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1 PART I TITLE IX PARTNERSHIP (Arts. 1767-1867) INTRODUCTION Brief historical background. (1) Development of partnership. — The earliest form of conducting business was the single entrepreneur ownership plan whereby one individual owned the business, had sole control of the same, reaped all the profi...

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PART I TITLE IX PARTNERSHIP (Arts. 1767-1867)

INTRODUCTION Brief historical background. (1) Development of partnership. — The earliest form of conducting business was the single entrepreneur ownership plan whereby one individual owned the business, had sole control of the same, reaped all the profits, and suffered all the losses. Under this system, the growth of an individual business was limited, owing especially to the limitation of capital and sometimes also to the limitation of skill or knowledge. To permit combinations of capital, or capital and experience, and to secure economy by eliminating some of the overhead costs of individual enterprises, the partnership plan of business association was developed. The partnership may be traced back to ancient history. (T.S. Kerr, Business Law: Principles and Cases, 2nd ed., p. 705.) (2) Ancient origin of partnership as a business organization. — Development, as distinguished from origin, of the partnership as a form of business organization, is often credited to the Romans. They found in this form of business organization a means whereby the capital, goods, talents, and credit of two or more individuals might best be combined to carry on a trade or business. Such trade or business might well have been, and frequently, was too large an undertaking for a single individual. 1

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(a) Historically, the partnership as a business organization was used long before the Romans. As early as 2300 B.C., Hammurabi, the famous king of Babylon, in his compilation of the system of laws of that time, provided for the regulation of the relation called partnership. Commercial partnerships of that time were generally for single transactions or undertakings. (b) Following the Babylonian period, we find clear-cut references to partnerships in Jewish law. In this connection, however, it must be remembered that the ancient Jews were a pastoral people, and, therefore, the partnership as a business organization under Jewish law was concerned with the holding of title to land by two or more persons. The Jewish word “shutolin” was used to designate this joint ownership of land. Subsequently, this same word was used to denote the partnership relation. (3) The relative newness of the law of partnership.1 — The partnership as a form of business organization has had a very long history of use. This would suggest that there would be a correspondingly long line of precedents and decisions dealing with this subject. Such is not the case. The explanation for this situation is both clear and understandable. For at least a century after the partnership as a business organization had been well and generally established in British commerce, the English courts of justice had scarcely dealt with this subject. The fact is that disputes between merchants were considered and disposed of by special courts.

1 Blackstone’s commentaries on the law which first appeared in 1765, do not contain any discussion on business partnerships. The fact is that partnerships did not have an early start in England. They began in the trading nations of Holland and Italy. The English law of partnerships is an ill-assimilated mixture of Roman Law, of the Law of Merchants, and of the Common Law of England. (Charles W. Gerstenberg, “Organization and Control” [1919], 3 Modern Business, p. 36.) One should not be surprised to learn, therefore, that the development of the law of partnership in England and the United States, was accompanied with so much confusion and uncertainty that demands for statutory uniformity arose. The result in England was Act of 1800, and in the United States, the Uniform Partnership Act and the Uniform Limited Partnership Act. (Wyatt & Wyatt, Business Law Principles and Cases [1963], p. 597.)

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These special courts were commonly known as Courts Staple, Admiralty Courts, and Courts of Piepoudre. (a) The law of merchants. — This subheading might well be taken to indicate that merchants had a special and peculiar kind of law that was applicable to them and their legal affairs. In fact, such was the case during the Middle Ages. During this time, there were numerous periods of rather intense commercial activity. In England, this activity was centered on so-called fairs or staples at which were gathered merchants from many countries seeking to sell their goods. Partnerships flourished during these periods of activity. During this same period, the common law courts of England were thought to be celebrated for their slowness and their methodical exactness of form. The merchants moved more rapidly than the law and they required that justice be more speedy and that it be in general accord with their customs. This background and need gave rise to the special courts mentioned above. (b) English law of partnership. — In time, the use of these special courts was discontinued and their functions were taken over by the law courts. During his term as Chief Justice, Lord Mansfield sought to establish a common law for commercial matters. His efforts were directed toward establishing and defining the customs of merchants and supplementing this body of law with the applicable principles of the civil law. It was not until the latter years of the 18th century that the law of partnership as we know it today began to assume both form and substance. In 1778, Lord Mansfield decided the case of Fox vs. Hanbury (2 Cowp. 445, 98 Eng. Rep. 1179 [1776].) which dealt with the relative rights of partners as well as the rights of partnership and separate creditors so far as partnership property was concerned. In 1794, William Watson wrote a text on the subject of partnership. (William Watson, Partnership, London [1794].) (c) Beginning of law of partnership. — These two sources, speaking most generally, may be said to mark the beginning

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of printed precedents and the publication of the principles of law applicable to partnerships. The increased use of the partnership as a business organization, together with the increase in the complexity of business, generally has brought forth a rapid succession of decisions involving the law of partnerships. (4) American Uniform Acts. — As in the case of sales and negotiable instruments, an attempt has been made to secure uniformity in the United States of state laws dealing with partnership. The Uniform Partnership Act and the Uniform Limited Partnership Act have been of the utmost importance in helping to achieve uniformity of decisions in this particular field of law. The National Conference of Commissioners on Uniform State Laws first commenced its work in the field of partnership in 1902. It was not until the fall of 1914 that the Conference finally agreed upon a draft of a Uniform Partnership Act that was recommended to the legislative bodies of the several states for adoption. The Commissioners’ Prefatory note is quoted in part: “It is, however, proper here to emphasize the fact that there are other reasons in addition to the advantages which will result from uniformity x x x. There is probably no other subject connected with our business law in which greater instances can be found where, in matters of daily occurrence, the law is uncertain. This uncertainty is due not only to conflict between the decisions of different states but more to the general lack of consistency in legal theory, x x x making the actual administration of the law difficult and often inequitable. Another difficulty of the present partnership law is the scarcity of authority of matters of considerable importance in the daily conduct and in the winding up of partnership affairs. In any one state, it is often impossible to find an authority on a matter of comparatively frequent occurrence, while not infrequently, an exhaustive research of the reports of the decisions of all the states and the federal courts fails to reveal a single authority throwing light on the question.”

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The Uniform Partnership Act that was approved for adoption by the several states in October of 1914 has many points of similarity with the Partnership Act (English) of 1890. For this reason, the practical operation of the Uniform Partnership Act has a background of application in the workings of the English Act. (see Barrett & Seago, Partners and Partnership Law and Taxation, Vol. 1, pp. 1-17.) To be sure, English settlers brought the partnership concept to their new country as part of the common law. In fine, modern partnership law may be said to contain a combination of principles and concepts developed from three sources: the Roman law, the law merchant and equity, and the common law courts. Governing law in our jurisdiction. Before the new Civil Code (R.A. No. 386.) took effect on August 30, 1950 (Lara vs. del Rosario, 94 Phil. 778; Aznar vs. Garcia, 102 Phil. 1055.), commercial or mercantile partnerships were governed by the Code of Commerce (Arts. 116-238.) and non-commercial or civil partnerships by the old Spanish Civil Code. (Arts. 1665-1708.) The new Civil Code superseded the old Civil Code. It expressly repealed in toto the provisions of the Code of Commerce relating to partnerships. (Art.* 2270[2].) Consequently, the provisions of Title IX, from Article 1767 to Article 1867, are intended to provide all the rules regarding partnerships, supplemented by other provisions of the Civil Code, insofar as they are applicable, particularly those on contracts and agency. There is no more distinction between commercial and civil partnerships. The partnerships contemplated are those formed for private interest or purpose. (Art. 45, last par.) Sources of our law on partnership. The Civil Code provisions on partnership were mostly taken, with or without modifications, from the old Civil Code and from *Unless otherwise indicated, refers to article in the Civil Code.

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two American statutes, namely: the Uniform Partnership Act and the Uniform Limited Partnership Act. In regard to the adoption of provisions of the Uniform Partnership Act and the Uniform Limited Partnership Act, the Code Commission which drafted the new Civil Code, has this to say: “Rules from these two Uniform Acts have been incorporated into the proposed Civil Code because there are numerous gaps in our present law on these two subjects. Moreover, these American statutes are more in keeping with modern business practices. (Report of the Code Commission, p. 67.) New rules were adopted from the Uniform Partnership Act (i.e., Arts. 1769, 1774, 1785, 1787, 1805 to 1807, 1809, 1810 to 1814, 1819 to 1826) and from the opinions of civilians (i.e., Arts. 1789, 1791). Some provisions were taken from the Code of Commerce. (Arts. 1789, 1808.) New Rules were also formulated by the Commission (i.e., Arts. 1768, 1770, par. 2, 1772, 1790, 1815.) Many provisions were amended for clarification or improvement.” (Ibid., p. 149.) — oOo —

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Chapter 1 GENERAL PROVISIONS ARTICLE 1767. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, with the intention of dividing the profits among themselves. Two or more persons may also form a partnership for the exercise of a profession. (1665a) Concept of partnership. The above article gives the legal definition of partnership (often called “co-partnership”) from the viewpoint of a contract. There are, however, other definitions. Thus: (1) “A partnership is a contract of two or more competent persons to place their money, effects, labor and skill, or some or all of them, in lawful commerce or business and to divide the profits and bear the losses in certain proportions.” (40 Am. Jur. 126, 474; 68 C.J.S. 398.) (2) “A partnership is an association of two or more persons to carry on as co-owners of a business for profit.” (Uniform Partnership Act, Sec. 6.) (3) “A partnership is a legal relation based upon the express or implied agreement of two or more competent persons whereby they unite their property, labor or skill in carrying on some lawful business as principals for their joint profit.” (Mechem, Elements of the Law of Partnership [1923], p. 1.) (4) “A partnership is the status arising out of a contract entered into by two or more persons whereby they agree to share as common owners the profits of a business carried on by all or 7

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Art. 1767

any of them on behalf of all of them.” (31 Words and Phrases [1957 ed.], p. 291.) (5) “A partnership is an organization for production of income to which each partner contributes one or both of the ingredients of income, which are capital or service.” (Ibid., p. 292.) (6) “A partnership is an entity, distinct and apart from the members composing it, and, for the purpose of which it was created, it is a person having its own assets and liabilities and any benefit or liability attaching to a member of the partnership, results from the partnership relation.” (Ibid., p. 293.) (7) “A partnership is a joint undertaking to share in the profit and loss.” (Eastman vs. Clark, 53 N.H. 276, 16 Am. Rep. 192.) Partnership is a legal concept, but the determination of the existence of a partnership may involve inferences drawn from an analysis of all the circumstances attending its creation and operation. (68 C.J.S. 399; see Art. 1769.) As a form of business organization, it falls between two extremes of organizational form — the single proprietorship and the corporation. Civil law concept and American concept of partnership distinguished. (1) Basis of concept. — While the Civil Code speaks of a partnership as a contract, the American concept of a partnership is that of a relation. The difference, however, is more apparent than real, because Article 1767 considers the term as the agreement itself out of which a partnership is created, while the Anglo-American idea of partnership is based on the result of the contract or agreement of the parties creating the partnership, that is, the juridical relation growing out from the express or implied agreement of the parties to create a partnership. (Phil. Law of Partnerships, by A. Espiritu and E. Sibal [1937], p. 2.) (2) Possession of separate personality. — It is a basic tenet of the Spanish and Philippine law that a partnership has a juridical personality of its own, distinct and separate from that of each of the partners. (Art. 1768.) The American and English law does not recognize such separate juridical personality (Commissioner of Internal Revenue vs. Suter and Court of Tax Appeals, 27 SCRA

Art. 1767

GENERAL PROVISIONS

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152 [1969].), a partnership being considered merely an extension of its members, although some states of the Union classify the partnership as a legal entity. The Uniform Partnership Act has in this respect codified the “aggregate theory” of partnership more than it has the “entity theory” or Roman Law theory of partnership.1 Unlike a corporation, a partnership is generally regarded as a conglomerate of individuals, “an association of two or more persons”2 and as such does not pay federal or state income taxes (although for purposes of information it is required to file a partnership tax return). The individual members of the partnership severally pay their income taxes, the partnership business being regarded merely as a source of income. (L. Teller, Law of Partnerships, 1949 ed., p. 6.) In our jurisdiction, partnerships, except general professional partnerships, are treated for income tax purposes as corporations and subject to tax as such. (Secs. 20[b], 24[a], Pres. Decree No. 1158 [National Internal Revenue Code], as amended.) General professional partnership. Paragraph 2 relates to the exercise of a profession. A profession has been defined as “a group of men pursuing a learned art as a common calling in the spirit of public service — no less a public service because it may incidentally be a means of livelihood.” (In the Matter of the Petition for Authority to Continue Use of Firm Name “Sycip, Salazar, etc.’’/”Ozaeta, Romulo, etc.,” 92 SCRA 1 [1979], citing Dean Pound.) Strictly speaking, the practice of a profession is not a business or an enterprise for profit. However, the law allows the joint pursuit thereof by two or more persons as partners.3 (see Art. At common law, a partner could maintain no action against his partnership at law. Since a partnership is conceived as an aggregate of individuals, rather than an entity existing apart from its individual members, a partner by suing a partnership of which he is a member, would be suing himself, and a judgment could not possibly be obtained both in behalf of and against a person at the same time. (L. Teller, op. cit., p. 81.) 2 The contracting parties are called “partners” and the association is called “firm.” 3 For tax purposes, the National Internal Revenue Code (Sec. 20[b], Pres. Decree No. 1158, as amended.) defines general professional partnerships as those “formed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any trade or business.’’ 1

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1783.) In such case, it is the individual partners, and not the partnership, who engage in the practice of the profession and are responsible for their own acts as such. The law does not allow individuals to practice a profession as a corporate entity. Personal qualifications for such practice cannot be possessed by a corporation. Partnership for the practice of law. (1) A mere association for non-business purpose. — The right to practice law is not a natural or constitutional right but is in the nature of a privilege or franchise. A partnership for the practice of law cannot be likened to partnerships formed by other professionals or for business.4 It is not a partnership formed for the purpose of carrying on (33) Partnership Names. — Partnerships among lawyers for the practice of their profession are very common and are not to be condemned. In the formation of partnerships and the use of partnership names, care should be taken not to violate any law, custom, or rule of court locally applicable. Where partnerships are formed between lawyers who are not all admitted to practice in the courts of the state, care should be taken to avoid any misleading name or representation which would create a false impression as to the professional position or privileges of the member not locally admitted. In the formation of partnerships for the practice of law, no person should be admitted or held out as a practitioner or member who is not a member of the legal profession duly authorized to practice, and amenable to professional discipline. In the selection and use of a firm name, no false, misleading, assumed, or trade names should be used. The continued use of the name of a deceased or former partner, when permissible by local custom, is not unethical but care should be taken that no imposition or deception is practiced through this use. When a member of the firm, on becoming a judge, is precluded from practicing law, his name should not be continued in the firm name. Partnerships between lawyers and members of other profession or non-professional persons should not be formed or permitted where any part of the partnership’s employment consists of the practice of law. (Canons of Professional Ethics.) Note: The Code of Ethics which was adopted by the American Bar Association in 1908, was also adopted by the Philippine Bar Association in 1917 (Canons 1 to 32) and in 1946 (Canons 33 to 47). In the cited case of “SyCip, Salazar, etc.,’’ the Supreme Court ruled that “in the Philippines, no local custom permits or allows the continued use of a deceased or former partner’s name in the firm names of law partnership.’’ Even if such custom is proven, it cannot prevail against “its Resolution directing lawyers to desist from including the names of deceased partners in their firm designation. This is not to speak of our civil law (Art. 1830.) which clearly ordains that a partnership is dissolved by the death of any partner.’’...