Module 1

Partnership Law

1. General Provisions

Definition

• By the contract of partnership:

1. Two or more persons bind themselves to contribute to a common fund:

a. money; b. property; or c. industry

2. With the intention of dividing the profits among themselves.

Two or more persons may also form a partnership for the exercise of a profession. [Art.
1767, NCC]

Concept of Partnership:

• A partnership is an association of two or more persons.

• A partnership is a legal relation.

• A partnership is a joint undertaking.

• A partnership is the status arising out of a contract.

• A partnership is an organization.

• A partnership is an entity.

Characteristics of a Contract of Partnership:

1. Consensual - It is a contract that is perfected by mere consent because all of the partners have
meeting of minds to enter into a contract of partnership.

2. Nominate – It is a contract which has a name in law.

3. Bilateral – It is a contract entered into by two or more persons.

4. Onerous – Each partners must contribute money, property or industry or one, some or any of
these.

5. Commutative – The contribution of each partner, whether money, property or industry, is

considered the equivalent of the contribution of the other partners.

6. Principal – It is a contract that does not depend on other contracts for its existence.

7. Preparatory – It is a contract in preparation for another.

• Profession is a “group of men pursuing a learned art as a common calling in the spirit of public
service, - no less a public service because it may incidentally be a means of livelihood.”
Essential Requisites of a Contract of Partnership

1. There must be a valid contract;

2. There must be a contribution of money, property or industry, to a common fund;

3. Must be organized for gain or profit; and

4. Should have a lawful object or purpose, and must be established for the common benefit or
interest of the partners.

2 Tests to Determine the Existence of Partnership

First Test

• Determine whether or not there is an agreement to contribute money, property or industry, to

a common fund.

Second Test

• Determine whether or not there is an intent of the contracting parties to divide the profits
among themselves.

Elements

1. Two or more persons bind themselves to contribute money, property, or industry to a common
fund

• Money – must be in legal tender. Checks, drafts, promissory notes, and other mercantile
documents are not money. There is no contribution of money until they have been cashed. [Art.
1249, NCC]

• Property – may be real, personal, corporeal, or incorporeal property.

• Industry – means the active cooperation, the work of the party associated, which may be either
personal manual efforts or intellectual, and for which he receives a share in the profits (not
salary) of the business.

COMMON FUND

• The NCC requires the parties “bind themselves to contribute” to a common fund. The
partnership may therefore exist even before the common fund is created. The common fund
may not even come from the partners themselves but may be borrowed from third persons. The
form of the common fund may not even be cash or property; it can be in the form of credit or
industry. [Lim Tong Lim v. Philippine Fishing Gear, G.R. No. 136448 (1999)]

2. With the intention of dividing the profits among themselves

Intention to Divide Profits

• If the common fund’s work is “indispensable, beneficial and economically useful to the
business” of the partners and the profit motive is the primordial reason to establish the
partnership, even if there are no actual profits, then there is partnership. [AFISCO v. CA,G.R. No.
112675 (1999)]

• Note: There must be a valid contract. Additionally, a partnership contract must comply with the
necessary elements of a contract under the Civil Code (cause, object and consideration).

Parties

General Rule: Any person capacitated to contract may enter into a contract of partnership.

The following persons CANNOT enter into a contract of partnership:

a. Those suffering from civil interdiction;

b. Minors;

c. Insane or demented persons;

d. Deaf-mutes who do not know how to write;

e. Incompetents who are under guardianship.

Exceptions: The capacity of the following persons to enter into a contract of partnership, though
capacitated to contract generally, are limited:

A. Those who are prohibited from giving each other any donation or advantage cannot enter into
a universal partnership [Article 1782];

• Note: A husband and wife, however, may enter into a particular partnership or be members
thereof (De Leon, 2010).

Kinds of Partners

1. As to the extent of liability

a. Capitalist- contributes either money or property to the common fund; he can also contribute
an intangible like credit, such as promissory note or other evidence of obligation, or even a goodwill
(Rabuya, 2017); and

b. Industrial- contributes only his industry

2. As to the time of entry

a. Original- one who became a partner at the time of the constitution of the partnership

b. Incoming- one who became a partner as a new member of an existing partnership.

3. Other kinds –

a. Managing- one entrusted with the management of the partnership. (Arts. 1800 and 1801,
NCC)
 b. Liquidating- one who takes charge of the liquidation and winding up of the partnership affairs
(Art. 1836, NCC)

c. Retiring- those who cease to be part of the partnership

d. Continuing- one who continues the business of a partnership after it has been dissolved by
reason of the admission of a new partner, or the retirement, death, or expulsion of one or more
partners

e. Dormant, Silent, Secret- one whose connection to the partnership is concealed and who does
not take any active part in it

f. Partner by Estoppel- although not an actual partner, he has made himself liable as such by
holding himself out as a partner of allowing himself to be so held out (Art. 1815, NCC)

Void Donations:

1) Those made between persons who were guilty of adultery or concubinage at the time of the
donation [Article 739, NCC]

2) Those made between persons found guilty of the same criminal offense, in consideration
thereof [Article 739, NCC]

3) Those made to a public officer or his wife, descendants and ascendants, by reason of his office
[Article 739, NCC]

4) Every donation or grant of gratuitous advantage, direct or indirect, between the spouses
during the marriage shall be void, except moderate gifts, which the spouses may give to each
other on the occasion of any family rejoicing. The prohibition shall also apply to persons living
together as husband and wife without a valid marriage. [Article 87, Family Code]

B. A corporation cannot enter into a partnership in the absence of express authorization by statute
or charter. [Mendiola v. CA, G.R. No. 159333 (2006)]

• Under Sec. 35 of the Revised Corporation Code (RCC), every corporation incorporated under the
RCC has the power and capacity to enter into a partnership, joint venture, merger,
consolidation, or any other commercial agreement with natural and juridical persons. There is
no prohibition against a partnership being a partner in another partnership. [de Leon]

Object. In a UNIVERSAL PARTNERSHIP

A universal partnership may refer to:

1. Of all present property – The following become the common fund of all the partners:

• Property which belonged to each of the partners at the time of the constitution of the
partnership

• Profits which they may acquire from all property contributed

A universal partnership may refer to:

1. Of all present property –

• a. The partners contribute all the property which belongs to them to a common fund, with the
intention of dividing the same among themselves, as well as the profits they may acquire
therewith. [Art. 1778, NCC]

• b. The property contributed includes all those belonging to the partners at the time of the
constitution of the partnership.

• c. A stipulation for the common enjoyment of any other profits may also be made. However, the
property which the partners may acquire subsequently by inheritance, legacy or donation
cannot be included in such stipulation, except the fruits thereof. [Art. 1779, NCC]

2. Of all the profits –

a) It comprises all that the partners may acquire by their industry or work during the existence of
the partnership.

b) Only the usufruct over the property of the partners passes to the partnership. [Art. 1780, NCC]

• When the articles of universal partnership do not specify its nature (all present property or all
the profits), the partnership will be considered as one only of all the profits. [Art. 1781, NCC]

What is the difference between universal partnership and particular partnership?

• Universal Partnership – which refers to all the present property or to all profits;

• Particular Partnership – a particular partnership has for its object determinate things, their use
or fruits or specific undertaking or exercise of a profession or vocation.

Rule on After-Acquired Properties

• Aside from the contributed properties, only the profits of the contributed common property (no
other profits) are included. Thus, should a partner subsequently acquire a property as
remuneration for his work, such property and its fruits are not to be enjoyed by the universal
partnership of all present property. [Paras]

• Properties subsequently acquired by inheritance, legacy, or donation, cannot be included in the

stipulation but the fruits thereof can be included in the stipulation.

IN A 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, NCC]

EFFECT WHEN THE OBJECT IS UNLAWFUL

If the partnership has an unlawful object or purpose:

1. The contract is void ab initio [Art. 1409(1), NCC];

2. Once dissolved by judicial decree:

a. The profits shall be confiscated in favor of the State;

b. The instruments or tools and proceeds of the crime shall also be forfeited in favor of the
State [Art. 1770, NCC];

3. The contributions of partners shall not be confiscated unless they are instruments or tools of the
crime. [de Leon]

What is Statute of Frauds in Philippine law?

• The Statute of Frauds embodied in Article 1403, paragraph (2), of the Civil Code requires certain
contracts enumerated therein to be evidenced by some note or memorandum in order to be
enforceable. The term "Statute of Frauds" is descriptive of statutes which require certain classes
of contracts to be in writing. e.g. Sale of Land

Form

• No required form is necessary, but the contract is subject to the provisions of Arts. 1771, 1772
and 1773, NCC and to the Statute of Frauds.

• Where immovable property or real rights are contributed to the partnership, a public
instrument shall be necessary.

• [Art. 1771, NCC] - An inventory of said property, signed by the parties, must be attached to the
public instrument;

• Otherwise, the contract of partnership is void. [Art. 1773, NCC]

• Every contract of partnership having a capital of P3,000 or more, in money or property, shall
appear in a public instrument.

• The instrument must be recorded in the Office of the Securities and Exchange Commission
(SEC).

• Failure to comply with these requirements shall not affect the liability of the partnership and the
members thereof to third persons. [Art. 1772, NCC]

Characteristics Generally

• Principal – does not depend on other contracts;

• Preparatory – entered as a means to an end;

• Commutative – undertaking of each one is considered equal with others;

• Consensual – perfected by mere consent;

• Bilateral – entered by two or more persons;

• Onerous – contributions have to be made, and

• Nominate – has a special designation in law. [de Leon]

Essential Attributes

1. Informal/Consensual and Weak Juridical Personality [Arts. 1771, 1785, 1830, NCC]
a) Generally, a partnership may be constituted in any form;
b) The juridical personality of a partnership is deemed weak since a partnership may be dissolved
without need of going through a formal dissolution process.

2. Mutual Agency [Arts. 1803, 1818, NCC]

a) All partners shall be considered agents and whatever any one of them may do alone shall bind
the partnership;
b) Every partner is an agent of the partnership for the purpose of its business, and the act of every
partner binds the partnership.

3. Delectus Personae (Selection of Persons)

One selects his partners on the basis of their personal qualifications and qualities. It is for this reason
that there is mutual representation among the partners so that the act of one is considered the act
and responsibility of the others as well. [Bautista]

• It implies the right to choose with whom a person wishes to associate or continue to associate
himself, thus, is the very foundation and essence of partnership. The rule that when personal
relations are important, a person cannot be compelled to associate with another person;
specifically, the principle that one has the right to select the person or persons with one whom
might form a partnership. Therefore, no one can become a member of the partnership
association without the consent of all the other associates. This is further justified by the fact
that relations among partners is fiduciary in nature, which means that it is based on trust and
confidence.

4. Partners Burdened with Unlimited Liability [Arts. 1816, 1817, NCC]

• Unlimited liability typically exists in general partnerships and sole proprietorships. It provides
that each business owner is equally responsible for whatever debt accrued within a business if
the company is unable to repay or defaults on its debt.

Rules to Determine Existence

When the intent of the parties is clear, such intent shall govern. When it does not clearly appear,
the following rules apply:

1. Persons who are not partners to each other are not partners as to third persons, subject to the
provisions on partnership by estoppel.

Ex: A and B are not partners to each other thus as to C, a third person, they’re not also partners.

Note: The exception would be if A misrepresents himself to C that he and B are partners and B
consented or did not object, then, as to C, A and B are considered partners by operation of law
(concept of partnership by estoppel).
2. Co-ownership or co-possession does not of itself establish a partnership, even when there is
sharing of profits in the use of the property.

Ex: A and B are both recipients of a donation/gift of a land from C. A and B are going to be co-
owners and not partners.

Exception:

The co-ownership of inherited properties is automatically converted into an unregistered

partnership the moment said common properties and/or the income derived therefrom are used as
a common fund with intent to produce profits for the heirs in proportion to their respective shares
in the inheritance as determined in a project partition. [Ona v. CIR, G.R. L19342 (1972)]

3. Sharing of gross returns does not of itself establish a partnership, even when the parties have
joint or common interest in any property from which the returns are derived.

*Disputable presumption of partnership = shared net profit; but not for gross returns or profit

Gross Sales

Less: Cost of Sales

Gross Profit

Less: Expenses

Net Profit/Loss

4. The receipt by a person of a share in the profits of a business is prima facie evidence that he is a
partner. *sufficient to establish a fact or raise a presumption unless disproved

*Aside from the circumstance of profit, the presence of other elements constituting partnership is
necessary, such as clear intent to form partnership, the existence of a juridical personality different
from that of the individual partners, and the freedom to transfer or assign any interest in the
property by one with the consent of the others.

No such inference is drawn if the profits are 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. [Art. 1769, NCC]

*See examples in books

Partnership Term
• A partnership begins from the moment of the execution of the contract, unless it is otherwise
stipulated. [Art. 1784]

As to period, a partnership may either be:

1. For a fixed term or particular undertaking; or

2. At will, the formation and dissolution of which depend on the mutual desire and consent of the
parties. Any one of the partners may, at his sole pleasure, dictate the dissolution of the partnership,
even in bad faith, subject to liability for damages. [Ortega v. CA, G,R, No. 109248 (1995)]

A partnership term may be extended by:

1. Express renewal; or

2. Implied renewal, when these requisites concur:

a. The partnership is for a fixed term or particular undertaking;

b. It is continued after the termination of the fixed term or particular undertaking without any
express agreement. [Art. 1785, NCC]

Partnership by Estoppel

Estoppel – a bar which precludes a person from denying or asserting anything contrary to that which has
been established as the truth by his own deed or representation, either express or implied. [de Leon]

• A partner by estoppel is a person who, by words spoken or written or by conduct:

(1) represents himself as a partner or

(2) consents to another representing him to anyone as a partner

a. In an existing partnership; or

b. With one or more persons not actual partners [par. 1, Art. 1825, NCC].

LIABILITY OF A PARTNER BY ESTOPPEL

Personal Representation

a. A partner by estoppel is liable to any such persons:

1. To whom such representation has been made; and

2. Who has, on the faith of such representation, given credit to the actual or apparent partnership.

[par. 1, Art. 1825]

Public Representation

If he has made such representation or consented to its being made in a public manner, whether the
representation has or has not been (personally) made or communicated to such persons so giving credit
by or with his knowledge:
 1. When 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
consenting to the contract or representation.

3. When there are no such other persons, he is separately liable. [par. 1, Art. 1825, NCC]

Effect on Existing Partnership or Other Persons not Actual Partners [par. 2, Art. 1825, NCC]
Representation Effect
When a person has been represented to be a partner He is an agent of the persons consenting to such
(1) in an existing partnership, or (2) with one or more representation:
persons not actual partners
• To bind them to the same extent and in the same
manner as though he were a partner in fact

• With respect to persons who rely upon the

When all the members of the existing partnership
consent to the representation
In all other cases
representation.
A partnership act or obligation results.
The representation is the joint obligation of the
person acting and the persons consenting to the
representation

Nature of Liability

Summarizing Article 1825, a partner by estoppel is liable in the following manner:

(a) He is liable as though he were a partner when –

1. There is an existing partnership;

2. All the partners consented to the representation; and

3. A partnership liability results.

(b) He is liable jointly and pro rata (as though he were a partner in fact) with those who consented
to the representation when:

1. There is an existing partnership but not all the partners consented; or

2. There is no existing partnership and all those represented as partners consented to the
representation.

(c) He is liable separately when:

1. There is an existing partnership but none of the partners consented; or

2. There is no existing partnership and not all of those represented as partners consented to the
representation.

• Note: Art 1825 does not create a partnership as between the alleged partners. The law only
considers them as partners and the association as a partnership insofar 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. [de Leon]

Partnership as distinguished from joint venture

Partnership Joint venture

Operates with firm name and legal personality Operates without firm name and legal personality
Generally relates to a continuing business of Usually limited to a single transaction
various transactions of a certain kind
A joint venture is an agreement between two parties to enter into a commercial undertaking. It
may fall under a partnership with a limited purpose.

Under Philippine law, a joint venture is a form of partnership and should thus be governed by
the laws of partnership. [Aurbach v. Sanitary Wares Manufacturing Corp, G.R. No. 75875]

Professional Partnership

Definition General Professional Partnerships

those formed by persons for the sole purpose of exercising their common profession, no part of
the income of which is derived from engaging in any trade or business. [Sec. 22(B), NIRC]

Distinction from an Ordinary Partnership The distinction between a Partnership and a General
Professional Partnership (GPP) is material in taxation.
• A GPP is NOT TAXABLE as an entity.
• The income tax is imposed not on the professional partnership, which is tax exempt, but on the
partners themselves in their individual capacity computed on their distributive shares of
partnership profits.” [Tan v. Del Rosario, G.R. No. 109289 (1994)]

Requirement to File Income Tax Returns

GPPs are still required to file income tax returns for the purposes of furnishing information as to
the share in the gains or profits which each partner shall include in his individual return. [RR 2-
1998]

Management
In General The property rights of a partner are:
(1) His rights in specific partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management [Art. 1810, NCC]

• Management of the partnership is primarily governed by the agreement of the partners in the
articles of partnership.

It may be stipulated that the partnership will be managed by:

1. All the partners; or

2. A number of partners appointed as managers which may be appointed – In the articles of

partnership; or
 - After constitution of the partnership.

Scope of Powers of a Managing Partner General Rule:

The partner designated as manager in the articles may execute all acts of administration, despite
opposition by the other partners.

Exception: He cannot do so when he acts in bad faith. [Art. 1800, NCC]

Revocation of Power by Managing Partner

General Rule:

Power is irrevocable without just or lawful cause.

The powers of the managing partner may be revoked: If appointed in the articles of partnership, when -

• There is just or lawful cause for revocation; and

• The partners representing the controlling interest

revoke such power.

If appointed after the constitution of the partnership, at any time and for any cause. [Art. 1800, NCC]

Rationale: Such appointment is a mere delegation of power, not founded on a change of will on the part
of the partners, the appointment not being a condition of the contract.

It is merely a simple contract of agency, which may be revoked at any time. Removal, however, should
also be done by the partners having the controlling interest. [de Leon]

Managing by Two or More Partners

When there are two or more managing partners appointed —

1. Each one may separately execute all acts of administration.

2. If any of them opposes the acts of the others, the decision of the majority prevails.

3. In case of a tie, the partners owning the controlling interest will decide. [Art. 1801, NCC]

Requisites for Applicability of Art. 1801:

• Two or more partners have been appointed as managers;

• There is no specification of their respective duties or no stipulation on how each one will act;
and

• There is no stipulation that one of them shall not act without the consent of all the others.
The right to oppose is not given to non-managers because in appointing their other partners as
managers, they have stripped themselves of all participation in the administration. [Paras]
• The other managers, however, should make the opposition before the acts produce legal effects
in so far as third persons are concerned.

Stipulation of Unanimity
General Rule:

• In case there is a stipulation that none of the managing partners shall act without the consent
of others —

a. The concurrence of all is necessary for the validity of

the acts, and

b. The absence or disability of one cannot be alleged.

Exception: Unless there is imminent danger of grave or irreparable injury to the partnership. [Art.

Management When Manner Not Agreed Upon [1802, NCC]

When there is no agreement as to the manner of management, the following rules apply:

1. All the partners are considered agents (mutual agency). Whatever any one does alone binds the
partnership, unless there is a timely opposition to the act, under Art. 1801, NCC.

2. Any important alteration in the immovable property of the partnership, even if useful to the
partnership, requires unanimity. If the alteration is necessary for the preservation of the property,
however, consent of the others is not required. [Art. 1803, NCC; de Leon]

If the refusal is manifestly prejudicial to the partnership, court intervention may be sought. [Art.
1803, NCC] The consent need not be express. It may be presumed from the fact of knowledge of the
alteration without interposing any objection. [de Leon]

Mutual Agency

• In addition to the Art. 1801, NCC there is effectively a mutual agency in the following cases:

1. Partners can dispose of partnership property even when in partnership name. [Art. 1819, NCC]

2. An admission or representation made by any partner concerning partnership affairs is

evidence against the partnership. [Art. 1820, NCC]

3. Notice to any partner of any matter relating to partnership affairs is notice to the partnership.
[Art. 1821, NCC]

4. Wrongful act or omission of any partner acting for partnership affairs makes the partnership
liable. [Art. 1822, NCC]
 5. Partnership is bound to make good losses for wrongful acts or misapplications of partners. [Art.
1823, NCC]

Rights and Obligations of Partnership and Partners

Right to Contribution, Right to Warranty

• As a general rule, every partner is a debtor of the partnership for whatever he may have
promised to contribute. [Art. 1786, NCC]

Contribution of Money or Property

With respect to contribution of money or property, a partner is obliged to:

1. To contribute, at the beginning of the partnership or at the stipulated time, the money, property
or industry which he undertook to contribute;

Effect of failure to contribute: Makes the partner ipso jure a debtor of the partnership even in
the absence of demand. The remedy is not rescission but an action for specific performance with
damages and interest. [Sancho v. Lizarraga, G.R. L33580 (1931)

Note: When contribution is in goods, the amount thereof must be determined by proper appraisal
of the value thereof at the time of contribution. [Art. 1787, NCC]

2. In case a specific and determinate thing is to be contributed:

• To warrant against eviction in the same manner as a vendor; and

• To deliver to the partnership the fruits of the property promised to be contributed, from the
time they should have been delivered, without need of demand [Art. 1786, NCC];

3. In case a sum of money is to be contributed, or in case he took any amount from the partnership
coffers, to indemnify the partnership for:

• Interest; and

• Damages from the time he should have complied with his obligation, or from the time he
converted the amount to his own use, respectively. [Art. 1788, NCC]

4. To preserve the property with diligence of a good father of a family pending delivery to the
partnership. [Art. 1163, NCC]

5. To indemnify for any interest and damages caused by the retention of the property or by delay in
its obligation to contribute a sum of money. [Art. 1788 and 1170, NCC]

Amount of Contribution
General rule:

• Partners are to contribute equal shares to the capital of the partnership.

Exception: When there is an agreement to the contrary, the contribution shall follow such
agreement [Art. 1790, NCC].
Industrial partners, unless he has contributed capital pursuant to an agreement to that effect.

ADDITIONAL CAPITAL CONTRIBUTION

Requisites:

• There is an imminent loss of the business of the partnership;

• The majority of the capitalist partners are of the opinion that an additional contribution to the
common fund would save the business;

• The capitalist partner refuses deliberately (not because of financial inability) to contribute an
additional share to the capital; and

• There is no agreement that even in case of imminent loss of the business, the partners are not
obliged to contribute.

• 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, unless
there is an agreement to the contrary. [Art. 1791, NCC]

• An industrial partner is obliged to contribute his industry at the stipulated time

Right to Have Sums Applied Pro Rata

• General rule: A partner —

1. Authorized to manage;

2. Who collects a demandable sum owed to him

a. In his own name;

b. From a person who also owes the partnership a demandable sum, is obliged to apply the sum
collected to both credits pro rata, even if he issued a receipt for his own credit only. [Art. 1792,
NCC]

Exceptions:

• In case the receipt was issued for the account of the partnership credit only, however, the sum
shall be applied to the partnership credit alone.

• When the debtor declares, pursuant to Art. 1252, NCC at the time of making the payment, to
which debt the sum must be applied, and if the personal credit of the partner is more onerous
to him, it shall be so applied. [Art. 1792, NCC]

Requisites for Applicability of Art. 1792:

• There exist at least two debts, one where the collecting partner is creditor, and the other,
where the partnership is the creditor; Both debts are demandable; and the partner who collects
is authorized to manage and actually manages the partnership.
Right to be Compensated

Every partner is responsible to the partnership for damages suffered by it through his fault.

• He cannot compensate the damages with the profits and benefits which he may have earned for
the partnership by his industry.

• However, the courts may equitably lessen this responsibility if through the partner's
extraordinary efforts in other activities of the partnership, unusual profits have been realized.
[Art. 1794, NCC]

Set-Off of Liability

General rule: The liability for damages cannot be set-off or compensated by profits or benefits
which the partner may have earned for the partnership by his industry.

Rationale: The partner has the obligation to secure the benefits for the partnership. As such, the
requirement for compensation that the partner be both a creditor and a debtor of the partnership
at the same time, is not complied with [Art. 1278, NCC; de Leon].

Exception: The court may equitably lessen the liability if, through his extraordinary efforts in other
activities of the partnership, unusual profits were realized [Art. 1794, NCC]. Note, however, that
there is still no compensation in this case.

Right to Accounting of Profits Received without the Consent of the Other Partners

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, NCC]

Obligation to Reimburse Partners

The partnership shall be responsible to every partner for:

• The amounts he may have disbursed on behalf of the partnership; and

• The corresponding interest, from the time the expenses are made;

• The obligations the partner may have contracted in good faith in the interest of the partnership
business; and

• Risks in consequence of the partnership’s management. [Art. 1796, NCC]

Obligations of the partners among themselves

Right to Associate Another in Share

• Every partner may associate another person with him in his share, but the associate shall not be
admitted into the partnership without the consent of all the other partners, even if the partner
having an associate should be a manager. [Art. 1804, NCC]

• This arrangement refers to a contract of subpartnership, which is a partnership within a

partnership, distinct and separate from the main partnership. It is considered a modification of
the original contract. [de Leon]

Right to Inspect Partnership Books

The partnership books shall be kept:

• At a place agreed upon by the partners;

• When there is no such agreement, at the principal place of business of the partnership.

Every partner shall, at any reasonable hour, have access to and may inspect and copy any of them.
[Art. 1805, NCC]

Any reasonable hour means reasonable hours on business days throughout the year. [Pardo v.
Lumber Co., G.R. No. L-22442 (1925)]

Right to Formal Account

• General rule: The right to a formal account of partnership affairs accrues only when the
partnership is dissolved.

• Exceptions: In the special and unusual cases mentioned in Article 1809, formal accounting may
be demanded by any partner even before dissolution:

• a. If he is wrongfully excluded from the partnership business or possession of its property by

his co-partners;

• b. If the right exists under the terms of any agreement;

• If, without his consent, a partner has derived profits from any transaction connected with the
formation, conduct, or liquidation of the partnership or from any use of partnership property;

• Whenever other circumstances render it just and reasonable. [Art. 1809, NCC]

As long as the partnership exists, any of the partners may demand an accounting of the partnership
business. Prescription of the said right starts to run only upon the dissolution of the partnership
when the final accounting is done. [Emnace v. CA, G.R. 126334 (2001)]

Property Rights of Partners

In General

The property rights of a partner are:

• His rights in specific partnership property;

• His interest in the partnership; and

• His right to participate in the management. [Art. 1810, NCC]

Ownership of Certain Properties

The ownership of property used by the partnership depends on the intention of the parties, which
may be drawn from an express agreement or their conduct.

A partner may allow the property to be used by the partnership without transfer of ownership,
contributing only the use or enjoyment thereof.

He may also hold title to partnership property, without acquiring ownership thereof. [Art. 1819,
NCC]

Property acquired by a partner with partnership funds is presumed to be partnership property.

The same presumption also arises when the property is indicated in the partnership books as
partnership asset.

Other factors may be considered to determine ownership of the property.

Rights in Specific Property

a. The partners have equal rights to possess partnership property for partnership purposes.

b. For other purposes, the consent of his partners is necessary.

c. If the partner is excluded, he may ask for:

1. Formal accounting [Art.1809, NCC]; or

2. Dissolution by judicial decree [Art.1831, NCC].

d. A partner’s right in such property is not assignable, except when all the partners assign their
rights in the same property.

e. The right is not subject to attachment or execution, except on claim against the partnership. In
case of such attachment, the partners, or any of them, or the representatives of a deceased
partner, cannot claim any right under the homestead or exemption laws.

f. The right is not subject to legal support under Article 291. [Art. 1811, NCC]

d. Contemplates tangible property.