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COMMENT:
(1) Liability Distinguished from Losses
While an industrial partner is exempted by law from
losses (as between the partners), he is not exempted from li-
670
CIVIL CODE OF THE PHILIPPINES Art. 1816
(2) Example
A, B and C, capitalist partners, each contributed P100,000;
and D, the industrial partner contributed his services. Sup-
pose X, a customer, is the creditor of the firm to the amount
of P900,000, what should X do?
ANS.: X must sue the firm and all the partners, includ-
ing D. After getting the P3 million (capital assets of the firm)
he can still recover P6 million from the 4 partners jointly or
pro rata (not solidarily). Hence, he can recover P1.5 million
from D. D can later on recover P1.5 million from A, B, and
C at the rate of P500,000 each, for after all, he is exempted
by the law from losses, as distinguished from liabilities.
(NOTE: Under the law the liability of the partners is
subsidiary and joint, not principal and solidary.)
671
Art. 1816 CIVIL CODE OF THE PHILIPPINES
(5) BAR
X, Y, and Z organized and registered a commercial
regular general co-partnership with a capital of P10 mil-
lion, X contributing 50% of the capital, Y 30% and Z 20%.
A certain creditor who has a claim of P2 million against the
co-partnership desired to file suit to collect his claim.
(a) Who should be made party defendant or defendants in
the creditor’s suit?
(b) Whose assets are liable for the satisfaction of the credi-
tor’s judgment? Explain the extent of liability of the
defendant or defendants.
Answer:
(a) The defendants should be the firm itself and the three
partners. (Art. 1816). (NOTE — Since there are no more
commercial partnerships today, the new Civil Code provi-
sions should be applied).
(b) First, the assets of the firm (P10 million) must be ex-
hausted, then X, Y and Z will be liable pro rata in the
proportion of 50-30-20 for the remaining P10 million.
(Art. 1860). Hence, X will pay from his individual as-
sets P5 million; P3 million; and Z, P2 million. As among
themselves the losses will be divided, in the absence of
agreement on losses or profits, in accordance with their
contribution of 50%, 30%, and 20%. (Art. 1797).
672
CIVIL CODE OF THE PHILIPPINES Art. 1817
673
Art. 1817 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Stipulation Eliminating Liability
Query: As among the partners, is it permissible to stipu-
late that a capitalist partner be exempted from liability?
ANS.: The answeris YES, under Art. 1817. And yet under
Art. 1799, a stipulation which excludes one or more partners
(capitalist) from any share in the profits or losses is VOID. How
can these two articles be reconciled? It would seem that the
only way to harmonize the two articles (insofar as capitalist
partners are concerned) is this: it is permissible to stipulate
among them that a capitalist partner will be exempted from
liability in excess of the original capital contributed; but will
not be exempted insofar as his capital is concerned.
Example:
A, B, and C, capitalist partners, each contributed P1 mil-
lion. The firm’s indebtedness amounts to P9 million. It was
stipulated that A would be exempted from liability. Assuming
that the capital of P3 million is still in the firm, what would
be the rights of the firms creditors?
ANS.: To get the P3 million and to get still P2 million
each from the 3 partners (a total of P9 million). A will thus
be liable to the third persons for P2 million. How much, if
any, can A recover from B and C? It is submitted that he
can recover P2 million from B and C (P1 million each) for as
to liability as among them, he is exempted (Art. 1817) but he
cannot recover his original capital of P1 million. (Art. 1799).
(3) BAR
In the articles of a general co-ownership, one of the
partners is expressly exempted from personal liability for the
losses of the partnership. Is this agreement valid? Explain.
674
CIVIL CODE OF THE PHILIPPINES Art. 1818
Answer:
675
Art. 1818 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) When A Partner Can Bind or Cannot Bind the Firm
This Article speaks of:
(a) the fact that the partner is an agent;
(b) the instances when he can bind the partnership;
(c) the instances when he cannot bind the partnership (in
which case, should he enter into the contract, he alone,
and not the firm nor the partner would be liable).
676
CIVIL CODE OF THE PHILIPPINES Art. 1818
Example:
A and B are partners in buying and selling auto-
mobiles. A, by the partner’s agreement, was authorized
to BUY automobiles on a CASH basis, never on the
INSTALLMENT plan. One day A bought on CREDIT or
on the INSTALLMENT PLAN a car from X, a client. X
did not know of A’s lack of authority. A’s purchase was
made on behalf and in the name of the partnership. Is
the partnership bound?
ANS.: Yes, the partnership is bound because
although A was not really authorized, still for “appar-
ently carrying on in the usual way the business of the
partnership” A is implicitly authorized and X was in
good faith. Had X known of A’s actual lack of authority,
the answer would be different, that is, the partnership
would not be bound. (See Smith, Bell & Co. v. Azaar &
CA, 40 O.G. 1882, citing 20 RCL, pp. 894-895: “Where
a business of a partnership is to buy and sell, a partner
who purchases on credit in the name of the firm is act-
ing within his implied powers, since it is usual to buy
and sell on credit.)
[NOTE: For apparently carrying on the business in
the usual way, is a partner legally authorized to enter
into FORMAL contracts that would bind the firm?]
ANS.: Yes. The words “including the execution
in the partnership name of any instrument” avoid any
possible doubt as to whether a partner has authority,
in the ordinary course of business, to enter into formal
contracts for his partnership, or to convey partnership
property when the conveyance is the result of a sale in
the ordinary course of partnership business. (Commis-
sioner’s Note, 7 ULA, Sec. 9, pp. 17-18). Indeed, it is
as if he had full power of attorney from all co-partners.
(Rouse v. Pollard, 1941, 129 N.J. Eq. 47, 18 A.2d. 5).]
677
Art. 1818 CIVIL CODE OF THE PHILIPPINES
(4) When Will the Act of the Partner Not Bind the Partner-
ship
(a) When, although for “apparently carrying on in the usual
way the business of the partnership,” still the partner
has in fact NO AUTHORITY, and the 3rd party knows
that the partner has no authority. (This is to penalize
customer or client in bad faith.)
(b) When the act is NOT for “apparently carrying on in the
usual way” of the partnership and the partner has NO
AUTHORITY.
(NOTE: Here, whether or not the 3rd party knows
of the LACK of AUTHORITY is NOT IMPORTANT. As
long as there was really no authority, the firm is not
bound.)
[NOTE: The 7 kinds of acts enumerated in Art.
1818 are instances of acts which are NOT for “appar-
ently carrying on in the usual way the business of the
partnership.” In those seven instances, the authority
must be UNANIMOUS (from ALL the partners) except
if the business has been abandoned.]
678
CIVIL CODE OF THE PHILIPPINES Art. 1818
Examples:
679
Art. 1819 CIVIL CODE OF THE PHILIPPINES
681
CIVIL CODE OF THE PHILIPPINES Art. 1819
COMMENT:
(1) Conveyance of Real Property
(a) This is a particular elaboration of Art. 1818, but is ap-
plicable to real property alone.
(b) The Article was adopted to do away with the existing
uncertainty surrounding the subject of the conveyance
of real property belonging to the partnership. (Commis-
sioner’s Note, 7 ULA, Sec. 10, p. 19).
(c) It will be noticed that in some instances, what is conveyed
is TITLE, and in other instances, what is conveyed is
merely the “EQUITABLE INTEREST.” What does this
phrase mean?
ANS.: An equitable interest or title is one not only
recognized by law, but also by the principles of equity.
(See 30 C.J.S. 401). Evidently, as used in Art. 1819, it
680
Art. 1819 CIVIL CODE OF THE PHILIPPINES
682
CIVIL CODE OF THE PHILIPPINES Art. 1819
(b) X had in turn sold the same land to Y for value and Y did
not know of A’s actual lack of authority. (This is the case
even when the selling of the land was not for apparently
carrying on the business in the usual ways.) Thus, in the
case presented, the firm cannot get back the land. Reason:
Because the property has in turn been “conveyed by the
grantee (X) to a holder for value (Y) without knowledge
that the partner, in making the conveyance, has exceeded
his authority.” (Art. 1819, 1st par.)
683
Art. 1819 CIVIL CODE OF THE PHILIPPINES
usual way the firm’s business. So, the firm cannot get back
the land, for title thereto has been conveyed to X.
Question: Suppose in the preceding problem A and B
had not been expressly disauthorized by the firm to sell land,
would your answers remain the same?
ANS.: It depends:
(a) If X had been in good faith, that is, he had no knowledge
of the lack of authority, the answer would be the same.
(1st par., Art. 1818).
(b) If X had been in BAD FAITH, the firm can get back the
land unless X in turn had sold the property to Y who is
in GOOD faith. (Here the assignee Y of the purchaser
X is a “holder for value without knowledge.”)
684
CIVIL CODE OF THE PHILIPPINES Art. 1820
COMMENT:
(1) Admission or Representation Made By a Partner
Generally, an admission by a partner is an admission
against the partnership under the conditions given:
(a) the admission must concern partnership affairs
(b) within the scope of his authority
685
Art. 1821 CIVIL CODE OF THE PHILIPPINES
COMMENT:
686
CIVIL CODE OF THE PHILIPPINES Art. 1821
687
Art. 1822 CIVIL CODE OF THE PHILIPPINES
(3) Problem
P acquired some knowledge about S’s credit before P became
a partner. Later P became a partner, and one day S had a trans-
action with the firm. P never conveyed the information he knew
to the firm although he could have done so. Another partner R
was the person who dealt with S’s transaction. Nobody else in
the firm knew what P already knew. Question: Is P’s knowledge
also the knowledge of the partnership?
ANS.: No, because P was not the partner acting in the
particular matter involved. He had acquired the knowledge
BEFORE he became a partner, not afterwards. The words
“present to his mind” (remembered) do not apply, for they ap-
ply only to the person ACTING in the particular matter. Thus,
the Commissioners have said: “Where the knowledge or notice
has been received by the partner before he became a partner,
and his partners are ignorant of this, and he is not the partner
acting in the particular matter, there is no doubt that there
has been neither knowledge of nor notice to the partnership.”
(Commissioner’s Note, 7 ULA, Sec. 12, pp. 20-21).
688
CIVIL CODE OF THE PHILIPPINES Art. 1822
COMMENT:
(1) Wrongful Act or Omission of a Partner
Example:
A, B, and C were partners. While acting within the scope
of the firm’s business, A committed a tort against X, a third
person. Is the firm liable?
ANS.: Yes. (Art. 1822). Moreover A, B, and C, as well as
the firm itself, are liable in solidum. (Art. 1824). Note that
even the innocent partners are civilly personally liable (Baxter
v. Wunder, 1927, 89 Pa. Super. Ct. 585), without prejudice
of course to their right to recover from the guilty partner.
(See Art. 1217). (See also Fairman v. Darney, 1919, 73 Pa.
Super. Ct. 238, where the court held that a wrongful refusal
to return a customer’s machine rendered ALL the partners
personally liable.)
(3) When the Firm and the Other Partners are NOT Liable
(a) If the wrongful act or omission was not done within
the scope of the partnership business and for its benefit
(Schlos v. Silverman, 172 Md. 632) or with the authority
of the co-partners. (Art. 1822).
(b) If the act or omission was NOT wrongful. (See Art. 1822
which uses the term “wrongful”.)
(c) If the act or omission, although wrongful, did not make
the partner concerned liable himself. (See Caplan v.
Caplan, 268 N.Y. 455).
689
Arts. 1823-1824 CIVIL CODE OF THE PHILIPPINES
COMMENT:
Liability of Partnership for Misappropriation
The difference between par. 1 and par. 2 is that in the
former the misappropriation is made by the receiving partner,
while in the latter, the culprit may be any partner. The effect
however is the same in both cases, as can be seen from Art.
1824.
COMMENT:
(1) Solidary Liability of the Partners With the Partner-
ship
(a) While in torts and crimes, the liability of the partners is
solidary, in contractual obligations, it is generally merely
joint. (Art. 1816). While Art. 1816 speaks of pro rata li-
ability of the partners, and while the Code Commission
says that pro rata in this article means “in proportion
to their contribution” (Memorandum of The Code Com-
691
CIVIL CODE OF THE PHILIPPINES Art. 1825
(2) Example
A and B are partners. A misappropriates a sum of
money belonging to a customer X but which was already in
the custody of the partnership. Whom can X hold liable?
ANS.: X can hold liable either the firm or A or B, and
the liability is for the whole amount because it is solidary.
However, if B is made to pay the full amount, he can recover
the whole amount, plus the interest from A later on instead
of only A’s share, for the simple reason that it is only A who
is guilty.
690
Art. 1825 CIVIL CODE OF THE PHILIPPINES
COMMENT:
692
CIVIL CODE OF THE PHILIPPINES Art. 1825
693
Art. 1825 CIVIL CODE OF THE PHILIPPINES
(6) Problem
A is engaged in business all by himself. With a view
to obtaining a better financial standing in the community,
A pretended to friends and clients that B was his partner.
The misrepresentation was with B’s consent. Who would be
preferred later on as to the assets of the business-creditors
who trusted only A or creditors who relied on the alleged
partnership of A and B?
ANS.: While partnership creditors are preferred over
separate creditors (See Art. 1827), still in this particular case,
there was no real partnership, and therefore neither partner-
ship assets nor partnership creditors properly exist. Therefore,
also no preference is given to creditors who relied on the
existence of the fictitious firm. Inasmuch as NO partnership
694
CIVIL CODE OF THE PHILIPPINES Art. 1826
COMMENT:
(1) Entry of a New Partner Into an Existing Partnership
Example:
A, B, and C are partners. D is admitted as a new part-
ner. Will D be liable for partnership obligations contracted
PRIOR to his admission to the partnership?
ANS.: Yes, but his liability will extend only to his share
in the partnership property, not to his own individual proper-
ties. (Art. 1826).
(NOTE: Had he been an original partner, he would be
liable both insofar as his share in the firm is concerned, and
his own individual property.)
(NOTE: It is understood that the newly admitted part-
ner would be liable as an ordinary original partner for all
partnership obligations incurred AFTER his admission to the
firm.)
695
Art. 1826 CIVIL CODE OF THE PHILIPPINES
under the new Civil Code (together with the new creditors of
the new firm), they are also considered creditors of the NEW
firm. (See also Art. 1840, which among other things provide
that generally “creditors of the dissolved partnership are also
creditors of the person or partnership continuing the business.”)
Thus, it is essential that the partnership assets of the new
firm (with the capital of the new partner) be available even
to the old creditors. (See Commissioner’s Note, 7 ULA, Sec.
17, pp. 26-27).
[NOTE: It is wrong to state that “the theory that a new
firm is created by the admission of a new partner, has been
abandoned.” It is wrong because indeed a new firm is created;
but the old creditors of the firm retain their preference as
partnership creditors. (See Commissioner’s Note to Sec. 41,
ULA).]
“Art. 1826 should be read together with Art. 1840. Both
are based on the principle that there has been one continuous
business. The fact that A has been admitted to the business,
or C ceased to be connected with it, should not be allowed
to cause endless confusion as to the claims of the creditors
on the property employed in the business. All creditors of
the business, irrespective of the times when they became
creditors, and the exact combinations of persons then owning
the business, should have equal rights in such property. The
recognition of this principle solves one of the most perplex-
ing problems of the partnership law.” (Commissioner’s Note,
7 ULA, Sec. 17, pp. 26-27).
696
CIVIL CODE OF THE PHILIPPINES Art. 1827
COMMENT:
(1) Reason for the Preference of Partnership Creditors
After all, the partnership is a juridical person with
whom the creditors have contracted. Moreover, the assets of
the partnership must first be exhausted.
697
Art. 1531 CIVIL CODE OF THE PHI LIPPINES
Chapter 3
COMMENT:
Dissolution Defined
See Comments under the next Article.
COMMENT:
(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 when
the partners cease to carry on the business together. (Com.
Note, 7 ULA, Sec. 29, p. 43).
698
CIVIL CODE OF THE PHILIPPINES Art. 1830
699
Art. 1830 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Causes of Dissolution
(a) Arts. 1830 and 1831 give the causes for dissolution.
(b) Note that in Art. 1830, eight causes are given, the first
one of which is subdivided into four instances.
701
CIVIL CODE OF THE PHILIPPINES Art. 1830
700
Art. 1830 CIVIL CODE OF THE PHILIPPINES
702
CIVIL CODE OF THE PHILIPPINES Art. 1830
Goquiolay v. Sycip
L-11840, Dec. 10, 1963
FACTS: The articles of a general partnership expressly
stipulated that “in the event of the death of any of the
partners at any time before the expiration of said term, the
co-partnership shall not be dissolved, but will have to be con-
tinued, and the deceased partner shall be represented by his
heirs or assigns in said co-partnership.” One of the partners
subsequently died, and this was before the expiration of the
partnership life. The deceased partner was then replaced by
his widow.
Issue: Does the widow or substitute become also a
general partner or only a limited partner?
HELD: She became a mere general partner. The articles
did not provide that the heirs of the deceased would be merely
limited partners; on the contrary, they expressly stipulated
that in case of death of either partner, “the co-partnership...
will have to be continued” with the heirs or assigns. It cer-
tainly could not be continued if it were to be converted from
a general partnership into a limited partnership since the dif-
ference between the two kinds of associations is fundamental,
and specially because the conversion into a limited associa-
tion would leave the heirs of the deceased partner without a
share in the management. Hence, the contractual stipulation
actually contemplated that the heirs would become general
partners rather than limited ones.
Bearneza v. Dequilla
43 Phil. 237
FACTS: Bearneza and Dequilla were partners for the
exploitation of a fish pond Bearneza died in 1912. In 1919,
703
Art. 1830 CIVIL CODE OF THE PHILIPPINES
704
CIVIL CODE OF THE PHILIPPINES Art. 1830
(11) Cases
705
Art. 1831 CIVIL CODE OF THE PHILIPPINES
Solomon v. Hollander
55 Mich. 256
FACTS: Kirkwood and Hollander were partners in the
jewelry business by virtue of a contract which stipulated
an existence for at least one year. A month after the firm
began, Kirkwood became dissatisfied and announced in the
newspapers the dissolution of the partnership, for he did not
want anymore to be a partner. Hollander, although he knew
this, nevertheless still ordered new goods in the partnership’s
name. Is Kirkwood still liable for these new transactions?
HELD: No more, since the firm was already dissolved,
and he had given no authority to his former partner. He is
entitled to his share of the assets as of the date of dissolu-
tion. However, damages may be deducted therefrom in view
of his wrongful dissolution of the firm. That he had the right
to withdraw even before the expiration of the term is clear,
because said right to dissolve “is a right inseparably incident
to every partnership.”
706
CIVIL CODE OF THE PHILIPPINES Art. 1831
COMMENT:
707
Art. 1831 CIVIL CODE OF THE PHILIPPINES
708
CIVIL CODE OF THE PHILIPPINES Art. 1831
709
Art. 1832 CIVIL CODE OF THE PHILIPPINES
711
CIVIL CODE OF THE PHILIPPINES Art. 1832
COMMENT:
710
Art. 1833 CIVIL CODE OF THE PHILIPPINES
COMMENT:
712
CIVIL CODE OF THE PHILIPPINES Art. 1833
(4) Examples
a) A, B, and C were partners. A resigned from the firm.
Therefore it was dissolved. B knew this, and yet he still
deliberately entered into new transactions with X, an
innocent customer. (The meaning of “innocent customer”
will be discussed in the next article.) The transactions
were not needed for winding up. Will the firm be still
liable?
ANS.: Yes. (See Art. 1834). If the firm assets are
not enough, X can still go after the individual assets of
A, B, and C. After all of them have paid X, can A and
C still recover from B, the partner who acted despite his
knowledge of the firm’s dissolution?
ANS.: Yes, because B should not have done what
he did.
(b) If in the preceding problem, X knew of the dissolution,
the firm cannot be held liable. Neither will A or C be
liable. Only B and X are concerned, and they will have
to settle with each other, depending on their reason why
they still entered into the contract.
713
Art. 1833 CIVIL CODE OF THE PHILIPPINES
(c) Note that for (a) to apply, B, must have knowledge, not
merely notice. If A had died or had become insolvent,
the principles in (a) will be followed whether B had
knowledge or mere notice. (According to the Commission,
“notice” should be sufficient if the fact to be notified is
an ordinary business fact as when a letter concerning
transactions is placed on the desk of B, but B never
opened the letter.) But dissolution caused by an act,
prior to the termination of the period agreed upon is
certainly not an ordinary fact. In this case, mere notice
not producing knowledge would not be sufficient. True
dissolution takes place automatically by virtue of such
act, but B, the partner acting should not be prejudiced.
(See Commissioner’s Note, 7 ULA, Sec. 84, pp. 48-50).
[NOTE: Death or insolvency, being more ordinary
than an “act, notice is enough. Hence, the law provides
“knowledge or notice.” However, it is still essential that
there be “knowledge or notice” of the fact of death or
insolvency to justify non-liability of the other partners
to the partner acting. Otherwise, it would be unfair to
let the partner acting assume the whole liability. Thus,
the Commission has said: “In the case of death, to hold
a partner acting for the partnership bona fide in igno-
rance of the death of one of his co-partners must assume
the entire liability, even though all other partners are
ignorant of the death of the partner, and even though
such deceased partner was entirely inactive, and may
have resided at any distance from the actual place of
business, is entirely unjust to the acting partner or
partners. What has been said of the death of a partner
applies also to the bankruptcy of a partner. If there are a
number of partners, and one of them becomes bankrupt,
and another having no knowledge or notice of this fact,
makes a contract in the ordinary course of the business,
there appears no reason why he should not be able to
call on his other partners not bankrupt or deceased, to
contribute towards any loss which his separate estate
may sustain on account of the contract.” (Commissioner’s
Note, 7 ULA, Sec. 84, pp. 48-50).]
714
CIVIL CODE OF THE PHILIPPINES Art. 1834
715
Art. 1834 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) When Firm Is Bound or Not Bound
This Article speaks of two possibilities:
(a) when the partnership is bound to strangers;
(b) when the partnership is not bound to strangers.
716
CIVIL CODE OF THE PHILIPPINES Art. 1834
Examples:
A, B, and C are partners. A dies. B knows this, but
still he later transacts new business with X, a business
not connected with winding up. This notice of dissolu-
tion was in the paper but X did not read the notice, and
when X transacted with B, X thought all the time that
the firm had not yet been dissolved.
(a) If X had been a previous creditor, is the firm liable?
ANS.: Yes [Art. 1834, 1st par. (2)(a)] BUT later on,
as among the partners, B alone will be liable, because
he knew of A’s death.
(b) If X had never extended credit before, is the firm li-
able?
ANS.: No, because after all there had been a pub-
lication of the dissolution and it is his fault that he did
not read the advertisement. He did not deserve special
attention for after all he had never been a previous
creditor of the firm.
(NOTE: Only B would be personally liable to X.)
(NOTE: Had there been no notice of dissolution
and X did not actually know of the dissolution, the firm
would have been liable.)
NOTE: Liability of the Unknown or Inactive Mem-
ber:
A, B, and C are partners. A withdraws. B knows
this, but he entered into a new contract with X, a pre-
vious creditor of the firm who had no actual knowledge
of the dissolution. C was not known by X to be ever a
partner of the firm, so it could not be because of C that
X had transacted the business.
Question: Is the firm liable?
ANS.: YES.
717
Art. 1834 CIVIL CODE OF THE PHILIPPINES
718
CIVIL CODE OF THE PHILIPPINES Art. 1835
Froess v. Froess
289 Pa. St., 691, 137 A. 124
719
Art. 1835 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Dissolution Ordinarily Does Not Discharge Existing
Liability of Partners
Just because the firm is dissolved does not automatically
mean that the existing liability of any partner is discharged.
Reason: Otherwise, creditors would be prejudiced, particu-
larly if a partner will just withdraw anytime from the firm.
(3) Problem
A, B, and C are partners. A dies. Is A’s estate (separate
properties) liable for his share of the partnership obligations
incurred while he was still a partner?
ANS.: Yes, but of course his individual creditors (as dis-
tinguished from the firm creditors) are to be preferred. (3rd
par., Art. 1835).
721
CIVIL CODE OF THE PHILIPPINES Art. 1836
COMMENT:
(1) Extrajudicial and Judicial Winding-Up
(a) Extrajudicially —
1) by the partners who have not wrongfully dissolved the
partnership
2) or by the legal representative of the last surviving partner
(when all the partners are already dead), provided the
last survivor was not insolvent.
NOTE:
Where the managing partners of the partnership
has the necessary authority to liquidate its affairs under
its article of co-partnership, he may sell the partnership
properties even AFTER the life of the partnership has
already expired since he as manager, is empowered to
wind up the business affairs of the partnership. (Ng Cho
Cio, et al. v. Ng Diong and Hodges, L-14832, Jan. 28,
1961).
(b) Judicially —
Under the control and direction of the court, upon
proper cause that is shown to the court.
[NOTE: Here the person to wind up must be ap-
pointed by the court. And said appointee should not be
the legal representative of a deceased partner but should
be instead a surviving partner. (Po Yeng Cheo v. Lim
Ka Yam, 44 Phil. 172).]
720
Art. 1837 CIVIL CODE OF THE PHILIPPINES
(3) Profits
Profits are supposed to accrue only during the existence
of the partnership before dissolution. Of course, profits that
will actually enter the firm after dissolution as a consequence
of transactions already made before dissolution are included
because they are considered as profits existing AT THE TIME
OF DISSOLUTION. Any other income earned after the time,
like interest or dividends on stock owned by the partners or
partnership at the time of dissolution should not be distributed
as profits (hence, the agreement here as to the distribution of
“profits” will not govern), but as merely additional income to
the capital (to be distributed under the rules on co-ownership,
that is, to be divided in proportion to the amount of capital
given).
[NOTE: Said “capital given” is computed as to the time
of dissolution, that is, after profits and losses have already
been computed (Wood v. Wood, 312 Pa. 374, 167 A 600).]
(NOTE: Indeed said income is not considered as “prof-
its” for after dissolution, the firm has ceased to continue the
business of the partners together.)
722
CIVIL CODE OF THE PHILIPPINES Art. 1837
723
Art. 1837 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Two Aspects of Causes of Dissolution
Dissolution may be caused:
(a) although the partnership contract is NOT VIOLATED
(Example: death, or arrival of term) (The rights of part-
ners are governed by the FIRST PARAGRAPH of this
article.)
(b) because the partnership contract is VIOLATED
Example: Deliberate withdrawal of a partner al-
though the period of the firm has not yet expired, thus
causing damage to the firm.
(NOTE: The rights of the partners here are governed
BUT the SECOND PARAGRAPH of this article.)
724
CIVIL CODE OF THE PHILIPPINES Art. 1837
725
Art. 1838 CIVIL CODE OF THE PHILIPPINES
but also for damages or for his share of the profits realized
from the appropriation of the partnership business and good
will. (Of course), it is otherwise if the excluded partner had
substantially broken the partnership agreement.” (Schnitzer
v. Josephthal, 1923, 122 Misc. 15, 202 N.Y.S. 77). Indeed, he
has a pecuniary interest in every existing contract that was
incomplete and in the trade name of the co-partnership and
assets at the time he was wrongfully expelled. (See Halfou-
baum v. Miss, 1936, 248 App. Div. 901, 290, N.Y.S. 708).
726
CIVIL CODE OF THE PHILIPPINES Art. 1839
COMMENT:
(1) Rescission or annulment of Partnership Contract
(a) Although the law here uses the term “rescind,” the proper
technical term that should have been used is “annulled,”
in view of the “fraud or misrepresentation.”
(b) The “fraud or misrepresentation” here vitiates the consent
whereby the contract of partnership had been entered
into, hence, it is really “dolo causante.”
727
Art. 1839 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Rules for Settling Accounts
(a) Commissioner’s Comment on No. (1) subdivision (b) “the
contributions of the partners necessary for the payment
of all liabilities . . .”:
“The adoption of this clause will end the present
(under the old law) confusion as to whether the contribu-
tion of the partners toward the losses of the partnership
are partnership assets or not. The Commissioners believe
that the opinion that such contributions are assets is
supported by the better reasoning.” (Commissioner’s Note,
7 ULA, Sec. 40, p. 59).
728
CIVIL CODE OF THE PHILIPPINES Art. 1839
729
Art. 1839 CIVIL CODE OF THE PHILIPPINES
(5) Problem
A, B, and C are partners. A died. Is A’s estate still li-
able for the contributions needed to pay off the partnership
obligations?
731
CIVIL CODE OF THE PHILIPPINES Art. 1839
730
Art. 1840 CIVIL CODE OF THE PHILIPPINES
732
CIVIL CODE OF THE PHILIPPINES Art. 1841
COMMENT:
(1) Right of Old Creditors to be Creditors of the New
Firm
Reason for the law (in making creditors of the dissolved
firm also creditors of the persons or partnership continuing
the business): So that said creditors will not lose their pref-
erential rights as creditors to the partnership property.
(2) Example
A and B are partners. Later, C was admitted as mem-
ber or partner and the firm’s business was continued. The
creditors of the old firm continue to be creditors of the new
partnership but the liability of C shall be satisfied out of
partnership property only. Exception: if there is a stipulation
to the contrary.
733
Art. 1842 CIVIL CODE OF THE PHILIPPINES
COMMENT:
Retirement or Death of a Partner
(a) This Article speaks of the rights of retiring partners or
of the estate of a deceased partner when the business
is continued without any statement of accounts.
(b) As a general rule when a partner retires from the firm,
he is entitled to the payment of what may be due him
after a liquidation. But no liquidation is needed when
there already is a settlement as to what the retiring
partner shall receive. (Bonnevie v. Hernandez, 95 Phil.
175).
COMMENT:
(1) When Right to Account Accrues
(a) See Arts. 1807 and 1809 which also deal with the duty
to account. Under the present Article (1842), the right
734
CIVIL CODE OF THE PHILIPPINES Art. 1842
735
CIVIL CODE OF THE PHILIPPINES
Chapter 4
LIMITED PARTNERSHIP
COMMENT:
Reason for and History of Limited Partnerships
“The business reason for the adoption of acts making
provisions for limited or special partners is that men in busi-
ness often desire to secure capital from others. There are
at least three classes of contracts which can be made with
those from whom the capital is secured: One, the ordinary
loan on interest; another, the loan where the lender, in lieu
of interest, takes a share in the profits of the business; third,
those cases in which the person advancing the capital secures,
besides a share in the profits, some measure of control over
the business.
“At first, in the absence of statutes, the courts, both
in this country and in England, assumed that one who is
interested in a business is bound by its obligations, carrying
the application of his principle so far that a contract where
the only evidence of interest was a share in the profits made
one who supposed himself a lender, and who was probably
unknown to the creditors at the time they extended their
credits, is unlimitedly liable as a partner for the obligations
of those actually conducting the business.
“Later decisions have much modified the earlier case. The
lender who takes a share in the profits, except possibly in one
or two of our jurisdiction, does not by reason of that fact, run
a risk of being held as a partner. If, however, his contract falls
736
CIVIL CODE OF THE PHILIPPINES Art. 1843
737
Art. 1843 CIVIL CODE OF THE PHILIPPINES
738
CIVIL CODE OF THE PHILIPPINES Art. 1843
739
Art. 1844 CIVIL CODE OF THE PHILIPPINES
741
CIVIL CODE OF THE PHILIPPINES Art. 1844
COMMENT:
(1) Requisites in the Formation of a Limited Partnership
Two important things are needed:
(a) The signing under oath of the required certificate (with
all the enumerated items), and
(b) The filing for record of the certificate in the Office of the
Securities and Exchange Commission.
740
Arts. 1845-1846 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) What the Limited Partner Can Contribute
Note that a limited partner is not allowed to contribute
industry or services alone.
COMMENT:
Non-Inclusion of Name of the Limited Partner
Note that a limited partner violating this article is li-
able as a general partner to innocent third parties, without
however the rights of a general partner.
742
CIVIL CODE OF THE PHILIPPINES Arts. 1847-1848
COMMENT:
Liability for a False Statement
This speaks of liability for a false statement. The person
who suffers loss can sue for damages.
COMMENT:
743
Arts. 1849-1850 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) When Additional Limited Partners May Be Admitted
Note that even after a limited partnership has already
been formed, the firm may still admit new limited partners,
provided there is a proper amendment to the certificate.
744
CIVIL CODE OF THE PHILIPPINES Art. 1851
COMMENT:
(1) Acts of Strict Dominion
Note that as a rule, in the instances enumerated, the gen-
eral partners (even if already unanimous among themselves)
must still get the written CONSENT or RATIFICATION of
ALL the limited partners.
Reason: In a sense the acts are acts of strict dominion
or ownership, and are not generally essential for the routine
or ordinary conduct of the firm’s business.
745
Art. 1852 CIVIL CODE OF THE PHILIPPINES
COMMENT:
COMMENT:
746
CIVIL CODE OF THE PHILIPPINES Art. 1853
COMMENT:
(1) General — Limited Partner
Note that a person may be a general and a limited partner
at the same time, provided same is stated in the certificate.
747
Art. 1854 CIVIL CODE OF THE PHILIPPINES
(2) Rights
Generally, his rights are those of a general partner (hence,
third parties can go against his individual properties).
EXCEPTION: Regarding his contribution (like the right
to have it returned on the proper occasions) he would be con-
sidered a limited partner, with the rights of a limited partner,
insofar as the other partners are concerned.
COMMENT:
Right of a Limited Partner to Lend Money and Transact
Other Business With the Firm
(a) Note that 3rd parties are always given preferential rights
insofar as the firm’s assets are concerned.
(b) Note also that while the limited partner, in the case of
a claim referred to in the article, is prohibited to “receive
or hold as COLLATERAL SECURITY any partnership
property,” still he if not prohibited to purchase partnership
assets which are used to satisfy partnership obligations
towards third parties.
748
CIVIL CODE OF THE PHILIPPINES Arts. 1855-1856
COMMENT:
(1) Preference to Some Limited Partners
(a) Note that preference can be given to some limited part-
ners over the other limited partners.
(b) However, the preference must be “stated in the certifi-
cate.”
COMMENT:
Profit or Compensation of Limited Partners
(a) Whereas Art. 1856 speaks of “profit or compensation
by way of income,” Art. 1857 deals generally with the
return of the contributions.
749
Art. 1857 CIVIL CODE OF THE PHILIPPINES
(b) Note that for Art. 1856 to apply, partnership assets must
be in excess of partnership liabilities to 3rd persons, not
liabilities to partners.
751
CIVIL CODE OF THE PHILIPPINES Art. 1857
COMMENT:
(1) When Contributions of Limited Partners Can Be Re-
turned
(a) The 1st paragraph deals with the CONDITIONS that
must exist before contributions (or part thereof) by a
limited partner can be returned to him.
(b) The second paragraph deals with the TIME when such
contributions can be returned, provided that the condi-
tions are complied with.
(c) Note that as a rule, even if a limited partner has con-
tributed property, he has the right to demand and receive
CASH in return.
(d) If paragraph one is violated, previous creditors can sue,
but they must allege and prove the non-existence of the
CONDITIONS. (Snipler v. Leland, 127 Mass. 291). Among
these in the same category as previous creditor is the
assignee in insolvency of a bankrupt limited partnership.
(Wilkins v. Davis, 29 Fed. Case No. 17, p. 644).
750
Art. 1858 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Liabilities of a Limited Partner
(a) This is a new provision of the new Civil Code.
752
CIVIL CODE OF THE PHILIPPINES Art. 1858
753
Art. 1859 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Assignment of a Limited Partner’s Interest
(a) This is a new provision of the new Civil Code.
Source: Sec. 19, Uniform Limited Partnership Act.
(b) May the interest of a limited partner be assigned?
ANS.: Yes. (Par. 1, Art. 1859).
(c) Does the assignee of the interest of the limited partner
become necessarily a substitute partner?
754
CIVIL CODE OF THE PHILIPPINES Art. 1859
ANS.: No.
1) In some cases, he becomes one.
2) In others, he remains a mere assignee.
755
Art. 1860 CIVIL CODE OF THE PHILIPPINES
COMMENT:
Some Causes for the Dissolution of a Limited Partner-
ship
(a) This is a new provision of the new Civil Code.
Source: Sec. 20, Uniform Limited Partnership Act.
Keyword: DRICI (death, retirement, insolvency, civil
interdiction, insanity of a GENERAL partner)
756
CIVIL CODE OF THE PHILIPPINES Art. 1861
(b) Example:
A, B, C, D, and E were partners, A and B being
general partners, and the rest, limited partners. A dies.
Is the partnership dissolved?
ANS.: Yes, unless it is continued by the remaining
general partners.
Query: When may the remaining general partners
continue the business?
ANS.:
1) If the right to do so is stated in the certificate; or
2) If all the members consent.
BUT, at any event, there should be an amendment
of the certificate.
[NOTE: The instances set forth in Art. 1860 (re-
tirement, etc.) do not apply in the case of the limited
partner, for in such a case, the firm is not dissolved.
(See Com. Note, 8 Uniform Laws Annotated, pp. 2-5).]
COMMENT:
(1) Death of a Limited Partner
(a) This is a new provision of the new Civil Code.
Source: Sec. 21, Uniform Limited Partnership
Act.
(b) A, a limited partner, while still alive contracted certain
liabilities as such. Is his estate liable for them?
ANS.: Yes. (2nd par., Art. 1861, Civil Code).
757
Art. 1862 CIVIL CODE OF THE PHILIPPINES
(2) Problem
A, a limited partner, was given the right to constitute
his assignee as a substituted limited partner. On his death,
may his administrator do the same?
ANS.: Yes. Furthermore, said administrator shall have
all the rights of a limited partner for the purpose of settling
the estate of the deceased.
COMMENT:
(1) Charging the Interest of a Limited Partner
This is a new provision of the new Civil Code.
Source: Sec. 22, Uniform Limited Partnership Act.
(2) Example
A is a limited partner who is indebted to X. X applies to
the court to charge the interest of A in the partnership. May
the interest charged be redeemed by partnership property?
ANS.: No. The law says that the interest may be re-
deemed with the separate property of any general partner,
but cannot be redeemed with partnership property.
758
CIVIL CODE OF THE PHILIPPINES Arts. 1863-1864
COMMENT:
Payment of Liabilities of the Limited Partnership
(a) This is a new provision of the new Civil Code.
Source: Sec. 23, Uniform Limited Partnership Act.
(b) Notice that profits are given priority over capital.
759
Art. 1864 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(2) Cancellation
When the partnership is dissolved, or when all the
limited partners cease to be limited partners, the certificate
shall be cancelled, not merely amended. This is obvious for
if there be no more limited partners, the limited partnership
cannot exist as such. The writing to cancel a certificate shall
be signed by all members. (Art. 1865, 2nd par.).
761
CIVIL CODE OF THE PHILIPPINES Art. 1865
760
Arts. 1866-1867 CIVIL CODE OF THE PHILIPPINES
COMMENT:
(1) Requisites for Amending or Cancelling the Certificate
This is a new provision of the new Civil Code.
Source: Sec. 25, Uniform Limited Partnership Act.
(2) Problems
(a) X, a limited partner, assigned his interest to Y, who
thereby acquired the right to be a substituted limited
partner. Aside from the others, should X and Y sign the
amendment?
ANS.: Yes.
(b) In the preceding problem, suppose X refuses to sign the
amendment, may Y petition the court to order the court
to order the amendment?
ANS.: Yes.
COMMENT:
762
CIVIL CODE OF THE PHILIPPINES Art. 1867
COMMENT:
Transitional Provisions on Limited Partnerships
(a) This is a new provision of the new Civil Code.
Source: Sec. 30, Uniform Limited Partnership
Act.
(b) On June 1, 1946, a limited partnership was formed. May
it become a limited partnership under the new Civil
Code?
ANS.: Yes, by following the conditions in Art.
1867.
(c) Suppose the limited partnership in question (b) does not
want to become one under the new Civil Code, what laws
will govern said partnership?
ANS.: The old law.
763