Muñasque vs. Court of Appeals

Partners are solidarily liable to third persons who, in good faith, relied upon the apparent authority of a partner, when the partner's wrongful act or misapplication of partnership funds falls under Articles 1822 or 1823 of the Civil Code, notwithstanding the general pro rata liability rule under Article 1816.

Muñasque and Galan organized a construction partnership under the name "Galan and Associates" (also referred to as "Galan and Muñasque"), which contracted with Tropical Commercial Company for the renovation of Tropical's Cebu branch building. The partnership obtained construction materials on credit from Cebu Southern Hardware Company and Blue Diamond Glass Palace, both of which were later allowed to intervene in the litigation. A dispute arose between the partners over the handling of progress payments from Tropical, leading Muñasque to deny the partnership's existence and seek exclusion from partnership liabilities to the creditor-intervenors.

On December 20, 1966, Muñasque, on behalf of the partnership "Galan and Muñasque" as Contractor, entered into a written contract with Tropical Commercial Co., Inc. for the renovation of Tropical's Cebu branch building. The contract, titled in its first paragraph as an agreement "by Galan and Muñasque hereinafter called the Contractor," called for a total payment of ₱25,000.00 for the entire services, with thirty percent (₱7,000.00) due upon signing and the balance divided into three equal installments of ₱6,000.00 every fifteen working days. The partnership operated under the duly registered name "Galan and Associates," under which a permit to do construction business had been issued by the Mayor of Cebu City.

The first payment of ₱7,000.00 was made by Tropical in the form of a check in Muñasque's name. Muñasque indorsed the check in favor of Galan, ostensibly to enable the latter to deposit it and pay for materials and labor used in the project. According to Muñasque, Galan spent ₱6,183.37 of the ₱7,000.00 for his personal use. When the second check for ₱6,000.00 came due on January 26, 1967, Galan asked Muñasque to indorse it again, but Muñasque refused. Galan informed Tropical's Cebu branch that there was a "misunderstanding" between him and Muñasque, and Tropical, through its Cebu Branch Manager Ramon Pons, changed the payee's name on the second check from Muñasque to "Galan and Associates," enabling Galan to encash it at the Cebu Branch of the Philippine Commercial and Industrial Bank.

Muñasque alleged that the construction continued through his sole efforts, he having borrowed approximately ₱12,000.00 from a friend, Mr. Espina. Although total expenses reached ₱34,000.00 due to Galan's failure to pay laborers and suppliers, the construction was completed ahead of the March 16, 1967 deadline. The two remaining checks, each in the amount of ₱6,000.00, were subsequently given to Muñasque alone, the last check being delivered pursuant to a court order. The intervenors, Cebu Southern Hardware Company and Blue Diamond Glass Palace, had supplied construction materials on credit to the partnership and remained unpaid.

Muñasque filed a complaint for payment of sum of money and damages against Galan, Tropical, and Pons, seeking to recover the amounts covered by the first and second checks, his additional construction expenses, moral and exemplary damages, and attorney's fees. Both the trial and appellate courts absolved Tropical and Pons from liability and held Muñasque and Galan liable to the intervenors for the credit extended to the partnership. The Court of Appeals modified the trial court's judgment by changing the partners' liability from "jointly and severally" to "jointly." Muñasque then filed the present petition for certiorari.

• Non-existence of Partnership: Petitioner contended that the appellate court erred in holding that he and respondent Galan were partners, maintaining that Galan was a sham and perfidious partner who misappropriated ₱13,000.00 due to the petitioner.
• Malversation by Galan: Petitioner argued that the appellate court erred in not finding Galan guilty of malversing the ₱13,000.00 covered by the first and second checks, rendering Galan accountable to the petitioner for said amount. He alleged that this issue was raised in his amended complaint, which was duly admitted by the court.
• Validity of Payment to Galan: Petitioner maintained that the appellate court committed grave abuse of discretion in holding that the payment made by Tropical through its manager Pons to Galan was "good payment," when such payment gave occasion for Galan to misappropriate the proceeds.

• Existence of Partnership: Whether a partnership existed between petitioner Muñasque and respondent Galan.
• Personal Liability of Galan for Misappropriation: Assuming a partnership existed, whether the court erred in not finding Galan guilty of malversing the ₱13,000.00 covered by the first and second checks and therefore accountable to the petitioner.
• Validity of Payment to Galan: Whether the court committed grave abuse of discretion in holding that the payment made by Tropical through its manager Pons to Galan was "good payment."
• Nature of Partners' Liability to Third Persons: Whether the liability of the partners to the intervenor-creditors should be joint or joint and solidary.

• Existence of Partnership: Yes. The contract was executed on behalf of the partnership "Galan and Muñasque," and nothing in the records indicated the partnership was not genuine; a falling out between partners does not convert a partnership into a sham organization.
• Personal Liability of Galan for Misappropriation: Not properly before the Court. The malversation issue was not among the issues delimited during pre-trial, and petitioner was bound by the pre-trial order he himself agreed to.
• Validity of Payment to Galan: No grave abuse of discretion. Tropical had every reason to believe the partnership existed and acted in good faith; the payment to Galan, a partner with apparent authority, was valid and binding on both partners.
• Nature of Partners' Liability to Third Persons: Joint and solidary. While Article 1816 provides for pro rata liability, Articles 1822, 1823, and 1824 impose solidary liability when a partner's wrongful act or misapplication of partnership funds causes loss to a third person who acted in good faith.

• Existence of Partnership: The written contract itself identified the contractor as "Galan and Muñasque," and the partnership name "Galan and Associates" was duly registered with a mayor's permit to do construction business. Muñasque indorsed the first check in favor of Galan, further manifesting the partnership relationship to Tropical and other creditors. The Court found nothing in the records to indicate the partnership was not genuine. A misunderstanding or falling out between partners does not negate the existence of a partnership. If the partnership was not genuine as petitioner claimed, he had only himself to blame for making the relationship appear otherwise to Tropical and their creditors. The payments made to the partnership were therefore valid.

• Personal Liability of Galan for Misappropriation: The issue of Galan's personal liability for alleged malversation was not among the issues agreed upon during pre-trial. Although petitioner alleged malversation in his amended complaint, the amendment was solely for impleading Pons in his personal capacity, and the malversation allegations were the same as those in the original complaint. The actual issue raised was the alleged connivance of Pons with Galan, not Galan's personal liability to the partnership. Petitioner was bound by the pre-trial delimitation of issues, having agreed to the same and never sought modification. The Court noted, however, that an existing judgment already held Galan liable for ₱7,000.00 in favor of Eden Hardware, aside from ₱2,000.00 he paid to Universal Lumber, so Muñasque was not solely burdened by partnership obligations.

• Validity of Payment to Galan: Tropical had every right to presume that Muñasque and Galan were true partners, given the contract's express naming of "Galan and Muñasque" as Contractor and Muñasque's indorsement of the first check to Galan. Applying the principle that where one of two innocent persons must suffer, the person who gave occasion for the damage must bear the consequences, the Court found no error in the appellate court's ruling. The general presumption that each partner is an authorized agent for the firm, with authority to bind it in carrying on partnership transactions, was sufficient to permit third persons to hold the firm liable on transactions entered into by a partner acting apparently on its behalf and within the scope of his authority.

• Nature of Partners' Liability to Third Persons: The Court took exception to the appellate court's ruling that liability should be merely joint. While Article 1816 provides that all partners are liable pro rata for contracts entered into in the name of the partnership, this provision must be construed together with Article 1824, which provides that all partners are solidarily liable with the partnership for everything chargeable under Articles 1822 and 1823. Article 1822 covers wrongful acts or omissions of a partner acting in the ordinary course of business or with authority of co-partners causing loss or injury to a non-partner. Article 1823 covers misapplication of money or property of a third person received by a partner within the scope of apparent authority, or misapplication by any partner of money received by the partnership in the course of business. The obligation is solidary because the law protects the person who in good faith relied upon the authority of a partner, whether real or apparent. Tropical, Cebu Southern Hardware, and Blue Diamond Glass Palace all had reason to believe the partnership existed and acted in good faith; thus, the consequences of any wrongful act by any partner should be answered solidarily by all partners and the partnership. As between the partners, however, justice dictates that Muñasque be reimbursed by Galan for payments made representing partnership liability to the intervenors, as Galan acted in bad faith.

• Apparent Authority of Partners — There is a general presumption that each individual partner is an authorized agent for the firm and has authority to bind the firm in carrying on partnership transactions. This presumption is sufficient to permit third persons to hold the firm liable on transactions entered into by one of the members of the firm acting apparently in its behalf and within the scope of his authority. The Court applied this doctrine to uphold Tropical's payment to Galan as valid, since Tropical reasonably believed the partnership existed and that Galan had authority to receive payment.

• Solidary Liability of Partners for Wrongful Acts or Misapplication — While Article 1816 of the Civil Code provides for pro rata liability of partners for partnership contracts, Articles 1822, 1823, and 1824 impose solidary liability when a partner's wrongful act or misapplication of partnership funds causes loss to a third person. All partners, whether innocent or guilty, as well as the partnership itself, are solidarily liable. The Court applied this doctrine to modify the appellate court's ruling, holding the partners solidarily liable to the intervenor-creditors who supplied materials on credit in good faith reliance on the partnership's existence and Galan's apparent authority.

• Pre-trial Delimitation of Issues — A party is bound by the delimitation of issues contained in the trial court's pre-trial order, which controls the subsequent course of the action unless modified before trial to prevent manifest injustice. The Court applied this doctrine to bar petitioner from raising Galan's personal liability for alleged malversation, as this was not among the issues agreed upon during pre-trial and no modification was ever sought.

• Equitable Reimbursement Between Partners — As between partners, the partner who acted in bad faith must reimburse the innocent partner for payments made representing partnership liability to third persons. The Court applied this principle by granting Muñasque the right to recover from Galan any amount paid to the intervenors, given that Galan acted in bad faith in his dealings with Muñasque.

• "Although it may be presumed that Margarita G. Saldajeno had acted in good faith, the appellees also acted in good faith in extending credit to the partnership. Where one of two innocent persons must suffer, that person who gave occasion for the damages to be caused must bear the consequences." — This quotation, cited from Singsong vs. Isabela Sawmill, articulates the equitable principle allocating loss between two innocent parties, which the Court applied to uphold the validity of Tropical's payment to Galan and the liability of both partners to creditor-intervenors.

• "The obligation is solidary, because the law protects him, who in good faith relied upon the authority of a partner, whether such authority is real or apparent. That is why under Article 1824 of the Civil Code all partners, whether innocent or guilty, as well as the legal entity which is the partnership, are solidarily liable." — This passage states the ratio decidendi for the Court's modification of the appellate court's ruling from joint to joint and solidary liability, explaining the policy rationale behind Articles 1822–1824 of the Civil Code.

• "If there was a falling out or misunderstanding between the partners, such does not convert the partnership into a sham organization." — This statement defines the principle that internal disputes between partners do not negate the existence of a partnership as to third parties, a key proposition in the Court's affirmance of the partnership's existence.

• Singsong vs. Isabela Sawmill, 88 SCRA 643 — Followed. Cited for the principle that where one of two innocent persons must suffer, the person who gave occasion for the damage must bear the consequences. Applied to uphold the validity of Tropical's payment to Galan and the liability of both partners to creditor-intervenors.

• George Litton vs. Hill and Ceron, et al., 67 Phil. 513, 514 — Followed. Cited for the doctrine that each individual partner is an authorized agent for the firm with authority to bind the firm in carrying on partnership transactions, and that this presumption permits third persons to hold the firm liable on transactions entered into by a partner acting apparently on its behalf.

• Permanent Concrete Products, Inc. vs. Teodoro, 26 SCRA 336 — Followed. Cited for the rule that a party is bound by the delimitation of issues in the pre-trial order, which controls the subsequent course of the action unless modified before trial to prevent manifest injustice.

• Article 1816, Civil Code — Provides that all partners, including industrial ones, shall be liable pro rata with all their property and after all partnership assets have been exhausted, for contracts entered into in the name and for the account of the partnership. The Court construed this provision together with Articles 1822–1824, clarifying that while general partnership liability is pro rata, solidary liability attaches in cases of wrongful acts or misapplication of funds.

• Article 1822, Civil Code — Provides that where a partner's wrongful act or omission in the ordinary course of business or with authority of co-partners causes loss or injury to a non-partner, the partnership is liable to the same extent as the partner so acting. Applied to hold the partnership and all partners solidarily liable for Galan's wrongful acts in dealing with the intervenor-creditors.

• Article 1823, Civil Code — Provides that the partnership is bound to make good where a partner acting within the scope of apparent authority receives money or property of a third person and misapplies it, and where the partnership in the course of business receives money or property of a third person and it is misapplied by any partner while in custody of the partnership. Applied to the misapplication of payments received by Galan from Tropical.

• Article 1824, Civil Code — Provides that all partners are solidarily liable with the partnership for everything chargeable to the partnership under Articles 1822 and 1823. Applied to modify the appellate court's ruling, establishing joint and solidary liability of both partners to the intervenor-creditors.

Teehankee (Chairman), Melencio-Herrera, De la Fuente, and Patajo, JJ., concurred. Plana, J., took no part. Relova, J., was on leave.