Module 2

Partnership Law

(Continuation…)

Interest In Partnership

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

[Art. 1812, NCC]

Assignment of Interest [Art. 1813, NCC]

Assignment by a partner of his whole interest in the partnership, of itself:

a. Does not dissolve the partnership; or

b. Does not entitle the assignee to:

1. Interfere in the management or administration of the partnership business or affairs;

2. Require information or account of partnership; or

3. Inspect the partnership books.

It merely entitles the assignee to:

a. Receive the profits to which the assigning partner was entitled;

b. In case of fraud in management, avail himself of the usual remedies provided by law, such as
dissolution [Art. 1831, NCC];

c. In case of dissolution:

1. Receive his assignor’s interest; and

2. Require an accounting from the date only of the last account agreed to by all the partners. [Art.
1813, NCC].

Rationale:

It would effectively allow a third party to participate in the affairs of the partnership and would basically
have a stranger become a partner without the consent of all other partners.

RISK OF LOSS OF THINGS CONTRIBUTED

Thing Contributed Who Bears the Risk

Specific and determinate things which are not
fungible; only the usufruct is contributed
Specific and determinate things the ownership of
which is transferred to the partnership
Fungible things
Borne by the partner because he remains the
owner of the things
Borne by the partnership as owner
Partnership, because use is impossible without
the things being consumed or impaired
 Things contributed to be sold
Things brought and appraised in the inventory
Partnership, for there cannot be any doubt that
the partnership was intended to be the owner
Partnership, because the intention of the parties
was to contribute to the partnership the price of
the things contributed with an appraisal in the
inventory. There is thus an implied sale.

Note: The list presupposes delivery. Without delivery, the loss is borne by the partner.

Right to be Reimbursed by the Partnership

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]

The provision is meant to grant to every partner the right to demand from the partnership
reimbursement of advances made on behalf of the partnership business. [Villanueva]

Article 1796 is not applicable when there is no other money than that contributed as capital is
involved. [de Leon; Martinez v. Ong Pong Co, G.R. No. 5236 (1910)]

Obligation to Render True and Full Information

Partners shall render on demand true and full information of all things affecting the partnership to:

• Any partner;

• The legal representative of any deceased partner; or

• The legal representative of any partner under legal disability [Art. 1806, NCC].

Even without demand, honesty demands the giving of vital information, the refraining from all kinds
of concealment. [Paras]

By “information”, it is meant that which can be used for partnership purposes, it is in the sense of
a property which the partnership has a valuable right. [de Leon]

Obligation to Account and Act as Trustee

Every partner must:

(a) Account to the partnership for any benefit; and

(b) 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].

• General Rule: The partner cannot use or apply exclusively to his own benefit partnership assets
or results of the knowledge or information gained by him as a partner to the detriment of the
partnership. [de Leon]

• Exception: If the taking by the partner is with the consent of all other partners. [Lim Tanhuv.
Ramolete, G.R. L-40098 (1975)] The duty to account continues until the partnership relation is
terminated. [de Leon]

• This obligation exists even when he issued a receipt for his share only [Art. 1793, NCC].
Rationale: In this case, the debt becomes a bad debt. It would be unfair for the partner who
already collected not to share in the loss of the other partners.

Credit collected after dissolution: The collecting partner need not bring the same to the partnership
capital. Art. 1793 presupposes that there exists partnership capital. Upon dissolution of the partnership
and the return to each principal of what he contributed, the community of interest between them
disappears altogether. [de Leon]

Obligation not to Engage in Another Business

FOR INDUSTRIAL PARTNER

General rule: An industrial partner cannot engage in business for himself. Should he do so, the capitalist
partners, as well as industrial partners may either: Exclude him from the firm; or Avail themselves of
the benefit which he may have obtained with a right to damages. [de Leon]

Exception: He may engage in business for himself when the partnership expressly permits him to do so.
[Art. 1789, NCC]

Remedy of the other partners The other partners have the remedy of either excluding the erring partner
from the firm or of availing themselves of the benefits which he may have obtained.

An action for specific performance to compel the partner to perform the promised work is not available
as a remedy because this will amount to involuntary servitude.

Reasons:

• To prevent the industrial partner from exploiting his services for his own personal benefit
without the permission of the firm.

• To prevent conflict of interest and to ensure compliance by said partner with his prestation.

FOR CAPITALIST PARTNERS

General Rule: For a capitalist partner, the prohibition on engaging in another business extends only to
any operation which is of the same or similar kind of business in which the partnership is engaged

Exception: Unless there is a stipulation to the contrary.

If the capitalist partner violates this prohibition, he shall: (1)Bring to the common funds any profits
accruing to him from his transactions; and (2)Personally bear all the losses. [Art. 1808, NCC]

The test is the possibility of unfair competition.

A partner occupies a fiduciary position with respect to his co-partners imposing duties of utmost good
faith and he may not carry on any other business in rivalry with the business of the partnership, whether
in his own name or for the account of another at the expense of the partnership. [de Leon]

Obligation to Share in the Profits/Losses

Rules for Distribution of Profits and Losses

The distribution of profits and losses shall be in accordance with the following rules:

1. They shall be distributed in conformity with the agreement.

2. If only the share in profits has been stipulated, the share in the losses shall be in the

same proportion.

3. In the absence of any stipulation:

• The share in the profits of the capitalist partners shall be in proportion to their

contributions.

• The losses shall be borne by the capitalist partners, also in proportion to the contributions.

• The share of the industrial partners in the profits is that share as may be just and equitable. If
he also contributed capital, he will receive a share of the profits in proportion to his
contribution; and

• The industrial partner, who did not contribute capital, is not liable for losses. [Art. 1797, NCC]

Exclusion Of Partner From Share

• General rule : A stipulation excluding one or more partners from any share in the profits or
losses is void. [Art. 1799, NCC]

• Exception: A stipulation exempting an industrial partner from losses is valid, since, if the
partnership fails to realize profits, he can no longer withdraw his work or labor. [de Leon]

• But this does not exempt the industrial partner from liability insofar as third persons are
concerned. He may however, recover what he has given to third persons from the other
partners, for he is exempted by law from losses.

Obligations of partnership/ partners to third persons

Operate Under a Firm Name

General rule: The partners may adopt any firm name desired, which may or may not include the name
of one or more of the partners. [Art. 1815, NCC]

Note: Those who, not being members of the partnership, include their names in the firm name, shall be
subject to the liability of a partner. [Art. 1815, NCC]

The partnership name shall contain the word “Company” or “Co.”, except for professional partnerships.
[SEC Memo Circ No. 14-00]

Exceptions:

They cannot use a name which is “identical or deceptively or confusingly similar one already protected
by the Commission or a sole proprietorship registered with the Department of Trade and Industry. [SEC
Memo Circ No. 14-00]

• The use of names of a deceased partner in law firms is “permissible provided that the firm
indicates in all its communications that said partner is deceased”. [Rule 3.02, Code of
Professional Responsibility]

Liability for Partnership Debts

Liability of Partners for Partnership Contracts

The partnership is primarily liable for contracts entered into:

• In its name and for its account;

• Under its signature; and

• By a person authorized to act for it.

Upon exhaustion of its assets, all partners are liable pro rata with all their property. Any partner may
enter into a separate obligation to perform a partnership contract [Art. 1816, NCC].

Nature of Individual Liability Subsidiary

General rule: The partners are liable subsidiarily. It only arises upon exhaustion of partnership assets.
[Cia. Maritima v. Muñoz, G.R. No. L-24796 (1907)]

Exceptions:

• A third person who transacted with the partnership can hold the partners solidarily (rather
than subsidiarily) liable for the whole obligation if the case falls under Articles 1822 or 1823.
[Muñasque v. CA, G.R. L-39780 (1985)] The provisions refer to wrongful acts or omission and
misapplication of money or property by a partner in the ordinary course of business.

A person admitted as a partner into an existing partnership is liable for all the obligations of the
partnership arising before his admission, except that his liability shall be satisfied only out of
partnership property, unless there is a stipulation to the contrary. [Art. 1826, NCC] In other words, he
is not personally liable.

Pro Rata
The partners are liable pro rata. This liability is not increased even when a partner: Has left the country
and the payment of his share of the liability cannot be enforced; [CoPitco v. Yulo, G.R. No. L-3146 (1907)]
or His liability is condoned by the creditor. [Island Sales v. United Pioneers, G.R. No. L-22493 (1975)]

Basis for Pro-rating Pro rata must be understood to mean equally or jointly and not its literal meaning.

After all partnership assets have been exhausted, pro-rating is based on the number of partners and
not on the amount of their contributions to the common fund, subject to adjustment among the
partners. [de Leon]

Liability of an Industrial Partner

• An industrial partner, who is not liable for losses, is not exempt from this liability (for
partnership debts). However, he can recover the amount he has paid from the capitalist
partners, unless there is a stipulation to the contrary. [Cia. Maritima v. Muñoz, G.R. No. L24796
(1907)]

• Stipulation against Individual Liability Any stipulation against pro rata liability is: Void against
third persons; but Valid among the partners. [Art.1817, NCC]

• A stipulation which excludes one or more partners from any share in the profits or loses is void.
[Art. 1799, NCC]

• Reconciling Art. 1816 and Art. 1797 The exemption of the industrial partner to pay losses relates
exclusively to the settlement of the partnership affairs among the partners themselves, and has
nothing to do with the liabilities of the parties to third persons. Art. 1816 refers to “liabilities”
while

• Art. 1797 speaks of “losses”. There is therefore no conflict between the two articles. [Nachura]

Liability of Partners for Partnership Contracts

1. Acts apparently for the carrying on of usual business

General rule: The partnership is liable for any act of a partner which is apparently for the carrying on
of the usual business of the partnership binds the latter, including the execution of any instrument in
the partnership name.

Exception: The partnership is not bound when the following concur:

(a) The partner has in fact no authority to act; and

(b) The person with whom he deals has knowledge of such fact [par. 1, Art. 1818, NCC].

2. Acts not apparently for carrying on of the usual business

• General rule: Acts of a partner which is not apparently for carrying on of the usual business does
not bind the partnership.

• Exception: The partnership is bound if the other partners authorized him to do the act. [par. 2,
Art. 1818, NCC]
3. Acts of Strict Dominion

General Rule: One or some of the partners have no authority to do the following acts of strict
dominion:

• Assign the partnership property in trust for creditors or on the assignee’s promise to pay the
debts of the partnership;

• Dispose of the goodwill of the business;

• Do any other act which makes it impossible to carry on the ordinary business of the partnership;

• Confess a judgment;

• Enter into a compromise concerning a partnership claim or liability;

• Submit a partnership claim or liability to arbitration;

• Renounce a claim of the partnership.

• Exceptions: They may do so if: 1. Authorized by all the partners; or 2. The other partners have
abandoned the business. [par. 3, Art. 1818, NCC]

4. Acts in Contravention of a Restriction

Any act of a partner in contravention of a restriction on authority does not bind the partnership to
persons having knowledge of the restriction. [par. 4, Art. 1818, NCC].

The partnership is not liable to third persons having actual or presumptive knowledge of the
restrictions, whether or not the acts are for apparently carrying on in the usual business of the
partnership. [de Leon]

Conveyance of Partnership Real Property

(a) Title In Partnership Name

Any partner may convey the real property in the name of the partnership. The partnership can
recover it, except when:

• The act of the partner binds the partnership, when he has authority to carry out the usual
business of the partnership, under par. 1, Art. 1818, NCC; or

• If not so authorized, the property has been conveyed by the grantee, or a person claiming under
him, to a holder for value and without knowledge that the partner exceeded his authority. [par.
1, Art. 1819, NCC]

A partner authorized to carry out the usual business may convey, in his own name, the equitable
interest of the partnership. [par. 2, Art. 1819, NCC]

Scenarios (see Domingo book for examples)

• Real Property Registered or Owned in the Name of the Partnership

 • Conveyance is in the Name of the Partnership

• Conveyance is executed in the Partners’ Name

• Title to Real Property is in the Name of One or More But Not All the Partners

• Title to Real Property is in the Name of One or More or All the Partners, or in a Third Person in
Trust for the Partnership

• Title to Real Property is in the Name of All the Partners

(b) Title in the Name of Other Persons

Where the title is in the name of one or more but not all the partners, and the record does not
disclose the right of the partnership:

1) The partners having title may convey title.

2) The partnership may recover it when the partners conveying title have no authority to carry on
the usual business of the partnership, unless the purchaser or his assignee is:

• A holder for value; and

• Without knowledge that the act exceeded authority. [par. 4, Art. 1819, NCC]

• Where the title is in the name of one or more or all the partners, or in a third person in trust
for the partnership, a partner authorized to carry on the usual business may convey equitable
title in the partnership name or in his own name. [par. 4, Art. 1819, NCC] Where the title is in
the names of all the partners, a conveyance executed by all of them passes all the rights to the
property. [par. 5, Art. 1819, NCC]

Liability for Admission by a Partner

An admission or representation by any partner may be used as evidence against the partnership
when:

a. It concerns partnership affairs; and

b. Such affairs are within the scope of his authority. [Art. 1820, NCC]

Instances Where Knowledge of a Partner is Considered Knowledge of the Partnership

a. Knowledge of the partner acting in the particular matter –

• Acquired while a partner; or

• Then present to his mind;

b. Knowledge of any other partner who reasonably could and should have communicated it to the
acting partner. [Art. 1821, NCC]

Liability for Wrongful Acts of a Partner

The partnership is solidarily liable with the partner who causes loss or injury to any person not a
partner, or incurs any penalty through any wrongful act or omission:

• In the ordinary course of the business of the partnership; or

• Not in such ordinary course of business, but with the authority of his co-partners. [Art. 1822,
NCC]

Liability for Misapplication of Money or Property

The partnership is liable for losses suffered by a third person whose money or property was:

a. Received by a partner –

• Acting within the scope of his apparent authority; and

• Misapplied it;

b. Received by the partnership –

• In the course of its business; and

• Misapplied by any partner while it is in the custody of the partnership

[Art. 1823, NCC]

LIABILITY OF THE OTHER PARTNERS UNDER ARTS. 1822 AND 1823, NCC

All partners are solidarily liable with the partnership for its liabilities under Arts. 1822 and 1823.
[Art. 1824, NCC]

This is without prejudice to the guilty partner being liable to the other partners. However, as far as
third persons are concerned, the partnership is answerable. [de Leon]

Applicability of the Rule of Respondeat Superior

The rule of respondeat superior (also called the rule of vicarious liability) applies to the law of
partnership in the same manner as other rules governing the agency relationship. [de Leon]

It is not only the partners who are liable in solidum; it is also the partnership. [Art 1824, NCC]

The injured party may proceed against the partnership or any partner. [Paras]

The reason for the law’s imposition of wider liability on the partnership with respect to torts and
breach of trust is based on public policy. [de Leon]

Criminal Liability for Criminal Acts

A non-acting partner in a partnership engaged in a lawful business is not criminally liable for the
criminal acts of another partner but he is criminally liable if the partnership is involved in an
unlawful enterprise with his knowledge or consent.

Partnership Liability
Does Not Extend to criminal liability where the wrongdoing is regarded as individual in character,
i.e. embezzlement.

Extends to criminal liability where the crime is statutory, especially where it involves fine or
imprisonment. [de Leon]

*those acts that are prohibited for the protection and/or betterment of society

Liability of an Incoming Partner

• A person admitted as a partner is liable for obligations incurred subsequent to his admission as
the other partners are liable. This is because he is already part of the partnership.

• As per Article 1826, the partner is liable for obligations incurred before his admission, but will
be satisfied only out of the partnership property, unless otherwise stipulated that he fully
assumes such obligations.

Rationale

• The new partner partakes of the benefits of the partnership property and an already established
business.

• He has every means of obtaining full knowledge of the debts of the partnership and remedies
that amply protect his interest. [de Leon]

Notice To or Knowledge of the Partnership

The following operate as notice to or knowledge of the partnership:

• Notice to any partner of any matter relating to partnership affairs;

• Knowledge of the partner acting in the particular matter acquired while a partner;

• Knowledge of the partner acting in the particular matter then present to his mind; or

• Knowledge of any other partner who reasonably could and should have communicated it to the
acting partner.

These do not apply in case of fraud on the partnership committed by or with the consent of the
partner. [Art. 1821, NCC]

Preference of Partnership Creditors in Partnership Property

With respect to partnership assets the partnership creditors are entitled to priority of payment.
However, the private creditors of each partner may ask the attachment and public sale of the share
of the latter in the partnership assets as provided in Art. 1814, NCC. [Art. 1827, NCC]

Property Preference:

Partnership Property – Partnership creditors are preferred;

• Partner’s Individual Property – Partner’s individual creditors are preferred. [de Leon]

Remedy in Case of Insufficiency of Assets:

• Partnership Creditor – After exhaustion of partnership assets, the creditor may come after the
private property of the partners

• Partner’s Individual Creditor – Ask for attachment and public sale of the share of the partner in
the partnership assets. [de Leon].

Liability with Regard to Personal Creditors of Partners

Interest by Personal Creditors

General rule: Partnership creditors are preferred over the personal creditors of the partners as
regards partnership property.

Exception: On due application by any judgment creditor of a partner, a competent court may:

• Charge the interest of the partner for the satisfaction of the judgment debt;

• Appoint a receiver of the share of the profits and of any other money due or to fall due to the
partner; and

• Make all other orders, directions, accounts and inquiries, which the debtor partner might have
made, or which the circumstances may require. [par. 1, Art. 1814, NCC]

3. Dissolution and Winding Up

a. Concepts

• Dissolution – the change in the relation of the partners caused by any partner ceasing to be
associated in the carrying on of the business. It is different from the winding-up of the business.
[Art. 1828, NCC]

• It does not terminate the partnership, which continues until the winding up of
partnership affairs is completed. [Art. 1829, NCC]

• Note: The dissolution of a partnership must not be understood in the absolute and strict sense
so that at the termination of the object for which it was created, the partnership is extinguished.
[Testate Estate of Mota v. Serra, G.R. No. L22825 (1925)]

• Partnership Still Exists. The partnership, although dissolved, continues to exist until its
termination, at which time the winding up of its affairs should have been completed and the
net partnership assets are partitioned and distributed to the partners. [Emnace v. CA, G.R. No.
126334 (2001)]

• Winding up – the actual process of settling the partnership business or affairs after dissolution.
It involves collection and distribution of partnership assets, payment of debts, and
determination of the value of the interest of the partners in the partnership.

• Termination – the point in time when all partnership affairs are completely wound up and finally
settled. It signifies the end of the partnership life. [de Leon]
c. Causes of Dissolution

i. Without Violation of the Agreement Between the Partners

• By the termination of the definite term or particular undertaking specified in
the agreement; By the express will of any partner, who must act in good faith,
when no definite term or particular is specified;
• By the express will of all the partners who have not assigned their interests or
suffered them to be charged for their separate debts, either before or after the
termination of any specified term or particular undertaking;

ii. With Violation of the Agreement Between the Partners

1. By the expulsion of any partner from the business bona fide in accordance with such
a power conferred by the agreement between the partners. [Art. 1830(1), NCC]

If, after the expiration of the definite term or particular undertaking, the partners continue the
partnership without making a new agreement, the firm becomes a partnership at will. [Art.
1785, NCC]

Any one of the partners may, at his sole pleasure, dictate the dissolution of the
partnership at will. He must, however, act in good faith, not that the attendance of bad faith
can prevent the dissolution of the partnership, but that it can result in a liability for damages.
[Ortega v. CA, G.R. No. 109248 (1995)]

iii. By operation of Law

• By the insolvency of any partner or of the partnership; Note: The insolvency of the partner or
of the partnership must be adjudged by the court. [de Leon]
• By the civil interdiction of any partner;
• Civil interdiction deprives the offender during the time of his sentence of the right to
manage his property and dispose such property by any act or any conveyance inter vivos. [Art.
34, RPC]

Ratio: One who is without capacity to manage his own property should not be allowed
to manage partnership property. [de Leon]

iv. By Decree of Court

A partner may apply for dissolution in court when:

1) A partner has been declared insane in any judicial proceeding or is shown to be of unsound
mind; Note: The partner may have been previously declared insane in a judicial proceeding;
otherwise, his insanity must be duly proved. It must materially affect the capacity of the
partner to perform his contractual duties as such. [de Leon]
 2) A partner becomes in any other way incapable of performing his part of the partnership
contract; Note: The incapacity must be lasting, from which the prospect of recovery is
remote. [de Leon]
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 to the partnership business that it is not
reasonably practicable to carry on the business in partnership with him; Ratio: They defeat
and materially affect and obstruct the purpose of the partnership. [de Leon]
5) The business of the partnership can only be carried on at a loss; Note: A court is authorized
to decree dissolution notwithstanding the partnership has been making profits where it
appears at the time of the application that the business can only be carried on at a loss. [de
Leon]
6) Other circumstances render a dissolution equitable. Reason for necessity of court decree:
In the instances mentioned in Art. 1831, the facts may be so far open to dispute as to make
necessary judicial determination as to dissolution, rather than allow them to be the
occasion for automatic dissolution by operation of law. [de Leon]
i. A person who acquires the interest of a partner may likewise apply:
7) After the termination of the specified term or particular undertaking;
8) At any time if the partnership was a partnership at will when the interest was assigned or
when the charging order was issued.

v. Other Causes
a. When a new partner is admitted into an existing partnership;
b. When any partner retires;
c. When the other partners assign their rights to the sole remaining partner;
d. When all the partners assign their rights in the partnership property to third persons.
[Art. 1840, NCC]

c. Effects of Dissolution
i. On Authority of the Partners
In general, upon dissolution, the authority of the partners to represent the partnership is
confined only to acts necessary to:
1. Wind up partnership affairs; or
2. Complete transactions begun but not then finished. [par. 1, Art. 1832, NCC]
With Respect to Partners. The authority of partners to act for the partnership is terminated,
with respect to partners:
1. When the dissolution is not by the act, insolvency or death of a partner; or
2. When the dissolution is by such act, insolvency or death, when the partner acting for the
partnership has knowledge or notice of the cause. [Art. 1832 and 1833, NCC]
In other cases, each partner is still liable for his share in the liability created by the partner
acting for the partnership. [Art. 1833, NCC]
With Respect to Third Persons
With respect to persons not partners:
 1. After dissolution, a partner can bind the partnership by any act appropriate for –
a. Winding up partnership affairs; or
b. Completing transactions unfinished at dissolution.
2. He can also bind it by any transaction which would bind the partnership as if dissolution had
not taken place, provided the other party to the transaction –
a. Had extended credit to the partnership prior to dissolution and had no knowledge or
notice thereof; or
b. Had not so extended credit but had known of the partnership prior to dissolution, and
having no knowledge or notice of dissolution, the fact had not been advertised in a
newspaper of general circulation in the place (or in each place if more than one) at
which the partnership business was regularly carried on. [par. 1, Art. 1834, NCC]

ii. On Liability for Transactions after Dissolution

The liability of a partner, in general, is the same as in ordinary contracts (pro rata and
subsidiary).
In the following cases, however, the liability shall be satisfied out of the partnership assets
alone (i.e., there is no subsidiary liability):
1. When the partner had been, prior to the dissolution, unknown as a partner to the person
with whom the contract is made;
2. When the partner had been, prior to the dissolution, so far unknown or inactive in
partnership affairs that the business reputation of the partnership could not be said to have been in
any degree due to his connection with it. [Art. 1834, NCC]

Any act of a partner after dissolution in no case binds the partnership in the following cases:
1. Where the partnership is dissolved because it is unlawful to carry on the business, unless
the act is appropriate for winding up partnership affairs;
2. Where the partner has become insolvent; or
3. Where the partner has no authority to wind up partnership affairs, except by a transaction
with one who –
a. Had extended credit to the partnership prior to dissolution and had no knowledge
or notice of his want of authority; or
b. Had not extended credit to the partnership prior to dissolution and, having no
knowledge or notice of his want of authority, the fact of his want of authority has not been
advertised. [Art. 1834, NCC]
Art. 1834, NCC does not affect the liability under Art. 1825, NCC of any person who, after
dissolution, represents himself or consents to another representing him as a partner in a partnership
engaged in carrying on business. [Art. 1834, NCC]

iii. On Liability for Contracts after Dissolution by Specific Causes

General rule:
A contract:
1. Entered into by a partner acting for the partnership;
2. After dissolution by – a. act, b. death, or c. insolvency of a partner, Binds the other partners.
Exceptions:
1. The dissolution being by act of any partner, the partner acting for the partnership had
knowledge of the dissolution; or
2. The dissolution being by death or insolvency of a partner, the partner acting for the
partnership had knowledge or notice of the death or insolvency. [Art. 1833, NCC]

iv. On Existing Liability of Partners

General rule: Dissolution does not of itself discharge the existing liability of any partner.
Exception: A partner may be relieved when there is an agreement to that effect between:
1. Himself;
2. The partnership creditor; and
3. The person or partnership continuing the business.
Such agreement may be inferred from the course of dealing between: 1. The creditor having
knowledge of the dissolution; and 2. The person or partnership continuing the business.
In case of dissolution by death, the individual property of a deceased partner is liable for obligations
of the partnership incurred while he was a partner, after payment of his separate debts. [Art.1835,
NCC]

d. Winding Up Partners

i. Who May Wind Up

The following partners have the right to wind up the partnership affairs:
1. Those designated in an agreement;
2. Those who have not wrongfully dissolved the partnership; or
3. The legal representative of the last surviving partner, who was not insolvent.
Any partner or his legal representative or assignee may obtain winding up by the court, upon cause
shown [Art. 1836, NCC].

ii. Manner of Winding Up

1. Extrajudicial, by the partners themselves; or

2. Judicial, under the control and direction of the proper court.
The action for liquidation of the partnership is personal. The fact that sale of assets, including real
property, is involved does not change its character, such sale being merely a necessary incident of
the liquidation of the partnership, which should precede and/or is part of its process of dissolution.
[Claridades v. Mercader, G.R. No. L-20341 (1966)]

e. Rights of Partners in Case of Dissolution

. Dissolution Without Violation of the Agreement Each partner may have:
• 1. The partnership property applied to discharge the partnership liabilities; and
• 2. The surplus applied in cash to the net amount owing to the respective partners. This is a
right as against his co-partners and all partners claiming through them in respect of their
 interests in the partnership. It cannot be availed if there is an agreement to the contrary. [Art.
1837 (1), NCC]
• Note: When dissolution is caused by expulsion, the expelled partner may be discharged from
all partnership liability in the same manner as above but he shall receive in cash only the net
amount due him from the partnership. [de Leon]
PARTNER WHO DID NOT CAUSE THE DISSOLUTION
• The partners who did not cause the dissolution wrongfully has the following rights:
• 1. To demand the right under par. 1, Art. 1837, NCC;
• 2. To be indemnified for damages for breach of the agreement against the partner who caused
the dissolution wrongfully [Art. 1837(1), NCC];
• 3. To continue the business:
• a. In the same name;
• b. By themselves or jointly with others;
c. During the agreed term for the partnership.
For the purpose of continuing the business, the said partners may possess the partnership
property provided:
• 1. They secure the payment by bond approved by the court; or
• 2. They pay any partner, who has caused the dissolution wrongfully, the value of his interest
in the partnership, less any damages recoverable, and indemnity against all present or future
partnership liabilities. [Art. 1837(2), NCC]

PARTNER WHO CAUSED THE DISSOLUTION

The partner who caused the dissolution wrongfully has the following rights:

• 1. If the business is not continued, all the rights par. 1, Art. 1837, NCC, subject to liability for
damages;
• 2. If the business is continued, the right, as against his co-partners and all claiming through
them, to:
• a. Ascertainment, without considering the value of the goodwill of the business, and
payment to him in cash the value of his partnership interest, less any damage, or have
the payment secured by a bond approved by the court; and
• b. Be released from all existing liabilities of the partnership. [Art. 1837(3), NCC] The
goodwill of a business may be defined to be the advantage which it has from its
establishment or from the patronage of its customers, over and above the mere value
of its property and capital.
The goodwill (which includes the firm name) is part of the partnership assets and may be subject of
sale. [de Leon]

Rights of Partners in Case of Rescission

A partner, who is induced by fraud or misrepresentation to become such partner, may rescind
the contract. Without prejudice to any other right, he is entitled:
• a. To a lien on, or right of retention of, the surplus of the partnership property after satisfying
the partnership liabilities to third persons for any sum of money paid by him for the purchase
of an interest in the partnership and for any capital or advances contributed by him;
 • b. To stand, after all liabilities to third persons have been satisfied, in the place of the
creditors of the partnership for any payments made by him in respect of the partnership
liabilities; and
• c. To be indemnified by the person guilty of the fraud or making the representation against all
debts and liabilities of the partnership [Art. 1838, NCC].

Nature of Fraud or Deceit

• The fraud or deceit must be material or substantial. Mere exaggerations of one

partner of the prospects of enterprises or of value of the property which he has put into the
firm as capital is not ground for dissolution. [Pineda]

Settling of Accounts between Partners

Subject to any agreement to the contrary, the following rules shall be observed in settling
accounts between partners after dissolution.
i. Composition of Partnership Assets
1. The partnership property; and
2. The contributions of the partners necessary for the payment of all the liabilities. [Art.
1839(1), NCC]
In accordance with the subsidiary liability of the partners, the partnership property shall be
applied first to satisfy any liability of the partnership. [Art. 1839(3), NCC]

ii. Amount of Contribution for Liabilities

The rules for distribution of losses shall determine the contributions of the partners. [Art. 1839(4),
NCC] As such:
1. The contribution shall be in conformity with the agreement.
2. If only the share in profits has been stipulated, the contribution shall be in the same
proportion.
3. In the absence of any stipulation, the contribution shall be in proportion to the capital
contribution. [Art. 1797, NCC]

iii. Enforcement of Contribution

The following persons have the right to enforce the contributions:
1. An assignee for the benefit of creditors;
2. Any person appointed by the court; or
3. To the extent of the amount which he has paid in excess of his share of the partnership
liability, any partner or his legal representative. [Art. 1839(5) and (6), NCC] The individual
property of a deceased partner shall be liable for the contributions. [Art. 1839(7), NCC]

iv. Order of Application of Assets

The partnership liabilities shall rank, in order of payment, as follows:
1. Those owing to creditors other than partners;
2. Those owing to partners other than for capital and profits;
3. Those owing to partners in respect of capital;
Those owing to partners in respect of profits. [Art. 1839(2), NCC]
v. Doctrine of Marshaling of Assets
When partnership property and the individual properties of the partners are in possession of a court
for distribution:
1. Partnership creditors have priority on partnership property;
2. Separate creditors have priority on individual property, saving the rights of lien of secured
creditors;
3. Anything left from either shall be applied to satisfy the other. [Art. 1839(8), NCC]

vi. Distribution of Property of Insolvent Partner

Where:
1. A partner has become insolvent; or
2. 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;
c. Those owing to partners by way of contribution. [Art. 1839(9), NCC].

i. As Creditors of the New Partnership

In the ff. cases, creditors of the dissolved partnership are also creditors of the
person or partnership continuing the business:
1. When the business is continued without liquidation, and the cause of dissolution is

a. Admission of a new partner into the existing partnership;

b. Retirement or death of any partner, and his rights to partnership property are
assigned to [1] two or more of the partners, or [2] one or more of the partners and
one or more third persons;

c. Retirement of all but one partner, and their rights to partnership property are
assigned to the remaining partner,who continues the business, either alone or
with others;

d. Wrongful dissolution by any partner, and the remaining partners continue the
business, either alone or with others; or

e. Expulsion of a partner, and the remaining partners continue the business, either
alone or with others.

2. When the cause of dissolution is the retirement or death of any partner, and business is
continued with the consent of the retired partner or the representative of the deceased
partner, without assignment of their rights to partnership property.

3. When the cause of dissolution is the assignment by all the partners or their representatives
of their rights in partnership property to one or more third persons who promise to pay the
debts and who continue the business of the partnership. [par. 1, Art. 1840, NCC]
 ii. Liability of A New Partner
• The liability to the creditors of the dissolved partnership of a new partner in the partnership
continuing the business shall be satisfied out of the partnership property alone. However, he
may, through agreement, assume individual liability. [par. 2, Art. 1840, NCC]
iii. Priority of Creditors of Dissolved Partnership

• Creditors of the dissolved partnership have prior right to any claim of the retired partner or
the representative of the deceased partner against the person or partnership continuing the
business. [par. 3, Art. 1840, NCC]

• This is without prejudice to the right of creditors to set aside any assignment on the ground of
fraud. [par. 4, Art. 1840, NCC]

• Ratio: Business will be hampered if outside creditors are not given superior right. It will be
risky for them to deal with partnerships. Moreover, if partners enjoy priority right, in the
natural order of things, they will prefer their own interests to that of the outside creditors.
Such state will make it easy to defraud non-partner creditors. [Pineda]

iv. Rights of a Retired Partner or a Representative of Deceased Partner

Unless otherwise agreed upon, when any partner retires or dies, and the business is
continued without any settlement of accounts as between him or his estate and the person or
partnership continuing the business, he or his legal representative, as against such person or
partnership, subject to the prior rights of creditors of the dissolved partnership:

a. May have the value of his interest at the date of dissolution ascertained; and

b. Shall receive as an ordinary creditor –

1. An amount equal to the value of his interest in the dissolved partnership with
interest; or

2. At his option or at the option of his legal representative, in lieu of interest, the
profits attributable to the use of his right in the property of the dissolved partnership.
[Art. 1841, NCC]

v. Right to an account
In the absence of any agreement to the contrary, the right to an account of his interest shall
accrue to any partner, or his legal representative at the date of dissolution, as against:
• a. The winding up partners;
• b. The surviving partners; or
• c. The person or partnership continuing the business [Art. 1842, NCC].

4. Limited Partnership

a. Definition
 1) A partnership;
2) Formed by two or more persons;
3) Having as members:
i. One or more general partners; and
ii. One or more limited partners.
iii. The limited partners as such shall not be bound by the obligations of the
partnership [Art. 1843, NCC], except to the extent of their capital
contributions.
b. Characteristics

1) A limited partnership is formed by compliance with the statutory requirements. [Art. 1844,
NCC]
2) The business is controlled or managed by one or more general partners, who are personally
liable to creditors. [Arts. 1848 and 1850, NCC]
3) One or more limited partners contribute to the capital and share in the profits but do not
manage the business and are not personally liable for partnership obligations beyond their
capital contributions. [Arts. 1845, 1848 and 1856, NCC]
4) Obligations or debts are paid out of the partnership assets and the individual property of the
general partners. [Art. 1843, NCC]
5) The limited partners may have their contributions back subject to conditions prescribed by
law. [Arts. 1844 and 1957, NCC]

A limited partnership has the following advantages:

1. For general partners, to secure capital from others while retaining control and supervision
for the business;

2. For limited partners, to have a share in the profits without risk of personal liability.

e. Formation

General Requirements

Two or more persons desiring to form a limited partnership shall:

1. Sign and swear to a certificate stating the items in Art. 1844, NCC; and

2. File for record the certificate in the SEC. [Art. 1844, NCC] A limited partnership is formed if there is
substantial compliance in good faith with the requirements. [Art. 1844, NCC]

When there is failure to substantially comply with the requirements:

1. In relation to third persons, the partnership is general, unless they recognized that the firm is a
limited partnership; and

2. As between the partners, the partnership remains limited, since they are bound by their
agreement. [de Leon]

Purpose of Filing
1. To give actual or constructive notice to potential creditors or persons dealing with the
partnership; and

2. To acquaint them with its essential features, including the limited liability of limited partners. [de
Leon]

Firm Name

General rule: The surname of a limited partner shall not appear in the partnership name.

Exceptions:

1. It is also the surname of a general partner; or

2. Prior to the time when the limited partner became such, the business had been carried on under
a name in which his surname appeared.

A limited partner whose surname appears in a partnership name contrary to this prohibition is liable
as a general partner to partnership creditors who extend credit without actual knowledge that he is
not a general partner. [Art. 1846, NCC]

iv. False Statement in the Certificate

If the certificate contains a false statement, one who suffers loss by reliance thereon may hold liable
any party to the certificate who knew the statement to be false:

1. At the time he signed the certificate; or

2. Subsequently, but within a sufficient time before the statement was relied upon to enable
him to cancel or amend the certificate, or to file a petition for its cancellation or amendment [Art.
1847, NCC].

Requisites:

1. The partner knew the statement to be false:

a. At the time he signed the certificate; or

b. Subsequently, but having sufficient time to cancel or amend it, or file a petition for its
cancellation or amendment, and he failed to do so;

2. The person seeking to enforce liability has relied upon the false statement in transacting business
with the partnership; and 3. The person suffered loss as a result of reliance upon such false
statement.

v. General and Limited Partner at the Same Time

A person may be:

1. A general; and

2. A limited partner, in the same partnership at the same time. This fact must be stated in the
certificate.
Such person shall have:

1. All the rights and powers of a general partner; and

2. Be subject to all the restrictions of a general partner.

Except that, in respect to his contribution as a limited partner, he shall have the rights against the
other members which he would have had if he were not also a general partner. [Art. 1853, NCC]

f. Management

General Rule: Only general partners have the right to manage the partnership.

A general partner shall have the rights and powers and be subject to all restrictions and
liabilities of a partner in a partnership without limited partners. Thus, he has general authority over
the business.

Thus, if a limited partner takes part in the control of the business, he becomes liable as a general
partner. [Art. 1848, NCC]

However, written consent or ratification by all limited partners is necessary to authorize the
general partners to:

a. Do any act in contravention of the certificate;

b. Do any act which would make it impossible to carry on the ordinary business of the partnership;

c. Confess a judgment against the partnership;

d. Possess partnership property, or assign their rights in specific property, for other than a
partnership purpose;

e. Admit a person as a general partner;

f. Admit a person as a limited partner, unless the right to do so is given in the certificate;

1. Continue the business with partnership property on the:

2. Death;

3. Retirement;

4. Insanity;

5. Civil interdiction; or

6. Insolvency of a general partner, unless the right so to do is given in the certificate [Art. 1850,
NCC]

g. Obligations of a Limited Partner

i. Obligations Related to Contribution

The contributions of a limited partner may be cash or other property, but not services. [Art.
1845, NCC] A limited partner is liable for partnership obligations when he contributes services
instead of only money or property to the partnership. [de Leon] A limited partner is liable to the
partnership:

1. For the difference between his actual contribution and that stated in the certificate as having
been made; and

2. 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. [par. 1, Art. 1858, NCC]

He holds as trustee for the partnership:

1. Specific property stated in the certificate as contributed by him, but which was not contributed or
which has been wrongfully returned; and

2. Money or other property wrongfully paid or conveyed to him on account of his contribution. [par.
2, Art. 1858, NCC]

These liabilities can be waived or compromised only by the consent of all members. Such waiver or
compromise, however, shall not affect the right to enforce said liabilities of a creditor:

1. Who extended credit; or

2. Whose claim arose, after the filing or before a cancellation or amendment of the certificate,
to enforce such liabilities. [par. 3, Art. 1858, NCC]

Even after a limited partner has rightfully received the return in whole or in part of his capital
contribution, he is still liable to the partnership for any sum, not in excess of such return with
interest, necessary to discharge its liabilities to all creditors:

1. Who extended credit; or

2. Whose claims arose before such return. [par. 4, Art. 1858, CC]

A person:

1. Who has contributed capital to a partnership;

2. Who erroneously believed that he has become a limited partner; and

3. Whose name appears in the certificate as a general partner, or who is not designated as a
limited partner, is not personally liable as a general partner by reason of his exercise of the rights of
a limited partner, provided:

a. On ascertaining the mistake, he promptly renounces his interest in the profits of the business
or other compensation by way of income [Art. 1852, NCC];

b. He does not participate in the management of the business [Art. 1848, NCC]; and c. His
surname does not appear in the partnership name. [Art. 1846, NCC]

Liability to Partnership Creditors

General rule: A limited partner is not liable as a general partner. His liability is limited to the extent
of his contributions. [Art. 1843, NCC]
Exceptions: The limited partner is liable as a general partner when:

1. His surname appears in the partnership name, with certain exceptions. [par. 2, Art. 1846, NCC]

2. He takes part in the control of the business. [Art. 1848, CC]

3. The certificate contains a false statement of which he knows and which was relied upon, resulting
in loss. [Art. 1847, CC]

In cases (1) and (2), the limited partner is entitled to reimbursement by the general partner/s.

Ratio: The general partner/s may not have been aware of such false statement.

Liability to Separate Creditors

On due application to a court of competent jurisdiction by any separate creditor of a limited partner,
the court may:

1. Charge his interest with payment of the unsatisfied amount of such claim;

2. Appoint a receiver; and

3. Make all other orders, directions and inquiries which the circumstances of the case may require.
The interest so charged may be redeemed with the separate property of any general partner, but
may not be redeemed with partnership property. [Art. 1862, NCC]

Note: In a general partnership, the interest may be redeemed with partnership property with the
consent of all the partners whose interests are not charged. [Art. 1814, NCC]

Rights of a Limited Partner

In General A limited partner shall have the same rights as a general partner to:

1. Require that the partnership books be kept at the principal place of business of the partnership;

2. To inspect and copy any of them at a reasonable hour;

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;

5. To ask for dissolution and winding up by decree of court;

6. To receive a share of the profits or other compensation by way of income; and

7. To receive the return of his contribution provided the partnership assets are in excess of all its
liabilities. [Art. 1851, NCC]

Right to Transact Business with the Partnership

A limited partner may:

1. Loan money to the partnership;

2. Transact other business with the partnership; and

3. Receive a pro rata share of the partnership assets with general creditors if he is not also a general
partner. [par. 1, Art. 1854, NCC]

Limitations: A limited partner, with respect to his transactions with the partnership, cannot:

1. Receive or hold as collateral security any partnership property; or

2. Receive any payment, conveyance, or release from liability if it will prejudice the right of third
persons. [par.1, Art. 1854, NCC]

Violation of the prohibition is considered a fraud on the creditors of the partnership. [par. 2, Art.
1854, NCC]

Right to Share in Profits

A limited partner may receive from the partnership the share of the profits or the compensation
by way of income stipulated for in the certificate.

This right is subject to the condition that partnership assets will still be in excess of partnership
liabilities after such payment. [Art. 1856, NCC] The partnership liabilities being referred to exclude
the liabilities to the limited and general partners.

Rationale: Otherwise, he will receive a share to the prejudice of third-party creditors.

Right to Return of Contribution

A limited partner may have his contributions withdrawn or reduced when:

1. All the liabilities of the partnership, except liabilities to general partners and to limited partners
on account of their contributions, have been paid or there remains property of the partnership
sufficient to pay them;

2. The consent of all members is had, unless the return may be demanded as a matter of right; and

3. The certificate is cancelled or so amended as to set forth the withdrawal or reduction. [par. 1, Art.
1857, NCC]

Note: Once withdrawal has been approved by the SEC and registered, the partnership may no longer
recover the limited partner’s contributions.

The return of his contributions may be demanded, as a matter of right [i.e., even when not all the
other partners consent]:

1. On the dissolution of the partnership;

2. Upon the arrival of the date specified in the certificate for the return; or

3. After the expiration of a 6-month notice in writing given by him to the other partners, if no time is
fixed in the certificate for:

a. The return of the contribution; or

 b. The dissolution of the partnership [par. 2, Art. 1857, CC].

General rule: A limited partner, irrespective of the nature of his contribution has only the right to
demand and receive cash in return for his contribution.

Exceptions: He may receive his contribution in a form other than cash when:

1. There is a statement in the certificate to the contrary; or

2. All the members of the partnership consent. [par. 3, Art. 1857, NCC]

Preference of Limited Partners

General rule: The limited partners stand on equal footing.

Exception: By an agreement of all the partners (general and limited) stated in the certificate,
priority or preference may be given to some limited partners over others with respect to:
1. The return of contributions;
2. Their compensation by way of income; or
3. Any other matter. [Art. 1855, NCC].
Note: Such an agreement shall be stated in the certificate.

vi. Right to Assign Interest

The interest of a limited partner is assignable.
The assignee may become:
1. A substituted limited partner; or
2. A mere assignee.
A substituted limited partner is a person admitted to all the rights of a limited partner who has
died or has assigned his interest in a partnership. He has all the rights and powers, and is subject to
all the restrictions and liabilities of his assignor, except those liabilities which:
1. The assignee was ignorant of; and
2. Cannot be ascertained from the certificate. [pars. 2 and 6, Art. 1859, NCC] An assignee is only
entitled to receive the share of the profits or other compensation by way of income, or the return
of contribution, to which the assignor would otherwise be entitled. He has no right:
1. To require any information or account of the partnership transactions;
2. To inspect the partnership books. [par. 3, Art. 1859, NCC] An assignee has the right to become
a substituted limited partner if:
1. All the partners consent thereto; or
2. The assignor, being empowered to do so by the certificate, gives him that right, [par.
4, Art. 1859, NCC].

vi. Right to Ask for Dissolution

A limited partner may have the partnership dissolved and its affairs wound up when:
1. He rightfully but unsuccessfully demands the return of his contribution; or
2. He has a right to contribution but his contribution is not paid because the partnership
property is insufficient to pay its liabilities. [par. 4, Art. 1857, NCC]
i. Dissolution
A limited partnership is dissolved in much the same way and causes as an ordinary partnership.
[de Leon]
General rule: The retirement, death, insolvency, insanity or civil interdiction of a general partner
dissolves the partnership.
Exception: It is not so dissolved when the business is continued by the remaining general partners:
a. Under a right to do so stated in the certificate; or
b. With the consent of all members. [Art. 1860, NCC]
Upon the death of a limited partner, his executor or administrator shall have:
a. All the rights of a limited partner for the purpose of settling his estate; and
b. The power to constitute an assignee as a substituted limited partner, if the deceased was so
empowered in the certificate.
The estate of a deceased limited partner shall be liable for all his liabilities as a limited partner.
[Art. 1861, NCC]

Settlement of Accounts
Order of Payment
In settling accounts after dissolution, the liabilities of the partnership shall be entitled to payment in the
following order:
1. Those to creditors, including limited partners except those on account of their contributions, in the
order of priority as provided by law;
2. Those to limited partners in respect to their share of the profits and other compensation by way of
income in their contributions;
3. Those to limited partners in respect to the capital of their contributions;
4. Those to general partners other than for capital and profits;
5. Those to general partners in respect to profits;
6. Those to general partners in respect to capital. [par. 1, Art. 1863, NCC]

Note: In settling accounts of a general partnership, those owing to partners in respect to capital enjoy
preference over those in respect to profits.

Share in the Partnership Assets

The share of limited partners in respect totheir claims for capital, profits, or for compensation by way of
income, is in proportion of their contribution, unless:
1. There is a statement in the certificate as to their share in the profits; or
2. There is a subsequent agreement fixing their share. [Art. 1863, NCC]

Amendment or Cancellation of Certificate

a. Cancellation of Certificate
The certificate shall be cancelled when: The partnership is dissolved; or
1. All limited partners cease to be such limited partners.