Title IX. - PARTNERSHIP
CHAPTER 1
GENERAL PROVISIONS
Art. 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.
Concept of partnership – a partnership is a:
Contract
Association
Legal relation
Status arising out of a contract
Organization
Entity distinct and apart from its members
Joint undertaking to share in profit and loss Civil law concept and American concept of partnership distinguished
Philippine American Basis of concept Contract – it is
the agreement itself where out of which it is created Relation – Anglo American idea of partnership is based on the result of the juridical relation growing out from the express or implied agreement of the parties Possession of separate personality Has a separate juridical personality of its own, distinct and separate from that of each of the partners No separate juridical personality. It is a mere extension of its members. (although some state unions classify the partnership as a separate entity Partnership for the practice of law:
A mere association for non-business purpose is in the nature of a privilege or franchise
o Cannot use nom de plume, assumed or trade name, as compared to the practice of accountancy
Distinguished from business – not an ordinary money making trade
o A duty of public service
o A relation as an officer of the court to the administration of justice involving sincerity, integrity and reliability
o A relation to clients in the highest fiduciary degree
o A relation to colleagues of the bar characterized by candor, fairness, and unwillingness to resort to current business methods of advertising and encroachment on their practice or dealing directly with their clients
Characteristics/ elements of partnership:
Consensual – perfected by mere consent express or implied
Nominate – special name or designation in law
Bilateral – entered into by two or more persons and the rights and obligations are reciprocal
Onerous – benefit by giving something
Commutative – undertaking of each partner is considered as equivalent of the others
Principal – does not depend on its existence on other contracts
Preparatory – means to an end
A contract of Agency Essential features of partnership:
There must be a valid contract
The parties must have legal capacity to enter into the contract
There must be mutual contribution of money, property, industry to a common fund
The object must be lawful
The primary purpose must be to obtain profits and to divide the same among themselves
Articles of partnership must not be kept secret among the members otherwise there is no legal personality
Existence of a valid contract:
Partnership relation fundamentally contractual o There is no such thing as partnership
created by law or operation of law alone o Form – oral or written, express or
implied subject to the provisions of Art. 1771, 1773, and Statute of Frauds. Thus a member need not sign articles of co-partnership to become a member, election is sufficient
o Articles of partnership – a written document embodying the terms of the
association. It contains: the name, nature, purpose, location of the firm and defines the powers, rights, duties and liabilities of the partners among themselves, their contributions, the manner of which the profits and losses are to share and the procedure of dissolving the partnership
o Requisites as a contract: consent of at least 2 parties, object and cause which is established
Partnership relation fiduciary in nature – voluntary association entered into by the associates
o In general partnership there is the element of delectus personae (choice of the person/s that law gives such wide authority to one partner to bind another by contract or otherwise). Delectus
personae allows one partner the power
(not the right) to dissolve partnership
Application of principles of estoppel
o A partner holds himself out or permits himself to be held out as a partner in an enterprise in favour of third persons. Even if no real partnership exists, they are bound to third persons by their conduct
Legal capacity of the parties to enter into the contract:
Individuals with legal capacity – no unemancipated minors, insane or demented persons, deaf mutes who do not know how to write, persons who are suffering from civil interdiction, incompetents under guardianship
Partnerships – no prohibition against a partnership being a partner with another partnership
Corporations – unless authorized by Statute or by its charter, a corporation is without legal capacity or power to enter into a contract of partnership based on public policy
o A corporation however may enter into a Joint Venture partnerships with another where the nature of the venture is in line with the business authorized by its charter
o Where the partnership agreement provides that the two partners will manage the partnership so that the management of the corporate interest is not surrendered the partnership may be allowed
o Where the entry of the foreign corporation as a limited partner in a limited partnership is merely for investment purposes and it shall not take part in management and control. It shall
not be deemed as doing business in the Philippines hence no license is required (RA 7042 Foreign Investments Act) Contribution of money, property, or industry:
Existence of proprietary interest – they must contribute capital
o Money must be in legal tender. Checks, drafts, promissory notes payable to order and other mercantile documents must be cashed to constitute contribution of money
o Property – real, personal, corporeal or incorporeal. Can be licenses, goodwill or credit
o Industry – active cooperation which may be either personal, manual efforts or intellectual for which the partner receives share not merely salary. Industrial partner must not be subject to control. He shall be considered as a lessor of services if he is subject to the supervision of other partners
Proof of contribution – proof that the contribution was made with the intention of dividing profits obtained therefrom
Legality of object – if object is unlawful, contract is inexistent and void ab initio. The object is unlawful when it is contrary to law, morals, good customs, public order, or public policy
Purpose to obtain profits – the very reason for the existence of partnership; need not only be the principal, not the exclusive claim; there may be incidental, moral, social or spiritual ends
Sharing of profits – not necessarily in equal shares; not conclusive evidence of partnership
Sharing of losses – necessary corollary of sharing in profits; agreement not necessary
Art. 1768. The partnership has a judicial 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.
Partnership, a juridical person
A partnership duly formed under the law is a juridical person to which the law grants a juridical personality separate and distinct. As an independent juridical person, a partnership may:
o Enter into contracts, acquire and possess property of all kinds in its name
o Incur obligations
o Bring civil or criminal actions in conformity with the laws and regulations of its organizations
Art. 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether such-co-owners or co-possessors do or do not share any profits made by the use of the property; (3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing them have a joint or common right or interest in any property from which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by instalments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner; (d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by instalments or otherwise.
Rules in determining existence of partnership:
Overview
o In general, all essential characteristics of a partnership must be present. Partners must expressly agree to contribute money, property, or industry as co-proprietors to carry on a business for profit, and to share the profits
o An essential characteristic, by itself, does not prove the existence of a partnership o In case of doubt, Art. 1769 would apply
Test to determine the existence of partnership o The terms of the contract would
determine the legal nature of the contract o Legal intention is the crux of partnership – existence of a partnership not always
dependent upon the personal arrangement or understanding of the parties. Parties may call themselves partners, but their contract may be adjudged something different. On the other hand, parties may expressly stipulate that their contract is not a partnership yet it may still be considered a partnership based on the legal intention
Incidents of partnership
o Share in the profits and losses
o Equal rights in management and conduct of business (see Art. 1803)
o Every partner is an agent of the partnership (Art. 1818)
o All partners, except limited partners, are personally liable for partnership debts with their separate property (see Art. 1816)
o There is a fiduciary relationship (see Art. 1807)
o Partnership is not terminated upon dissolution. It continues until the winding up is completed (see Art. 1828)
Presumption and burden of proof
o Existence of partnership is not presumed. It must be proved
o Persons who are acting as partners are presumed to have entered into a contract of partnership. The burden of proof is on the party denying its existence o Once partnership is shown to exist, the
presumption is that it continues in the absence of evidence to the contrary. The burden of proof is on the person claiming its termination
Use of “partner”
o Person asserting the existence of the partnership cannot prove it by just showing an agreement wherein the parties call themselves „partners‟. The use of the word „partners‟ may be just for convenience and not necessarily to show the intention to create a partnership o „associate‟ means „partner‟, but an
employee may also be an „associate‟ Persons not partners as to each other:
Persons who are partners as between themselves are partners as to third persons. Consequently, persons who are not partners as to each other cannot be partners as to third persons
General rule: persons who are not partners as to each other cannot be partners as to third persons
Exception: if by their acts, consent, representations, third persons were led to believe that they are partners in a non-existing partnership
Example: A and B are not partners. However, A, with the consent of B, told X that they are partners. So as to X, A and B are partners
Co-ownership or co-possession:
Intention to obtain profits
o In partnership, the profits must be derived from the operation of a business or undertaking and not merely from property ownership
o There is no presumption of partnership between co-owners because there must be a clear intention to a partnership
Existence of fiduciary relationship
o There is no fiduciary relationship between co-owners
o Persons may become co-owners without a contract. For example, by inheritance. But they cannot be partners without a contract
Partnership distinguished from co-ownership
Partnership Co-ownership
Creation Generally created
by law. It may exist without a contract Always created by a contract, either express or implied Juridical personality Has a juridical personality No juridical personality
Purpose To obtain profit Common
enjoyment of a thing. Does not necessarily involve sharing of profits
Duration No limitation Maximum is 10
years Disposal of
interest
A partner cannot dispose his interest as to make the transferee a partner
May dispose his interest
Power to act with third persons
Partner may bind the partnership, unless there is a stipulation to the contrary
Co-owner cannot represent the co-ownership
Effect of death Dissolves the
partnership
Does not necessarily dissolve the partnership
Sharing of gross returns – not presumptive evidence of partnership
Reason: because in a partnership, the partners, being interested in the success and failure of the business, share in the profits only after satisfying all partnership liabilities
Sharing of gross profits:
Prima facie evidence of partnership
o Sharing of profits and losses is a strong presumptive evidence of a partnership. Conversely, lack of such agreement strongly negates the existence of a partnership
o Sharing of profits and losses is not conclusive evidence. This may be rebutted by other circumstances
When existence of partnership will not be inferred despite share in the profits
o Profits received as payment of a debt by instalment or otherwise
Example: A is a creditor of a partnership X. A was authorized to manage the business. A will receive compensation, and a share in the net profits as payment for the debt
o Profits received as wages of an employee or rent to a landlord
Example: A is an employee of partnership X. instead of a fixed salary, A agreed to receive a certain percentage of the monthly net profits
Example: A is the owner of the building where partnership X holds its office. As payment for rent, A will receive a share if the net profits.
o Profits received as an annuity to a widow or representative of a deceased partner
Example: A is the widow of a partner in Partnership X. A will receive an annuity based on a certain percentage of the net profits in exchange for the continuation of the partnership without liquidation and satisfaction of the deceased partner‟s interest
o Profits received as interest on a loan Example: A is a creditor of
interest on the loan be taken from the net profits
o Profits received as the consideration for the sale of a goodwill or other property by instalments of otherwise
Example: A sold a land to partnership X. A agreed that the purchase price will be paid out of the net profits
Partnership distinguished from other legal relationships:
Distinguished from a labor union
o A labor union is an association of employees, which exists in whole or in part, for the purpose of collective bargaining agreement or dealing with the employers concerning terms and conditions of employment
o The difference between them is the purpose. The purpose of a partnership is the realization of profits whereas the purpose of a labor union is to negotiate with the employers, collective bargain
Distinguished from a business trust
o A trust is when the equitable ownership and the legal title of a property are with two different persons
o The difference is that partners are principals and agents of each other. While in trust, the trustee is just a principal, and not an agent
Distinguished from a Conjugal Partnership of Gains Partnership CPG Parties 2 or more partners of either sex Future spouses – man and woman Laws which govern Stipulation of the parties By law Juridical personality Has a juridical personality No juridical personality Commencement From the moment
of execution of contract. The parties may stipulate otherwise
From the date of the celebration of the marriage. Any stipulation to the contrary is void Purpose To obtain profits To regulate
property relations during marriage Distribution of profits According to their agreement or in proportion to their capital contributions Divide equally
Management Shared equally by all partners unless one or some are appointed managers Administration belongs to both spouses. But husband‟s decision will prevail in case of disagreement Disposition of shares Entire interest may be disposed even without the consent of the other partners Share of each spouse cannot be disposed of during the marriage, even with the consent of the other
Distinguished from a voluntary association Partnership Voluntary
association Juridical
personality
Has one Does not have one
Purpose For pecuniary profit No such objective Contributions of members There is contribution of money, property or services No contribution, although fees are usually collected Liability of members Partnership is primarily liable to partnership debts Members are individually liable for debts of the association, authorized or subsequently ratified by them
Distinguished from a corporation
Partnership Corporation Manner of creation By agreement of the parties By law or operation of law Number of incorporators
At least 2 persons At least 5 incorporators Commencement of juridical personality From the execution of the contract of partnership. The parties may stipulate otherwise
Only from the date of issuance of the certificate of incorporation by the SC
Powers Those authorized by the partners
Only those expressly granted by law, and those implied from those granted and those incidental to its existence
Management Every partner is an agent of the partnership, if there is no agreement as to management
Vested with the Board of Directors or Trustees
Effect of mismanagement
Partner can sue the partner who mismanages Suit against member of the BOD or BOT must be in the name of the corporation Right of succession
No right Has a right Extent of liability to third person Partners, except limited partners, are liable personally and subsidiarily Stockholders liable only to the extent of their subscribed shares Transferability of interest Partner cannot transfer his interest as to make the transferee a partner without the consent of all the other partners
Stockholder can transfer his shares without the consent of the other
stockholders
Term of existence For any period as may be agreed by the parties Maximum of 50 years, extendible for another 50 years
Firm name Limited partnership required to add “Ltd.” To its name
May adopt any name as long as it is not the same as or similar to any registered firm names
Dissolution At anytime by the will of any or all of the partners
Only with the consent of the State
Governing law Civil Code Corporation Code
Similarities between a partnership and a corporation
o Both have a juridical personality separate and distinct from the individuals composing it
o Both can act only through agents
o Both are organizations composed of an aggregate of individuals
o Both distribute its profits to those who contribute capital to the business
o Both can be organized only where there is law authorizing its organization
Art. 1770. A partnership must have a lawful object or purpose, and must be established for the common benefit or interest of the partners.
When an unlawful partnership is dissolved by a judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the provisions of the Penal Code governing the confiscation of the instruments and effects of a crime.
Object or purpose of partnership:
The parties possess absolute freedom to choose the transactions they must engage in. the only limitation is that the object must be lawful and for the common benefit of the partners
Illegality of the object will not be presumed; it must appear to be of the essence of the relationship
Effects of an unlawful partnership:
Consequences:
o The contract is void ab initio and the partnership never existed in the eyes of the law
o The profits shall be confiscated in favour of the government
o The instruments or tools and proceeds of the crime shall also be forfeited in favour of the government
o The contributions of the partners shall not be confiscated unless they fall under number 3
Juridical decree unnecessary:
o A judicial decree is not necessary to dissolve an unlawful partnership
o Third persons who deal with the partnership without being aware of its illegal purpose or character are protected unless such knowledge can be presumed as where the transaction is plainly unlawful
Right to return the contribution where partnership is unlawful:
Art. 1770 does not state whether upon the dissolution of the unlawful partnership, the amounts contributed are to be returned to the partners, because it only deals with the disposition of profits
The fact that said contributions are not included in the disposal prescribed for said profits shows that in consequence of said exclusion, the general rules of law must be followed and the partners must be
reimbursed for the amount of their respective contributions
The partner who limits himself to demanding only the amount contributed by him need not resort to the partnership contract on which to base his claim or action. The manager or administrator of the partnership holding said contribution retains what belongs to others, without consideration, for which reason he is bound to return it, and he who has paid in his share is entitled to recover it Right to receive profits where partnership is unlawful:
Art. 1770 permits no action for the purpose of obtaining the earnings made by an unlawful partnership because the partner will have to base his action upon the partnership contract which is null and without legal existence; and what does not exist, cannot be a cause of action
Profits earned in the course of the partnership do not constitute or represent the partner‟s contribution but are the result of the industry, business or speculation which is the object of the partnership
It would be immoral and unjust for the law to permit profit from an industry that is prohibited
The courts will not aid either party to an illegal agreement
Effect of partial illegality of partnership business:
An account of that which is legal may be had
Where, without the knowledge or participation of the partners, the firm‟s profits in a lawful business have been increased by wrongful acts, innocent partners are not precluded as against the guilty partners from recovering their share of profits Effect of subsequent illegality of partnership business:
The happening of an event subsequent to the making of a valid partnership contract which would render illegal the business of the partnership as planned, will not nullify the contract
Where the business for which the partnership is formed is legal when the partnership is entered into but afterwards becomes illegal, an accounting may be had as to the business transacted prior to such time
Community of interest between the partners for business purposes – salient features of an ordinary partnership:
Community of interest in profits and losses o Basis of the partnership relation
o However, although every partnership appears to be founded on a community of interest, every community of interest does not necessarily constitute a partnership
Community of interest in capital employed o Property used in business may belong to
one or more partners so that there is no joint property other than joint earnings
Community of power in administration
o Partners may agree upon concentration of management, leaving some of their members entirely inactive or dormant
Art. 1771. 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.
Form of partnership contract:
General rule
o No special form is required for the validity or existence of the contract of partnership
o The contract may be made orally or in writing regardless of the value of the contributions
When immovable property or real rights are contributed
o When read together, Articles 1771 and 1773 require the execution of a public instrument for the validity of a contract of partnership whenever immovable property is contributed thereto
o To affect third persons, the transfer of real property to the partnership must be duly registered in the Registry of Property of the province or city where the property contributed is located
When partnership agreement covered by the Statute of Frauds
o An agreement to enter a partnership at a future time, which “by its terms is not to be performed within a year from the making thereof” is covered by the Statutes of Frauds
o Such agreement is unenforceable unless the same be in writing or at least evidenced by some note or memorandum
thereof subscribed by the parties (Art. 1403[2a])
Partnership implied from conduct:
Binding effect – a partnership‟s existence may be implied from the acts or conduct of the parties, as well as from other declarations, and such implied contract would be as binding as a written and express contract
Ascertainment of intention of parties
o In determining whether or not a particular transaction constitutes a partnership, as between the parties, the intention as disclosed by the entire transaction, and as gathered from the facts and from the language employed by the parties as well as their conduct, should be ascertained
o A partnership may even be created without any definite intention; the intention of the parties being inferred from their conduct and dealings with each other
Conflict between intention and terms of contract – if the parties intend a general partnership, they are general partners although their purpose is to avoid the creation of such relation
Art. 1772. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a public instrument, which must be recorded in the Office of the Securities and Exchange Commission.
Failure to comply with the requirements of the preceding paragraph shall not affect the liability of the partnership and the members thereof to third persons.
Registration of partnership
Partnership with capital of 3,000Php or more – requirements:
a) the contract must appear in a public instrument, and
b) it must be recorded with the SEC
o However, failure to comply with the above requirements does not prevent the formation of the partnership (Art. 1768) or affect its liability and that of the partners to third persons
o But any of the partners is granted the right by the law (Articles 1357 and 1358) to compel each other to execute the contract in a public instrument
o This right cannot be availed of if the partnership is void under Art. 1773
Purpose of registration – the requirement of public instrument of public instrument is imposed as a prerequisite to registration and registration is necessary as a condition for the issuance of licenses to engage in business or trade. In this way, the tax liabilities of big partnerships cannot be evaded and the public can also determine more accurately their membership and capital before dealing with them
When partnership considered registered
o The only objective of the law is to make the recorded instrument open to all and to give notice thereof to interested persons o The date the partnership papers are
presented to and left for record in the Commission is considered the effective date of registration of the articles of partnership
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto, if an inventory of said property is not made, signed by the parties, and attached to the public instrument.
Partnership with contribution of immovable property
Where immovable property, regardless of its value, is contributed, the failure to comply with the following requirements will render the partnership contract void insofar as the contracting parties are concerned:
o The contract must be in a public instrument (Art. 1771)
o An inventory of the property contributed must be made, signed by the parties, and attached to the public instrument
With regard to third persons, a de facto partnership or partnership by estoppel may exist When inventory is not required:
An inventory is required only “whenever immovable property is contributed”
Hence, Art. 1773 does not apply in the case of immovable property which may be possessed or even owned by the partnership but not contributed by any of the partners
If personal property, aside from real property, is contributed, the inventory need not include the former
Importance of making inventory of real property in a partnership
Art. 1773 complements Art. 1771
To show how much is due each partner to complete his share in the common fund and how much is due to each of them in case of liquidation
The execution of a public instrument of partnership would be useless if there is no inventory of immovable property contributed because without its description and designation, the instrument cannot be subject to inscription in the Registry of Property and the contribution cannot prejudice 3rd persons
Art. 1774. Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only in the partnership name.
Acquisition or conveyance of property by partnership
Since a partnership has a juridical personality separate from and independent of that of the persons or members composing it (Art. 1768), it is but logical and natural that immovable property may be acquired in the partnership name
Title so acquired can therefore be conveyed only in the partnership name
The right of a partnership to deal in real as well as personal property is subject to limitations and restrictions prescribed by the Constitution and special laws
Art. 1775. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in his own name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership.
Secret partnerships without juridical personality
Associations whose articles or agreements are kept secret among the members and wherein anyone of them may contract in his own name with third persons are deprived of juridical personality for evidently, such associations are not partnerships
As among themselves, they shall be governed by the provisions relating to co-ownership
A member who transacts business for the secret partnership in his own name becomes personally bound to third persons unaware of the existence of such association
But a person may be held liable as a partner or partnership liability may result in favour of third persons by reason of estoppel (Art. 1785)
Importance of giving publicity to articles of partnership – for the protection not only of the members themselves but also third persons from fraud and deceit to which they would otherwise be easy victims
Art. 1776. As to its object, a partnership is either universal or particular. As regards the liability of the partners, a partnership may be general or limited.
Classification of partnership:
As to the extent of its subject matter
o Universal partnership or one which refers to all the present property or to all profits
There are 2 kinds of universal partnership
Universal partnership of all present property (Art. 1778)
Universal partnership of profits (Art. 1780) o Particular partnership (Art. 1783)
As to liability of the partners
o General partnership – one consisting of general partners who are liable pro rata and subsidiarily liable (Art. 1822-1824) with their separate property for partnership debts
o Limited partnership – one formed by 2 or more persons having as members one or more general partners and one or more limited partners, the latter not being personally liable for the obligations of the partnership (Art. 1843)
As to its duration
o Partnership at will – one in which no time is specified and is not formed for a particular undertaking or venture and which may be terminated at anytime by mutual agreement of the partners, or by will of any one partner alone; or one for a fixed term or particular undertaking which is continued by the partners after the termination of such term or particular undertaking without express agreement (Art. 1785)
o Partnership with a fixed term – one in which the term for which the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking, and upon the expiration of the term or completion of the particular enterprise,
the partnership is dissolved, unless continued by the partners (Art. 1785)
As to legality of its existence
o De jure partnership – one which has complied with all the legal requirements for its establishment
o De facto partnership – one which has failed to comply with all the legal requirements for its establishment
As to representation to others
o Ordinary or real partnership – one which actually exists among the partners and also as to third persons
o Ostensible partnership or partnership by estoppel – one which in reality is not a partnership, but is considered a partnership only in relation to those who, by their conduct or admission, are precluded to deny or disprove its existence
As to publicity
o Secret partnership – one wherein the existence of certain persons as partners is not avowed or made known to the public by any of the partners
o Open or notorious partnership – one whose existence is avowed or made known to the public by the members of the firm
As to purpose
o Commercial or trading partnership – one formed for the transaction of business o Professional or non-trading partnership –
one formed for the exercise of a profession
Class of partners – partners are classified according to their interest in the partnership business, or their obligations to the partnership, or liabilities to third persons
Under the Civil Code:
Capitalist partner – one who contributed money or property to the common fund
Industrial partner – one who contributed only his industry or personal service
General or real partner – one whose liability to third persons extends to his separate property; may be either a capitalist or industrial partner
Limited or special partner – one whose liability to third persons is limited to his capital contribution
Managing partner – one who manages the affairs or business of the partnership; may be appointed whether in the articles of partnership or after the constitution of the partnership; also known as a general or real partner
Liquidating partner – one who takes charge of the winding up of partnership affairs upon dissolution
Partner by estoppel – one who is not really a partner, not being a party to a partnership agreement, but is liable as a partner for the protection of innocent third persons; he is one who is represented as being in fact a partner, but is not so as between the partners themselves; also known as partner by implication or nominal partner or quasi-partner
Continuing partner – one who continues the business of a partnership after it has been dissolved by reason of the admission of a new partner, or the retirement, death, or expulsion of one or more partners
Surviving partner – one who remains after a partnership has been dissolved by the death of any partner
Sub-partner – one who, not being a member of the partnership, contracts with a partner with reference to the latter‟s share in the partnership Other classifications
Ostensible partner – one who takes active part and is known to the public as a partner in the business, whether or not he has an actual interest in the firm; he may be an actual partner of a nominal partner; if he is not actually a partner, he is subject to liability by the doctrine of estoppel
Secret partner – one who takes active part in the business but is not known to be a partner by outside parties nor held out as a partner by the other partners, although he participates in the profits and losses of the partnership; he is an actual partner; he is also an active partner in the sense that he participates in the management of the partnership affairs
Silent partner – one who does not take any active part in the business although he may be known to be a partner; he need not be a secret partner; if he withdraws from the partnership, he must give notice to those persons who do business with the firm to escape liability in the future
Dormant or “sleeping” partner – one who does not take active part in the business and is not known or held out as a partner; both a silent and a secret partner; may retire from the partnership without giving notice and cannot be held liable for obligations of the firm subsequent to his withdrawal; his only interest in joining the partnership would be the sharing of the profits earned
Original partner – one who is a member of the partnership from the time of its organization
Incoming partner – a person lately, or about to be taken into an existing partnership as a member
Art. 1777. A universal partnership may refer to all the present property or to all the profits.
Universal partner – either present property or all the profits
Art. 1778. A partnership of all present property is that in which the partners contribute all the property which actually belongs to them to a common fund, with the intention of dividing the same among themselves, as well as all the profits which they may acquire therewith.
Partnership of all present property
Partners contribute all the property which actually belongs to them to a common fund
There is an intention to divide the property among themselves
There is an intention to divide the profits they may acquire
Art. 1779. In a universal partnership of all present property, the property which belongs to each of the partners at the time of the constitution of the partnership, becomes the common property of all the partners, as well as all the profits which they may acquire therewith.
A stipulation for the common enjoyment of any other profits may also be made; but the property which the partners may acquire subsequently by inheritance, legacy, or donation cannot be included in such stipulation, except the fruits thereof.
Universal partnership of all present
Comprises all that the partners may acquire by their industry or work during the existence of the partnership
The following become the common property of all partners:
o Property which belonged to each of them at the time of the constitution of the partnership
o Profits which they may acquire from the property contributed
Future properties cannot be contributed
The very essence of partnership requires the contribution of things determinate
Property subsequently acquired by inheritance, legacy or donation CANNOT be included by stipulation except the fruits
Art. 1780. A universal partnership of profits comprises all that the partners may acquire by their industry or work during the existence of the partnership.
Movable or immovable property which each of the partners may possess at the time of the celebration of the contract shall continue to pertain exclusively to each, only the usufruct passing to the partnership.
Universal partnership of profits
Ownership of present and future property
o What passes to the partnership are the profits or income
Profits acquired through chance not included
Fruits of property subsequently acquired not included (unless stipulated)
Art. 1781. Articles of universal partnership, entered into without specification of its nature, only constitute a universal partnership of profits.
Presumption in favour of universal partnership of profits
A universal partnership of property imposes less obligations on the partners, since they preserve the ownership of their separate property
Applies only when a universal partnership has been organized
Art. 1782. Persons who are prohibited from giving each other any donation or advantage cannot enter into universal partnership.
Limitations upon the right to form a partnership – persons prohibited by law to give donations cannot enter into a universal partnership; each of the partners virtually makes a donation
Art. 1783. A particular partnership has for its object determinate things, their use or fruits, or specific undertaking, or the exercise of a profession or vocation.
Object of particular partnership
Difference between a universal partnership and a particular partnership
o Scope of subject matter
Universal: vague and indefinite, with a degree of continuity;
Particular: well-defined, confined to an undertaking of a single, temporary or ad hoc nature
Business need not be continuing in nature
o An agreement to undertake a particular piece of work or a single transaction and immediately divide the profits within the meaning of partnership as used in law o Joint venture: though not a formal
partnership, it is governed by almost the same rules of partnership
There is a community of interest similar to a partnership
Has a legal personality separate and district from the parties
CHAPTER 2
OBLIGATIONS OF THE PARTNERS
SECTION 1. - Obligations of the Partners Among Themselves
Relations created by a contract of partnership
Four distinct juridical relations:
o Relations among the partners with the partnership
o Relations of the partners with the partnership
o Relations of the partnership with third persons with whom it contract
o Relations of the partners with such third persons
Partnership relationship one of mutual trust and confidence
Fiduciary relationship remains until partnership s terminated
Rights and obligations of the partners as to each other are provided on the theory that a partner is both a principal and an agent in relation to his co-partners
o But the relationship between a limited partner and other partners in a limited partnership does not involve the element of trust and confidence
Art. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated.
Commencement and term of partnership
Partnership is a consensual contract; hence it exists from the moment of the celebration of the contract by the partners (even when the partners
have not yet begun the carrying on of its business or given their contributions)
o Predicated on the mutual desire and consent of the parties
In effect, its registration in the SEC is not an essential to give it juridical personality
No time limit prescribed by law for the life of partnership
The partners MAY stipulate some other date for the commencement of the partnership
A partnership in fact cannot be predicated on an agreement to enter into a co-partnership at a future day unless it is shown that such an agreement was actually consummated
Art. 1785. When a partnership for a fixed term or particular undertaking is continued after the termination of such term or particular undertaking without any express agreement, the rights and duties of the partners remain the same as they were at such termination, so far as is consistent with a partnership at will.
A continuation of the business by the partners or such of them as habitually acted therein during the term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a continuation of the partnership.
Continuation of partnership beyond fixed term
Partnership with fixed term: one in which the terms of its existence has been agreed upon expressly or impliedly
o It may be extended or renewed by the partners by express or implied agreement o In such case, the rights and duties of the
partners remain the same
o With such continuation, the partnership for a fixed term or particular undertaking is dissolved and a new one is created
Partnership for an indefinite term: an understanding that the relationship shall continue until the accomplishment of a particular undertaking
Partnership with mere expectation: such a hope does not establish even by implication a fixed term or particular undertaking
Art. 1786. Every partner is a debtor of the partnership for whatever he may have promised to contribute thereto.
He shall also be bound for warranty in case of eviction with regard to specific and determinate things which he may have contributed to the partnership, in the same
cases and in the same manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time they should have been delivered, without the need of any demand.
Obligations with respect to contribution of property
Obligations of the partners among themselves o To contribute at the beginning of the
partnership the property, money or industry
Failure to contribute property will make the partner a debtor of the partnership
Remedy of other partners is specific performance with damages and interest
o To answer for eviction in case the partnership is deprived of the determinate property contributed
The partner is bound in the same manner as the vendor is bound with respect to the vendee o To answer to the partnership for the fruits
of the property, from the date they should have been contributed up to the time of actual delivery
No demand needed to put the partner in default
Failure to deliver the property prejudices the common purpose of obtaining the greatest possible profits
o To preserve said property with the diligence of a good father
o To indemnify the partnership for any damage caused to it by the retention of the same or by the delay in its contribution
Liability of partner for failure to perform service stipulated
o Partners are generally not entitled to charge each other for their services in the firm business
o To require a partner to account for the value of his services would be allowing compensation to the other members of the partnership for the services rendered o If a partner neglects to render the
services by reason of which the partnership suffered loss, no good reason can be suggested why the erring partner should not be just as responsible for the breach of his agreement
o If the partner is compelled to make good the loss, each member will receive his
proportion of the amount in the distribution of the partnership assets o Measure of damages: value of the
services wrongfully withheld
Money or property contributed cannot be withdrawn without the consent of the partnership or of the other partners
Art. 1787. When the capital or a part thereof which a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for account of the partnership.
Appraisal of goods or property contributed
Necessary to determine how much has been contributed by the partners
Two ways of appraisal: in the manner prescribed by the contract of partnership and in the absence of stipulation, by experts chosen by the partners and according to current prices
For immovable property: appraisal is made in the inventory of said property
Art. 1788. A partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the interest and damages from the time he should have complied with his obligation.
The same rule applies to any amount he may have taken from the partnership coffers, and his liability shall begin from the time he converted the amount to his own use.
Obligations with respect to contribution of money & money converted to personal use
2 instances involved: money promised but not given on time and partnership money converted to personal use of the partner
Obligations of the partner under this article o Contribute on the date due the amounts
he has undertaken to the partnership to contribute
Liability of guilty partner for interest and damages: from the time he should have complied (not from judicial or extrajudicial demand)
o Reimburse any amount he may have taken
The party is guilty of estafa if he misappropriates partnership money or property
Mere failure on the part of the industrial partner to return to the capitalist partner the capital brought by him does not constitute estafa
o Pay the agreed or legal interest if he fails to pay his contribution on time
o Indemnify the partnership for the damages caused to it by the delay
Art. 1789. An industrial partner cannot engage in business for himself, unless the partnership expressly permits him to do so; and if he should do so, the capitalist partners may either exclude him from the firm or avail themselves of the benefits which he may have obtained in violation of this provision, with a right to damages in either case.
Obligations of industrial partner
Industrial partner contributes his industry, labor or services to the partnership
o Considered as the owner of his services o Becomes a debtor of the partnership for
his partnership acquires exclusive right to avail itself of his industry
o Action for specific performance is not the proper action
Prohibition against engaging in business
o Absolute and applies whether the industrial partner is to engage in the same business or in any kind of business
Remedies where the industrial partner engages in business
o Capitalist partners have the right to exclude him from the firm (with damages)
o Or avail of the benefits (with damages)
It is believed that industrial partners are also entitled to the remedy
Art. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership.
Extent of contribution to partnership capital
The presumption is that their contribution shall be in equal shares
The rule does not apply to an industrial partner unless he has contributed capital
Art. 1791. If there is no agreement to the contrary, in case of an imminent loss of the business of the partnership, any partner who refuses to contribute an additional share to the capital, except an industrial partner, to save the venture, shall he obliged to sell his interest to the other partners.
Obligation of capitalist partner to contribute additional capital
General rule: capitalist is not bound to contribute to the partnership more than what he agreed to contribute, but in case of imminent loss, he is under obligation to contribute additional share to save the venture
Refusal to contribute means he is obliged to sell his interest to the other partners
Requisites before a capitalist partner may be obliged to sell his interest
o Imminent loss of the business
o Majority of the capitalist partners believe that an additional contribution to the common fund would save the business o Capitalist partner refuses deliberately o No agreement that the partners are not
obliged to contribute in case of an imminent loss
Reason: refusal of the partner shows his lack of interest in the continuance of the partnership
Art. 1792. If a partner authorized to manage collects a demandable sum which was owed to him in his own name, from a person who owed the partnership another sum also demandable, the sum thus collected shall be applied to the two credits in proportion to their amounts, even though he may have given a receipt for his own credit only; but should he have given it for the account of the partnership credit, the amount shall be fully applied to the latter.
The provisions of this article are understood to be without prejudice to the right granted to the other debtor by Article 1252, but only if the personal credit of the partner should be more onerous to him.
Obligations of managing partner who collects debt
If a person is separately indebted to the partnership and to the managing partner, the amount received shall be applied to the two credits in proportion to their amounts
o But where the managing partner receives it for the account of the partnership, the whole sum is applied to the partnership credit only
Requisites
o There are at least 2 debts, where the collecting partner is creditor, and the other, where the partnership is the creditor
o Both debts are demandable
o The partner who collects is authorized to manage and actually manages the partnership
Reason: the law safeguards the interest of the partnership by preventing the possibility of their being subordinated by the managing partner to his own interest to the prejudice of other partners
The article does not apply where the partner who collects for his own credit is not authorized to manage if the manner of management has not been agreed upon and all the partners participate in the management, then every partner shall be considered a managing partner
Debtor is given the right to prefer payment of the credit of the partner if it should be more onerous to him
Art. 1793. A partner who has received, in whole or in part, his share of a partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should thereafter become insolvent, to bring to the partnership capital what he received even though he may have given receipt for his share only.
Obligation of partner who receives share of partnership credit
There is only one credit under this article (that in favour of the partnership)
Applies whether the partner who receives his share is authorized to manage or not
Requisites
o A partner has received his share of the partnership credit
o Other partners have not collected their shares
o Partnership debtor becomes insolvent
The article is based on the community of interests among the partners
Credit collected after dissolution of the partnership: conflicting views on the more diligent partner who collects the portion pertaining to him
o Other partners may demand what the partner has already collected (on the principle of community and equality) o It would be unjust to demand from the
diligent partner (the partnership ceased)
Art. 1794. Every partner is responsible to the partnership for damages suffered by it through his
fault, and he cannot compensate them with the profits and benefits which he may have earned for the partnership by his industry. However, the courts may equitably lessen this responsibility if through the partner's extraordinary efforts in other activities of the partnership, unusual profits have been realized.
Obligation of partner for damages to partnership
Any person guilty of negligence or fraud shall be liable for damages
o The partner‟s fault is determined in accordance with the nature of the obligation and the circumstance of the person, time and place
Damages caused by a partner cannot be offset by the profits he may have earned for the partnership by his industry
o The partner has the obligation to secure benefits for the partnership
o The partner also has the obligation to exercise diligence in the performance of his obligation as a partner
o Exception: unusual profits through extraordinary efforts
Based on equity Case to case basis
Art. 1795. The risk of specific and determinate things, which are not fungible, contributed to the partnership so that only their use and fruits may be for the common benefit, shall be borne by the partner who owns them. If the things contribute are fungible, or cannot be kept without deteriorating, or if they were contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation, the risk of the things brought and appraised in the inventory, shall also be borne by the partnership, and in such case the claim shall be limited to the value at which they were appraised.
Risk of loss of things contributed: FIVE cases for the determination of the risk of the things contributed to the partnership
Specific and determinate things which are not fungible where only the use is contributed – risk of loss borne by the partner because he remains the owner
Specific and determinate things the ownership of which is transferred to the partnership – risk of loss is for the account of the partnership, as owner
Fungible things which cannot be kept without deteriorating even if they are contributed only for the use of the partnership – risk of loss is borne by the partnership
Things contributed to be sold – partnership bears risk of loss for there cannot be any doubt that the partnership was intended to be the owner
Things brought and appraised in the inventory – partnership bears risk of loss because the intention of the parties was to contribute to the partnership the price of the things contributed with an appraisal (implied sale making the partnership owner of the said things, the price being represented by their appraised value)
Art. 1796. The partnership shall be responsible to every partner for the amounts he may have disbursed on behalf of the partnership and for the corresponding interest, from the time the expense are made; it shall also answer to each partner for the obligations he may have contracted in good faith in the interest of the partnership business, and for risks in consequence of its management.
Responsibility of the partnership to the partners
Every partner is an agent of the partnership for the purpose of its business
o Partner is not personally liable as long as he is not at fault
o But the partner is not given the right of retention if he is not reimbursed
Obligations of the partnership
o Refund amount disbursed by the partner is behalf of the partnership with interest from the time expenses are made
o Answer for the obligation the partner may have contracted in good faith o Answer for risks in consequences of its
management
Art. 1797. The losses and profits shall be distributed in conformity with the agreement. If only the share of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the industrial partner shall receive such share as may be just and equitable under the circumstances. If besides his services he has contributed capital, he shall also receive a share in the profits in proportion to his capital.
Rules for distribution of profits and losses
Distribution of profits
o The partners share the profits according to their agreement subject to Art. 1816 o If there is no such agreement
Share of each capitalist partner – shall be in proportion to his capital contribution. This rule is based on the presumed will of the partners
Share of industrial partner – must be satisfied first before the capitalist partners divide the profits. Amount will be based on what is just and equitable under the circumstances. The share of an industrial partner in the profits is not fixed, as in the case of capitalist partners, because it is very difficult to ascertain the value of services A partner is entitled to receive only his share of the profits actually realized by the venture
Even when assurances of huge profits were made by a partner, in the absence of fraud, the other partner cannot claim right to recover profits promised. This is especially true when the business was highly speculative and turned out to be a failure
Hidden risks in any business venture have to be considered
Distribution of losses
o According to the Agreement of the Partners, subject to Art. 1799
o If no agreement, but the contract provides for the share of the partners in the profits, the share of each in the losses shall be according to the profit-sharing ratio
However, the industrial partner shall NOT be liable for losses To determine profits or losses,
all transactions must be considered, not only one particular transaction
o If also no profit-sharing stipulated in the contract, losses shall be borne by the partners in proportion to their capital contributions
But the purely industrial partner shall NOT be liable for the losses
Art. 1798. If the partners have agreed to intrust to a third person the designation of the share of each one in the profits and losses, such designation may be impugned only when it is manifestly inequitable. In no case may a partner who has begun to execute the decision of the third person, or who has not impugned the same within a period of three months from the time he had knowledge thereof, complain of such decision. The designation of losses and profits cannot be intrusted to one of the partners.
Designation by a 3rd person of share in profits and losses
Delegation to a 3rd person – designation of shares in the profits and losses may be delegate to 3rd person by common consent
o Designation must be to 3rd
person, and not to one of the partners. In accordance with rule in contracts that fulfilment of contract cannot be left to the will of one of the contracting parties
o Prohibition in 2nd
paragraph necessary to guarantee impartiality
Binding force of designation – designation by 3rd person generally binding unless manifestly inequitable
o Partner who has begun to execute decision of 3rd person or who fails to impugn the same within 3 months from time he had knowledge of it can no longer complain
o In this case, partner guilty of estoppel or deemed to have given consent or ratification to designation
o 3 month period only so operations of partnership will not be paralyzed
Art. 1799. A stipulation which excludes one or more partners from any share in the profits or losses is void.
Stipulation excluding a partner from any share in profits or losses
Stipulation generally void, but partnership subsists
o In general, law does not allow a stipulation excluding one or more partners from any share in profits and losses
Partnership must exist for common benefit and interest of partners
o Hence, contract excluding one or more partners from share contravenes the very purpose of a partnership
o However, although the stipulation is void, the partnership is otherwise valid and the profits or losses shall be apportioned as if there was no stipulation on the same
If also no profit-sharing stipulated in the contract, losses shall be borne by the partners in proportion to their capital contributions (Art. 1797)
Stipulation, a factor to show no partnership exists o Where parties expressly stipulate that
there shall be no liability for losses, or where from the nature of the contract, it is clear that a party did not intend to share in the losses, such fact may be an indicator/ factor in determining that no partnership exists
Where person excluded not intended by parties to become a partner
o Stipulation is valid
o When one of several persons engaged in an enterprise agreed to assist by advancing money and to share in the losses but not to receive any part of the profits, which will be divided among the others exclusively, is not deemed to be a partner
o But if he represents to others or allows himself to be held as a partner to a 3rd person who enters into a contract with them believing him to be such partner, he is liable
Where person excluded from losses is industrial partner
o Naturally valid because Art. 1797 specifically excludes an industrial partner from losses
o But this is without prejudice to the rights of 3rd persons
o Industrial partner is excluded because he cannot withdraw his labor or efforts, unlike a capitalist partner. Also when no profits are realized, then he would have worked in vain and has already contributed his share in the loss
Where stipulation provides doe unequal shares o Partners are allowed to stipulate for
unequal shares in the profits or losses even if their contributions are equal o Unless inequality is so gross that it is, in
effect, a simulated form or attempt to exclude a partner from any share in the profits or losses
Art. 1800. The partner who has been appointed manager in the articles of partnership may execute all
