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Partnership Finals (de Leon Annotations)

Partnership Finals (de Leon Annotations)

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Published by Janz Serrano
under Prof. Dionne Sanchez
under Prof. Dionne Sanchez

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Published by: Janz Serrano on Jun 09, 2012
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1
Agency & Partnership Finals Reviewer 
de leon annotationsProf. D. Sanchez2
 nd
 
 semester, AY ’10
-
‘11
 
 Janz Hanna Ria N. Serrano 
The law on partnershipI.
 
Nature; CreationA.
 
Definition; essential features
CC, 1767
. By the contract of partnership two or more persons bind themselves to contribute money, property, or industry to a common fund, withthe intention of dividing the profits among themselves.Two or more persons may also form a partnership for the exercise of a profession
 
Partnership is a legal concept, but the determination of the existence of a partnership may involve inferences drawn from an analysis of all thecircumstances attending its creation and operation.
 
Civil law concept v. American concept of partnershipCivil Law AmericanPartnership as a contract Partnership as a relation1767
terms as the agreement itself out of which a partnership iscreatedBased on the result of the contract/agreement, i.e., the juridicalrelation growing out from the express/implied agreement of theparties to create a partnershipSeparate juridical personality Partnership is considered merely an extension of its members
 
General professional partnership
1767, 2
nd
par.
o
 
Profession
 
“a group of men pursuing a learned art as a common calling in the spirit of public service –
no less a public service becaust it mayincidentally be a means of livelihood
o
 
Strictly speaking, the practice of a profession is not a business or an enterprise or profit; but the law allows the joint pursuit thereof 
o
 
Partnership for the practice of law(1)
 
A mere association for non-business purposes(2)
 
Distinguished from business
the practice of law is intimately and peculiarly related to the administration of justice and should not be
considered like an ordinary ‘money
-
making’ trade. Primary distinguishing characteristics:
 (a)
 
A duty of public service(b)
 
A relation as an officer of court (c)
 
A relation to clients in the highest fiduciary degree(d)
 
A relation to colleagues at the bar characterized by candor, fairness and unwillingness to resort to current business methods of advertising and encroachment on their practice
 
Characteristics
o
 
Consensual
perfected b y mere consent 
o
 
Nominate
it has a special name/designation in law
o
 
Bilateral
entered into by 2 or more persons and the rights and obligations arising therefrom are always reciprocal
o
 
Onerous
each party aspires to procure for himself a benefit 
o
 
Commutative
the undertaking of each
partner is considered as equivalent of the others’
 
o
 
Principal
does not depend for its existence and validity upon some other contracts
o
 
Preparatory
entered into as a means to an end, i.e. to engage in business for profit-realization
 
Essential features
o
 
There must be a valid contract (1)
 
Partnership relation fundamentally contractual
no such thing as a partnership created by law/operation of law | partnership relation asa result of the contract of partnership(a)
 
Form
relation is evidenced by the terms of the contract [oral or written, express or implied](b)
 
Articles of Partnership
while the partnership relation may be informally created, it is customary to embody the terms of theassociation in a written document, stating the name, nature/purpose, location of the firm and defining among others, the powers,rights, duties & liabilities of the partners among themselves, their contributions, the manner by which profits and losses are to beshared, and the procedure for dissolution.(c)
 
Requisites
since fundamentally contractual
consent & capacity, object, cause/consideration(2)
 
Partnership relation fiduciary in nature
partnership is a form of 
voluntary association
entered into by the associates; it is a
 personal relation in which the element of delectus personae exists, involving as it does trust & confidence between the partners
 (a)
 
Right to choose co-partners(b)
 
Power to dissolve the partnership(3)
 
Application of the principles of estoppel
CC, 1825. In such cases, there is no actual or legal partnership but merely a partnership liabilityimposed by law in favor of 3
rd
persons
o
 
The parties [2 or more persons] must have legal capacity to enter into the contract (1)
 
Individuals
as a general rule, any person may be a partner who is capable of entering into contractual relations; consequently, anyperson who cannot give consent to a contract cannot be a partner, e.g. unemancipated minors, insane or demented persons, deaf-muteswho do not know how to write, persons suffering from civil interdiction, incompetents(2)
 
Partnerships
there is no prohibition against a partnership being a partner in another partnership(3)
 
Corporations
 
Mendiola v. CA, Tuason v. Bolanos
: unless authorized by statute or by its charter, a corporation is
without 
capacity toenter into a contract of partnership(a)
 
A corporation, however, may enter into
joint venture partnership
 
where the nature of the venture is in line with the businessauthorized by its charter [
 JM Tuason v. Bolanos; Aurbach v. Sanitary Wares
](b)
 
Where the partnership agreement provides that the 2 partners will manage the partnership so that the management of corporateinterest is not surrendered, the partnership may be allowed [
 SEC Opinion, Dec. 22, 1966
](c)
 
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 the management and control of the business operation, it shall not be deemed “doing business” in the
Philippines. [
 SEC Opinion, Aug. 6, 1998 
]
o
 
There must be a mutual contribution of money, property or industry to a common fund(1)
 
Existence of proprietary interest 
partners must contribute capital(a)
 
Money(b)
 
Property
may be real or personal, corporeal or incorporeal(c)
 
Industry
the active cooperation, the work of the party associated, which may be either personal manual efforts or intellectual-
 
Contribution may be in all 3 forms, or any 2 or 1 of them-
 
A partnership may therefore exist even if it is shown that the partners have not contribute any capital of their own to a common funfor the contribution may be in the form of credit or industry not necessarily cash or fixed assets [
Lim Tong Lim v. Phil. FishingGear Industries
]-
 
Note: The law does not specify the kind of industry that a partner may contribute [
Evangelista v. Abad Santos
](2)
 
Proof of contribution
 
necessary 
 
Lim Tong Lim v. Phil Fishing Gear Industries
: Three persons decided to form a corporation which was not legally formed, and one of them did not directly act on behalf of the corporation but reaped the benefits of the contract entered into by the other 2.
Held 
: given thefacts, it is clear that there was a partnership between Lim, Chua and Yao
they purchased the boats, which constituted the main assets of the partnership, and they agreed that the proceeds from the sales and operations thereof would be divided among them.
o
 
The object must be lawful
 
Should not be contrary to law, morals, good customs ,public order or public policy
 
Instances of unlawful object:
 
2
Agency & Partnership Finals Reviewer 
de leon annotationsProf. D. Sanchez2
 nd
 
 semester, AY ’10
-
‘11
 
 Janz Hanna Ria N. Serrano 
-
 
To create illegal monopolies or combinations in restraint -
 
To carry on gambling [
 Arbes v. Polistico
]-
 
To engage in smuggling-
 
To lease furnished apartments to prostitutes-
 
To prevent competition in bidding for government contracts-
 
To control the price of a commodity in the interest of its members
o
 
The primary purpose must be to obtain profits and to divide the same among the parties(1)
 
The very reason for existence of partnership-
 
One without any right to participate in the profits cannot be deemed as partner since the essence of partnership is that the partnersshare in the profits and losses [
Tocao v. CA
](2)
 
Need only be the principal, not exclusive aim
o
 
*articles of partnership must not be kept secret among members (otherwise, co-ownership [A1775])
 
Sharing of profits(1)
 
Not necessarily in equal shares(2)
 
Not conclusive evidence of partnership
merely presumptive
 
Sharing of losses(1)
 
Necessary collateral of sharing in profits(2)
 
Agreement not necessary
the obligation is implied from the partnership relation
CC, 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 anyprofits 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 orinterest 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 inferenceshall 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 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 installments or otherwise.
 
A1769 shall apply only when there is doubt 
 
Where existence disputed
 
Heirs of Tan Eng Kee v. CA
: The existence of a partnership may be disputed by an interested party. The issue as towhether a partnership exists is a factual matter to be decided on the basis of all circumstances. No single factor usually is controlling. Wherecircumstances taken singly may be inadequate to prove the intent to form a partnership, nevertheless the collective effect of these circumstancesmay be such as to support a f 
inding of the existence of the parties’ intent 
 
 
Gatchalian v. Collector 
: 2 persons contributed money to buy a sweepstakes ticket with the intention to divide the prize which they may win.
Held 
: A partnership was formed. It appeared that B personally appeared in the PCSO, in
capacity as co-partner
to collect the prize.
 
Obillos, Jr v. Commissioner 
: Children sold lots given by their father and divided the proceeds.
Held 
: no partnership. The division of profits wasmerely incidental. There must be unmistakable intention to form a partnership
 
Sharing of gross returns alone does not indicate a partnership,
 since in a partnership, the partners share net profits after satisfying all of the
 partnership’s liabilities
 
 
Receipt of share in the profits = strong presumptive evidence of partnership
o
 
Philex Mining v. Commissioner 
: Where the “compensation” given to the manager of a project who had put substantial sum in the venture is
pegged to profits, such compensation actually constitutes his share in the net profits of the partnership as a partner and not as an employee
o
 
Basic test of partnership, whether inter se or as to 3
rd
persons,
is whether the business is carried on in behalf of the person sought to beheld liable
 
 
Burden of proof rests on the party asserting(1)
 
The existence of a partnership must be proved; will not be presumed(2)
 
The law presumes that persons who are acting as partners have entered into a contract of partnership(3)
 
When a partnership is shown to exist, presumption is that it continues in the absence of evidence to the contrary(4)
 
One who alleges that a partnership cannot prove it merely by evidence of an agreement wherein the parties call themselves “partners”
 ** LEGAL INTENTION is the crux of partnership.B.
 
Creation
CC, 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 tothe provisions of the Penal Code governing the confiscation of the instruments and effects of a crime.
 
Effects of an unlawful partnership(1)
 
Contract is void ab initio(2)
 
Profits confiscated in favor of the government (3)
 
Instruments or tools and proceeds of the crime also forfeited in favor of government (4)
 
Contributions of the partners shall not be confiscated unless they fall under (3)
 
Judicial decree not necessary to dissolve, but is advisable
 
Right to return of contribution
Any other solution would be immoral, and the law will not consent to the contribution remaining in thepossession of the manager or administrator who refused to return them by denying to the partners the action to demand them [
 Arbes v.Polistico
]
 
Right to receive profits in an unlawful partnership = unlawful
CC, 1771
. A partnership may be constituted in any form, except where immovable property or real rights are contributed thereto, in which case apublic instrument shall be necessary.
 
Form of partnership contract (1)
 
General rule
no special form required. Contract may be oral or in writing regardless of the value of the contributions(2)
 
Where immovable or real rights are contributed
public instrument necessary(3)
 
When partnership agreement covered by A1403
agreement to enter into a partnership at a future time
 
Partnership implied from conduct (1)
 
Binding effect 
a partnership may exist and often exists in the absence of express agreement.
Its existence may be implied from theacts or conduct of the parties
, as well as from other declarations, and such implied contract would be binding as a written and expresscontract.(2)
 
Ascertainment of intention of parties
the intention as discloses by the entire transaction, and as gathered from the facts and from thelanguage employed by the parties as well as their conduct should be ascertained.(3)
 
Conflict between intention and terms of contract 
intention prevails
CC, 1772
. Every contract of partnership having a capital of three thousand pesos or more, in money or property, shall appear in a publicinstrument, 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 membersthereof to third persons.
 
Partnership with capital of 3K or more:
 
3
Agency & Partnership Finals Reviewer 
de leon annotationsProf. D. Sanchez2
 nd
 
 semester, AY ’10
-
‘11
 
 Janz Hanna Ria N. Serrano 
(a)
 
Contact must appear in a public instrument (b)
 
Must be recorded or registered with the SEC
 
Failure to comply DOES NOT prevent the formation of a partnership or affect its liability and that of the partners to 3
rd
persons
 
Purpose: tax liabilities cannot be evaded; public can also determine more accurately they membership and capital before dealing with them
 
When partnership considered registered
Date the partnership papers are presented to and left for record
CC, 1784
. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated.
 
Partnership is a consensual contract, hence, it exists from the moment of the celebration of the contract by the partners
 
The birth and life of a partnership is predicated on the mutual desire and consent of the parties (
Ortega v. CA
]
 
Executory agreement of partnership
A1784 not absolute: Partners may stipulate some other date for the commencement of the partnership
CC, 1815
. Every partnership shall operate under a firm name, which may or may not include the name of one or more of the partners.Those who, not being members of the partnership, include their names in the firm name, shall be subject to the liability of a partner.
 
Importance
necessary to distinguish the partnership which has a distinct and separate juridical personality
 
Persons, who, not being partners, include their names in the firm name do not become a partner, but shall be subject to liability of a partner asregards 3rd persons.
Code of Professional Responsibility Rule 3.02
. In the choice of a firm name, no false, misleading or assumed name shall be used. The continueduse of the name of a deceased partner is permissible provided that the firm indicates in all its communications that said partner is deceased.
CC, 1141
. Real actions over immovables prescribe after thirty years.This provision is without prejudice to what is established for the acquisition of ownership and other real rights by prescription.C.
 
Separate juridical personality
CC, 1768
. The partnership has a judicial personality separate and distinct from that of each of the partners, even in case of failure to comply withthe requirements of Article 1772, first paragraph.
 
Partnership a juridical person-
 
Like the corporation, a partnership is duly formed under the law is a juridical person to which the law grants a juridical personality separateand distinct from that of each of the partners-
 
It may enter into contracts, acquire and possess property of all kinds in its name, as well as incur obligations and bring civil or criminal actionsin conformity with the laws and regulations of its organizations
CC, 1774
. Any immovable property or an interest therein may be acquired in the partnership name. Title so acquired can be conveyed only inthe partnership name.-
 
In view of the separate juridical personality of a partnership, the partners cannot be held liable for the obligations of the partnership unless it is shown that the legal fiction of a different juridical personality is being used for a fraudulent, unfair or illegal purpose and except as providedin A1816 [
 Aguila v. CA
]
 
Effect of failure to comply with statutory requirements(1)
 
Under A1772
still acquires juridical personality(2)
 
Under A1773 and 1775
no separate juridical personality
CC, 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.
 
Requirements
: regardless of value of immovable property:(a)
 
Contract must be in a public instrument (b)
 
An inventory of the property must be made, signed by the parties and attached to the public instrument 
 
 Agad v. Mabolo
: A partnership contract which states that the partnership is established “to operate a fishpond” (not “to engage in a
fishpond business) is not rendered void because no inventory of the fishpond was made
where it did not clearly and positivelyappear that the real property had been contributed by anyone of the partners
 
 
Importance of inventory: to show how much is due from each partner to complete his share in the common fun and how much is dueto each of them in case of liquidation
 
To organize a partnership not an absolute right 
merely a privilege which may be enjoyed only under such terms as the state may deemnecessary to impose
CC, 1775
. Associations and societies, whose articles are kept secret among the members, and wherein any one of the members may contract in hisown name with third persons, shall have no juridical personality, and shall be governed by the provisions relating to co-ownership
NIRC Sec 22(b)
. The term
"corporation" 
shall include partnerships, no matter how created or organized, joint-stock companies, joint accounts(cuentas en participacion), association, or insurance companies, but does not include general professional partnerships and a joint venture orconsortium formed for the purpose of undertaking construction projects or engaging in petroleum, coal, geothermal and other energy operationspursuant to an operating consortium agreement under a service contract with the Government 
.
"General professional partnerships
are partnershipsformed by persons for the sole purpose of exercising their common profession, no part of the income of which is derived from engaging in any tradeor business.
NIRC Sec. 26
.
Tax Liability of Members of General Professional Partnerships
. - A general professional partnership as such shall not be subject tothe income tax imposed under this Chapter. Persons engaging in business as partners in a general professional partnership shall be liable forincome tax only in their separate and individual capacities.For purposes of computing the distributive share of the partners, the net income of the partnership shall be computed in the samemanner as a corporation.Each partner shall report as gross income his distributive share, actually or constructively received, in the net income of the partnership.
CC, 1811, 2
nd
par
. The incidents of this co-ownership are such that:(1)
 
A partner, subject to the provisions of this Title and to any agreement between the partners, has an equal right with his partners to possessspecific partnership property for partnership purposes; but he has no right to possess such property for any other purpose without theconsent of his partners;(2)
 
A partner's right in specific partnership property is not assignable except in connection with the assignment of rights of all the partners inthe same property;(3)
 
A partner's right in specific partnership property is not subject to attachment or execution, except on a claim against the partnership. Whenpartnership property is attached for a partnership debt the partners, or any of them, or the representatives of a deceased partner, cannot claim any right under the homestead or exemption laws;(4)
 
A partner's right in specific partnership property is not subject to legal support under Article 291D.
 
Mutual agency
CC, 1803
. When the manner of management has not been agreed upon, the following rules shall be observed:(1)
 
All the partners shall be considered agents and whatever any one of them may do alone shall bind the partnership, without prejudice to theprovisions 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 thepartnership, the court's intervention may be sought.
 
All partners considered managers and agents
 
unanimous consent required for alteration of immovable property
o
 
Bachrach v. La Protectora
: A contract was entered into by a partner without the consent of the others, there being no agreement withregard to the manner of management.
Held 
: Partnership liable for the indebtedness. There being no agreement with regard to the mannerof management, all the partners are considered agents of the partnership. Partner A must be deemed to have authority to contract theindebtedness in question inasmuch as it was incurred in the prosecution of the business.
CC, 1818
. Every partner is an agent of the partnership for the purpose of its business, and the act of every partner, including the execution in thepartnership name of any instrument, for apparently carrying on in the usual way the business of the partnership of which he is a member binds the

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