Chapter 1 – General Provisions Article 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. (1665a).
NOMINATE
- There is a name given by the law
- Contract of Partnership: CONSENSUAL (meaning it is perfected by both parties)
PERSONS
- Includes not only natural persons but also JURIDICAL persons. A corporation may NOT be a partner but it may engage in JOINT VENTURES.
BIND THEMSELVES
- Must be capable and competent, meaning, the following may are not included:
1. Minors
2. Emancipated Minors
3. Those under civil interdiction – accessory penalty of being convicted of crimes
4. Insane persons
5. Incompetent persons (see oblicon notes)
- HOWEVER, if the person is only a SUSPECT, he may still bind himself into a contract since there is no final verdict yet.
TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY - Makes the contract onerous since this is MUTAL and
ALL must give either one of the above - Examples:
1. A and B create a partnership with a promise of contributing P10,000 each in cash. A gave his share while B gave a check worth P10,000. Is the issuance a contribution of money?
No, unless the check is encashed.
2. Considering the same information above but with B contributing P10,000 in equivalent dollars.
No, the contribution must be made using the legal tender, in this case, Philippine pesos.
- Property contributed may be movable, immovable or intangible property. (Ex: equipment, land, patents, etc.) - If the partnership did not contribute money or property,
then industry was contributed.
- Note: Contributions may differ for each of the partners. TO A COMMON FUND TO DIVIDE PROFITS AMONGST
EACH OTHER
- The primary objective of partnerships is to make profits. Sharing profits need not be equal.
- Sharing ratios are determined by the partner’s agreement, and if there was no agreement, then the ratios will be based on the ratio of the partners’ contributions.
- Sharing ratios for losses will be the same as the sharing ratios for profits.
- The industrial partner shall NOT share in losses. - The industrial partner is exempt only to the partners but
not to 3rd parties without prejudice to his right. A1816 CONSENT (DELECTUS PERSONAE)
- You can’t join a partnership without the consent of ALL partners.
Why?
Because the partnership will need to be dissolved before you are admitted and a new partnership will be made in its place.
Article 1768
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. (n)
Example
- If A and B form a partnership with X & Co., the property of X & Co. is not A & B’s property and likewise, A & B’s property is not X & Co.’s.
- Since X & Co is a juridical entity, it can acquire any property since the partners are merely agents.
- Thus the obligations of X & Co are not those of A & B’s. - The partnership of X & Co can file against A & B and be sued by A & B, likewise, if a third party sues X & Co., A & B are not affected.
- The partnership will still be a juridical entity even without compliance with A1772.
- If X & Co. is exempted from certain things, it does not follow that A & B are included.
Consequences of being a Juridical Person - Can sue and be sued
- Acquire any kind of property
- Insolvency of a partnership does not mean that the partners themselves are insolvent.
Article 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 odes 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 in the profits of a business is prima facie evidence that he is partner in the business, but no such inference shall be drawn if such profits were received in payment: (a) As a debt by installments 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 amounts of payment vary with the profits of the business (e) As consideration for the sale of a goodwill of a
business or other property by installments or otherwise. (n)
Provides the rule in determining partnerships Example for (1)
- If A & B say PUBLICLY that they are not partners, then according to A1825, if they told C that they are and C enters into a contract of partnership with them, then A and B are in a PARTNERSHIP OF ESTOPPEL.
Example for (2)
- If A & B inherited land from their parents and subsequently leased the land out for P50,000/month, then it can be said that they share profits, but are they in a partnership?
No, they are merely co-owners. The P50,000 profit is merely incidental and besides, it was not derived from BUSINESS OPERATIONS.
- If they bought the land for P1,000,000 each to build a house but instead opted to sell it for P2,500,000 then they have a profit of P500,000 but are they partners? No, because even if there was a profit of P500,000, this is merely incidental to the sale and not from business operations of A&B.
- If the land was instead used to build an apartment that is rented out?
Yes, because A & B share profits from RENTING, this can be considered as ordinary business operations. Example for (3)
- If a person owns a big tract of land for planting rice and entered into an agreement with a farmer that they will divide the harvest, is the farmer partners with the owner of the land?
No because of the following reasons: (1) The farmer had no contribution
(2) The farmer has no say in the disposition of the land (3) The farmer has no say in management
(4) In case of loss, the owner shall carry the entire burden and the farmer need not pay anything Example for (4)
- A partnership borrowed P50,000 and instead of giving the creditor a specific amount to be repaid, they agreed that the creditor will receive 1% of the partnership’s annual gross profit. Is the creditor a partner?
No because the receipt of share in net income happens to be because of an existing debt.
To determine whether a person is a partner: (1) Required contribution
(2) Say in management (3) Share in losses Article 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. (1666a)
The partnership must have a lawful object or purpose - Lawful object refers to CAPITAL
- Lawful purpose refers to the BUSINESS itself There must be common interest and benefit
Unlawfulness of the partnership will cause it to be dissolved and profits shall be confiscated
Example of unlawful purpose: - GAMBLING
A & B are partners where A contributed P100,000 in cash and B contributes gambling paraphernalia. They were raided and the gambling paraphernalia was confiscated. Can the P100,000 also be confiscated? No because the P100,000 was not the reason for the crime in anyway. The state is therefore required to return this amount to A.
Legal effects of a Judicial Dissolution
- Partnership is considered void from the beginning - Profit and instrument of the crime is confiscated
- The only returnable items are those that were never related to or connected with the crime committed Article 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 (1667a)
Can a partnership be created orally?
Yes. A partnership may be constituted in any form (as stated in Article 1771)
Partnerships are not covered by the Statute of Fraud since these are not necessarily required to be in writing (contract of partnership can be in any form)
If immovable property and/or real rights are contributed to the partnership, then the contract must be in a public instrument (notarized documents)
In order to bind 3rd
persons, the transfer of OWNERSHIP of immovable property MUST BE REGISTERED with the REGISTRY OF PROPERTY in the province or city where the property is located
The article shows that partnerships can be perfected by MERE CONSENT.
Article 1772
Every contract of partnership having a capital of P3,000.00 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. (n) If the partnership’s capital is P3, 000.00 or more (in any form), it must be in a public instrument, recorded with the SEC and note that property referred to here is MOVABLE since immovable property is covered by Article 1771. Failure to comply with the requirements of Article 1772 will
not affect the liability of the partnership to 3rd persons. Isn’t this inconsistent with Article 1358?
No, remember that in Article 1358, if the contract terms exceed P500.00 then the contract must be in writing. This is merely for purposes of convenience and not validity or enforceability of the law. Also note that according to Article 1768, the partnership will still be valid and have a juridical entity.
How do we reconcile this with Article 1358 and 1357? Article 1358 is for purposes of convenience and not for validity or enforceability of the law.
Article 1357 states that contracting parties have the right to compel each other to place the contract into writing. Purpose of Registration:
(1) Condition for obtaining a license to engage in business and in trade
(2) 3rd persons want proof that the partnership is existent, who the partners are and what the capitalization is before they enter into contracts/engage in business. (3) The government requires this so that tax liabilities may
not be avoided (BIR)
Failure to comply with the Article’s requirements will not prevent the formation of the partnership
The Statute of Fraud will only apply if there was an agreement made by the contracting parties
Example:
A and B promise to contribute to their partnership money worth P10,000.00 each within one year from their agreement. A contributes early but when the time comes for B to contribute his share, he refuses to do so. Can A compel B to give his contribution?
No, A cannot compel B to pay his contribution to the partnership.
Why?
Because the contract/agreement between the two parties was purely ORAL and never really written, and it has already been one year since they agreed to their contract terms.
Article 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. (1668a) Refers specifically where one or both of the parties
contribute immovable property. The requirements are: (1) The contract must be in a public instrument
(2) An inventory of the immovable property must be made, signed by BOTH parties and attached to the public instrument, otherwise the partnership is VOIDED. Actual Case in Applying Article 1773:
A and B agree to form a partnership engaging in a fish pond business where both partners will contribute cash; the cash is later used to buy land that is converted into a fish pond. C comes along and points out that the partnership is void because no inventory of the land was made. Is the partnership really void?
No, the partnership is not void because according to the Supreme Court, Article 1773 need not apply since the land was BOUGHT from the CASH CONTRIBUTION.
Suppose a partnership contributes immovable property but does not conduct an inventory and enters into a contract with A. The partnership does not fulfill its obligation to A and A sues the partnership. Was A right in suing the partnership? No, since the partnership was void from the beginning. A should instead file against the “partners” themselves. They will be sued under the legal basis of them being partners by estoppels, as stated in Article 1825.
If A wishes to be in a partnership with B and promises to contribute land but subsequently sells the same plot to C, who immediately registers the transfer, who owns the land? C owns the land because A never registered the transfer. Estafa: when the owner of a property sells the same to two
or more different persons. Article 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. (n) Being a juridical entity, a partnership can acquire property
and subsequently become its owner. Article 1775
Associations and societies whose articles are kept secret among members, and wherein anyone 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. (1669)
There is no juridical entity since the members can contract with 3rd persons in their own name without binding others. In a partnership:
(1) The partners are merely agents who cannot act alone (2) Articles of Partnership are known to ALL partners AND
to the GENERAL PUBLIC. Article 1776
As to its object, a partnership is either universal or particular.
As regards to the liability of the partners, a partnership may be general or limited. (1671a)
Classifications of Partnerships: (1) As to the Object:
(a) Universal Partnership of All Present Property – defined in Article 1778
(b) Universal Partnership of All Profits – defined in Article 1780
(c) Particular Partnerships – defined in Article 1783 (2) As to the Liability:
(a) General – general partners are liable PRO-RATA and subsidiarily, sometimes solitarily, with their own property/assets if the partnership is insolvent. (may include industrial partners)
(b) Limited – limited partners are liable only up to the extent of their contribution
(3) As to Duration:
(a) At will – no particular undertaking, can be dissolved at any time
(b) With a Fixed Term – may only be dissolved upon the end of its term unless continued by the partners (4) As to Legality of Existence:
(a) De Jure – complied with ALL requirements (b) De Facto – failed to comply with ALL requirements (5) As to Representation to Others:
(a) Ordinary/Real – actually exists
(b) Ostensible/by Estoppel – exists only to partners (6) As to Publicity:
(a) Secret – some partners are not known to the public (b) Open/Notorious – all partners are known to the
public (7) As to Purpose:
(a) Commercial/Trading – business transactions (b) Professional/Non-Trading – exercise of professions Kinds of Partners:
(1) Under the Civil Code:
(a) Capitalist – contributes money/property (b) Industrial – contributes industry
(c) General – liability extends to personal assets (d) Limited – liability up to contribution only (e) Managing – manages the partnership (f) Liquidating – responsible during dissolution (g) By Estoppel – not really a partner
(h) Continuing – continues business after dissolution (i) Surviving – remains after partner’s death
(j) Sub-partner – contracts with partners, Article 1804 (2) Other Classifications:
(a) Ostensible – active, known to the public (b) Secret – active, unknown to the public (c) Silent – inactive, known to the public (d) Dormant – inactive, unknown to the public (e) Original – member at time of organization (f) Incoming – about to become a member (g) Retiring – about to withdraw
Article 1777
A universal partnership may refer to all the present property or to all the profits. (1672)
Article 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 the profits which they may acquire therewith. (1673)
Article 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. (1674a)
Why is the universal partnership of all present property not popular in the Philippines?
Property owned at the time of contribution will become common property of the partnership eventually because only the profits acquired through the contribution will become common property, unless there was a stipulation that says otherwise.
Example:
A and B form a Universal Partnership of All Present Property and stipulate that property and profits that are acquired during business operations will become common property even if these were not due to their contributions and that if anyone inherits property, it will become common property as well. A acquires land as part of his compensation package from AyalaLand and B inherits land from his parents. Whose property will become common property?
Only A’s land will become common property because it was essentially PAYMENT while B’s was inherited. The article prohibits donations to become common property, only fruits of such can become common property.
In a partnership, contributions must be determinate/certain and partners are akin to donors. Donations cannot comprehend future property but profits can be stipulated. Article 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. (1675)
Example:
Suppose A and B form a Universal Partnership of All Profits and A wins in the lotto, P100,000.00. B tries to share in 50% citing the existence of their partnership and that A used the partnership’s money to purchase the lottery ticket. Can B really share in the lotto winnings?
No, B cannot since it came from CHANCE, not WORK. If the P100,000.00 instead came from A’s work in DLSU, can B share in the profits of A?
Yes, because it came from WORK.
As long as it is PROFIT, the profit becomes common property to the partners UNLESS there was a stipulation in their agreement
If A and B form a Universal Partnership of All Profits for a Taxi-Cab business and both contribute vehicles that will serve as the taxi, what they were actually contributing is the USE or the RIGHT TO USE their vehicles. Upon dissolution, the vehicles will be returned to them since there was never a transfer of ownership.
Unique feature of the Universal Partnership of All Profits: - The partners retain the title of ownership.
Article 1781
Articles of Universal Partnership, entered into without specification of its nature, only constitute a universal partnership of profits (1676)
If the articles of universal partnership are doubtful or unclear then the presumption is that it is a universal partnership of all profits.
- Because a universal partnership of all profits require less obligations and is less onerous since the partners get to retain ownership over the property that they contribute.
Article 1782
Persons who are prohibited from giving each other any donation or advantage cannot enter into a universal partnership. (1677)
A husband and wife cannot join a universal partnership. - They are not allowed to donate to each other and a
universal partnership essentially requires that the partners donate to each other.
- They can join a particular partnership instead.
A partnership formed in violation of this article shall be null and void. It shall not have any legal personality either. Illustrative Case:
A, B and C form a partnership to engage in the importation, marketing and operation of automatic phonographs, radios, television sets, amusement machines and their parts accessories, with B and C as limited partners. Subsequently, A and B got married and thereafter, C sold his share to A and B for a nominal amount. Was the partnership dissolved after the marriage of A and B and C’s sale to them of his share in the partnership?
No, the firm was not a universal partnership but a particular one.
Pertinent Legal Provisions
(1) Article 87: Every donation or grant of gratuitous advantage, direct or indirect, between spouses during their marriage, valid or not, shall be void except moderate gifts which the spouses may give each other on the occasion of any family rejoicing.
(2) Article 739: The following donations shall be void: (a) Those made between persons who were guilty of
adultery or concubinage at the time of the donation (b) Those made between persons found guilty of the
same criminal offense, in consideration thereof (c) Those made to a public officer or his wife,
descendants and ascendants by reason of his office
Article 1783
A particular partnership has for its object determinate things, their use or fruits, or a specific undertaking, or the exercise of a profession or vocation (1678)
Defines what a particular partnership is Particular partnerships are those that are:
- Neither a universal partnership for all present property nor a universal partnership for all profits
- Example: Those that are formed for the acquisition and sale of property, Accounting Firms, Law Firms, etc. - Popular because it is easy to join
Chapter 2 – Obligations of the Partners
Section 1 – Obligations of the Partners amongst Themselves
Relations created by a contract of partnership (1) Relations among the partners themselves (2) Relations of the partners with the partnership (3) Relations of the partnership with third persons (4) Relations of the partners with third persons
Article 1784
A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679)
Partnership is perfected by mere consent and if ALL the requirements are met
Notwithstanding the fact that the partners have not given their contributions yet
Example:
A and B agree to form a partnership that will begin on December 1 and upon the arrival of certain machinery needed by the business. In this situation, are A and B in already in a partnership?
As long as the agreement remains executory, then A and B are NOT partners therefore there is no partnership yet. Partners may agree to form a partnership to take effect in
the future Example:
A and B agree to form a partnership 1.5 years later, with contributions of P100,000.00 each. A contributes his share early but when the time comes for B to contribute his share, he refuses and says he no longer wants to partake in the partnership. Can A compel B to contribute his share to the partnership?
NO. Because they cannot enforce the contract since it was perfected 1.5 years ago and the contract was only oral. Since the contract was for 1.5 years, it was greater than 1 year and should have been written instead.
The Statute of Fraud does not usually apply but to some particular cases such as the example above, it will.
If the contribution is immovable property, comply with Article 1773 otherwise the partnership will be void.
Article 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. (n)
A partnership with a fixed term/particular undertaking is continued without express agreement
- Rights and duties remain the same as they were at termination.
Example:
If A and B form a partnership to last until December 30, 2011 and A is the manager and they share profits 50-50 and after December 30, 2011 they continue with their partnership. What happens?
A and B retain their rights, meaning A is still the manager and they still share profits 50-50.
If there was express agreement for the term of existence, then when the term expires, the partnership is dissolved and becomes a partnership at will
Continuation is when there is NO settlement/liquidation. There must be prima facie evidence, meaning it must be seen on first glance.
Article 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. (1681a) Article 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 the account of the partnership. (n)
Article 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. (1682)
Suppose A, B and C are partners. A promises to contribute a RED CAR, B promises to contribute GOODS WORTH P50,000.00 and C promises to contribute P50,000.00 IN CASH on October 2011. On October 2011, none of them comply. What happens?
A, B and C thus become debtors to the partnership.
Suppose B and C contribute their parts but A does not. Can B and C ask for the recission or annulment of the contract? NO. If one of the partners fails to comply with his requirements, then the others can request for specific performance with damages from the defaulting partner A. What are the obligations of A before October 2011?
(1) To contribute what he promised
(2) To be held liable to answer for eviction if the partnership is deprived of his contribution
(3) To take care of the contribution with the diligence of a good father of a family.
Suppose A leased the car out and gets it back by December 2011.
Then A must deliver the car and the fruits (profits from lease) to the partnership because there was a delay.
Suppose that after A contributes the car, a 3rd
person, D claims to the real owner of the car and is able to prove so. Then A is held liable for eviction because the partnership is deprived for a specific thing. A is also held liable for damages to BOTH the partnership and to D.
What about B? Can the partnership determine the value of the goods he contributed?
In Article 1787, it clearly states that the goods SHOULD be appraised by the partnership. If there was no agreement/stipulation, then the partnership shall have the goods appraised by an expert.
What if the goods appreciate/depreciate? It will be charged to the partnership’s account.
What will happen if C fails to comply with his obligation? C will be liable for his contribution plus interest and damages from the date he was supposed to contribute. The same rule will apply if the partners take money from the partnership’s funds without everyone’s consent. He will however, not be charged for theft or estafa and his obligation will only be to
return the money he took plus interest and damages from the time he took the money.
When will a partner be held criminally liable?
Suppose the partners set aside P10,000.00 for payment to one of their creditors. A takes this amount from the fund and is subsequently discovered to have done so.
- Then A can be charged for estafa since he misappropriated the money ALREADY SET ASIDE. Article 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. (n)
An industrial partner contributes his industry
- Partnership has the EXCLUSIVE RIGHT to his industry - Prohibited from the engaging in business of ANY kind
unless the partnership has expressly permitted him to do so.
Example:
Suppose that a partnership is engaged in a automobile repair shop. A is the industrial partner (chief mechanic) and works only up to 5PM every working day. Can he go home and work on the partnership’s customers’ autos, even if he says it to the capitalist partners EVERY DAY before he leaves?
The law says that there must be EXPRESSED permission, in this situation, all A has is IMPLIED permission. The capitalist partners’ remedy is therefore to either: (only one) (1) Avail of the benefits from A’s “business”
(2) Exclude A from the partnership and demand for damages
Capitalist partners are prohibited from engaging in SIMILAR businesses only.
Industrial partners have the same remedies as capitalist partners.
Article 1790
Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the capital of the partnership. (n)
The partners shall contribute to the capital of the partnership as per their agreement, except if there was no agreement in the first place, in which case, they shall contribute equally. Example:
A and B decide to form a partnership and agree to contribute to the capital in the ratio of 60:40, how much should the partners contribute to the partnership?
The partners shall contribute in the ratio of 60:40, meaning if their partnership capital is a combined total of P10, 000.00 then A contributed P6, 000.00 and B contributed P4, 000.00. A and B decide to form a partnership but did not say how much the other should contribute, how much should each partner contribute to the partnership?
Since the partners did not give any sort of agreement as to the ratio of their capital contribution, we shall assume that they will contribute in equal proportions, meaning if the partnership capital is a combined total of P10, 000.00, then each partner contributed P5, 000.00.
Article 1791
If there is no agreement to the contrary, in case of 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 sav4e the venture, shall be obliged to sell his interest to the other partners. (n)
If there is an imminent loss in the partnership, the partner who refuses to contribute additional funds, IF HE IS CAPABLE TO DO SO, shall sell his share TO THE PARTNERS, unless he is an industrial partner.
- Imminent Loss
There is a need for the capitalist partners to contribute additional funds to save the partnership The industrial partner need not do so because he
has already given 100% of his efforts
If the capitalist partner is WILLING but NOT FINANCIALLY CAPABLE, the article will NOT apply to him because he is already insolvent
- Selling of interest
Refusal to contribute additional funds to save the partnership means that the partner no longer has any interest in the partnership
He should not be allowed to reap the benefits that the other partners have worked hard for because he had not done anything to help anyway
He cannot complain of being removed from the partnership because he will be paid what is due to him for his share in the interest of the partnership - Agreement that the partner need not contribute
additional funds in cases of loss
The capitalist partner will not be required since it was in their agreement in the first place.
Note that more contribution to the partnership capital would mean you share more in the profits but this should be voluntary
Things to consider:
(1) There must be an IMMINENT LOSS
(2) The partner who is unwilling to contribute must be SOLVENT/FINANCIALLY CAPABLE
(3) There was no agreement that the partners will not have to contribute additional funds in cases of loss
If the purpose of additional contribution is simply to raise capital, then this article will not apply.
Article 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 debtor by Article 1252, but only if the personal credit of that partner should be more onerous to him. (1684)
A and B are in a partnership where A is the managing partner. C owes A a sum of P5,000.00 and the partnership a sum of P10,000.00. The credit to A is due on September 1 while the partnership’s is due on September 15, both debts are due and demandable. A collects from C a total of P3,000.00 only and A subsequently issues a receipt in his name. Is the partnership entitled to share in the P3,000.00? Yes but in proportion to their respective debts so A gets P1,000.00 and the partnership gets P2,000.00.
Supposing there was no mention as to who the managing partner is, will the requisites of Article 1792 still be present?
Yes, in the absence of information relating to the identity of the managing partner, the assumption shall be that ALL partners are managing partners.
If A issues a receipt on the name of the partnership instead, to whose credit will the P3,000.00 be put?
The entire P3,000.00 will go to the partnership.
Supposing the credit of A carries 18% while that of the partnership carries only 10%. C pays A and says that the P3,000.00 shall be applied to A’s credit. Is the partnership entitled to share in the P3,000.00 still?
No, the debtor is given the right to apply payment to whichever debt is more onerous.
Things to remember:
The two conditions should be both present in order for the Article to apply, otherwise, the entire amount will go to whoever collects payment from the debtor.
(1) 2 debts and both are due and demandable (2) The one collecting should be the managing partner Article 1793
A partner who was 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. (1685a) In this case, there is only ONE debt but 2 or more debtors,
both of which are partners. Example:
A and B are partners and C owes the partnership a sum of P10,000.00. B is the managing partner but A collects his share in the P10,000.00 and C pays A P5,000.00 to which A issues a receipt in his name. When B’s turn to collect comes, C is already insolvent. What should A do?
A shall return his P5,000.00 to the partnership and split it with B because C has already become insolvent.
Take not that whoever collects doesn’t matter as it doesn’t make a difference
If you get your share early and the other parties cannot get theirs because the debtor has become insolvent, then you must return YOUR share to the partnership so that no one gets more than he should have.
Article 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. (1686a)
Why compensation will not apply:
Compensation will not apply because in compensation, you should be both a debtor and a creditor at the same time. However, the partner here is only a DEBTOR for damages and he cannot compensate using his profits and benefits earned for the partnership because it IS HIS DUTY to do so in the first place.
Responsibility may be equitably mitigated by the courts if, through extraordinary efforts of the partner, unusual profits are recognized/realized.
Example:
A partnership between A and B is engaged in an autoshop business. A customer brought his car in to be painted YELLOW but A bought RED paint instead and the car is
painted RED. Damages are suffered by the partnership for P30,000.00 due to the repainting. Can A compensate this loss using the profits he earned for the partnership?
A cannot compensate it with the profits he earned because it is his obligation to bring profits in the first place. The responsibility of the P30,000.00, however, may be mitigated by the court if by other activities, A is able to bring about unusual or extraordinary profits, meaning, he may be allowed by the courts to pay back just P15,000.00 instead. Follows that if the partner is guilty of fraud or damages, he
shall be liable for that. Article 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 contributed 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 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. (1687)
Refers to rules as to who bears the risks made by contributions
If the contribution is determinate and non-fungible but only the use is contributed, when it is lost, then the one who contributes it is liable for it.
If fungible things are contributed, the partnership shall be the one to shoulder the risks
The partnership shall also be the one to bear the risk for items brought for sale in inventory for appraisal for the value at which they were appraised.
Article 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 expenses 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 the risks in consequence of its management. (1688a)
Refers to the obligation of the partnership to the partners The partners are merely agents so they are not personally
liable except if they are at fault or if they exceeded their expressed authority
Obligations of the Partnership:
(1) To reimburse any amount disbursed by the partners in behalf of the partnership
- Example:
A partnership borrows from the bank a sum of P10,000.00 for additional funds but cannot pay it back when it is due to be paid back. A pays back the P10,000.00 using his personal funds. Should he be reimbursed by the partnership?
Yes, the partnership should reimburse A for the sum of P10,000.00 PLUS legal interest starting from the date A disbursed the P10,000.00.
(2) To answer for any obligation contracted in good faith - Example:
A partnership needs office supplies so B contracts for P10,000.00 worth of supplies. Who will pay for the contract price of P10,000.00?
The partnership shall be the one to shoulder the cost as it was made in good faith and B did not overstep his authority.
If it was stated that the partners cannot contract for more than P5,000.00 worth of supplies and B still contracts for P10,000.00, how much will the partnership pay?
The partnership will only pay what was allowed, that is, P5,000.00 and B will pay the remaining balance since B overstepped his authority.
(3) To answer for risks in management - Example:
A partnership is engaged in selling goods and a customer keeps asking for discounts and an argument ensues between the customer, C and the partner A. A gets injured and is brought to the hospital. Who shall shoulder the hospital bills? The partnership shall shoulder the hospital bills as it was during A’s time in managing the business that he was injured.
Article 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. (1689a)
Article 1798
If the partners have agreed to entrust 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 entrusted to one of the partners. (1690)
Article 1799
A stipulation which excludes one or more partners from any share in the profits or losses is void. (1691)
Lays out the rules in the distribution of profits and losses A, B and C are partners with the following capital
contributions, P30,000.00, P20,000.00 and P10,000.00 respectively, where C is a capitalist-industrialist partner. For one year of their operations, their partnership had earned net profits of P17,000.00. How shall these profits be divided among the partners? (C is entitled to receive P2,000.00 out of the entire P17,000.00)
(1) In accordance with any existing agreement between the partners as to how they shall share.
(2) If there was no agreement, then the partners shall share on a pro-rata basis
(3) The industrial partner shall get what is JUST and EQUITABLE in the circumstances. (BONUS TO PARTNER) P CAPITAL CONTRIBUTION RATIO SHARE IN DISTRIBUTABLE PROFIT BONUS TOTAL SHARE IN PROFITS A P 30,000.00 3/6 P 7,500.00 - P 7,500.00 B P 20,000.00 2/6 P 5,000.00 - P 5,000.00 C P 10,000.00 1/6 P 2,500.00 P 2,000.00 P 4,500.00 TOTAL P 60,000.00 6/6 P 15,000.00 P 2,000.00 P 17,000.00
The same rules shall apply for losses in the partnership’s operations, however the industrial partner shall not share in the losses as there is no way for him to retract his industry and in the event of losses, his efforts would have been for vain and it can thus be said that he has already shared. What is the legal effect of having a stipulation that excludes
a partner from sharing in the profits or losses?
Under Article 1799, the stipulation shall be void because there must be mutual sharing of profits and losses.
Can the partners appoint a 3rd person to designate the division of their profits and losses?
Yes and they will not be allowed to question his decisions unless the designation of shares is manifestly inequitable. 2 cases where partners ABSOLUTELY cannot question
designated shares by the 3rd parties:
(1) When a partner begins to execute the 3rd party’s decision
(2) When complaints are raised AFTER three months from the point of knowledge of the designation
Can the partners designate one of themselves to distribute profits or losses?
No, the law prohibits this situation because there may be disparities when it comes to the distribution of net profits. Article 1800
The partner who has been appointed manager in the articles of partnership may execute all acts of administration despite the opposition of his partners, unless he should act in bad faith; and his power is irrevocable without just and lawful cause. The vote of the partners representing the controlling interest shall be necessary for such revocation of power.
A power granted after the partnership has been constituted may be revoked any time. (1692a)
2 Kinds of Managing Partners:
(1) Appointed DURING the Constitution of the Partnership - May execute all administrative acts unless he acted in
bad faith. His power may not be revoked unless there is a JUST and LAWFUL cause and the vote of the partners with controlling interest
- Even if there are objections as to his decisions coming from the partners, his authority will prevail UNLESS he has acted in bad faith
- Acts of administration: ordinary business and administrative transactions
- Why can he note be revoked for no reason?
Because if you revoke his power, you are in effect changing the terms of the contract of partnership. (2) Appointed AFTER the Constitution of the Partnership
- May have his power revoked with or without cause - Decided upon by those partners who own controlling
interest in the partnership Article 1801
If two or more partners have been entrusted with the management of the partnership without specification of their respective duties, or without stipulation that one of them shall not act without the consent of the others, each one may separately execute all acts of
administration, but if any of them should oppose the acts of the others, the decision of the majority shall prevail. In case of tie, the matter shall be decided by the partners owning the controlling interest. (1693a)
Assume that A, B, C and D are all managing partners. A appoints E as a secretary but B objects to this. Is the appointment of E valid?
Yes since majority votes are first counted by head. If C&D were the ones to object, and they owned a combined total of 51% of partnership interest, then the appointment will not be valid. However, if B was still the one who objected and he owns 51% of partnership interest, the appointment will still be valid because majority votes are first counted by head. If the partnership cannot make a decision and ends up in a
tie (head count and interest), then the partnership is to be dissolved. This will be the only remedy, unless one of the other partners will relent.
Article 1802
In case it should have been stipulated that none of the managing partners shall act without the consent of the others, the concurrence of all shall be necessary for the validity of the acts, and the absence or disability of any one of them cannot be alleged, unless there is imminent danger of grave or irreparable injury to the partnership. (1694)
This is a case wherein two partners, A and B, stipulate that one cannot act without the consent of the other. Thus, there must always be concurrence between the two before any transactions may be entered into, the absence of the other’s consent shall not be used as an excuse.
Illustrative Case:
A sold to B, one of the managing partners of Partnership X, the other being C, a certain number of mining claims without the consent of C. In an action by A to recover the unpaid balance of the purchase price against Partnership X, C claims that the contract is not binding upon the partnership for the reason that under the articles of partnership, there is a stipulation that one of the partners cannot bind the firm by a written contract without the consent of others. Is the transaction made by B binding upon the partnership? According to the Supreme Court, the stipulation applies only to B and C. A has the right to assume that B was authorized to complete the transaction. Therefore, the partnership is liable, and since B violated the terms of contract between himself and C, he is required to reimburse C for the amount C will be paying A on behalf of the partnership, the reason being, it would be unfair to C who had no knowledge of B’s transaction to have to pay when he never agreed anyway. The only instance in which a partner may transact without
concurrence is when there is imminent danger of grave or irreparable damage to the partnership if he does not do so. However, the party involved must be able to prove so else he shall become liable for what he has done.
Example:
A and B are in a partnership where they sell fruits, B notices that the fruits in the warehouse are starting to rot so, without consent of A, he sells them.
This will be alright because if the fruits rot, then it would have been bad on the part of the partnership.
Article 1803
When the manner of management has not been agreed upon, the following rules shall be observed:
(1) All of the partners shall be considered agents and whatever any one of them may do alone
shall bind the partnership, without prejudice to the provisions of article 1801.
(2) None of the partners may, without the consent of the others, make any important alteration in the immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of consent by the other partners is manifestly prejudicial to the interest of the partnership, the court’s intervention may be sought. (1695a)
If there is no agreement as to who will be the managing partners, during constitution and after constitution of the partnership, then the assumption shall be that ALL the partners are managing partners, without prejudice to Article 1801, meaning Article 1801 will then apply to their case. The second paragraph of this article provides that the
partners cannot simply alter immovable property owned by the partnership without the consent of the other partners because this is NOT an act of administration but of OWNERSHIP.
Note that consent here is no qualified, so it may be expressed or it may be implied.
Example:
Suppose A, B, C and D are in a partnership where the managing partner is not specified and A decides to put up a warehouse in a piece of land owned by the partnership without consent of other partners because he believes it to be useful and beneficial to the partnership. His partners come over, once the warehouse is finished, to look at it and did not object to its existence. Was this valid?
Yes, since the partners did not object, then there is IMPLIED consent. Since consent was never qualified in the article, it is assumed that implied consent is enough.
Suppose before A builds the warehouse, he asks for the consent of the other partners, who refuse to give it. When A tries to convince them and asks why they refuse to give consent, they simply say that they do not want it to be there, making their objection manifestly prejudicial, meaning, there is really no reason for their objection, what then, is the remedy of A in this situation?
A may bring the matter to court. If the court finds the other partners of having no solid reason to object, it may compel the other partners to give their consent.
Article 1804
Every partner may associate another person with him in his share, but the associate shall not be admitted into the partnership without the consent of all the other partners, even if the partner having an associate should be a manager. (1696)
Refers to SUBPARTNERSHIP
A, B and C are in a partnership wherein A is the managing partner. A enters into a contract with D that states D will receive 50% of A’s share in partnership profits. Can A do this even without the consent of the other partners?
Yes, because a sub-partnership will not affect the composition of the partnership and D will not be able to interfere with the partnership’s management anyway. When are you required to share your partnership profits with
3rd persons?
When you contract with 3rd persons because perhaps in some past event you needed money and they provided you with it, and in your contract, it was agreed upon that you will share in the partnership profits.
The 3rd person can also opt to receive ALL profits.
Can D become a partner without the consent of the other partners, if he associates with the managing partner?
No, D would need to get the consent of all partners because this would change the partnership composition.
Article 1805
The partnership books shall be kept, subject to any agreement between the partners, at the principal place of business of the partnership, and every partner shall at any reasonable hour have access to and may inspect and copy any of them. (n)
The partnership books shall be kept in the following places, in order:
(1) In accordance with partnership agreements
(2) If there were no agreements, then the partnership books shall be kept in the principal place of business of the partnership (ex: headquarters)
Each partner will have access to ALL partnership books. When will the partner be allowed to access the partnership
books?
The partner is allowed to access partnership books during REASONABLE HOURS OF BUSINESS (8am-5pm), according to the law. The one who is keeping the partnership books cannot state when it can be inspected.
Article 1806
Partners shall render on demand true and full information of all things affecting the partnership to any partner or legal representative of any deceased partner or of any partner under legal disability. (n)
The article does not mean that the partners need wait for demands before disclosing information, when they get hold of the information, they should disclose it immediately, although additional details may be demanded.
If information is not disclosed and it is found out later on, the partner/s who did not disclose such will be held liable for it and be charged for misrepresentation.
Suppose A, B and C are in a partnership wherein A is sent to inspect partnership property in Mindanao. A realizes that the property contains oil deposits and does not disclose this information to B and C. He also lies and says that the property is completely useless for their business and offers to buy B and C’s interests in the partnership. When A is the only one holding the business, he develops the land and gains substantial profits from the oil deposits. B and C later on learn about the information A kept hidden from them and demand that they be given their shares in the oil profits. The question now is, can B and C, after having sold their interests in the partnership, still share in the profits?
Yes, they will be allowed to share in the profits because the information regarding oil deposits was present when they sold their share to A, just that it was hidden from them. Article 1807
Every partner must account to the partnership for any benefit, and hold as trustee for it any profits derived by him without the consent of the other partners from any transaction connected with the formation, conduct or liquidation of the partnership or from any use by him of its property. (n)
A partner who receives benefits or profits derived without consent of others shall account for it as the partnerships. If particular property is mortgaged and foreclose, the partner
who uses personal funds is able to get the property back will not become the new owner, he will only be its trustee. If the partner gets the property back after ONE year from the
3rd party involved, then it shall become his as it was a private transaction, so long as he uses his own funds.
Example:
A and B are partners engaged in the operation of a cinema business. The theater was mortgaged to C who foreclosed the mortgaged debt. A, in his own behalf, redeemed the property with his own private funds. Subsequently, A files a petition for the cancellation of the old title of the partnership and the issuance of a new title in HIS name alone. Did A become the absolute owner of the property?
No, the law says that he will only hold the property as the trustee and will be entitled to reimbursement plus interest from the time he redeemed the property.
Article 1808
The capitalist partners cannot engage for their own account in any operation which is of the kind of business in any operation which is of the kind of business in which the partnership is engaged, unless there is a stipulation to the contrary.
Any capitalist partner violating this prohibition shall bring to the common fund any profits accruing to him from his transaction, and shall personally bear all the losses. (n)
The article is with regards to a capitalist partner engaging in other businesses.
Is the capitalist partner allowed to engage in other businesses aside from the one he has with the partnership? Yes, as long as the business he engages in is something dissimilar or different from the of the partnership’s.
What will happen if the capitalist partner violates the law regarding his ability to engage in other businesses?
Then he shall have to bring the profits he gained from the other business to the partnership and be liable for losses suffered by the partnership.
Why is the capitalist partner not allowed to engage in a similar line of business?
Because he might take advantage of the information in the partnership or of their clients, resulting in a conflict of interest between himself and the other partners.
The capitalist partner can engage in a business similar to the partnership if there was a stipulation in the contract of partnership and if the business he operates exists in a different area or place.
Article 1809
Any partner shall have the right to a formal account as to partnership affairs:
(1) If he is wrongfully excluded from the partnership business or possession of its property by his co-partners
(2) If the right exists under the terms of any agreement
(3) As provided by Article 1807
(4) Whenever other circumstances render it just and reasonable. (n)
General Rule:
During existence, a partner is not required to demand for an accounting because his interest is already protected by two Articles of the law, Article 1805 and Article 1806. But for specific cases, the law provides that he can DEMAND for an accounting of the partnership books.
4 Cases where a partner can demand for an accounting: (1) When he is wrongfully excluded from the partnership
operations (business and property possession) (2) If the right exists under their agreement (3) Under Article 1807
(4) Other circumstances which render it just and reasonable.
