Classification of Partnership
Classification of Partnership
Classification of Partnership
ART. 1828. The dissolution of a partnership is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding up of the business. (n)
Article 1830. Dissolution is caused:
1. Without violation of the agreement between the partners:
a. By the termination of the definite term or particular undertaking specified in the agreement;
b. By the express will of any partner, who must act in good faith, when no definite term or
particular is specified;
c. By the express will of all the partners who have not assigned their interests or suffered them to
be charged for their separate debts, either before or after the termination of any specified term
or particular undertaking;
d. By the expulsion of any partner from the business bona fide in accordance with such a power
conferred by the agreement between the partners;
2. In contravention of the agreement between the partners, where the circumstances do not permit a
dissolution under any other provision of this article, by the express will of any partner at any time;
3. By any event which makes it unlawful for the business of the partnership to be carried on or for the
members to carry it on in partnership;
4. When a specific thing which a partner had promised to contribute to the partnership, perishes before
the delivery; in any case by the loss of the thing, when the partner who contributed it having reserved
the ownership thereof, has only transferred to the partnership the use or enjoyment of the same; but the
partnership shall not be dissolved by the loss of the thing when it occurs after the partnership has
acquired the ownership thereof;
5. By the death of any partner;
6. By the insolvency of any partner or of the partnership;
7. By the civil interdiction of any partner;
8. By decree of court under the following article. (1700a and 1701a)
(2) By the express will of any partner. — A partnership at will, regardless of whether the business is
profitable or unprofitable, may be dissolved at any time by any partner without the consent of his co-
partners without breach of contract, provided, the said partner acts in good faith. Here, each partner
has both the power and the right to terminate the relation at any time. If there is bad faith, the
dissolution is wrongful.
o (a) The existence of good faith will absolve the partner exercising the right to dissolve the
partnership from liability for damages which result to his co-partners by reason of his action.
(68 C.J.S. 844.) In a case, where the withdrawal of a partner has been spurred by “interpersonal
confl ict’’ among the partners, it would not be right to let any of the partners remain in the
partnership under such an atmosphere of animosity and, certainly, not against their will.
Indeed, for as long as the reason for withdrawal of a partner is not contrary to the dictates of
justice and fairness, nor for the purpose of unduly causing harm and damage upon the
partnership, bad faith cannot be said to characterize the act. In the context used in the law, bad
faith is no different from its normal concept of a conscious and intentional design to do a
wrongful act for a dishonest purpose or moral obliquity. (Ortega vs. Court of Appeals, 245
SCRA 529 [1995].)
o (b) While the attendance of bad faith cannot prevent the dissolution of a partnership, it can
result in liability for damages. (Ibid.) The guilty partner would be liable for wrongful
dissolution as provided in Article 1837.
o (c) A violation of the partnership agreement by the exclusion of a partner from participation in
the management of the business of the fi rm has been held to give the excluded partner the right
to declare the partnership dissolved. (68 C.J.S. 844.)
o (d) The partner who breaks off the partnership with an unfair design, or for selfish objects,
discharges his copartners from all liabilities to him but he does not thereby free himself from his
obligations to them. When he quits the partnership that he may buy for himself what the
partnership has a right to purchase, or that he may make a profit for his own advantage and to
their prejudice, he is answerable to the partnership for the loss and damage; and so, if he quits
at an unreasonable time, which occasioned a deprivation of profi t to the partnership, it is but
right that he should repair and make good such loss. (Howell vs. Harvey, 39 Am. Dec. 37.)
(4) By expulsion of any partner. — The expulsion has the effect of decreasing the number of the
partners, hence, the dissolution. The expulsion must be made in good faith, and strictly in accordance
with the power conferred by the agreement between the partners. This power may be vested in one
partner exclusively. The partner expelled in bad faith can claim damages.
Loss of specific thing. This provision of Article 1830 refers only to specific things. When the thing to be
contributed is not specific, Articles 1786 (par. 1.) and 1788 shall govern.
o (1) Loss before delivery. — If the specific thing to be contributed by a partner is lost before
delivery, the partnership is dissolved because there is no contribution inasmuch as the thing to
be contributed cannot be substituted with another. There is here a failure of a partner to fulfill
his part of the obligation.
o (2) Loss after delivery. — If the loss occurred after the delivery of the thing promised, then the
partnership is not dissolved, but it assumes the loss of the thing having acquired ownership
thereof. The partners may contribute additional capital to save the venture. (see Art. 1791.)
o (3) Loss where only use or enjoyment contributed. — If only the use or enjoyment of the thing is
contributed, the partner having reserved the ownership thereof, the loss of the same before or
after delivery dissolves the partnership because in either case, the partner cannot fulfill his
undertaking to make available the use of the specific thing contributed. Here, the partner bears
the loss and, therefore, he is considered in default with respect to his contribution. (Art. 1795,
par. 1.) Upon dissolution, the partners may demand for an accounting and liquidation.
The mere failure by a partner to contribute his share of capital pursuant to an agreement to
form a partnership does not prevent the existence of a firm. (see Art. 1786.) Such failure may be
waived by the other parties to the agreement. (68 C.J.S. 414.)
Death of any partner. The deceased partner ceases to be associated in the carrying of the business;
hence, the ipso facto dissolution of the partnership by his death by operation of law. The surviving
partners have no authority to continue the business except so far as is necessary to wind up (see Art.
1836.) except as provided in Article 1833. (see Art. 1840[3].)
o (1) Status of partnership. — The subsequent legal status of a partnership dissolved by the death
of a partner is that of a partnership in liquidation, and the only rights inherited by the heirs are
those resulting from the said liquidation in favor of the deceased partner, and nothing more.
Before this liquidation is made, it is impossible to determine what rights or interests, if any, the
deceased partner had. (Bearneza vs. Dequilla, 43 Phil. 237 [1922].)
o (2) Liquidation of its affairs. — The liquidation of its affairs is by law entrusted to the surviving
partners, or to liquidators appointed by them and not to the administrator or executor of the
deceased partner. (Guidote vs. Borja, 53 Phil. 900 [1929]; Lota vs. Tolentino, 90 Phil. 829 [1952].)
o (3) Continuation of business without liquidation. — A clause in the articles of co-partnership
providing for the continuation of the fi rm notwithstanding the death of one of the partners is
legal. (Goquiolay vs. Sycip, 108 Phil. 947 [1960].)
A view has been expressed that the death of one of the partners does not ipso facto dissolve the
partnership when, by common agreement, the surviving partners and the heirs of the deceased
decide to continue, the said agreement being in such case considered as a continuation of the
original contract of partnership.5 (Espiritu and Sibal, op. cit., p. 245, citing 11 Manresa 407-408.)
In such a case, however, there is a dissolution of the partnership without winding up, and a
continuance of the business of the dissolved partnership by a new partnership, of which the
surviving partners and the heirs of the deceased or executors are the members becoming liable
as the old to the creditors of the fi rm. (see Art. 1840[3].)
It will be seen from the foregoing that it is possible to continue a partnership (actually, a new
one) after the death of a partner, thereby increasing the usefulness of the partnership device,
and decreasing its disadvantage as compared with the corporate firm. (see Teller, op. cit., p. 88.)
Insolvency of any partner or of partnership. The insolvency of the partner or of the partnership must
be adjudged by a court.
o (1) The insolvency of a partner subjects his interest in the partnership to the right of his creditors
(see Art. 1814.) and makes it impossible for him to satisfy with his property partnership
obligations to its creditors in the event that partnership assets have been exhausted. (see Art.
1816.) Thus, by his insolvency, its credit is impaired. An insolvent partner has no authority to
act for the partnership nor the other partners to act for him. (Art. 1833.)
o (2) The insolvency of the partnership renders its property in the hands of the partners liable for
the satisfaction of partnership obligations resulting in their inability to continue the business,
which practically amounts to a dissolution. But the reconveyance by the assignee of the
properties of the partnership pursuant to an order of the court after the termination of
insolvency proceedings involving the partnership has the effect of restoring the partnership to
its status quo. (Ng Cho Cio vs. Ng Diong, 1 SCRA 275 [1961].)
Civil interdiction of any partner. A partnership requires the capacity of the partners. A person under
civil interdiction (or civil death) cannot validly give consent (Art. 1327.), as his capacity to act is limited
thereby. (Art. 38.) Civil interdiction deprives the offender during the time of his sentence of the right to
manage his property and dispose of such property by any act or any conveyance inter vivos. (Art. 34,
Revised Penal Code.) Surely, one who is without capacity to manage his own property should not be
allowed to manage partnership property.
Article 1831. On application by or for a partner the court shall decree a dissolution whenever:
1. A partner has been declared insane in any judicial proceeding or is shown to be of unsound mind;
2. A partner becomes in any other way incapable of performing his part of the partnership contract;
3. A partner has been guilty of such conduct as tends to affect prejudicially the carrying on of the
business;
4. A partner wilfully or persistently commits a breach of the partnership agreement, or otherwise so
conducts himself in matters relating to the partnership business that it is not reasonably practicable to
carry on the business in partnership with him;
5. The business of the partnership can only be carried on at a loss;
6. Other circumstances render a dissolution equitable.
On the application of the purchaser of a partner's interest under article 1813 or 1814:
1. After the termination of the specified term or particular undertaking;
2. At any time if the partnership was a partnership at will when the interest was assigned or when the
charging order was issued. (n)
Grounds for dissolution by decree of court. Dissolution of a partnership may be decreed judicially on
application, either by a partner in the cases mentioned in paragraph 1, Nos. 1-6; or (2) by the purchaser or
assignee of a partner’s interest under paragraph 2, Nos. 1 and 2.
1. On application by a partner:
a. Insanity. — The partner may have been previously declared insane in a judicial proceeding;
otherwise, the fact of his being of unsound mind must be duly proved. An insane person is
incapacitated to enter into a contract. (Art. 1327[2].) The insanity must materially affect the
capacity of the partner to perform his contractual duties as a partner.
b. Incapacity. — Obviously, this refers to incapacity other than insanity. Independent of any
express stipulation, a partner impliedly undertakes to advance the success of the partnership of
which he is a member by devoting to it, within reasonable limits, his time, effort, and ability.
His co-partners are entitled to his contribution and if, for any reason, he fails to fulfill his duties
they are thereby deprived, in greater or less degree, according to the extent of his failure, of the
benefits of the contract which they have made, and of the fruits thereof to which they are
legitimately entitled. Hence, the rule that courts have the power to decree dissolution of a
partnership because of incapacity of a partner which materially affects his ability to discharge
the duties imposed by his partnership contract. (Barclay vs. Barrie, 102 N.E. 102.)
However, it is not the mere fact of the existence of insanity, infirmity, or other disability
supervening that will justify a court to decree a dissolution. The incapacity contemplated by law
is incapacity which is lasting, from which the prospect of recovery is remote. If the disability be
of a temporary nature, if it be merely an occasional malady or accidental illness, if there be a fair
prospect of recovery within a reasonable time, then, and in such cases, there is no fi t ground to
decree a dissolution, for every partnership must be presumed to be entered into, subject to the
common incidents of life such as temporary illness, infi rmity, or insanity. (Ibid., citing Story on
Partnership, Sec. 297.)
c. Misconduct and persistent breach of partnership agreement. — Like incapacity, conduct
prejudicial to the carrying on of the business (e.g., inveterate drunkenness) and persistent
breach of the partnership agreement (e.g., keeping and rendering false accounts, misuse or
misappropriation of partnership funds) are grounds for judicial dissolution, for they defeat and
materially affect and obstruct the purpose of the partnership.
Temporary grievances, discourtesies, disagreements, or mistakes of judgments that involve no
permanent mischief or injury will not suffice as the basis for a judicial decree of dissolution.
But courts may order the dissolution of a partnership where the quarrels and disagreements are
of such a nature and to such extent that all confidence and cooperation between the parties have
been destroyed, or where one of the parties, by his misbehaviour, materially hinders a proper
conduct of the partnership business. It is not only large affairs which produce trouble. The
continuance of overbearing and vexatious petty treatment of one partner by another frequently
is more serious in its disruptive character than would be larger differences which would be
discussed and settled. For the purpose of demonstrating his own preeminence in the business,
one partner cannot constantly minimize and depreciate the importance of the other without
undermining the basic status upon which a successful partnership rests. (Owen vs. Owen, 119
P. 2d 713.)
Where a partner is guilty of serious misconduct, the only remedy ordinarily available to co-
partners is to apply to the court for dissolution. But the partnership agreement may expressly
confer the power to expel a partner under specified conditions. (see Art. 1830[1, d].) When this
power is exercised in good faith, it causes dissolution (without violation of the partnership
agreement) although no suit has been instituted to that end. (Babb & Martin, op. cit., pp. 259-
260.)
d. Business can be carried on only at a loss. — Since the purpose of a partnership is the carrying
of a business for profit, it may be dissolved by decree of court when it becomes apparent that it
is unprofitable with no reasonable prospects of success.
Where a partnership had lost all its capital, or had become insolvent, or that the enterprise for
which it had been organized had been concluded or utterly abandoned, a provision in the
articles of partnership prohibiting the dissolution of the partnership except by the consent and
agreement of two-thirds of its partners, can in no wise limit or restrict the right of a less number
of the partners to effect a dissolution of the partnership through judicial intervention or
otherwise. It would be absurd and unreasonable to hold that such an association could never be
dissolved and liquidated without the consent and agreement of two-thirds of all the partners.
(Lichauco vs. Lichauco, 33 Phil. 350 [1916].)
A court is authorized to decree a dissolution notwithstanding that the partnership has been
making profits where it appears at the time of the application that the business can only be
carried on at a loss.
e. Other circumstances. — Examples of circumstances which render a dissolution equitable are
abandonment of the business, fraud in the management of the business, refusal without
justifiable cause to render accounting of partnership affairs, etc. In a case, it was held that the
sale of all real property (lots) of a partnership did not work the dissolution of the fi rm which
was left without the real property it originally had because the fi rm was not organized to
exploit the lots sold but to engage in buying and selling real estate, and “in general real estate
agency, and brokerage business.” (Goquiolay vs. Sycip, 108 Phil. 984 [1960].)
2. On application by a purchaser of a partner’s interest. — In either of the two cases mentioned in the
last paragraph, a purchaser of a partner’s interest under Article 1813 or 1814 may apply for judicial
dissolution of a partnership.
o Note that the rule in Article 1831 (par. 2[2].) applies only if in continuing the business, a
partnership at will is created, or the partnership is a partnership at will from the beginning.