining a particular partnership,
include the 'exercise of a vocation'which may not include one that seeks to provide a livelihood for the so-called
partners, such as religious or civic vocation?

2. As to Duration

When it comes to the partnership term or life, the law distinguishes between:

1. (a) Partnership with Fixed Term;

2. (b) Partnership for a Particular Undertaking; and
3. (c) Partnership at Will.

*lbid, at pp. 641-642.

558 NON-CORPORATE MEDIA OF DOING BUSINESS

Both partnerships with fixed term and for a particular undertaking are automatically dissolved upon the
expiration of the stipulated term or the achievement of the particular undertaking stipulated in the contract of
partnership; whereas, in a partnership at will, the partnership has an indefinite term and it would be dissolved
only when an act or cause of dissolution happens or arises. Nonetheless, under Article 1785 of New Civil Code,
when a partnership for a fix term or particular undertaking is continued after it has terminated without any
express agreement, partnership then become one at will and "the rights and duties of the partners remain the
same as they were at such termination, so far as is consistent with a partnership at will." The article also
provides that "A continuation of the business by the partners or such of them as habitually acted therein during
the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a
continuation of the partnership."

6
In Ortega v. Court of Appeals, the Court described the characteristics of a partnership at will in the following
manner, thus:
The birth and life of a partnership at will is predicated on the mutual desire and consent of the partners. 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 a cause for dissolution provided by 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
10
can result in a liability for damages.

Nonetheless, by way of obiter, Ortega also described the ability of every partner even in a partnership with fixed
term or for a particular undertaking, to be able to dissolve the partnership

9
245 SCRA 529

(1995). mid, at pp.

535-536.

CLASSES OF PARTNERS AND PARTNERSHIPS 559

upon the application of the principles of mutual agency and delectus personae, thus —

In passing, neither would the presence of a period for its specific duration or the statement of a particular
purpose for its creation prevent the dissolution of any partnership by an act or will of a partner. Among
partners, mutual agency arises and the doctrine of delectus personae allows them to have the power, although
not necessarily the right, to dissolve the partnership. An unjustified dissolution by the partner can subject him to
11
a possible action for damages.

Ortega also clarified that the designation of the purpose in the articles does not prevent it from being a
partnership at will, thus:

The "purpose" of the partnership is not the specific undertaking referred to in the law. Otherwise, all
partnerships, which necessarily must have a purpose, would all be considered as partnerships for a definite
undertaking. There would therefore be no need to provide for articles on partnership at will as none would so
exist. Apparently what the law contemplates, is a specific undertaking or "project" which has a definite or
definable period of completion.

12
In Rojas v. Maglana, the Court held that where there has been duly registered articles of partnership, and
subsequently the original partners accept an industrial partner but do not register a new partnership, and
thereafter the industrial partner retires from the business, and the original partners continue under the same
set-up as the original partnership, then although the second partnership was dissolved with the withdrawal of
the industrial partner, there resulted a reversion back into the original partnership under the terms of the
registered articles of partnership. In effect, the Court in Rojas held that there is no new partnership at will
constituted.

"Ibid, at p. 536.

12
192 SCRA 110 (1990).

560 NON-CORPORATE MEDIA OF DOING BUSINESS

3. As to Extent of Partners' Liabilities

When it comes to the kinds of liabilities that the partners may be exposed to for partnership debts and
obligations, the New Civil Code distinguishes between:

(a) (b)

General Partnership, where all the partners are unlimitedly liable; and

Limited Partnership, where there is one or more general partners who are unlimitedly liable, with one or more
limited partners, who are liable for partnership debts only to the extent of their stipulated contributions under
the articles of partnership.

In his concurring opinion in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.,TM Justice Vitug summarized
the nature of the liabilities of general partners, thus:

. . . The liability of general partners (in a general partnership as so opposed to a limited partnership) is laid down
in Article 1816 which posits that all partners shall be liable pro rata beyond the partnership assets for all the
contracts which may have been entered into in its name, under its signature, and by a person authorized to act
for the partnership. This rule is to be construed along with other provisions of the Civil Code which postulate
that the partners can be held soidarily liable with the partnership specifically in these instances — (1) where, by
any wrongful act or omission of any partner acting in the ordinary course of the business of the partnership or
with the authority of his co-partners, loss or injury is caused to any person, not being a partner in the
partnership, or any penalty is incurred, the partnership is liable therefor to the same extent as the partner so
acting or omitting to act; (2) where one partner acting within the scope of his apparent authority receives
money or property of a third person and the money or property so received is

13
317 SCRA 728 (1999).

CLASSES OF PARTNERS AND PARTNERSHIPS 561

misapplied by any partner while it is in the custody of the partnership — consistently with the rules on the
14
nature of civil liability in delicts and quasi-delicts.

KINDS OF PARTNERS

Other than the general and limited partners that have been previously discussed, there are two kinds of
partners when it comes to the nature of their contributions:

1. (a) Capitatist Partner, and

2. (b) Industrial Partner.

A capitalist partner contributes money and/or property to the partnership, while an industrial partner
contributes only his industry or his service. The law does not specify the kind of industry a partner may
15
contribute into the partnership.

The importance of such distinction is essentially on the nature of the obligations and liabilities that they must
assume, in that:
 1. (a) The capitalist partner is liable for the losses sustained by the business and any stipulation to the
18
contrary would be void; whereas, the industrial partner is not liable for losses of the partnership
17
venture;
2. (b) The capitalist partner may not engage in business or commercial undertaking which is competing
18
with that of the partnership business; whereas, the industrial partner cannot engage in any other

"Ibid, at pp. 746-747.

K
Evangeiista & Co. v. Abad Santos, 51 SCRA 416 18
(1A9r7t3s.).1791,1797, and 1799, New Civil Code.

18
"Art. 1797, New Civil Code. Art. 1808, New Civil Code.

NON-CORPORATE MEDIA OF DOING BUSINESS

19
form of business or commercial undertaking at all during his tenure as industrial partner; and

562

Philippine Partnership Law also distinguishes between the liabilities assumed by an:

1. (a) Original Partner who is with the partnership at the time of its constitution;
2. (b) Subsequent or Incoming Partners, who come in during the life of a pre-existing partnership.

In the case of an incoming partner, his liability with respect to the partnership obligations which were incurred
prior to his admission into the partnership shall be satisfied only out of partnership property, unless it is
21
otherwise stipulated.

Partnership Law also refers to the following types of partners:

22
• Managing Partner who has been given the management of the partnership enterprise;

23
• Liquidating Partner, who takes charge of the liquidation and winding-up of partnership affairs;

• Retiring Partner, who ceases to be part of the partnership which is continued after dissolution, as compared
2
with the partners who remain with the venture as Continuing Partners, * and

19
Art. 1789, New Civil Code.
^Art. 1791, New Civil Code.
21
Arts. 1826 and 1840, New Civil Code. "Arts. 1800 and 1801, New Civil Code.
"Art. 1836, New Civil Code.
24
Arts. 1837,1839,1840 and 1841, New Civil Code.

(c) Whereas a capitalist partner is bound to make additional contributions to the partnership in case of an
20
imminent loss of the business of the partnership, the industrial partner has no such obligation.

4
CLASSES OF PARTNERS AND PARTNERSHIPS 563

• Partner by Estoppel, who is not a formal partner in an existing partnership, but by his act he has led third-
parties dealing with the partnership to believe he is a partner, and thereby becomes liable as a regular partner
25
as to such relying creditors.

SPECIAL ISSUES OF WHO MAY VALIDLY BECOME PARTNERS

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 New 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 New 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 New 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.

^Art. 1815, New Civil Code.

564 NON-CORPORATE MEDIA OF DOING BUSINESS

Bautista discussed the rationale of the prohibition under Article 1782 as to be "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 to each other from doing indirectly what the law prohibits them from doing
directly."

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 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 which 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;» 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 of the New Civil Code), 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

»27 SCRA 152 (1969).

CLASSES OF PARTNERS AND PARTNERSHIPS 565

for gains. Toientino 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.

It seems to the writer that in addressing the issue raised, it would be error to base the resolution only on Article
1782 of the New 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
27
purposes because the spouses have exclusive ownership and control of the business."

The Court found no merit in the position of the Commissioner, and quoted from the commentaries of Toientino,
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

27
Ibid, at p. 156.

566 NON-CORPORATE MEDIA OF DOING BUSINESS

28
each other are prohibited from entering into universal part- nerships. It follows that the marriage of partners
29
necessarily brings about the dissolution of a pre-existing partnership.

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 [ i t ] . . . was not a partnership that [the] spouses were forbidden to enter under Article
1677 of New Civil Code of 1889 [now Article 1782]." In essence, Suter holds that spouses are not disqualified
from becoming partners in a limited partnership, provided both of them are limited partners, 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
30
property as to then have a direct co-ownership interest therein. Effectively, even in a limited partnership (such
as the Suter situation), the contribution of the limited partner

2B
Citing 2 Echaverri 196.

29
27 SCRA 152, 157, quoted from TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON COMMERCIAL LAWS OF THE PHILIPPINES,
Vol. 1, 4th ed., at p. 58, citing 1 Guy de Montella 58.

M
Arts. 1810 and 1811, New Civil Code.

CLASSES OF PARTNERS AND PARTNERSHIPS 567

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 New 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 New Civil Code. Although Article 1782 provides that "Persons who are
prohibited from giving each other any donation or advantage 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

568 NON-CORPORATE MEDIA OF DOING BUSINESS

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
31
acquired thereafter."

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 a 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 of the New Civil Code is not the
main rule on regulating property rights between spouses, but merely supple- tory to the primary rules set out by
the Family Code.

(2) Spouses Governed by the Conjugal Partnership of Gains

Take then the case 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 New Civil Code on the conjugal property
contributed, that would

31
Art. 91, Family Code.

CLASSES OF PARTNERS AND PARTNERSHIPS 569

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

570 NON-CORPORATE MEDIA OF DOING BUSINESS

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
32
and the partnership property. 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 encum- brance of the community or the conjugal property, done by one

^Arts. 1803(1) and 1818, New Civil Code.

CLASSES OF PARTNERS AND PARTNERSHIPS 571

33
without the consent of the other partner, would be void. 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. Can 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
34 35
community property, or the conjugal property, 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

33
Guiang v. Court of Appeals, 291 SCRA 372 (1998); Cirelos v. Hernandez, 490 SCRA 625 (2006); Bautista v. Silva,
502 SCRA 334 (2006).

M
Arts. 94 and 95, Family Code. ^Arts. 121 to 123, Family Code.

572 NON-CORPORATE MEDIA OF DOING BUSINESS

36
or default thereof, to the current market value of their separate properties.

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 New 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 pri- marily bind actual community or conjugal properties, and
therefore does 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 "Ei- ther spouse may exercise any legitimate profession, occupation, business or activity without the
consent of the other."

"Art. 146, Family Code.

CLASSES OF PARTNERS AND PARTNERSHIPS 573

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
37
scope of the partnership.

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
38
business without sharing that duty and responsibility with others.

a. Jurisprudential Rule

M
Tuason v. Bolanos, recognized at that time in Philippine jurisdiction the doctrine in Anglo-American
40
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
41
the business authorized by its charter."

A joint venture is essentially a partnership arrangement, although of a special type, since it pertains to a
42
particular project or undertaking.

37
FLETCHER CYC. CORPORATIONS (Perm. Ed.) 2520. ^BAUTISTA, at p. 9.
"95 Phil. 106 (1954).
40
Ibid, at p. 109.

"Ibid, quoting from Wyoming-Indiana Oil Gas Co. v. Weston, 80 A.L.R., 1043, citing FLETCHER CYC. OF CORP., Sec.
1082.

42
BAUTISTA, supra, at p. 50.

574 NON-CORPORATE MEDIA OF DOING BUSINESS

43
In Torres v. Court of Appeals, 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 New 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 joint
venture arrangement, it would seem that the policy behind the prohibition on why a corporation cannot be
made a partner do not apply in a joint venture arrangement. Being for 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. 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 of directors, the situation therefore in a joint venture arrangement, allows the board of directors to fully
bind the corporation to matters essentially within the board's business appreciation and anticipation. It is clear
therefore that what makes a project or undertaking a "joint venture" to authorize a corporation to be a co-
venturer therein is not the name or nomenclature given to the undertaking, but the very nature and essence of
the undertaking that limits it to a particular project which allows the board of directors of the participating
corporation to properly evaluate all the consequences and likely liabilities to which the corporation would be
held liable for.
b. SEC Rules

44
In a number of opinions, the SEC has recognized the general rule that a corporation cannot enter into a
contract of partnership with an individual or another corporation on the

43
278 SCRA 793.

"SEC OPINION, 22 December 1966, SEC FOLIO 1960-1976, at p. 278; citing 13 AM. JUR. Sec. 823 (1938); 6 FLETCHER
CYC. CORP., PERM. ED. REV. REPL. 1950, at p. 2520.

CLASSES OF PARTNERS AND PARTNERSHIPS 575

premise that it would be bound by the acts of the persons who are not its duly appointed and authorized agents
and officers, which is inconsistent with the policy of the law that the corporation shall manage its own affairs
separately and exclusively.

However, the SEC has on special occasions allowed exceptions to the general rule when the following conditions
are complied with:

1. (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 of the
45
corporation involved;
2. (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
46
severally liable for all the obligations of the partnership.

The second condition set by the SEC would have the effect of allowing a corporation to enter as a general
partner in general partnership, which would still have contravened the doctrine of making the corporation
unlimitedly liable for the acts of the other partners who are not its authorized officers or agents. This
interpretation of the second condition was confirmed by the SEC in 1994, to mean that a partnership of
corporations should be organized as a "general partnership" wherein all the partners are "general partners so
that all corporate partners shall take part in the management and thus be jointly and severally liable with the
47
other partners."

^SEC Opinion, 29 February 1980.

mid.

47
SEC Opinion, dated 23 February 1994, XXVII SEC QUARTERLY BULLETIN 18 (No. 3, Sept. 1994).

576 NON-CORPORATE MEDIA OF DOING BUSINESS

The rationale given by the SEC for the second condition was that if the corporation is allowed to be a limited
partner only, there is no assurance that the corporate partner shall participate in management of the
partnership which may create a situation wherein the corporation may not be bound by the acts of the
partnership in the event that, as a limited partner, the corporation chooses not to participate in the
48
management.
However, in 1995, the SEC reversed such interpretation and practically dropped the second requirement, when
it admitted the following reasoning for allowing a corporation to invest in a limited partnership, thus:

1. Just as a corporate investor has the power to make passive investments in other corporations by purchasing
stock, a corporate investor should also be allowed to make passive investments in partnerships as a limited
partner, who would then not be bound beyond the amount of its investment by the acts of the other partners
who are not its duly appointed and authorized agents and officers. Hence, the very reason why as a general rule,
a corporation cannot enter into a contract of partnership, as stated in the 1966 SEC opinion, would no longer be
present, as the corporation, which is merely a limited partner, will now be protected from the unlimited liability
of the other partners who are not agents or officers of the corporation;

2. Section 42 of the Corporation Code which permits a corporation to invest its funds in another corporation or
business, does not require that the investing corporation be involved in the management of the investee
corporation with a view to protect its 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 solidarity 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 not to do so and opts
to become a limited partner; and

48
Ibid.

CLASSES OF PARTNERS AND PARTNERSHIPS 577

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
49
corporations to become partners is proof of the unsoundness of and dissatisfaction with such doctrine.

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
50
Commission is inclined to adopt your view on the matter," provided that the power to enter into a partnership
is provided for in the corporation's charter. The SEC went on to rule:

"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 environ

49
SEC OPINION, 17 August 1995, XXX SEC QUARTERLY BULLETIN 8-9 (No. 1, June 1996); SEC OPINION, 17 August 1995,
XXX SEC QUARTERLY BULLETIN 8-9 (No. 1, June 1996).

mid.
578 NON-CORPORATE MEDIA OF DOING BUSINESS

ment 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
51
enterprise.

PARTNERSHIP DISTINGUISHED FROM OTHER BUSINESS MEDIA

1. Distinguished from "Joint Venture"

Bautista, although confirming that a joint venture "is an association of two or more persons to carry out a single
business enterprise for profit. . . [and] embodies several of the essential elements or characteristics of a
partnership and bears such a close resemblance to it that the rights and liabilities of joint adventures are largely
52
governed by rules applied to partnership," nevertheless would distinguish a partnership and a joint venture in
the following manner:

1. (a) "[A] joint venture is ordinarily limited to a single transaction [and] not intended to pursue a
continuous business;" whereas a partnership, "though it may exist for a single transaction, usually
contemplates the undertaking of a general and continuous business of a particular kind which
53
necessarily involves a series of transactions;"
2. (b) In a joint venture, "the property used remains the undivided property of its contributor, whereas in
a partnership the same, as a rule, becomes the property of the business entity and hence of all the
54
partners;"

mid.

"BAUTISTA, at pp. 41-42.

mid, at p. 42.

mid.

CLASSES OF PARTNERS AND PARTNERSHIPS 579

(c) In a joint venture, none of the co-venturers "can bind the joint adventure or his co-adventurers, while a
partner, when acting in pursuance of the firm business, binds not only himself as a principal but, as their agent
55
as well, also the partnership and his co-partners;" and

56
(d) A "joint adventure has no firm name, while a partnership is required to operate under a firm name."

To the writer, the foregoing distinctions only affirm the fact that a joint venture is a species of the genus
partnership as defined under Article 1767 of New Civil Code, since it contains the two essential elements of the
creation of a common fund and undertaking to divide profits; that in fact it is a particular partnership for a
specific undertaking fully recognized under Article 1783 covering "a specific undertaking," and Article 1830 that
recognizes the dissolution of a partnership "By the termination of the . . . particular undertaking specified in the
agreement." The position that in a joint venture the co-venturers do not become mutual agents is a conclusion
that can only be drawn if we premise that a co-venture is not a species of partnerships. Finally, that a
7
partnership adopts no firm name does not make it void as a contract or a partnership, so also with a joint
venture.
In any event. the distinction between a joint venture as a business medifjm not falling within the ambit of
Partnership Law, onas-nofconstituting a species of partnerships, has really become moot since in Kilosbayan,
57
Inc. v. Guingona, Jr., it was held:

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 in connection

55 x
lbid. lbid.

S7
232 SCRA 110,143(1994).

580 NON-CORPORATE MEDIA OF DOING BUSINESS

therewith, and duty, which may be altered by agreement to share both in profit and losses. The acts of working
88
together in a joint project.

59
In Torres v. Court of Appeals, the Court took no exception to defining the terms, rights and obligations of the
parties to a "Joint Venture Agreement" covering the development of a subdivision project under provisions of
New Civil Code governing partnerships. The section on Philippine Joint Ventures provides for a more thorough
discussion of the joint venture as a medium of doing business under Philippine setting.

2. Distinguished from Co-Ownership

Although the Law on Partnerships recognizes that partners have co-ownership interest in the partnership
60
properties, nonetheless a co-ownership constitutes merely a property relation whereby two or more persons
own pro-indiviso a property, but the relationship does not seek the business or mercantile pursuit of the
property relationship. In other words, a co-ownership situation comes about other than by a contractual intent
to pursue a business venture in common, and consequently, no separate juridical personality arises from a
purely co-ownership relationship.

Without the contractual intent to pursue a business venture through a common fund, the fact that co-owners
happen to share in the profits that may be produced by the property owned in common, there is still no
partnership arrangement. Thus, Article 1769 of New Civil Code provides that "In determing whether a
partnership exists ... Co-ownership or co-possession does not of itself establish a partnership, whether such co-
owners or co- possessors do or do not share any profits made by the use of the property."

^Ibid, citing BLACK'S LAW DICTIONARY, Sixth ed., at p. 59

839.
320 SCRA 428 (1999).

•"Art. 1811, New Civil Code.

CLASSES OF PARTNERS AND PARTNERSHIPS 581 3. Distinguished from Joint Account (Sociedad de Cuentas en

Participation)

A joint account is governed under Article 239 of the Code of Commerce, and still referred to as a corporate
taxpayer under the National Internal Revenue Code. But its use is a rarity in our jurisdiction because it does not
lend itself to commercial or business efficiency, as shown by the discussion of its features in Bourns v. Carman,"
thus —

. . . Apartnership constituted in such manner, the existence of which was only known to those who had an
interest in the same, there being no mutual agreement between the partners, and without a corporate name
indicating to the public in some way that there were other people beside the one who ostensibly managed and
conducted the business, is exactly the accidental partnership of cuentas en participation defined in Article 239 of
the Code of Commerce.

Those who contract with the person under whose name the business of such partnership of cuentas en
participation is conducted, shall have only a right of action against such person and not against the other
persons interested, and the latter, on the other hand, shall have no right of action against the third person who
contracted with the manager unless such manager formally transfers his right to them. (Art. 242 of the Code of
62
Commerce).

4. DistinguishedfromAgency

In a pure agency agreement, the agent is merely a legal extension of the personality of the principal and thereby
under the complete control of the principal.

The partnership relationship among the partners make them mutual agents of one another, and thereby the
control that a principal has over his agent does not pertain between and among the partners. Likewise, unlike in
a pure agency relationship where

61
7 Phil.

119-120.

117(1906).
« lbid, at pp.

582 NON-CORPORATE MEDIA OF DOING BUSINESS

the agent who acts within the scope of his authority does not bind himself to the contract or transaction he
enters into, in a partnership situation, the partner binds not only the other partners and the partnership, but
also himself in the pursuit of the partnership enterprise.

63
In Binglangawa v. Constantino, the Court held that just because a duly appointed agent has made personal
advances for the expenses of the business venture that he had been designated to administer, does not make
him a partner of his principal.

64
In United States v. Muhn it was held that the agent cannot escape the criminal liabilities of the crime of estafa
for conversion of the funds given to him by his principal by claiming that he had become a partner when the
books of accounts kept for the business showed that the amount was charged to him since the same was
"merely a method of keeping an account of the business, so that the parties would know how much money had
65
been invested and what the condition thereof was at any particular time."

a. Distinguishing Agency Principles from the Doctrine of Mutual Agency in the Partnership Setting
Since the attribute of mutual agency is always an integral feature in every partnership arrangement, can we
therefore presume that the contribution of service is an implicit obligation of every partner in a partnership
setting? The answer would be in the negative. Under the Law on Partnerships, particularly Article 1797 of the
New Civil Code, all partners are entitled to share in the profits of the partnership business based not on their
rendering of service to the partnership business, but primarily on the basis of their contributions, thus: "In the
absence of stipulation, the share

"l 09 Phil. 168

^(1Ib90id6,).at p. 166.

(1960).
6 Phil. 164

CLASSES OF PARTNERS AND PARTNERSHIPS 583

of each partner in the profits and losses shall be in proportion to what he may have contributed."

It is only the industrial partner whose service to the partnership becomes the basis by which he can participate
in
the profits, since Article 1797 provides: "As for the profits, the industrial partner shall receive such share as may
be just and equitable under the circumstances. If besides his services, he
has contributed capital, he shall also receive a share in the profits in proportion to his capital."

In essence, the difference between the principles of repre- sentation in Agency Law and those pertaining to the
doctrine of mutual agency in a partnership arrangement are as follows:

1. (a) Since in agency the subject matter of the con- tractual relationship is the service of the agent, then
essentially the agent earns the commission
or remuneration agreed upon only when he is able to render for the benefit of the principle the service
that he contracted to give;

Whereas, in a partnership, partners, other than industrial partners, are entitled to participate in the
profits of the venture, not by reason of the service they give or render, but by reason of their equity
standing in the venture;

2. (b)In an agency relationship, the agent must enter into contracts and transactions in the name of
the principal for the latter to be bound thereby; whereas, in a partnership arrangement, even when a
partner enters into a contract in his own name but in the pursuit of partnership business, the other
partners and the partnership itself would still be bound thereby.

5. Distinguished from the Business Trust

As compared to a partnership, a business trust is constituted by deed of trust which is easier and less expensive
to constitute

584

NON-CORPORATE MEDIA OF DOING BUSINESS

for it is not bounded by any legal requirements like the registration requirements for partnerships where the
real property or more than P3.000 worth of property is contributed to the partnership.

The creation of a business trust does not give rise to a separate juridical personality, and is mainly governed by
contractual doctrines and the common law principles on trust. There is no element of mutual agency or co-
ownership in a business trust relationship, and in fact the trust relationship is centered upon the splitting in the
properties contributed (the corpus) of the legal or naked title in the trustee who then manages and control the
properties, and beneficial or equitable title in the beneficiary and for whose benefit the trustee shall manage
and control the properties of the corpus.

6. Distinguished from the Corporation

The most important distinction between the corporation and the partnership are their legal capacities. With the
right of succession, a corporation has a stronger legal personality, enabling it to continue despite the death,
incapacity, withdrawal or insolvency of any of its stockholders or members. In a partnership, the withdrawal,
death, incapacity or insolvency of any partner would automatically bring about the dissolution of the
66
partnership.

Limited liability is a main feature in a corporate setting, whereas partners are liable personally for partnership
67
debts not only to what they have invested in the partnership but even as to their other properties.

68 69
Generally, every partner is an agent of the partnership, and by his sole act, he can bind the partnership
whereas in a corporation, only the Board of Directors or its duly authorized agents can bind the corporation.

^Arts. 1828 and 1830, New Civil Code. ^Arts. 1816,1817,1824, and 1839, New Civil

^CAodrtes. 1803(1), 1818, and 1819, New Civil Code. ^Arts. 1822 and 1823, New Civil Code.

CLASSES OF PARTNERS AND PARTNERSHIPS 585

In a partnership setting, although a partner has the power to sell or dispose of his capital interest or proprietary
interest, the buyer or transferee does not assume transferor's position as partner, but merely has a right to
70
demand for accounting or distribution of the profits pertaining thereto. In a corporate setting, every
stockholder has the right to transfer his shares in the corporation, and the buyer or transferee assumes the role
of stockholder of said shares when the transfer has been duly registered in the corporate books Section 63,
Corporation Code. In other words, the position of being partner is inherently not transferable, whereas, shares
are freely transferable in the corporate setting.

a. Does a Defective Incorporation Process Result into a Partnership?

The clear distinctions between the corporation and partnership can best be illustrated by discussing the issue of
whether a defective incorporation process that does not result into a corporate entity, would at least result into
a partnership.

It is a legal principle that when parties come together and all the elements of a particular contract are present,
although the parties may have nominated it otherwise, the law will impose such contractual relationship upon
them. In other words, the contract or relationship is what the law says it is, not how the parties wish to call it.
Therefore, it may agreed when five or more persons come together to contribute money or property to a
common venture or fund, with the intention of dividing the profits among themselves, the parties may wish to
call it otherwise, however, under the definition of the Article 1767 of New Civil Code, it would still be a
partnership, even if the parties had intended a corporation but did not materialize because of certain
registration deficiencies.

If the parties have in fact pursued the incorporation process, by executing and filing with the SEC the articles of
incorporation, then there should be no resulting partnership in the event that

70
Arts. 1804 and 1813, New Civil Code.

586 NON-CORPORATE MEDIA OF DOING BUSINESS

the incorporation process does not bear fruition, based on the following grounds:

Firstly, both corporate and partnership relationships are fundamentally contractual relationship created by the
co- venturers who consent to come together under said relationships. If the parties had intended to create an
association in the form of a corporation, a partnership cannot be created in its stead since such is not within
their intent, and therefore does not constitute a part of their consent to the contractual relationship.

More importantly, while partnership lies essentially within the norms of Contract Law, the corporation gets it
essence from a particular state-grant of separate juridical personality. In other words, parties to a corporate
venture are fully aware that it is the process of incorporation and the issuance of the certificate of incorporation
by which the corporate entity comes into being. There is therefore no doubt in the minds of incorporators that
they could effect a venture under a juridical being, and thereby achieve both the advantages and suffer the
burdens associated with such corporate medium, by the mere meeting of minds.

Secondly, the important differences between the corporation and the partnership cannot lead one to the
conclusion that in the absence of the first, the contracting parties would have gone along with the latter. Limited
liability, centralized management and easy transferability of the units of ownership in a corporation are by
themselves strong factors for parties' intention to be bound in the corporate relationship, and one cannot
presume that if these features are not met that they would in the alternative wish to be covered by a
partnership relationship, which has generally would involve unlimited liability, mutual agency among the
partners, and the delectus personae feature.

The essence of what constitutes the contractual relationship of partnership under Article 1767 is the coming
"together" or what is known in Partnership Law as"delectus personae" and not just the joint venture. The
essence of partnership is the personal relationship, i.e., that each would-be partner goes into the venture
precisely because he wants the other co-venturers, and no other person, to be with him in the venture. A
venturer who

CLASSES OF PARTNERS AND PARTNERSHIPS 587

seeks to enter into a corporate relationship perhaps does not even care about the personality of the other co-
venturers, and fully aware that he himself and others have the ability to transfer their investments to outsiders.

Nonetheless, there are indications of a contrary view to the above. Under Section 21 of the Corporation Code,
when parties act and pretend to be a corporation, when in fact none exist, the law would impute to them a
juridical personality to validate the contract under the corporation by estoppel doctrine; however, it would treat
the parties as partners since it expressly makes them liable as "general partners."

Under such contrary view, the main issue would be the priority between the personal creditors of the "partners"
in a corporation by estoppel doctrine, and the "corporate" creditors of the corporation by estoppel, as to the
assets invested into the venture. The author would presume that it would have to be the corporate creditors
that would have priority over the "corporate" assets as this seems to be the moving spirit of the corporation by
estoppel doctrine.

This position of the author has been partially justified by the discussions of in Pioneer Insurance & Surety Corp.
7
v. Court of Appeals, ' when it resolved the particular issue raised: "What legal rules govern the relationship
among co-investors whose agreements was to do business through the corporate vehicle but who failed to
72
incorporate the entity in which they had chosen to invest?"

Quoting from American jurisprudence, the Supreme Court in Pioneer Insurance held that "there has been the
position that as among themselves the rights of the stockholders in a defectively incorporated association
should be governed by the supposed charter and the laws of the state relating thereto and not by the rules
73
governing partners, nevertheless it has been held that

71 72
175 SCRA 668 (1989). lbid, at p. 681.

73
Quoting from CORPUS JURIS SECUNDUM citing Cannon v. Brush Electric Co., 54 A. 121, 96 Md. 446, 94 Am. S.R. 584.

588 NON-CORPORATE MEDIA OF DOING BUSINESS

"ordinarily persons who attempt, but fail, to form a corporation and who carry on business under the corporate
74
name occupy the position of partners inter se and their rights as members of the company to the property
75
acquired by the company will be recognized."

Notwithstanding the foregoing, the Court took the position that such partnership relationship does not exist,
"for ordinarily persons cannot be made to assume the relation of partners, as between themselves, when their
purpose is that no partnership shall exist . . . and it should be implied only when necessary to do justice between
the parties; thus, one who takes no part except to subscribe for stock in a proposed corporation which is never
legally formed does not become a partner with other subscribers who engage in business under the name of the
pretended corporation, so as to be liable as such in an action for settlement of the alleged partnership and
contributions. . . A partnership relation between certain stockholders and other stockholders, who were also
directors, will not be implied in the absence of an agreement, so as to make the former liable to contribute for
76
payment of debts illegally contracted by the latter. Nor will it make the investor to a would-be corporation
77
liable for losses sustained from its operations under a partnership inter se theory." The key elements in
resolving the issue seem to have been in Pioneer Insurance those of intent and participation in business
activities.

The doctrinal pronouncement in Pioneer Insurance can be summarized as follows: When parties come together
intending to form a corporation, but no corporation is formed due to some legal cause, then:

(a) Parties who had intended to participate or actually participated in the business affairs of the proposed

7A
lbid, citing Lynch v. Perryman, 119 P. 229, 29 Okl. 615, Ann. Cas. 1913 A. 1065.

75
lbid, citing Smith v. Schoodoc Pond Packing Co., 84 A, 268m 109 Me. 555; Whipple v. Parker, 29 Mich 369.

n 77
lbid, at p.683, quoting from CORPUS JURIS SECUNDUM, Vol. 68, p. 464. Ibid, at p. 685.

CLASSES OF PARTNERS AND PARTNERSHIPS 589

corporation would be considered as partners under a de facto partnership, and would be liable as such in an
action for settlement of partnership obligations;

- Whereas -

(b) Parties who took no part except to subscribe to shares of stock in a proposed corporation, do not become
partners with other subscribers who engaged in business under the name of the pretended corporation, and are
not liable for action for settlement of the alleged partnership contribution.

The doctrinal pronouncements in Pioneer Insurance are consistent with the distinctions between an investor in
partnership venture, where there is a clear intent to participate in the management of the partnership business
and for which limited liability is not afforded by law; and an investor in a corporation, where under the principal
of centralized management, there is no intent to participate in the corporate operations, and for which limited
liability is afforded by law.

On the other hand, where the parties to a venture merely use a business name that pretends there is a
corporation, when in fact there was no intention among the co-venturers to formally incorporate a juridical
entity, then there can be no doubt that what was really the meeting of minds among them was a partnership,
for in essence they agreed to set up a common fund {i.e., pursue a business venture), with clear indication to
divide the profits among themselves.

76
This is exactly the situation covered in the decision in Lim Tong Lim v. Philippine Fishing Gear Industries, Inc.,
where the liabilities of the parties were adjudged under the corporation by estoppel doctrine.

In Lim Tong Lim, the Court found that three co-venturers agreed "to engage in a fishing business, which they
started

"317 SCRA 728 (1999).

590

NON-CORPORATE MEDIA OF DOING BUSINESS

by buying boats worth P3.35 million, financed by a l o a n . . . I n their Compromise Agreement, they
subsequently revealed their intention to pay the loan with the proceeds of the sale of the boats, and to divide
equally among themselves the excess or l o s s . . . These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term 'common fund' under Article 1767. The contribution to such
fund need not be cash or fixed assets; it could be an intangible like credit or industry. That the parties agreed
that any loss or profit from the sale and operation of the boats would be divided equally among them also
79
shows that they had indeed formed a partnership."

The only complication in Lim Tong Lim was that the transaction upon which the personal liabilities of the co-
venturers was being pursued, was entered into on behalf of "Ocean Quest Fishing Corporation," although no
such corporation existed nor was there any attempt to incorporate such entity. Consequently, both the
unlimited liability principle under Partnership Law and the corporation by estoppel doctrine in Corporate Law
were applied to determine the personal liability of each of the partners in the business venture, which resulted
in legal incongruence

In a partnership, as a legal consequence of the application of the doctrine of mutual agency, every partner shall
be personally liable for partnership debts and liabilities, even when the underlying transaction was effected by
another partner, or even when a partner does not participate at all in the affairs of the partnership. On the
other hand, under the corporation by estoppel doctrine now embodied in Section 21 of the Corporation Code, it
is only the active or managing officers who assume the liability of a general partner, thus: "All persons who
assume to act as a corporation knowing it to be without authority to do so shall be liable as general partners, for
all debts, liabilities and damages incurred or arising as a result thereof;" and that consequently, passive
stockholders are not deemed to be personally liable for debts incurred on behalf of the ostensible corporation.

n
lbid, at p. 739.

CLASSES OF PARTNERS AND PARTNERSHIPS 591

This was In fact the defense raised by the petitioner in Lim Tong Lim, where he held that since he did not
participate actively in the business venture, then under the principles of corporation by estoppel doctrine, he
cannot be made personally liable for the debts incurred in pursuing the business venture. Instead of holding that
the primary doctrine to apply would be the rules of unlimited liability since there was duly constituted a valid
partnership, the Court instead humored the argument and went on to also apply the corporation by estoppel
doctrine with a jurisprudential twist when it held —

The doctrine of corporation by estoppel may apply to the alleged corporation and to a third party. ... a third
party who, knowing an association to be unincorporated, nonetheless treated it as a corporation and received
benefits from it, may be barred from denying its corporate existence in a suit brought against the alleged
corporation. In such case, all those who benefited from the transaction made by the ostensible corporation,
despite knowledge of its legal defects, may be held liable for contracts they impliedly assented to or took
80
advantage of.

The result is that by mixing principles in Partnership Law and Corporate Law in Lim Tong Lim, the corporation by
estoppel doctrine has grown out of the confines of Section 21 of the Corporation Code, as to make liable as
general partners, not only those parties to acted for the ostensible corporation, but also all passive parties who
knowing there is no such corporation sat back and benefited from the venture.

7. Distinguished from Cooperatives

A cooperative is a duly registered association of persons, with a common bond of interest, who have voluntarily
joined together to achieve lawful common social or economic end, making equitable contributions to the capital
required and accepting

mid, at p. 743.

592 NON-CORPORATE MEDIA OF DOING BUSINESS

a fair share of the risks and benefits of the undertaking in accordance with universally accepted cooperative
81
principles.

A cooperative, like an ordinary corporation and a partnership, has a juridical personality separate and distinct
82
from its members, and has limited liability feature.

The Tax Code defines a cooperative as an association conducted by the members thereof with the money
83
collected from among themselves and solely for their own protection and not for profit.

Unlike ordinary corporations, cooperatives are governed by principles of democratic control where the
84
members in primary cooperatives shall have equal voting rights on a one-member- one-vote principle; where
the Board of Directors manages the affairs of the cooperative, but it is the general assembly of full membership
85
that exercises all the rights and performs all of the obligations of the cooperative; and are under the
supervision and control of the Cooperative Development of Authority, and not the SEC.

Unlike a partnership which should be organized for profit, and a non-stock corporation which can be organized
for any eleemosynary purpose and no part of the net income is to be distributed to the officers and members
thereof, the primary objective of every cooperative is self-help: "to provide goods and services to its members
and thus enable them to attain increased income and savings, investments, productivity, and purchasing power
and promote among them equitable distribution of net surplus through maximum utilization of economies of
scale, cost- sharing and risk-sharing without conducting the affairs of the cooperative for eleemosynary or
88
charitable purposes."

81
Art. 3, Cooperative Development Authority Act (R.A. 6938). ^Arts. 12 and 30, R.A. 6938.
83
Republic v. Sunlife Assurance Company of Canada, 473 SCRA 129

(2005).
"Art. 4(2), R.A. 6938.
"Arts. 5(3) and 34, R.A. 6938. "'Art. 7, R.A. 6938.

593

The Law on Cooperatives declares it a policy of the State to foster the creation and growth of cooperatives as a
practical vehicle for promoting self-reliance and harnessing people power towards the attainment of economic
87
development and social justice. In one case, the Court held that cooperatives are established to provide a
strong social and economic organization to ensure that the tenant-farmers will enjoy on a lasting basis the
88
benefits of agrarian reforms.