Page 1 of 4
Chapter 2: OBLIGATIONS OF THE PARTNERS
Section 1. Obligations of the Partners
among Themselves
(T.N. Read with the codal)
Relations created by a contract
of partnership.
A contract of partnership gives rise to at least four distinct
juridical relations, namely:
(1) Relations among the partners themselves;
(2) Relations of the partners with the partnership;
(3) Relations of the partnership with third persons with
whom it contracts; and
(4) Relations of the partners with such third persons.
Rights and Obligations of Partner among themselves
in general.
(1) Partnership relationship essentially one of mutual
trust and confidence.
a. Each partner is a trustee (his duties with
his co-partners and the partnership) and
at the same time a cestui que trust
(duties of his co-partners)
b. Fiduciary relationship
(2) Fiduciary relationship exists until partnership is
terminated.
(3) Relationship in a limited partnership.
a. Partners are both a principal and an
agent in relation to his co-partners (See
Art. 1818).
b. A limited partner and other partners in a
limited partnership does not involve the
element of trust and confidence, unlike
in a general partnership.
(Must read in relation to Article 171 and 1773)
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)
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)
General rule: No special form is required for the validity or
existence of the contract of partnership. (see Art. 1356.)
The contract may be made orally or in writing regardless of
the value of the contributions.
XPN: Requires the execution of a public instrument for the
validity of a contract of partnership whenever immovable
property is contributed thereto.
Notes: 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.
Article 1773 Requirements. — Where immovable property,
regardless of its value, is contributed, the failure to comply
with the following requirements will render the partnership
contract void in so far as the contracting parties are
concerned:
(a) The contract must be in a public instrument (Art.
1771.); &
(b) An inventory of the property contributed must be made,
signed by the parties, and attached to the public
instrument.
Article. 1772. Two requirements where the capital of the
partnership is P3,000.00 or more,25 in money or property,
namely:
(a) The contract must appear in a public instrument; and
(b) It must be recorded or registered with the Securities
and Exchange Commission.
Notes: 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.
Purpose of Registration: “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.” (IV
Capistrano, Civil Code of the Phils., p. 260.)
Article. 1784. A partnership begins from the moment
of the execution of the contract, unless it is otherwise
stipulated. (1679)
o As a consensual contract, a partnership exists
form the moment of its celebration by the
partners.
o Unlike a corporation, a partnership has no
prescribed time limit. Its term is bound by the
contract of the parties.
XPN: Future Partnerships – wherein the partners may
stipulate come other date for the commencement of the
partnership.
Article 1785: Usually, a partnership is dissolved when its
fix term expires. However, the partnership may be
extended or renewed by the partners by
(a) express agreement – written or oral
(b) Implied agreement – by the mere continuation of
the business after the termination of such term or
particular undertaking without any settlement or
liquidation.

a. In this case, the rights and duties of the
partners remain the same but only
insofar as is consistent with a
partnership at will (See Article 1776).
Notes: One of the partners may dictate the dissolution of
the partnership at will. However, he must act in good faith
in doing so (See Article 1830).
Article. 1786. Obligations with respect to contribution
of property.
The above article deals with the obligations of the
partners among themselves and to the partnership with
respect to contribution of property. They are as follows:
(1) To contribute at the beginning of the partnership or at
the stipulated time the money, property, or industry which
he may have promised to contribute;
(2) To answer for eviction in case the partnership is
deprived of the determinate property contributed; and
(3) To answer to the partnership for the fruits of the
property the contribution of which he delayed, from the
date they should have been contributed up to the time of
actual delivery.
In addition, the partner has the obligation:
(4) To preserve said property with the diligence of a good
father of a family pending delivery to the partnership (Art.
1163.); and
(5) To indemnify the partnership for any damage caused to
it by the retention of the same or by the delay in its
contribution. (Arts. 1788, 1170.)
Notes: The money or property contributed by a partner
becomes the property of the partnership. It necessarily
follows that the same cannot be withdrawn or disposed of
by the contributing partner without the consent or approval
of the partnership or of the other partners. (Lozana vs.
Depakakibo, 107 Phil. 728 [1960].)
Remedy of a partner or the partnership to those
partners who did not contribute to the partnership:
- an action for specific performance (to collect what
is owing) with damages and interest from the
defaulting partner from the time he should have
complied with his obligation. (Art. 1788.)
Article 1838, however, allows rescission or annulment
of a partnership contract on the ground of fraud or
misrepresentation committed by one of the parties thereto.
ART. 1787. The appraisal of the value of the goods
contributed is necessary to determine how much has been
contributed by
the partners. In the absence of an stipulation, the share of
each partner in the profits and losses is in proportion to
what he may have contributed. (Art. 1797.)
Page 2 of 4
The appraisal is made:
(1) Firstly, in the manner prescribed by the contract
of partnership; and
(2) Secondly, in the absence of stipulation, by
experts chosen by the partners and according to
current prices.
Notes: In the case of immovable property, the appraisal is
made in the inventory of said property (see Arts. 1773,
1795.);
Article 1788. This article contemplates two distinct cases.
The first paragraph refers to money promised but not
given on time and the second, to partnership money
converted to the personal use of the partner.
The following are the obligations of the partners with
respect
to the partnership capital under Article 1788:
(1) To contribute on the date due the amount he has
undertaken to contribute to the partnership;
(2) To reimburse any amount he may have taken from the
partnership coffers and converted to his own use;
(3) To pay the agreed or legal interest, if he fails to pay his
contribution on time or in case he takes any
amount from the common fund and converts it to his own
use;
(4) To indemnify the partnership for the damages caused
to
it by the delay in the contribution or the
conversion of any sum for his personal benefit.
Article 1789. Obligations of industrial partner.
An industrial partner is one who contributes his
industry, labor, or services to the partnership. He is
considered the owner of his services, which is his
contribution to the common fund.
Notes:
Unless the contrary is stipulated, he becomes a
debtor of the partnership for his work or services from the
moment the partnership relation begins. In effect, the
partnership acquires an exclusive right to avail itself of his
industry. Consequently, if he engages in business for
himself, such act is considered prejudicial to the interest of
the other partners.
An action for specific performance to compel the
partner to perform the promised work or service is not
available as a remedy because this will amount to
involuntary servitude which, as a rule, is prohibited by the
Constitution. (Art. III, Sec.
18[2] thereof.)

Reason for the prohibition (an industrial partner
cannot engage in business for himself):
To prevent any conflict of interest between the
industrial partner and the partnership and to ensure faithful
compliance by said partner with his prestation.
(Evangelista & Co. vs. Abad Santos, 51 SCRA 416
[1973].)
- Applies whether the industrial partner is to
engage in the same business in which the
partnership is engaged or in any kind of business.
- For a capitalist partner, there is prohibition only to
any operation which is of the same kind of
business in which the partnership is engaged
unless there is a stipulation to the contrary. (Art.
1808.)
Remedies where industrial partner engages in
business.
The capitalist partners have the right either:
(1) To exclude him from the firm or
(2) To avail themselves of the benefits which he may
have obtained.
Notes: In either case, the capitalist partners have a right
to damages.
Although the law mentions only the capitalist
partners, it is believed that industrial partners are also
entitled to the remedy granted since they are equally
prejudiced by the act of their copartner engaging in
business for himself.
Article. 1791. Obligation of capitalist partner to
contribute additional capital.
General Rule: a capitalist partner is not bound to
contribute to the partnership more than what he agreed to
contribute.
XPN: A capitalist partner may contribute in case of
imminent loss of the business and there is no agreement
to the contrary.
- If a capitalist partner refuses to contribute, he
shall be obliged to sell his interest to the other
partners.
- An industrial partner is exempted from the
requirement to contribute an additional share.
Having contributed his entire industry, he can do
nothing.
Article 1792. Obligation of managing partner who
collects debt.
Where a person is separately indebted to the
partnership and to the managing partner at the same time,
Page 3 of 4
any sum received by the managing partner shall be
applied to the two credits in proportion to their amounts,
except where he received it for the account of the
partnership, in which case the whole sum shall be applied
to the partnership credit only.
Requisites for application of rule. — The following are
the
requisites for the application of this article:
(a) There exist at least two debts, one where the collecting
partner is creditor, and the other, where the
partnership is the creditor;
(b) Both debts are demandable; and
(c) The partner who collects is authorized to manage and
actually manages the partnership.
EXAMPLE:
A and B are partners in X and Co., with A as the
managing partner. C is indebted to A in the sum of
P2,000.00. C is also indebted to the partnership in the sum
of P4,000.00. Both debts are demandable. A collects the
amount of P1,500.00 from C.
If A issues a receipt to the effect that it is in
payment of his (A’s) credit, P500.00 will be applied only to
his credit, the partnership being entitled to a proportionate
amount of P1,000.00 in the payment made by C. But if A
gives a receipt for the account only of the partnership
credit, the amount of P1,500.00 will be fully applied to the
latter.
Right of debtor to application of payment. — Under the
second paragraph, the debtor is given the right to prefer
payment of the credit of the partner if it should be more
onerous to him in accordance with his right to application
of
payment. (Art. 1252.6)
EXAMPLE:
In the example given above, if the obligation in
favor
of A bears 18% interest per annum while that in favor of
the
partnership is 16% interest per annum, the credit of A
being
more onerous or burdensome, the law allows C to prefer
the
payment of A’s credit in case he so desires.
Article 1793. Obligation of partner who receives share
of partnership credit. In the present article, there is only
one credit — credit in favor of the partnership.
Furthermore, the present article applies whether the
partner who receives his share of the partnership credit is
authorized to manage or not.
 Page 4 of 4

Requisites for application of rule. — The requisites for

the application of this article are as follows:

(a) A partner has received, in whole or in part, his share of

the partnership credit;
(b) The other partners have not collected their shares; and
(c) The partnership debtor has become insolvent.

EXAMPLE:
D owes partnership X and Co. P4,500.00. A, a
partner, received a share of P1,500.00 ahead of B and C,
the two other partners. When B and C were collecting from
D, the latter was already insolvent.
In this case, even if A had given a receipt for his
share only, he can be required to share the P1,500.00 with
B and C.