Litton v. Hill
REITERATIONFacts
The Antecedents: Petitioner George Litton sold mining shares to Carlos Ceron, one of the managing partners of the firm Hill & Ceron. Ceron delivered a document acknowledging receipt of the shares and payment of P1,150, leaving an unpaid balance of P720. Procedural History: Litton filed a complaint against Hill & Ceron, Robert Hill, Carlos Ceron, and Visayan Surety & Insurance Corporation for the unpaid balance. The Court of First Instance ordered Carlos Ceron to pay personally and absolved the partnership and its surety. The Court of Appeals affirmed, concluding Ceron did not act for the firm. The Petition: Litton sought review via certiorari, arguing that despite the Court of Appeals' factual finding that Ceron acted individually, the transaction should be considered binding on the partnership Hill & Ceron based on undisputed facts and provisions of the Code of Commerce.
Issue(s)
Whether the transaction entered into by Carlos Ceron with George Litton, despite being found to be individual in nature by the Court of Appeals, is binding upon the partnership Hill & Ceron. Whether the dissolution of the partnership, if any, was effective against third parties prior to its registration in the commercial registry. Whether a third party contracting with a managing partner of a firm is obligated to ascertain the consent of the other partners before the contract can bind the partnership.
Ruling
The Supreme Court reversed the decision of the Court of Appeals. The defendants were ordered to pay George Litton jointly and severally the sum of P720, with legal interest, minus the commission, with costs to the respondents.
Ratio Decidendi
On the binding effect of Ceron's transaction on the partnership: The Court held that even if Ceron individually entered into the transaction, it should be understood in law as effected by Hill & Ceron and binding upon it. This is because the partnership was in existence at the time of the transaction, and its dissolution had not been recorded in the commercial registry. Furthermore, under the Code of Commerce, brokers are prohibited from buying or selling shares on their own account, implying that Ceron's transaction, being in the nature of brokerage, was within the scope of the partnership's business. The Court also invoked the general presumption that each individual partner is an authorized agent for the firm and has the authority to bind it in carrying on partnership transactions. On the effectiveness of partnership dissolution against third parties: The Court reiterated the principle that under Article 226 of the Code of Commerce, the dissolution of a commercial association does not prejudice third parties until it has been recorded in the commercial registry. The Supreme Court of Spain's opinion was cited, holding that an unregistered dissolution by the will of the partners does not prejudice third persons. Therefore, since the partnership's dissolution was not registered, it could not prejudice Litton, a third party. On the obligation of third parties to ascertain partner consent: The Court disagreed with the Court of Appeals' view that a partner needs the explicit consent of the other partner to bind the firm and that the third party must prove this consent. The Court stated that third persons are not bound to ascertain internal agreements between partners. They have the right to presume that the partner with whom they contract has the consent of the other, acting in the ordinary course of business. The presumption is that the ordinary course of business has been followed and the law obeyed. The burden is not on the third party to prove consent, but on the partner seeking to avoid liability to prove lack of consent and the third party's knowledge thereof. Moreover, Article 130 of the Code of Commerce provides that even if a contract is entered into against the will of a managing partner, it shall not be annulled if the third party acted in good faith, without prejudice to the liability of the partner who contracted it.
Main Doctrine
A partnership's dissolution is not effective against third parties until it is recorded in the commercial registry. Furthermore, third parties contracting in good faith with a partner acting apparently on behalf of the partnership are not bound to ascertain the internal consent of other partners, and may presume that the partner has the necessary authority.