MODULE IN LAW ON PARTNERSHIP

(Arts. 1767 – 1867, Civil Code)

Module I

(Concept, Elements, Formalities

and Commencement of a Partnership)

CONCEPT OF PARTNERSHIP

It is a contract where 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 (Art. 1767).

CHARACTERISTICS OF A PARTNERSHIP CONTRACT

1. Consensual;
2. Nominate;
3. Bilateral;
4. Onerous;
5. Commutative;
6. Principal; and,
7. Preparatory

ESSENTIAL FEATURES OF A CONTRACT OF PARTNERSHIP

1. There must be a valid contract;

2. The parties (two or more persons) must have legal capacity to enter
into the contract;
3. There must be a mutual contribution of money, property, or industry
to a common fund;
4. The object must be lawful;
5. The primary purpose must be to obtain profits and to divide the same
among the parties; and
 6. There must be at least one general partner

Note: Since partnership is fundamentally contractual, all the essentials of a

valid contract must be present, namely, consent, object and cause.

JURIDICAL PERSONALITY

Art. 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 requirement of article 1772, first paragraph.

Art. 1772. Every contract of partnership having a capital of P3,000 or

more, in money or property, shall appear in a public instrument, which must
be recorded in the Office of the SEC.

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.

PARTNERSHIP FOR THE EXERCISE OF A PROFESSION

Two or more persons may form a partnership for the exercise of a

profession. (Art. 1767). While strictly speaking the exercise of a profession is
neither a business undertaking nor an enterprise for profits, the law considers
the joint pursuit thereof, for mutual help, as partnership.

CONSEQUENCES IF THE OBJECT OR PURPOSE OF THE PARTNERSHIP IS

UNLAWFUL

1. The contract is void ab initio and the partnership never existed in the
eyes of the law;
2. The profits shall be confiscated in favor of the government;
3. The instrument or tools and proceeds of the crime shall be forfeited in
favor of the government; and
4. The contributions of the partners shall not be confiscated unless they
fall under number 3.
RULES IN DETERMINING THE EXISTENCE OF PARTNERSHIP

1. Except as provided by Art. 1825 (Partnership by Estoppel), persons

who are not partners as to each other are not partners as to third
persons;
2. Co-ownership or co-possession does not of itself establish a
partnership, whether such co-owners or co-possessors do or do not
share any profits made by the use of the property;
3. The sharing of gross returns does not of itself establish a partnership,
whether or not the persons sharing them have a joint or common
right or interest in any property from which the returns are derived;
4. The receipt by a person of a share of the profits of a business is prima
facie evidence that he is a partner in the business, but no such
inference shall be drawn if such profits were received in payment:

a. As a debt by 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; and
e. As the consideration for the sale of a goodwill of a business or
other property by installments or otherwise (Art. 1769).

TESTS TO DETERMINE WHETHER OR NOT A PARTNERSHIP EXISITS

1. Whether or not there is an agreement to contribute money, property,

or industry to a common fund; and
2. Whether or not the contracting parties intended to divide the profits
among themselves (Art. 1767).

PARTNERSHIP VS BUSINESS TRUSTS

When certain persons entrust their property or money to others who will
manage the same for the former, a business trust is created. In a true business
trust, the beneficiaries (cestui que trust) do not participate in the management;
hence, they are exempted from personal liability, in that they can be bound
only to the extent of their contribution. In Partnership, the partners shall be
considered as agents and whatever any one of them may do alone shall bind
the partnership (Art. 1803, Par.1), and all partners, including industrial ones,
shall be liable pro-rata with all their property and after all partnership assets
have been exhausted, for the contracts which may be entered into in the name
and for the account of the partnership (Art. 1816).

PARTNER VS AGENT

An agent never acts for himself but only for his principal. A partner is
both a principal (for his own interest) and an agent (for the firm and the other
partners).

PARTNERSHP VS CO-OWNERSHIP

PARTNERSHIP CO-OWNERSHIP

1. Creation Contract Law

2. Juridical Has a juridical None
Personality personality
3. Purpose Profit Common enjoyment of a
thing or right
4. Duration Indefinite Not to exceed 10 years
5. Disposal of Not allowed, unless Allowed
Interest agreed upon by all
6. Power to act with Partner is allowed Co-owner not allowed
third persons
7. Effect of Death Dissolution No dissolution

PARTNERSHIP VS CONJUGAL PARTNERSHIP OF GAINS

PARTNERSHIP CONJUGAL
PARTNERSHIP OF
GAINS
1. Parties Any capacitated person Future spouses
2. Governing Law Contract Law
3. Juridical Has a juridical None
Personality personality
4. Commencement Execution of the contract Date of celebration of
 (Exc. Stipulation) marriage
5. Purpose Profit To regulate the property
relations
6. Management Appointed managers; Both spouses
otherwise, all
7. Disposition of With or without consent Not allowed during the
Shares marriage

MAY A CORPORATION BECOME A PARTNER

The majority view is that a corporation cannot become a partner on

ground of public policy. However, a corporation can enter into a joint venture
with another where the nature of the venture is in line with the business
authorized in its charter.

FORMALITIES REQUIRED OF A PARTNERSHIP

General Rule: A partnership may be constituted in any form (Art. 1771).

Exceptions:

1. Where immovable property or real rights are contributed

thereto, in which case a public instrument shall be necessary
(Art. 1771);
2. In cases where personal property is contributed:
a. If capital is less than P3,000, no special form is required for
its validity or existence (Art. 1772); or
b. Where the contract of partnership has a capital of P3,000 or
more, in money or property, the same shall appear in a
public instrument and must be recorded in the office of the
Securities and Exchange Commission. However, a
partnership has a juridical personality and is valid even in
case of failure to comply with this requirement (Art. 1772,
1768);
3. In cases where real property is contributed regardless of value:
a. It must be in writing in a public instrument;
b. An inventory of said property should be made, signed by the
parties, and attached to the public instrument;
 c. It must be recorded with the Register of Deeds where the
immovable is located to bind third persons; and
d. Where the contract falls within the statute of frauds, the
contract itself must be in writing in a public instrument (Art.
1773).

PURPOSE OF REGISTRATION WITH THE OFFICE OF THE SECURITIES

AND EXCHANGE COMMISSION (SEC) AS PROVIDED IN ART. 1772

The registration is to set 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.

ARTICLES OF PARTNERSHIP

This is not required for the existence of a partnership. However, while the
partnership relation may be informally created and its existence proved by
manifestations of the parties, it is customary to embody the terms of the
association in a written document known as “Articles of Partnership.”

COMMENCEMENT OF A PARTNERSHIP

A partnership begins from the moment of the execution of the contract,

unless otherwise stipulated (Art. 1784).

ARE CONTRIBUTIONS NECESSARY BEFORE A CONTRACT OF

PARTNERSHIP EXIST

No. as a rule, even if contributions have not been made, the form already
exist, for partnership is a consensual contract.

PARTNERSHIP TERM
 A partnership is unlimited as to its duration, as the law fixes no limit.
The term may be agreed upon expressly; as when there is a definite period, or
impliedly, as when a particular enterprise is undertaken – it being understood
as soon as its purpose is achieved.

CLASSIFICATION OF PARTNERSHIP

1. According to manner of creation:

a. Orally constituted;
b. Constituted in a private instrument;
c. Constituted in a public instrument; or
d. Registered in the Office of the Securities and Exchange
Commission.

2. According to object:
a. Universal with all present property;
b. Universal with all profits;
c. Particular.

3. According to liability:
a. Limited Partnership;
b. General Partnership.

4. According to legality:
a. Lawful / legal;
b. Unlawful / illegal.

5. According to duration:
a. For a specific period;
b. Until the purpose is accomplished;
c. A partnership at will.

6. According to representation to others:

a. Ordinary partnership;
b. Partnership by estoppel.

UNIVERSAL PARTNERSHIP
 A universal partnership may refer to all the present property or to all the
profits (Art. 1777).

UNIVERSAL PARTNERSHIP OF ALL PRESENT PROPERTY

A universal partnership of all present property is that in which the

partners contribute all the property which actually belongs to them to a
common fund, with the intention of dividing the same among themselves, as
well as all the profits which they may acquire therewith (Art. 1778).

CAN FUTURE PROPERTIES BE CONTRIBUTED IN A UNIVERSAL

PARTNERSHIP OF ALL PRESENT PROPERTY

As a general rule, future properties cannot be contributed. Thus,

property subsequently acquired by inheritance, legacy or donation cannot be
included by stipulation except the fruits thereof.

UNIVERSAL PARTNERSHIP OF PROFITS

A universal partnership of profits comprises all that the partners may

acquire by their industry or work during the existence of the partnership. The
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 (Art. 1780).

IN A UNIVERSAL PARTNERSHIP OF PROFITS, ARE PROFITS ACQUIRED

THROUGH CHANCE INCLUDED?

No. profits acquired by the partners through chance, such as lottery or

by lucrative title without employment of any physical or intellectual efforts are
not included.

PERSONS WHO CANNOT ENTER INTO A UNIVERSAL PARTNERSHIP

 Persons who are prohibited from giving each other any donation or
advantage cannot enter into a universal partnership (Art. Art. 1782).

EXAMPLES OF PERSONS PROHIBITED FROM ENTERING INTO A

UNIVERSAL PARTNERSHIP

1. Husband and wife;

2. Those guilty of adultery or concubinage; and
3. Those guilty of the same criminal offense, if the partnership was
entered into in consideration of the same.

RULE WHEN THE ARTICLES OF UNIVERSAL PARTNERSHIP ARE

ENTERED INTO WITHOUT SPECIFICATION AS TO ITS NATURE

Articles of universal partnership entered into without specification of its

nature only constitute universal partnership of profits (Art. 1781).

PARTNERSHIP WITH A FIXED TERM

One in which the term for which the partnership is to exist is fixed or
agreed upon or one formed for a particular undertaking, and upon the
expiration of the term or completion of the particular undertaking, the
partnership is dissolved, unless continued by the partners.

PARTNERSHIP AT WILL

A partnership at will is 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. 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 partnership at will (Art. 1785).

PARTICULAR PARTNERSHIP
 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
(Art. 1783).

Note: In a universal partnership, the object is vague and indefinite,

contemplating a general business with some degree of continuity. In particular
partnership, the object is well defined and limited, being confined to an
undertaking of a single, temporary or ad hoc nature.

GENERAL PARTNERSHIP

A general partnership is one where all the partners are general partners,
that is, they are liable even with respect to their individual properties, after the
assets of the partnership have been exhausted.

LIMITED PARTNERSHIP

A limited partnership is one formed by two or more persons under

provisions of Art. 1844 of the Civil Code, having as members one or more
general partners and one or more limited partners. The limited partners as
such shall not be bound by the obligations of the partnership (Art. 1843).

Note: A partnership where all the partners are limited partners cannot exist as
a limited partnership, it will even be refused registration. If at all it continues,
it will be a general partnership, and all the partners will be general partners.

PARTNERSHIP BY ESTOPPEL

When a person, by words spoken or written, or by conduct, represents

himself, or consents to another representing him to anyone, as a partner in
existing partnership or with one or more persons not actual partners, he is
liable to any such persons to whom such representation has been made, and
who has, on faith of such representation, given credit to the actual or apparent
partnership, and if he has made such representation or consented to its being
made in public manner, he is liable to such person, whether the representation
has or has not been made or communicated to such person so giving credit by
or with the knowledge of the apparent partner making the representation or
consenting to its being made:
 1. When a partnership liability results, he is liable as though he were an
actual member of the partnership;
2. When no partnership liability results, he is liable pro-rata with the
other persons, if any so, so consenting to the contract or
representation as to incur liability, otherwise, separately (Art. 1825).

Note: Art. 1825 does not create a partnership as between the alleged partners.
The law only considers them partners and the association as a partnership as
it is favorable to third persons. However, partnership liability is created only in
favor of persons who on the faith of such representation given credit to the
partnership.

A PARTNERSHIP BY ESTOPPEL ARISES WHEN A PERSON:

1. Represents himself as a partner or consents himself to be represented

as a partner of an existing partnership with or without the consent of
the partnership; or
2. Represents himself as a partner of a non-existent partnership.

DOCTRINE OF EXTOPPEL IS INAPPLICABLE

When although there is misrepresentation, the third party is not

deceived.

MANAGEMENT OF THE PARTNERSHIP

The management of the partnership may be vested by agreement in one,

or some, or all of the partners or even in a third person, either in the Articles of
the Partnership or after the partnership had already been constituted (Arts.
1800, 1801, 1802). If there is no agreement, it is vested in all of the partners
(Art. 1803).

TWO MODES OF APPOINTING A PARTNER

1. Appointment as manager in the Articles of Partnership; and

2. Appointment as manager made in an instrument other than the
Articles of Partnership or made orally.
EXTENT OF THE POWER OF A MANAGING PARTNER APPOINTED IN THE
ARTICLE OF PARTNERSHIP

The partner appointed in the Articles of Partnership may execute all acts
of administration notwithstanding the opposition of the other partners, unless
he should act in bad faith. His power is revocable only upon just or lawful
cause and upon the vote of the partners representing the controlling interest.
The reason for this principle is that the revocation represents a change in the
terms of the contract.

EXTENT OF THE POWER IF THE APPOINTMENT IS AFTER THE

CONSTITUTION OF THE PARTNERSHIP

As long as he remains the manager, he can perform all acts of

administration, but if others oppose and he persists, he can be removed. The
appointment, constituted independently of the articles of partnership, may be
revoked at any time for any cause whatsoever.

RULES WHEN TWO OR MORE REMAINING PARTNERS ARE ENTRUSTED

WITH MANAGEMENT OF THE PARTNERSHIP

1. When the appointment is without specification of their respective

duties and without stipulation that one of them shall not act without
the consent of the others, each one may execute all acts of
administration, except if any such partner should oppose:
a. decision of the majority of the managing partners shall prevail;
and
b. in case of a tie, decision of the partners having the controlling
interests shall prevail.
2. With stipulation requiring unanimity of action, unanimous consent of
all the managing partners shall be necessary for the validity of the
acts and absence or disability of any managing partner cannot be
alleged, except when there is an imminent danger of grave or
irreparable injury to the partnership (Art. 1802); or
3. When manner of management has not been agreed upon, all partners
shall be considered as managers and agents and unanimous consent
requires for alteration of immovable property (Art. 1801)
 Module II

(Obligations of the Partners)

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; and,
4. Relations of the partners with third persons.

RIGHTS AND OBLIGATIONS OF PARTNERS AMONG THEMSELVES

1. Obligations with respect to contribution of property;

2. Obligations with respect to contribution of money and money
converted to personal use;
3. Obligations not to engage in another business for himself;
4. Obligations to contribute additional capital;
5. Obligations of the managing partner who collects debt;
6. Obligations of partner who receives share in partnership credit;
7. Obligations of partner for damages to partnership;
8. Duty to render information; and
9. Obligation to account for any benefit and hold as trustee
unauthorized personal profits.

OBLIGATIONS OF PARTNERS WITH RESPECT TO CONTRIBUTION OF

PROPERTY

1. To contribute at the beginning of the partnership or at the stipulated

time the money, property, or industry he had promised (Art. 1786);
2. To answer for eviction in case the partnership is deprived of the
determinate property contributed (Art. 1786);
 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 (Art. 1786);
4. When the contribution of the partner 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
(Art. 1787);
5. To preserve said property with the diligence of a good father of a
family pending delivery to the partnership (Art. 1163); and
6. To indemnify the partnership for any damage caused to it by the
retention of the same or by the delay in its contribution (Art. 1170).

THREE IMPORTANT DUTIES OF EVERY PARTNER

1. Duty to contribute what had been promised;

2. Duty to deliver the fruits of what should have been delivered; and
3. Duty to be bound for warranty in case of eviction. (Art. 1786).

Note: If a partner fails to contribute what was promised within the stipulated
time, the partnership contract cannot be rescinded. The remedy should be to
collect what is owing as well as damages.

APPRAISAL

When contribution consists of goods, appraisal value is needed to

determine how much has been contributed.

HOW IS APPRAISAL MADE

Firstly, as prescribed by the contract. In default of the first, by experts

chosen by the partners, and at current prices.
OBLIGATIONS OF PARTNERS WITH RESPECT TO CONTRIBUTION OF
MONEY AND MONEY CONVERTED TO PERSONAL USE

1. To contribute on the date due the amount he has undertaken to

contribute;
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; and
4. To indemnify the partnership of the damages caused to it by the delay
in the contribution or for the conversion of any sum for his personal
benefit (Art. 1788).

OBLIGATION OF A PARTNER NOT TO ENGAGE IN ANOTHER BUSINESS

FOR HIMSELF

1. 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 (Art.
1789).
2. A capitalist partner cannot engage for his own account in any
operation which is of the kind of business in which the partnership is
engaged, unless there is a stipulation to the contrary (Art. 1808).

REMEDY WHEN AN INDUSTRIAL PARTNER ENGAGES IN A BUSINESS FOR

HIMSELF

1. The capitalist partner may either exclude him from the firm with
damages; or
2. Avail themselves of the benefits which he may have obtained with
damages (Art. 1789).

REMEDY WHEN A CAPITALIST PARTNER ENGAGES IN BUSINESS FOR HIS

OWN ACCOUNT
 The capitalist partner violating the prohibition shall bring to the common
funds any profits accruing to him from his transactions, and shall personally
bear all the losses (Art. 1808).

EXTENT OF CONTRIBUTION TO PARTNERSHIP CAPITAL

The partners can stipulate the contribution of unequal shares to the

common fund, but in the absence of such stipulation, the presumption is that
their contribution shall be in equal shares.

Exception: Industrial partner

OBLIGATION TO CONTRIBUTE ADDITIONAL CAPITAL

If there is no agreement to the contrary, in case of an imminent loss of

the business of the partnership, any partner who refuses to contribute an
additional share to the capital, except an industrial partner, to save the
venture, shall be obliged to sell his interest to the other partners (Art. 1791).

OBLIGATION OF A PARTNER WHO COLLECTS A DEBT IN FAVOR OF THE

PARTNERSHIP

If a partner authorize 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 (Art.
1792)

DUTY OF A PARTNER WHO RECEIVED HIS SHARE IN THE PARTNERSHIP

CREDIT AND THE PARTNERSHIP DEBTOR AFTERWARDS BECOMES
INSOLVENT

A Partner who has received, in whole or in part, his share of a

partnership credit, when the other partners have not collected theirs, shall be
obliged, if the debtor should thereafter become insolvent, to bring to the
partnership capital what he received even though he may have given receipt for
his share only (Art. 1793).

OBLIGATION OF A PARTNER TO PAY FOR DAMAGES SUFFERED BY THE

PARTNERSHIP DUE TO HIS FAULT

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 court may equitably lessen this responsibility if through the
partner’s extraordinary efforts in other activities of the partnership, unusual
profits have been realized (Art. 1794).

RULES ON RISK OF LOSS OF THE THING CONTRIBUTED

1. 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;
2. Specific and determinate things the ownership of which is transferred
to the partnership, the risk is for the account of the partnership,
being the owner;
3. If the things contributed are fungible or cannot be kept without
deteriorating, the risk shall be born by the partnership;
4. If the thing contributed is to be sold, the risk shall be born by the
partnership; and
5. If the thing is brought and appraised in the inventory, the risk shall
be born by the partnership (Art. 1795).

RESPONSIBILITIES OF THE PARTNERSHIP TO THE PARTNERS

1. To refund amounts disbursed on behalf of the firm plus interest (legal)

from the time expenses were made (and not from demand, since after
all, a partner is an agent and the rule on agency applies to him);
2. To answer to each partner for obligations he may have entered into in
good faith in the interest of the partnership; and
3. To answer for risk in consequences of its management (Art. 1796).
RULES ON THE DISTRIBUTION OF PROFITS AND LOSSES

1. Profits are distributed according to agreement; if none, according to

amount of contribution;
2. Losses are distributed according to agreement; if none, according to
amount of contribution;
3. The share of the industrial partners on the profits is such as may be
just and equitable under the circumstances; and
4. While the industrial partner may be held liable by third persons, he
can recover whatever he has paid from the partners for he is
exempted from losses with or without stipulation to this effect (Art,
1797).

EXCLUSION OF A PARTNER FROM THE PROFITS/LOSSES

A stipulation which excludes one or more partners from any share in the
profits or losses is void (Art. 1799), except in case of industrial partners whom
the law itself excludes from losses (Art. 1797).

DESIGNATION OF SHARE IN PROFITS AND LOSSES BY A THIRD PERSON

General Rule: Designation by the third person is binding.

Exception: Estoppel, as when:

1. A partner who has begun the execution of the decision of the third
person; or

2. Failure to impugn the decision within three months from knowledge of

the decision. (Art. 1798)

MANAGEMENT OF THE PARTNERSHIP

The management of the partnership may be vested by agreement in one,

or some, or all of the partners or even in a third person, either in the Articles of
the Partnership or after the partnership had already been constituted. If there
is no agreement, it is vested in all of the partners. (Arts. 1800, 1801, 1802,
1803)

TWO MODES OF APPOINTING A PARTNER

1. Appointment as manager in the Articles of Partnership; and

2. Appointment as manager made in an instrument other than the

Articles of Partnership or made orally.

EXTENT OF THE POWER OF A MANAGING PARTNER APPOINTED IN THE

ARTICLE OF PARTNERSHIP

The partner appointed in the Articles of Partnership may execute all acts
of administration notwithstanding the opposition of the other partners, unless
he should act in bad faith. His power is revocable only upon just or lawful
cause and upon the vote of the partners representing the controlling interest.

EXTENT OF THE POWER IF THE APPOINTMENT IS AFTER THE

CONSTITUTION OF THE PARTNERSHIP

As long as he remains the manager, he can perform all acts of

administration, but if others oppose and he persists, he can be removed.

Note: The appointment may be revoked at any time for any cause
whatsoever.

RULES WHEN TWO OR MORE REMAINING PARTNERS ARE ENTRUSTED

WITH MANAGEMENT OF THE PARTNERSHIP

1. When the appointment is without specification of their respective

duties and without stipulation that one of them shall not act without the
consent of the others, each one may execute all acts of administration, except if
any such partner should oppose:

a. Decision of the majority of the managing partners shall prevail; and

 b. In case of a tie, decision of the partners having the controlling
interests shall prevail

2. With stipulation requiring unanimity of action, unanimous consent of

all the managing partners shall be necessary for the validity of the acts and
absence or disability of any managing partner cannot be alleged, except when
there is an imminent danger of grave or irreparable injury to the partnership
(CIVIL CODE, Art. 1802); or

3. When manner of management has not been agreed upon, all partners
shall be considered as managers and agents and unanimous consent requires
for alteration of immovable property (CIVIL CODE, Art. 1801)

MAY A PARTNER ASSOCIATE ANOTHER PERSON WITH HIM IN HIS

SHARE

Yes. Every partner may associate another person with him in his share,
but the associate shall not be admitted in the partnership without the consent
of all the other partners (Art. 1804).

DOCTRINE OF “DELECTUS PERSONAE”

The principle refers to the rule which is inherent in every partnership

that no one can become a member of the partnership without the consent of all
the partners. Consequently, even if a partner will associate another person in
his share in the partnership, the associate shall not be admitted into the
partnership without the consent of all the partners, even if the partner having
an associate should be a manager (Art. 1804).

DUTY TO RENDER TRUE AND FULL INFORMATION

Partners shall render on demand true and full information of all things
affecting the partnership to any partner or the legal representative of any
deceased partner or of any partner under legal disability (Art. 1806).

PARTNER ACCOUNTABLE AS FIDUCIARY

 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 (Art.
1807).

PARTNER ACCOUNTABLE AS FIDUCIARY

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 (CIVIL
CODE, Art. 1807).

PARTNERSHIP BOOKS

General Rule: Partnership books shall be kept at the place agreed upon
in the articles of partnership.

Exception: If there is no articles of partnership or if the articles is silent,

the books shall be kept at the principal place of business.

Note: Every partner shall at any reasonable hour have access to the
books and may inspect and copy any of them

RIGHTS OF A PARTNER IN A PARTNERSHIP

1. Property rights of a partner;

2. Right to reimbursement for amounts advanced to the partnership and
to indemnification for risks in consequence of management;
3. Right to associate with another person in his share;
4. Right of access and inspection of partnership books;
5. Right to true and full information of all things affecting the
partnership; and
6. Right to a formal account of partnership affairs under certain
circumstances.
PROPERTY RIGHTS OF A PARTNER

1. His rights in specific partnership property;

2. His interest in the partnership;
3. His right to participate in the management.

NATURE OF A PARTNERSHIP RIGHT IN SPECIFIC PARTNERSHIP

PROPERTY

A partner does not actually own any part of partnership property or

property owned by the partnership as a separate business entity, although he
does have rights in specific partnership assets. As a consequence:

1. A partner has an equal right with his partners to possess specific

partnership property for partnership purposes;
2. A partner’s right in specific partnership property is not assignable;
3. A partner’s right in specific partnership property is not subject to
attachment or execution; and
4. A partner’s right in specific partnership property is not subject to legal
support.

NATURE OF PARTNERS INTEREST IN THE PARTNERSHIP

A partner’s interest in the partnership is his share of the profits and

surplus (Art. 1812).

NOTE: A partner is not a creditor of the partnership for the amount of his
share.

ASSIGNMENT OF A PARTNER’S INTEREST

A partner may assign his interest (his share in the profits and surplus) in
the partnership to any of his co-partners or third persons without the consent
of the other partners, in the absence of agreement to the contrary.

EFFECTS OF ASSIGNMENT OF PARTNER’S WHOLE INETERST IN

PARTNERSHIP
 1. Rights withheld from assignee:
a. To interfere in the management;
b. To require any information or account; and
c. To inspect any of the partnership books.
2. Rights of assignee of partner’s interest:
a. To receive in accordance with his contract the profits accruing to
the assigning partner;
b. To avail himself of the usual remedies provided by law in the event
of fraud in the management;
c. To receive the assignor’s interest in case of dissolution; and
d. To require an account of partnership affairs, but only in case the
partnership is dissolved and such account shall cover the period
from the date only of the last account agreed to by all partners
(Art. 1813).

REMEDY OF A SEPARATE JUDGMENT CREDITOR OF A PARTNER

Application for a charging order after securing judgment on his credit to

subject the interest of the debtor partner with payment of the judgment debt
(Art. 1814).

CHARGING ORDER

A charging order upon a partner’s interest in the partnership refers to

the remedy available to a judgment creditor of a debtor partner to charge the
interest of the latter in the partnership by means of a court order for the
purpose of satisfying the amount of judgment. A receiver of the debtor partner’s
share of the profits may even be appointed. However, the charging order is
always subject to the preferred rights of partnership creditors (Art. 1814).

FIRM NAME

Every person shall operate under a firm name, which may or may not
include the name of one or more of the partners. (Art. 1815)
OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD PERSON

1. Liability of strangers whose names are included in the firm name

Strangers (those who are not members of the partnership) who

include their names in the firm are liable as partners because of estoppel (Art.
1815) but do not have the rights of partners for after all, they had not entered
into any partnership contract.

2. Liability of partners for contractual obligations

All partners, including industrial ones, shall be liable pro rata with
all their property and after all the partnership assets have been exhausted, for
the contract which may have been entered into in the name and for the
account of the partnership, under its signature, and by a person authorized to
act for the partnership. However, any partner may enter into a separate
obligation to perform a partnership contract (Art. 1816).

INDUSTRIAL PARTNER LIABLE TO THIRD PERSONS

An industrial partner is liable to third persons but he can recover the

amount he has paid from the capitalist partner.

POWER OF PARTNER AS AGENT OF PARTNERSHIP

Every partner is an agent of the partnership for the purpose of its

business, and the act of every partner for apparently carrying on in the usual
way the business of the partnership of which he is a member binds the
partnership, unless the partner so acting has in fact no authority to act for the
partnership in the particular matter, and the person with whom he is dealing
has knowledge of the fact that he has no such authority (Art. 1818).

ADMISSION OF A PARTNER

General Rule: An admission by a partner is an admission against the

partnership under the following conditions:

1. The admission must concern partnership affairs; and

 2. Within the scope of his authority.

EFFECT UPON THE PARTNERSHIP OF GIVING NOTICE TO A PARTNER

Notice to a partner is notice to the partnership. A partnership cannot

claim ignorance if a partner knew. However, notice to a partner, given while
already a partner, is notice to the partnership, provided it relates to
partnership affairs.

IS KNOWLEDGE OF A PARTNER WHEN NO NOTICE HAS BREEN GIVEN,

ALSO CONSIDERED AS KNOWLEDGE OF THE PARTNERSHIP

Knowledge of the partner is also knowledge of the firm provided:

1. The partner acting on the particular matter involved acquires the

knowledge (NOTE: It may have been acquired while already a partner
or even prior to that time, provided he still remembers the same); and
2. Although not acting in the particular matter involved, the partner
having knowledge had reason to believe that the fact related to a
matter which had some possibility of being the subject of the
partnership business and only if he was so situated that he could
communicate it to the partner acting in the particular matter before
such partner gives binding effect to his act.

LIABILITY OF THE PARTNERSHIP WITH REGARD TO THE PARTNER’S

TORT OR BREACH OF TRUST

1. Where, by any wrongful act or omission of any partner acting in the

ordinary course of the business of the partnership or with the
authority of his co-partners, loss or injury is caused to any person,
not being a partner in the partnership, or any penalty is incurred, the
partnership is liable therefore to the same extent as the partner so
acting or omitting to act (Art. 1822);
2. The partnership is bound to make good the loss:
a. Where one partner acting within the scope of his apparent
authority receives money or property of a third person and
misapplies it; and
 b. Where the partnership in the course of its business receives
money or property of a third person and the money or property
so received is misapplied by any partner while it is in the
custody of the partnership (Art. 1823);
3. All partners are liable solidarily with the partnership for everything
chargeable to the partnership (Art. 1824);
4. The rule of respondeat superior / vicarious liability applies to the law
of partnership in the same manner as other rules governing the
agency relationship.

LIABILITY OF INCOMING PARTNER FOR EXISTING OBLIGATIONS

General Rule: An incoming partner is liable for all obligations existing at

the time of his admission as though he was already a partner when such
obligations were incurred.

Exception: Personal liability

Exception to the Exception: Stipulation

PREFERENCE OF CREDITORS

The creditors of the partnership shall be preferred to those of each

partner as regards the partnership property. Without prejudice to this right,
the private creditors of each partner may ask for the attachment and public
sale of the share of the latter in the partnership assets. (Art. 1827)

Module III

(Dissolution and Winding up)

DISSOLUTION
 It is the change in the relation of the partners caused by any partner
ceasing to be associated in the carrying on as distinguished from the winding
up of the business (Art. 1828).

CONCEPTS OF DISSOULUTION, WINDING UP AND TERMINATION OF A

PARTNERSHIP

Dissolution – is the change in the relation of the partners caused by any

partner ceasing to be associated in the carrying of the business (Art. 1828). It
is that point of time when the partners cease to carry on the business together.

Winding up – it is the process of settling business affairs after

dissolution.

Termination – it is the point in time after all the partnership affairs have
been wound up.

KINDS OF DISSOLUTION

1. Extrajudicial (Art. 1830); and

2. Judicial (Art. 1831).

CAUSES FOR EXTRAJUDICIAL DISSOLUTION

1. Without violation of the agreement between the partners:

a. By the termination of the definite term or particular
undertaking specified in the agreement;
b. By the express will of any partner, who must act in good faith,
when no definite term or particular undertaking is specified;
c. By the express will of all the partners who have not assigned
their interest or suffered them to be charged for their separate
debts, either before or after the termination of any specified
term or particular undertaking; or
d. By the expulsion of any partner from the business bona fide in
accordance with such a power conferred by the agreement
between the partners;
 2. In contravention of the agreement between the partners, where the
circumstances do not permit a dissolution under any other provision
of this article, by the express will of any partner at any time;
3. By any event which makes it unlawful for the business of the
partnership to be carried on or for the members to carry it on in
partnership;
4. When a specific thing which a partner had promised to contribute to
the partnership perishes before the delivery, in any case by the loss of
the thing, when the partner who contributed it having reserved the
ownership thereof, has only transferred to the partnership the use or
enjoyment of the same; but the partnership shall not be dissolved by
the loss of the thing when it occurs after the partnership has acquired
the ownership thereof;
5. By the death of any partner;
6. By the insolvency of any of the partner or of the partnership;
7. By the civil interdiction of any partner; or
8. By decree of court under the following article (Art. 1830).

GROUNDS FOR JUDICIAL DISSOLUTION

On application by or for a partner, the court shall decree a dissolution

whenever:

1. A partner has been declared insane in any judicial proceeding or is

shown to be of unsound mind;
2. A partner becomes in any other way incapable of performing his part
of the partnership contract;
3. A partner has been guilty of such conduct as tends to affect
prejudicially the carrying on of the business;
4. A partner willfully or persistently commits a breach of the partnership
agreement, or otherwise so conducts himself in matters relating the
partnership business that it is not reasonably practicable to carry on
the business in partnership with him;
5. The business of the partnership can only be carried on at a loss;
6. Other circumstances render dissolution equitable; and
7. On application of the purchaser of a partner’s interest under Article
1813 or 1814, after the termination of the specified term or particular
undertaking, or at any time if the partnership was a partnership at
 will when the interest was assigned or when the charging order was
issued (Art. 1831).

EFFECTS OF DISSOLUTION AS TO PARTNER’S AUTHORITY TO ACT FOR

THE PARTNERSHIP

General Rule: Dissolution terminates all authority of any partner to act

for the partnership (Art. 1832).

Exceptions:

1. Acts necessary to wind up partnership affairs; and

2. Acts necessary to complete transactions begun but unfinished
(Art. 1832).

Qualifications to the General Rule with Respect to the Partners:

1. When dissolution is not by act, insolvency or death of a partner,

dissolution terminates the actual authority of a partner to
undertake new business for the partnership (Art. 1832).
2. When dissolution is by act, insolvency or death of a partner,
authority of partners inter se to act for the partnership is not
deemed terminated. Thus, each partner is liable to his co-
partners for his share of any liability created by any partner
acting for the partnership as if the partnership has not been
dissolved. This rule is subject to the following exceptions:
a. The cause of dissolution is the act of a partner and the
acting partner had knowledge of such dissolution; and
b. The cause of dissolution is the death or insolvency of a
partner and the acting partner had knowledge or notice of
such dissolution (Art. 1833).

Qualifications to the General Rule with Respect to Third Persons:

1. When partnership is bound to third persons after dissolution:

a. Act appropriately for winding up partnership affairs;
b. Act for completing unfinished transactions; and
c. Completely new transaction which would bind the
partnership if dissolution had not taken place provided
the other party is in good faith, meaning: previous
creditor (had previously extended credit) and he had no
 knowledge or notice of the dissolution; or not a previous
creditor and the fact of dissolution had not been
published in a newspaper of general circulation.
2. When partnership is not bound to third persons after
dissolution:
a. Where partnership was dissolved because it was unlawful
to carry on the business, except when the act is for
winding up;
b. Where the acting partner in the transaction has become
insolvent;
c. Where the partner is unauthorized to wind up, except if
the transaction is with third persons in good faith (same
circumstances as defined above);
d. Where act is not appropriate for winding up or for
completing unfinished transactions; and
e. Completely new transaction which would bind the
partnership if dissolution had not taken place with third
persons in bad faith (Art. 1834).

PARTNER’S EXISTING LIABILITY IN CASE OF DISSOULUTION

General Rule: Dissolution does not automatically discharge the existing

liability of any partner (Art. 1835, Par. 1).

Exception: A partner may be discharged from all existing liabilities upon

dissolution only by an agreement between himself, the partnership creditor and
the person or partnership continuing the business; and such agreement may
be inferred from knowledge of the dissolution and the person or partnership
continuing the business (Art. 1835, par. 2).

KINDS OF WINDING-UP

1. Extrajudicial winding up:

a. By the partners who have not wrongfully dissolved the
partnership; or
b. By the legal representative of the last surviving partners (when
all the partners are already dead), provided the last survivor
was not insolvent.
 2. Judicial winding up – under the control and direction of the court
upon proper cause that is shown to the court (Art. 1836).

RULES IN SETTLING ACCOUNTS AFTER DISSOLUTION

1. The assets of the partnership are:

a. The partnership property; and
b. The contributions of the partners.
2. The liabilities of the partnership shall rank in order of payment, as
follows:
a. Those owing to creditors other than partners;
b. Those owing to partners other than for capital and profits;
c. Those owing to partners in respect of capital;
d. Those owing to partners in respect of profits.
3. Where a partner has become insolvent or his estate is insolvent, the
claims against his separate property shall rank in the following order:
a. Those owing to separate creditors;
b. Those owing to partnership creditors; and
c. Those owing to partners by way of contribution.

Module IV

(Limited Partnership)

LIMITED PARTNERSHIP

A limited partnership is one formed by two or more persons under the

provisions of Art 1844 of the Civil Code, having as members one or more
general partners and one or more limited partners. The limited partners as
such shall not be bound by the obligations of the partnership (Art. 1843).

CONTRIBUTION OF A LIMITED PARTNER

 A limited partner in a limited partnership cannot contribute mere
industry or services (Art. 1845). His contribution may either be in the form of
money and/or property.

REQUIREMENTS FOR THE FORMATION OF A LIMITED PARTNERSHIP

1. The certificate or articles of the limited partnership stating the

matters enumerated in Art. 1844 of the Civil Code which must be
signed and sworn to; and
2. Such certificate must be filed for record in the Office of the Securities
and Exchange Commission (Art. 1844).

AMENDMENT OF A LIMITED PARTNERSHIP

1. In the following cases, a certificate shall be amended:

a. There is a change in the name of the partnership or in the
amount or character of the contribution of any limited partner;
b. A person is substituted as a limited partner;
c. An additional limited partner is admitted;
d. A person is admitted as a general partner;
e. A general partner retires, dies, becomes insolvent or insane, or
is sentenced to civil interdiction and the business is continued
under Art. 1860;
f. There is a change in the character of the business of the
partnership;
g. There is a false or erroneous statement in the certificate;
h. There is a change in the time as stated in the certificate for the
dissolution of the partnership or for the return of a
contribution;
i. A time is fixed for the dissolution of the partnership, or the
return of a contribution, no time having been specified in the
certificate; or
j. The members desire to make a change in any other statement
in the certificate in order that it shall accurately represent the
agreement among them (Art. 1864).
2. The certificate must be signed and sworn to by all the members, and
an amendment substituting a limited partner or adding a limited or
general partner shall be signed also by the member to be substituted
 or added, and when a limited partner is to be substituted, the
amendment shall also be signed by the assigning limited partner; and
3. The cancellation or amendment must be recorded in the SEC (Art.
1865).

OBLIGATIONS OF A LIMITED PARTNER

A limited partner cannot be held liable for partnership obligations (Art.

1843). However, if his surname appears in the partnership or firm name or if
he participates in the management or control of the business, he can be held
liable (Art. 1846, 1848).

RIGHTS OF A LIMITED PARTNER

1. To require that the partnership books be kept at the principal place of

business of the partnership (Art. 1851);
2. To inspect and copy at a reasonable hour partnership books or any of
them (Art. 1851);
3. To demand true and full information of all things affecting the
partnership;
4. To demand a formal account of partnership affairs whenever
circumstances render it just and reasonable (Art. 1851);
5. To ask for dissolution and winding up by decree of court (Art. 1851);
6. To receive a share of the profits or other compensation by way of
income (Art. 1856); and
7. To receive the return of his contribution provided the partnership
assets are in excess of all its liabilities (Art. 1857).

PARTNER CLASSIFIED A GENERAL AND LIMITED PARTNER AT THE SAME

TIME

A person may be a general and limited partner at the same time provided
the same is stated in the certificate. His rights are those of a general partner.
However, regarding his contribution, he would be considered a limited partner
with the rights of a limited partner insofar as the other partners are concerned
(Art. 1853).
LIABILITIES OF A LIMITED PARTNER

1. A limited partner’s liability for unpaid contribution are the following:

a. For the difference between his contribution as actually made
and that stated in the certificate as actually made; and
b. For any unpaid contribution which he agreed in the certificate
to make in the future at the time and on the conditions stated
in the certificate.
2. A limited partner is considered as trustee for the partnership for:
a. Specific property stated in the certificate as contributed by him
but which he had not contributed;
b. Specific property of the partnership which had been wrongfully
returned to him;
c. Money wrongfully paid or conveyed to him on account of his
contribution; and
d. Other property wrongfully paid or conveyed to him on account
of his contribution (Art. 1858).

SUBSTITUTED LIMITED PARTNER

He is a person admitted to all the rights of a limited partner who has died
or has assigned his interest in the partnership (Art. 1859).

EFFECT OF DEATH, RETIREMENT, INSOLVENCY, CIVIL INTERDICTION

OF A GENERAL PARTNER IN A LIMITED PARTNERSHIP

The partnership is dissolved, unless the remaining general partners

continue the business:

1. Under a right to do so stated in the certificate; or

2. With the consent of all members (Art. 1860).

PRIORITY IN THE DISTRIBUTION OF THE LIMITED PARTNERSHIP’S

ASSETS
1. Partnership creditors, including limited partners who are at the same
time creditors;
2. Limited partners in respect to their share of the profits;
3. Limited partners in respect to the return of their capital;
4. General partners who are creditors of the partnership;
5. General partners in respect to profits; and
6. General partners in respect to their contribution.