Week 2 Chapter 2 - Obligations of the Partners Section 1 - Obligations of the
partners among themselves (Art. 1784 to 1809, New Civil Code)
ART. 1784. A partnership begins from the moment of the execution of the contract, unless it is otherwise stipulated. (1679)
Commencement and term of partnership. (1) A partnership is a consensual contract; hence, it exists from the moment of the celebration of the contract by the partners.1 (see Art. 1315.) Since under Article 1784, a partnership commences from the time of execution of the contract if there is no contrary stipulation as to the date of effectivity of the same, its registration in the Securities and Exchange Commission is NOT essential to give it juridical personality. (2) The birth and life of a partnership is predicated on the mutual desire and consent of the parties. (see Ortega vs. Court of Appeals, 245 SCRA 529 [1995].) Unlike a corporation, no time limit is prescribed by law for the life of partnership. Hence, the partners may fi x in their contract any term and they shall be bound to remain under such a relation for the duration of the term barring the occurrence of any of the events causing dissolution of the partnership before its expiration. (Arts. 1830-1831.)
Rules governing partnership relation. What is necessary for the existence of a partnership is that the essential requisites of a contract of partnership are present even when the partners have not yet actually begun the carrying on of its business or given their contributions, or even though its conditions or details, such as the participation of the partners in the profi ts and losses and the nature of the partnership, have not yet been fi xed, as they pertain to the accidental and not to the essential parts of the contract.
Where a partnership relation results, the law itself fi xes the incidents and consequences of this relation (supra.) if the parties fail to do so. (Fernandez vs. De la Rosa, 1 Phil. 671 [1902].) This is true although the parties thereto actually call their relation something other than a partnership or even go as far as to state expressly that they are not partners.
Executory agreement of partnership (1) Future partnership. — The partners may stipulate some other date for the commencement of the partnership. Persons who have entered into a contract to become partners at some future time or on the happening of some future contingency do not become partners until or unless the agreed time has arrived or the contingency has happened. As long as the agreement for a partnership remains inchoate or unperformed, the partnership is not consummated. (68 C.J.S. 418; Urra vs. Ponce, [C.A.] 59 O.G. 244.) Hence, there can be a future partnership which at the moment has no juridical existence yet. In the absence of express stipulation, evidence is admissible to show the commencement date as determined by the words, acts or conduct of the parties. Incidentally, the Statute of Frauds provides that an agreement that by its terms is not to be performed within a year from the making thereof, must be in writing and signed by the party charged in order to be enforceable. (Art. 1403[2, a].) (2) Agreement to create partnership. — There is a marked distinction between a partnership actually consummated and an agreement to enter into a contract of partnership at a future time. A partnership in fact cannot be predicated on an agreement to enter into a co-partnership at a future day unless it is shown that such an agreement was actually consummated. So long as the agreement remains executory the partnership is inchoate, not having called into being by the concerted action necessary under the partnership agreement. (40 Am. Jur. 142.)
The death of either party to an executory agreement of partnership prevents the formation of a fi rm, since such agreement is based on the continuance of the life of each. (68 C.J.S. 419.)
(3) Failure to agree on material terms. — A failure of the parties to agree on material terms may not merely be evidence of the intent of the parties to be bound only in the future, but may prevent any rights or obligations from arising on either side for lack of complete contract. (7 C.J.S. 391; Limuco vs. Calinao, [C.A.] No. 10099-R, Sept. 30, 1953.) Article 1784 must be read in relation to Articles 1771 and 1773.
ART. 1785. When a partnership for a fi xed 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)
Continuation of partnership beyond fi xed term. A partnership with a fi xed term is one in which the term of its existence has been agreed upon expressly (as when there is a defi nite period) or impliedly (as when a particular enterprise or transaction is undertaken). The expiration of the term thus fi xed or the accomplishment of the particular undertaking specifi ed (or the demonstration of the impossibility of its accomplishment) will cause the automatic dissolution of the partnership. (Art. 1830[1, a].)
(1) Rights and duties of partners. — The partnership, however, may be extended or renewed by the partners by express agreement, written or oral, or impliedly, by the mere continuation of the business after the termination of such term or particular undertaking without any settlement or liquidation. In such case, the rights and duties of the partners remain the same as they were at such termination but only insofar as is consistent with a partnership at will. (See Art. 1776.)
In other words, with such continuation, the partnership for a fi xed term or particular undertaking is dissolved and a new one, a partnership at will, is created by implied agreement the continued existence of which will depend upon the mutual desire and consent of the partners. Thus, for example, the manner of management and profi t-sharing ratio originally agreed upon shall still govern but the partnership having become a partnership at will may be lawfully terminated at any time by the express will of all the partners or any of them. (see Art. 1830[1, b, c].)
(2) Dissolution of partnership. — Verily, any one of the partners may, at his sole pleasure, dictate a dissolution of a partnership at will. He must, however, act in good faith not that the attendance of bad faith can prevent the dissolution of the partnership (see Art. 1830[1, b].) but that can result in a liability for damages to the other partners. (Art. 1830[2]; see Art. 1837, par. 2; Ortega vs. Court of Appeals, 245 SCRA 529 [1995].) Implicit in good faith is the requirement that the dissolution must not be made at an improper or unreasonable time. Even a partnership for a fi xed term may likewise be terminated by the express will of any partner before the time mentioned. (Art. 1830[2].) There is no such thing as an indissoluble partnership
Continuation of partnership for an indefi nite term. (1) Partnership for a term impliedly fi xed. — Although the term of a partnership is not expressly fi xed, an agreement of the parties may evidence an understanding that the relation should continue until the accomplishment of a particular undertaking or certain things have been done or have taken place
(a) When a partner advances a sum of money to a partnership with the understanding that the amount contributed is to be loaned to the partnership and is to be repaid as soon as feasible from the prospective profi ts of the business, the partnership is for the term reasonably required to repay the loan. The partners may impliedly agree to continue in business until a certain sum of money is earned, or one or more partners recoup their investment, or until certain debts are paid, or until certain property could be disposed of on favorable terms. In each of these cases, however, the implied agreement must be proved. (b) In each of the following cases the court properly held that the partners’ implied promise was to continue the partnership for a term reasonably required to allow the partnership to earn suffi cient money to accomplish the understood objective: 1) where the partners borrowed substantial amounts of money to launch an enterprise and there was an understanding that the loans would be repaid from partnership profi ts (Owen vs. Owen, 119 P. 2d 713.); 2) where one partner loaned his co-partner money to invest in the partnership with the understanding that the money would be repaid from partnership profi ts (Vangel vs. Vangel, 254 P. 2d 919.); 3) where one partner contributed all the capital, the other contributed his services, and it was understood that upon the repayment of the contributed capital from partnership profi ts the partner who contributed his services would receive a one-third interest in the partnership assets (Mervyn Investment Co. vs. Beber, 194 P 1037.); and 4) where the parties entered into a joint venture to build and operate a motel until it could be sold upon favorable and mutually satisfactory terms. (Shannon vs. Hudson, 325 P. 2d 1022.) (2) Partnership with mere expectation that business will be profi table. — Where the understanding to which defendant (the partner who contended that the partnership created was for a term) testifi ed was no more than a common hope that the partnership earnings would pay for all the necessary expenses, such a hope does not establish even by implication a “fi xed term or particular undertaking” as required by Article 1785. The mere expectation that the business would be successful and that the partners would be able to recoup their investment is not suffi cient to create a partnership for a term. All partnerships are ordinarily entered into with the hope or expectation that they will be profi table, but that alone does not make them all partnerships for a term and obligate the partners to continue in the partnership until all the losses over a period of many years may have been recovered. (Cohen vs. Cohen, 119 P. 2d 713.)
ART. 1786. Every partner is a debtor of the partnership
for whatever he may have promised to contribute thereto. He shall also be bound for warranty in case of eviction with regard to specifi c 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)
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.) 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].)
Effect of failure to contribute property promised.
The mutual contribution to a common fund being of the
essence of the contract of partnership (Art. 1767.), for without the contributions the partnership is useless, it is but logical that the failure to contribute is to make the partner ipso jure a debtor of the partnership even in the absence of any demand. (see Art. 1169[1].) Under this article, the remedy of the other partner or the partnership is not rescission but an action for specifi c 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 1191, which refers to resolution of reciprocal obligations in general, is not applicable. Articles 1786 and 1788 specifi cally refer to the contract of partnership in particular; and it is a well-known principle that special provisions prevail over general provisions. (Sancho vs. Lizaraga, 55 Phil. 60 [1930]; see, however, Uy vs. Puzon, 79 SCRA 598 [1977], cited under 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.
Liability of partner for fruits of property in case of delay.
Here, again, no demand is necessary to put the partner in default.
From the mere fact that the property which a partner ought to deliver does not pass to the common fund on time, the partnership fails to receive the fruits or benefi ts which the said contribution produced as well as those it ought to produce, thus prejudicing the common purpose of obtaining from them the greatest possible profi ts through some means of speculation or investment. The injury, therefore, to the partnership is constant. (see 11 Manresa 332-335.)
Liability of partner for failure to perform service stipulated.
Is a partner who fails to perform the personal services which
he has stipulated to render to the partnership, liable to the other partners for the value of the services?
(1) Partner generally not liable. — Unless there is a special
agreement to that effect, the partners are not entitled to charge each other, or the partnership of which they are members, for their services in the fi rm business. The doctrine seems to be that every partner is bound to work to the extent of his ability for the benefi t of the whole, without regard to the services of his copartners, however unequal in value or amount, and to require a partner to account for the value of his services would be, in effect, allowing compensation to the other members of the partnership for the services they rendered.3 (2) Exception. — The general rule that partners are not entitled to compensation for their services is inapplicable where the reason of it fails.
(a) If a partner neglects or refuses, without reasonable
cause, to render the service which he agreed to perform by reason of which the partnership suffered loss, no good reason can be suggested why the erring partner should not be just as responsible for the breach of his agreement to render personal service to the partnership as for the breach of any other stipulation in the partnership contract. (Marsh’s Appeal, 69 Pa. St. 30.)
(b) If the partner is compelled to make good the loss,
each member of the fi rm, including himself, will receive his proportion of the amount in the distribution of the partnership assets, and in no just sense can this be regarded as compensation for the services individually rendered. The proper measure of damages in such case is the value of the services wrongfully withheld. (Ibid.)
(c) If under the circumstances of the case the proper
measure of the damages or loss (which may include unrealized profi ts) is the value of the services wrongfully withheld, then the defendant should be charged this value. If the defendant had made profi t by engaging in other business in violation of the contract, he is liable to account for the same. (Ibid.)
ART. 1787. When the capital or a part thereof which
a partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the partners, and according to current prices, the subsequent changes thereof being for the account of the partnership. (n)
Appraisal of goods or property contributed.
(1) 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 profi ts and losses is in proportion to what he may have contributed. (Art. 1797.)
The appraisal is made, fi rstly, in the manner prescribed by the
contract of partnership; secondly, in the absence of stipulation, by experts chosen by the partners and according to current prices. After the goods have been contributed, the partnership bears the risk or gets the benefi t of subsequent changes in their value. (2) In the case of immovable property, the appraisal is made in the inventory of said property (see Arts. 1773, 1795.); otherwise it may be made as provided in Article 1787. There is no reason why the rule in Article 1787 should not also apply with respect to other kinds of property.