How Can You Dissolve a Verbal Joint Venture Agreement?
Introduction
A verbal joint venture may create enforceable obligations even when the parties never signed a formal agreement. Philippine law generally recognizes agreements based on the parties’ consent, subject to the rules on validity, proof, authority, and enforceability.
Dissolving an unwritten joint venture therefore requires more than simply stopping operations. The parties should identify the agreement, document their mutual decision to end it, account for contributions and liabilities, distribute or sell remaining inventory, settle third-party obligations, and execute a written release that clearly severs their continuing legal ties.
This article assumes that the joint venture was not organized as a corporation. An incorporated joint venture is governed by the Revised Corporation Code of the Philippines, while an unincorporated venture is generally governed by the parties’ agreement and, when appropriate, the general principles of partnership law.
What Is a Verbal Joint Venture?
A joint venture is generally an undertaking formed for a specific or temporary business purpose. Its usual elements include a community of interest, an agreement to share profits and losses, and mutual control or participation in the venture.
In Valdes, et al. v. La Colina Development Corporation, et al., G.R. No. 208140, 12 July 2021, the Supreme Court explained that a joint venture is closely related to a partnership and may be governed by partnership law. The Court also recognized that a joint venture normally concerns a particular undertaking, although Philippine partnership law itself permits a partnership formed for a specific purpose.
The absence of a written contract does not automatically invalidate the arrangement. In Fong v. Dueñas, G.R. No. 185592, 2015, the Supreme Court held that an agreement to incorporate a business venture could be valid and enforceable even though it was not reduced to writing, because no law required that particular agreement to be written.
What Law Governs the Dissolution?
The first source of authority is the parties’ agreement, including their oral terms as proved by conduct, messages, payment records, invoices, business records, and testimony. If the agreement is silent, the general principles governing partnership dissolution may apply to an unincorporated joint venture.
Article 1830 of the Civil Code of the Philippines provides causes for dissolution, including the expiration of an agreed period or undertaking, the good-faith will of a partner where no definite term exists, the agreement of the partners, illegality of the business, death or insolvency of a partner, and a court decree.
Article 1836 of the Civil Code provides that, unless otherwise agreed, the partners who did not wrongfully dissolve the partnership generally have the right to wind up its affairs. A partner, legal representative, or assignee may also seek judicial winding up upon showing sufficient cause.
SEC OGC Opinion No. 25-12 explains that an unincorporated joint venture may ordinarily be governed by its agreement and, where the agreement is silent, by general partnership principles. If the joint venture is incorporated, however, dissolution must comply with the Revised Corporation Code of the Philippines rather than the partnership provisions of the Civil Code.
Can One Party End the Venture Alone?
Sometimes, but the consequences depend on the agreement and the circumstances. Where the joint venture has no definite term or undertaking, a partner’s express decision to end the relationship may support dissolution if exercised in good faith. Where the venture concerns a definite project or period, unilateral termination may constitute a breach unless authorized by the agreement or justified by law.
A party should not assume that abandoning the business eliminates existing obligations. The venture may still owe suppliers, employees, landlords, lenders, customers, government agencies, or the other co-venturers. Dissolution ends the business relationship, but winding up is still required to settle its affairs.
If both parties substantially breached their reciprocal obligations and it cannot be determined who breached first, Article 1192 of the Civil Code may apply. In Fong v. Dueñas, the Supreme Court treated the agreement as extinguished and required mutual restitution, while denying damages because neither party could be identified as the first infractor.
Step One: Confirm the Terms of the Verbal Agreement
Before announcing dissolution, prepare a written reconstruction of the agreement. It should state the venture’s purpose, the parties’ contributions, ownership percentages, profit and loss arrangements, management rights, duration, responsibility for expenses, and the procedure for ending the venture.
Useful evidence may include:
- Messages, emails, and voice recordings lawfully obtained and authenticated;
- Bank transfers, receipts, invoices, purchase orders, and payment vouchers;
- Inventory lists and warehouse or delivery records;
- Business permits, registrations, leases, and supplier documents;
- Accounting records and statements of sales, expenses, and collections; and
- Witness testimony concerning the parties’ agreement and subsequent conduct.
The written reconstruction is not a substitute for proof. Its purpose is to reduce disagreement before the parties sign the final dissolution and settlement document.
Step Two: Send a Written Notice of Dissolution
The party proposing dissolution should send a written notice identifying the venture, the date of termination, the reason for ending the relationship, and the proposed winding-up procedure. If the parties agree to dissolve, the notice should be followed by a signed termination or dissolution agreement.
The notice should avoid admissions that are unnecessary or inaccurate. It should also reserve rights concerning undisclosed liabilities, fraud, unauthorized transactions, and assets that may later be discovered.
For stronger proof, deliver the notice through a method that generates reliable evidence of receipt, such as personal service with acknowledgment, registered mail, courier delivery, or a verifiable electronic communication consistent with the parties’ established practice.
Step Three: Stop New Business and Preserve Assets
After the effective dissolution date, the parties should stop accepting new orders or incurring new obligations unless those acts are necessary for winding up. Existing contracts should be reviewed to determine whether notice, consent, completion, or cancellation is required.
The parties should also secure cash, documents, equipment, inventory, digital accounts, permits, customer lists, and intellectual property. Neither party should remove or sell venture assets without a documented authority and accounting.
Where one party controls the business records or physical assets, the other party should make a written demand for access, copies, inspection, and preservation. A court may order winding up where voluntary cooperation is not possible and sufficient cause is shown.
Step Four: Prepare a Complete Inventory
Inventory should be counted and valued as of a specified date. The inventory report should identify the item, quantity, condition, acquisition cost, estimated market value, location, and any encumbrance or customer claim.
| Inventory Category | Recommended Treatment |
|---|---|
| Saleable goods | Sell through an agreed channel and credit the net proceeds to the venture. |
| Perishable goods | Sell promptly, document discounts, or dispose of them with both parties’ approval. |
| Defective or obsolete goods | Obtain an agreed valuation or independent assessment before allocation. |
| Goods subject to customer orders | Complete, refund, or transfer the orders after addressing customer rights. |
| Third-party or consigned goods | Return them to the owner and exclude them from distributable venture assets. |
Physical counting should preferably be conducted jointly. If one party does not attend, the other should document the process through photographs, signed count sheets, independent witnesses, and, when appropriate, an accountant’s certification.
Step Five: Sell or Allocate the Remaining Inventory
The parties should agree whether the remaining inventory will be sold, divided in kind, transferred to one party at an agreed value, or returned to the contributors. The selected method should be recorded in writing.
A sale is often preferable where the inventory is readily marketable and the parties want a clean financial settlement. The parties should agree on the sale period, price reductions, sales channel, custody, expenses, and reporting of gross and net proceeds.
Division in kind may be appropriate where the inventory is divisible and both parties can independently use or sell their allocated goods. The allocation should account for differences in quality, condition, demand, and market value rather than merely dividing the number of units.
If one party will retain all inventory, the parties should record the valuation method and whether the retained goods will be credited against that party’s share, contribution, or other amount payable.
Step Six: Pay Debts Before Distributing Assets
Venture assets should not be distributed while material liabilities remain unresolved. The parties should prepare a closing statement showing cash on hand, inventory, receivables, debts, taxes, employee claims, refunds, professional fees, and winding-up expenses.
The usual order of work is to collect receivables, pay or reserve for venture liabilities, return third-party property, determine each party’s contributions, and distribute the remaining balance according to the agreement or applicable law.
A party should not sign a broad release without confirming that the statement of accounts includes hidden liabilities, unpaid taxes, pending customer claims, supplier disputes, employee obligations, and obligations arising from unauthorized acts.
Step Seven: Settle Contributions, Profits, Losses, and Restitution
The final settlement should state the amount contributed by each party, the venture’s revenues and expenses, the treatment of losses, the value of retained property, and the exact amount payable to or by each party.
Where the relationship is rescinded because of a substantial breach, restitution may be required to restore the parties to their original positions. In Fong v. Dueñas, the Supreme Court ordered the return of a contribution because retaining it after the extinguishment of the agreement would result in unjust enrichment.
Damages should be addressed separately from the return of contributions. A settlement should specify whether claims for lost profits, expenses, penalties, moral damages, or attorney’s fees are released, preserved, or subject to further determination.
Step Eight: Execute a Written Dissolution and Release Agreement
Although the original joint venture was verbal, the termination should be documented in a signed instrument. The document should identify the parties, describe the venture, state the effective date of dissolution, and confirm that no new business will be undertaken in the venture’s name.
The agreement should also cover:
- Final inventory and valuation;
- Disposition of cash, receivables, equipment, and records;
- Payment and allocation of liabilities;
- Distribution of net proceeds or retained assets;
- Authority to communicate with customers, suppliers, and government offices;
- Confidentiality and use of business information;
- Ownership of names, marks, permits, accounts, and intellectual property;
- Representations regarding undisclosed liabilities; and
- Mutual release, subject to stated exceptions.
The release should be precise. It should identify the claims being discharged and exclude claims involving fraud, concealment, later-discovered assets, breach of the settlement agreement, or obligations expressly preserved by the parties.
What If One Party Refuses to Cooperate?
The non-breaching party should first make a written demand for an accounting, access to records, delivery of property, and participation in winding up. The demand should set a reasonable deadline and attach or describe the proposed inventory and settlement process.
If the dispute remains unresolved, the parties may consider negotiation, mediation, or another agreed dispute-resolution process. A court action may be necessary where there is no genuine agreement, assets are being misappropriated, records are being withheld, or the parties cannot complete the winding up voluntarily.
Article 1836 of the Civil Code recognizes judicial winding up upon a showing of cause. The appropriate remedy will depend on the pleadings, the nature of the venture, the assets involved, and whether the claimant seeks dissolution, accounting, restitution, damages, or several remedies together.
Can the Parties Continue Using the Venture’s Name?
After dissolution, continued use of the venture’s name may create the appearance that the business remains active. This can expose the parties to disputes with customers, suppliers, and other third persons.
The dissolution agreement should identify who, if anyone, may use the name, customer accounts, branding, websites, social-media pages, permits, and business records. Notices should be sent to relevant third parties when necessary to prevent further transactions in the venture’s name.
Where a corporation or corporate officer is involved, apparent authority may bind the corporation to acts that third parties reasonably relied upon in good faith. In Burgundy Realty Corp. v. Bella, et al., G.R. No. 268562, 2025, the Supreme Court held that a corporation may be estopped from denying an officer’s apparent authority when its conduct clothed the officer with authority and third parties relied on it.
Unincorporated and Incorporated Joint Ventures Compared
| Issue | Unincorporated Joint Venture | Incorporated Joint Venture |
|---|---|---|
| Primary source of rules | Joint venture agreement and, when appropriate, partnership principles | Revised Corporation Code of the Philippines and corporate documents |
| Liability | Generally determined by the agreement and applicable partnership rules | Generally governed by corporate personality and shareholder liability rules |
| Ending the venture | Agreement, accomplishment of purpose, applicable dissolution grounds, or court action | Corporate dissolution procedures under the Revised Corporation Code |
| Winding up | Accounting, payment of debts, asset distribution, and settlement among co-venturers | Corporate liquidation and statutory dissolution procedures |
Common Mistakes to Avoid
- Assuming that stopping operations automatically ends all liabilities;
- Dividing inventory without first accounting for third-party claims and debts;
- Relying on oral promises after the parties have decided to separate;
- Signing a general release without identifying undisclosed liabilities and exceptions;
- Removing venture assets or records without consent or documented authority; and
- Using the venture’s name after dissolution without notifying customers and suppliers.
Recommended Closing Checklist
For a proper closing, the parties should preserve evidence of the original agreement, confirm the legal form of the venture, issue and acknowledge a written dissolution notice, stop new business, conduct a joint inventory, settle liabilities, prepare a final accounting, distribute assets, and sign a carefully drafted termination and release agreement.
Where substantial assets, employees, tax obligations, creditors, or disputed ownership are involved, the parties should obtain legal and accounting advice before transferring property or signing a release. The document should reflect the actual settlement and should not state that all obligations are settled when material accounts remain unresolved.
Conclusion
Dissolving a verbal joint venture successfully requires a documented winding-up process. The parties should treat the unwritten agreement as a potentially binding arrangement, determine the applicable legal rules, preserve evidence, account for all assets and liabilities, and record the final settlement in writing.
The safest closing instrument is one that clearly states the termination date, inventory disposition, payment obligations, retained claims, authority to complete winding up, and scope of the mutual release. This reduces the risk that the former co-venturers will later dispute ownership, contributions, inventory, debts, or continuing authority to act for the venture.
About Nicolas and De Vega Law Offices
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