PARTNERSHIP VS PARTNERSHIP BY ESTOPPEL

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.
Application of principles of estoppel. A
partnership liability may be imposed upon a
person under principles of estoppel where he
holds himself out, or permits himself to be held
out, as a partner in an enterprise. (see Art. 1825.)
In such cases, there is no actual or legal
partnership relation but merely a partnership
liability imposed by law in favor of third persons.
(40 Am. Jur. 137; see Art. 1825.)
A partnership may be created without any
definite intention to create it. It is the substance
and not the name of the arrangement, which
determines the legal relationship, although the
designation adopted by the parties should be
considered as indicative of their intention. (68
C.J.S. 415-417.) In case there is no written
agreement between the parties, the existence or
non-existence of a partnership must be
determined from the conduct of the parties, any
documentary evidence bearing thereon, and the
testimony of the parties. (Greenstone vs. Clar.
[Misc.], 69 N.Y.S.[2d] 548 [1947], cited in Barrett
& Seago, p. 461.)
Partnership by estoppel. A partnership can
never exist as to third persons if no contract of
partnership, express or implied, has been entered
into between the parties themselves. (see Art.
1834, last par.) The exception refers to
partnership by estoppel. Thus, where persons by
their acts, consent, or representations have
misled third persons or parties into believing that
the former are partners in a non-existing
partnership, such persons become subject to
liabilities of partners to all who, in good faith, deal
with them in their apparent relations. This liability
is predicated on the doctrine of estoppel provided
for in Article 1825.
EXAMPLE:
If A and B are not partners as to each other,
neither will they be partners with respect to C, a
third person. But if A, with the consent of B,
represents to C that they are partners, then A and
B will be considered partners as to C even if they
are not really partners.
Partnership by Estoppel
Arises when a person by any means represents
himself or consents to another representing him

to anyone, as partner in an existing partnership,

or with one or more persons not actual partners;
he is liable to any such person to whom such
representation has been made, who has, on the
faith of such representation given credit to the
actual or apparent partnership. (Art. 1825)
Partner by Estoppel
A person not a partner may become a partner by
estoppel and thus liable to third persons as if he
was a partner when by words or by conduct he:
1. Directly represents himself to anyone as a
partner in a non-existing partnership (with
one or more persons not actual partners);
or
2. Indirectly represents himself by
consenting to another representing him as
a partnership in an existing partnership or
a non-existing partnership.
CHARGING ORDER
Art. 1814. Without prejudice to the
preferred rights of partnership creditors
under article 1827, on due application to a
competent court by any judgment creditor
of a partner, the court which entered the
judgment, or any other court, may charge
interest of the debtor partner with payment
of the unsatisfied amount of such judgment
debt with interest thereon; and may then or
later appoint a receiver of his share of the
profits, and of any other money due or to
fall due to him in respect of the
partnership, and make all other orders,
directions, and accounts and inquiries
which the debtor partner might have made,
or which circumstances of the case may
require.
The interest charged may be redeemed at
any time before the foreclosure, or in case
of sale being directed by the court, may be
purchased without thereby causing a
dissolution:
(1) With separate property, by any one
or more of the partners; or
(2) With partnership property, by any
one or more of th partners with the
consent of all the partners whose
interest are not so charged or sold.
Nothing in this Title shall be held to
deprive a partner of his right if any,
under the exemption laws, as regards
his interest in the partnership. (n)
Application for a charging order after securing
judgment on his credit. While a separate
creditor of a partner cannot attach or levy upon
specific partnership property for the satisfaction
of his credit (Art. 1811[3].) because the
partnership assets are reserved for partnership

creditors (Art. 1827), he can secure a judgment

on his credit and then apply to the proper court
for a charging order, subjecting the interest of
the debtor partner in the partnership (Art. 1812)
with the payment of the unsatisfied amount of
such judgment with interest thereon with the
least interference with the partnership business
and the rights of the other partners. By virtue of
the charging order, any amount or portion thereof
which the partnership would otherwise pay the
debtor-partner should instead be given to the
judgment creditor.
This remedy, however, without prejudice
to the preferred rights of partnership creditors
under Article 1827. It means that the claims of
partnership creditors must be satisfied first
before the separate creditors of the partners can
be paid out of the interest charged. (See Art.
1839[8])
Availability of other remedies. In providing for
the charging order above described, Article 1814
seems to have made this an exclusive remedy so
that a writ of execution will not be proper. The
court may resort to other courses of action
provided in Article 1814 (i.e., appointment of
receiver, sale of the interest, etc.) if the judgment
debt remains unsatisfied, notwithstanding the
issuance of the charging order.
A similar procedure is established by
Article 1862 as to private creditors of a limited
partner.
Example:
T recovers a judgment against A, a
member of partnership X composed of A and B,
on As individual liability.
May T attach any portion of the
partnership property or execute the same?
No. Ts remedy is to apply or a charging
order against the partnership. No specific
property is attached. The partnership continues
and Ts judgment is satisfied out of partnership
assets. The partnership need not be necessarily
dissolved.
LUCRUM CESSANS
This legal term comes from Latin. Literally it
means ceased profits. In the Tort law, it refers
to the awarded damages and the missed benefits
from the non-used and damaged item. For
example, a buyer of off-plan property invests
their money, but then the developer fails to
construct the property and demolishes it instead.
So in such a case the buyer is legally entitled to
claim lucrum cessans, in other words the
financial loses he met and the benefits he missed
because of the impossibility to use the property
after the agreed deadlines of completion.

DELECTUS PERSONAE
Partnerhsip relation fiduciary in nature.
Partnership is a form of voluntary association
entered into by the associates. It is a personal
relation in which the element of delectus
personae exists, involving as it does trust and
confidence between the partners.
Delectus Personae this latin phrase, sometimes
written delectus personarum which is the plural
of the phrase, may be literally translated choice
of the person or choise of the persons. It is
because of this delectus personae that the law
gives such wide authority to one partner, to bind
another by contract or otherwise. It is so
unnatural that one party should give another
wide authority to make contracts, incur
obligations, possibly commit binding torts, pledge
personal credit, without first ascertaining the
character of that individual. Where such choice of
person is lacking, the law presumes a lack of
partnership.
This element of delectus personae,
however, is true only in the case of a general
partner, but not as regards a limited partner. (see
Art. 1866.)
DISSOLUTION
When a partnership ends it involves three stages:
1. Dissolution
Change in the relation of the partners
caused by any partner ceasing to be
associated in carrying on the business.
Not automatically terminate legal
personality
Dissolution does not automatically result
in the termination of the legal personality
of the partnership, nor the relations of the
partners among themselves who remain
as co-partners until the partnership is
terminatied.
Partnership still exists
The partnership, although dissolved
continues to exist until its termination, at
which time the winding up of its affairs
should have been completed and the net
partnership assets are partitioned and
distributed to the partners.
2. Winding Up
Process of settling the partnership
business or affairs after dissolution.
Illustration:
a. Collection and distribution of assets
b. Payment of debts

c. Determination of the value of each

partners interest in the partnership.
3. Termination
Point in time when all partnership affairs
are wound up or completed and is the end
of the partnership life.
Lim Tong Lim v. Philippine Fishing Gear Industries
Inc.

Business Organization Partnership, Agency, Trust

Corporation by Estoppel
It was established that Lim Tong Lim requested Peter Yao to
engage in commercial fishing with him and one Antonio Chua.
The three agreed to purchase two fishing boats but since they
do not have the money they borrowed from one Jesus Lim
(brother of Lim Tong Lim). They again borrowed money and
they agreed to purchase fishing nets and other fishing
equipments. Now, Yao and Chua represented themselves as
acting in behalf of Ocean Quest Fishing Corporation
(OQFC) they contracted with Philippine Fishing Gear
Industries (PFGI) for the purchase of fishing nets amounting
to more than P500k.
They were however unable to pay PFGI and so they were sued
in their own names because apparently OQFC is a nonexistent corporation. Chua admitted liability and asked for
some time to pay. Yao waived his rights. Lim Tong Lim
however argued that hes not liable because he was not aware
that Chua and Yao represented themselves as a corporation;
that the two acted without his knowledge and consent.

ISSUE: Whether or not Lim Tong Lim is liable.

HELD: Yes. From the factual findings of both lower courts, it

is clear that Chua, Yao and Lim had decided to engage in a
fishing business, which they started by buying boats worth
P3.35 million, financed by a loan secured from Jesus Lim. In
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 them the excess or loss.
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 shows that they had indeed formed a
partnership.
Lim Tong Lim cannot argue that the principle of corporation
by estoppels can only be imputed to Yao and Chua.
Unquestionably, Lim Tong Lim benefited from the use of the
nets found in his boats, the boat which has earlier been proven
to be an asset of the partnership. Lim, Chua and Yao decided
to form a corporation. Although it was never legally formed
for unknown reasons, this fact alone does not preclude the
liabilities of the three as contracting parties in representation
of it. Clearly, under the law on estoppel, those acting on behalf
of a corporation and those benefited by it, knowing it to be
without valid existence, are held liable as general partners.