In Lilibeth Sunga-Chan and Cecilia Sunga vs. Lamberto T. Chua, the Supreme Court addressed the enforceability of a verbal partnership agreement after one partner’s death. The Court ruled in favor of the surviving partner, affirming the existence of the partnership and enforcing his rights to accounting and share recovery, despite the deceased partner’s family taking over the business. This decision clarifies that the ‘Dead Man’s Statute’ does not automatically bar testimony regarding transactions with a deceased person, especially when the estate presents a counterclaim. It underscores the judiciary’s commitment to upholding partnership agreements, ensuring that surviving partners receive their rightful shares even after a partner’s demise.

Can a Verbal Agreement Hold Up in Court After a Partner’s Death?

The case revolves around Lamberto T. Chua’s claim of a partnership with the late Jacinto L. Sunga in their Shellane LPG distribution business, Shellite Gas Appliance Center. Chua alleged that he and Jacinto verbally agreed to a partnership in 1977, with profits to be divided equally. Upon Jacinto’s death, his wife and daughter, Lilibeth Sunga-Chan and Cecilia Sunga, took over Shellite’s operations without accounting to Chua for his share. This prompted Chua to file a case for winding up partnership affairs, accounting, and recovery of shares. The Sungas contested the existence of the partnership, invoking the ‘Dead Man’s Statute’ to bar Chua’s testimony and arguing that the Regional Trial Court lacked jurisdiction.

The central legal question was whether Chua could present evidence to prove the partnership’s existence, given Jacinto’s death. Petitioners primarily relied on the **’Dead Man’s Statute,’** which generally prevents parties from testifying about facts that occurred before the death of a person when the claim is against that person’s estate. The petitioners argued that because Jacinto was deceased, Chua’s testimony and that of his witness, Josephine, should be inadmissible to prove claims against Jacinto’s estate, which they now represented. However, the Court found two key reasons why the ‘Dead Man’s Statute’ did not apply in this case.

First, the Court noted that the petitioners had filed a **compulsory counterclaim** against Chua in their answer before the trial court.

Well entrenched is the rule that when it is the executor or administrator or representatives of the estate that sets up the counterclaim, the plaintiff, herein respondent, may testify to occurrences before the death of the deceased to defeat the counterclaim.

By initiating this counterclaim, the petitioners effectively waived the protection of the ‘Dead Man’s Statute,’ allowing Chua to testify about transactions and events before Jacinto’s death to defend against the counterclaim. This principle ensures fairness and prevents the estate from using the deceased’s inability to testify as a shield while simultaneously pursuing its own claims against the opposing party.

Second, the Court clarified that the testimony of Josephine, Chua’s witness, was not subject to the ‘Dead Man’s Statute’ because she was not a party, assignor, or person in whose behalf the case was prosecuted.

Petitioners’ insistence that Josephine is the alter ego of respondent does not make her an assignor because the term “assignor” of a party means “assignor of a cause of action which has arisen, and not the assignor of a right assigned before any cause of action has arisen.”

Josephine’s testimony served to corroborate Chua’s claims about the partnership’s formation and operations, and her credibility was not successfully impeached by the petitioners.

Building on the inapplicability of the ‘Dead Man’s Statute,’ the Court reaffirmed the established principle that a partnership can be formed verbally, except when immovable property or real rights are contributed, which requires a public instrument.

A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case a public instrument shall be necessary.

The essential elements of a partnership are (1) mutual contribution to a common stock and (2) a joint interest in the profits. The Court found that Chua had sufficiently demonstrated these elements through both testimonial and documentary evidence. The oral contract of partnership between Chua and Jacinto was proven, and therefore can be recognised.

Furthermore, the Court addressed the petitioners’ argument that Chua’s claim was barred by laches or prescription. The Court held that the action for accounting filed by Chua three years after Jacinto’s death was within the prescriptive period.

Considering that the death of a partner results in the dissolution of the partnership, in this case, it was after Jacinto’s death that respondent as the surviving partner had the right to an account of his interest as against petitioners.

According to the Civil Code, an action to enforce an oral contract prescribes in six years, and the right to demand an accounting accrues at the date of dissolution, which, in this case, was upon Jacinto’s death. The action was commenced within the prescribed time limit.

The Court also addressed the issue of non-registration with the Securities and Exchange Commission (SEC). While Article 1772 of the Civil Code requires partnerships with a capital of P3,000.00 or more to register with the SEC, this requirement is not mandatory for the partnership’s validity. The Civil Code explicitly states that a partnership retains its juridical personality even if it fails to register.

The partnership has a juridical personality separate and distinct from that of each of the partners, even in case of failure to comply with the requirements of article 1772, first paragraph.

Thus, non-compliance with this directory provision does not invalidate the partnership as among the partners.

Finally, the Court underscored that factual findings by the trial court and the Court of Appeals regarding the existence of a partnership are generally binding and not subject to re-evaluation on appeal to the Supreme Court. Absent any compelling reasons to overturn these findings, the Court upheld the lower courts’ determination that a partnership existed between Chua and Jacinto. In this case, the petitioners failed to raise any significant error by the lower court.

FAQs

What was the key issue in this case?	The key issue was whether a verbal partnership agreement could be enforced after one partner’s death, especially given the ‘Dead Man’s Statute’ and the lack of formal registration.
What is the ‘Dead Man’s Statute’?	The ‘Dead Man’s Statute’ generally prevents a party from testifying about facts occurring before a person’s death when the claim is against the deceased’s estate. However, it has exceptions, such as when the estate files a counterclaim.
Can a partnership exist without a written agreement?	Yes, a partnership can exist based on a verbal agreement, provided there is evidence of mutual contribution to a common stock and a joint interest in the profits.
What happens when a partner dies?	The death of a partner dissolves the partnership, but the partnership continues until the winding up of its affairs is completed. The surviving partner has a right to an accounting of their interest.
Is SEC registration mandatory for all partnerships?	While partnerships with a capital of P3,000 or more are required to register with the SEC, failure to do so does not invalidate the partnership as among the partners.
What is a compulsory counterclaim?	A compulsory counterclaim is a claim that a defending party has against an opposing party, arising out of the same transaction or occurrence that is the subject matter of the opposing party’s claim.
What is the prescriptive period for enforcing an oral contract?	The prescriptive period for enforcing an oral contract under the Civil Code is six years from the date the cause of action accrues.
What evidence is needed to prove a verbal partnership?	Evidence such as testimonial accounts, documentary evidence indicating shared profits, and evidence of mutual contribution can be used to prove the existence of a verbal partnership.

The Supreme Court’s decision in Sunga-Chan v. Chua affirms the enforceability of verbal partnership agreements, even after a partner’s death. It reinforces that the ‘Dead Man’s Statute’ is not an absolute bar to testimony and clarifies the rights of surviving partners to an accounting and recovery of their rightful shares. This ruling strengthens the legal framework protecting partnership interests and ensures that families cannot automatically dissolve legally binding arrangements upon the death of a partner.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Lilibeth Sunga-Chan and Cecilia Sunga, vs. Lamberto T. Chua, G.R. No. 143340, August 15, 2001