BL 2 - Prelims

BUSINESS LAW
AND
REGULATIONS
Atty. Jill B. Manangkil-Benitez
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Table of Contents
TITLE Page
Module 1: General Provisions on Partnership
Introduction 1
Learning Objectives 1
Lesson 1. Concept of partnership and governing law 2
Lesson 2. Characteristics and elements of partnership 3
Lesson 3. Nature of partnership 5
Lesson 4. Tests of partnership existence 5
Lesson 5. Partnership distinguished from co-ownership 7
Lesson 6. Essential features of partnership 8
Assessment Task 1 13
Summary 14
References 15
Module 2: Formalities and Different Classifications of 16
Partnership
Introduction 16
Lesson 1. Form of partnership contract 17
Lesson 2. Registration of partnership 18
Lesson 3. When immovable property is involve 19
Lesson 4. Articles of partnership 28
Lesson 5. Different classification of partnership 31
Summary 40
References 41
Module 3: Obligations of the Partners
Introduction 42
Lesson 1. Obligations of partners among themselves 43
Lesson 2. Rules for distribution of profits and losses 51
Lesson 3. Management of partnership 55
Lesson 4. Rights and duties of a partner 59
Lesson 5. Property rights of a partner 61
Lesson 6. Obligations of partners to third persons 64
Summary 77
References 79
Module 4: Dissolution and Winding Up of a Partnership
Introduction 80
Lesson 1. Dissolution, winding up and termination, defined 81
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Lesson 2. Causes of dissolution 81
Lesson 3. Effects of dissolution 88
Lesson 4. Rights of a partner upon dissolution 90
Lesson 5. Manner of winding up 91
Summary 94
References 95
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Course Code: BL 2
Course Description: This course is intended to give the students a broad

knowledge on legal provisions governing business associations-limited
liability companies, partnership and corporations. Topics include the
nature of partnerships, elements and kinds of partnership; formalities
required; rules of management; distribution of profits and sharing of
losses and liabilities; models of dissolution; limited partnership; nature
and classes of corporations; requirements of incorporation; power of a
corporation (expressed, implied and incidental); Board of Directors,
classes of stock, powers and obligations of shareholders; majority and
minority controls; corporate reorganization (mergers, consolidations and
other business combinations), modes of dissolution and liquidation;
statutory books, records and returns required for a corporation; and law
of associations such as clubs.Important case doctrines or jurisprudence
in partnership and corporate law are likewise discussed for purposes of
illustration.
Course Intended Learning Outcomes (CILO):

At the end of the course, students should be able to:
1. Explain and evaluate when a business association - partnership or
corporation - starts to exists;
2. Analyze and apply the legal principles and provisions of law as it
applies in business associations - partnership or corporation; and
3. Develop critical and analytical skills in understanding business
associations - partnership and corporation.
Course Requirements:
 Assessment Tasks - 60%
 Major Exam s - 40%
Periodic Grade 100%
PRELIM GRADE : 60% (Activity 1-4) + 40% (Prelim exam)

MIDTERM GRADE : 30% (Prelim Grade) + 70 % [60% (Activity 5-7)
+ 40%(Midterm exam)]
FINAL GRADE : 30% (Midterm Grade) + 70 % [60% (Activity 8-10)
+ 40%(Final exam)]
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MODULE 1
GENERAL PROVISIONS ON PARTNERSHIP
Introduction
This module touches on partnership first as a form of business organization recognized in the
Philippines. This module will discuss the different concepts of partnership for the students to
appreciate more the nature and characteristics of the topic.
In this module, we will understand the nature and characteristics of partnership, as well as
how to differentiate it with co-ownership. We will discuss when a partnership starts to exists. We will
also discuss what law governs partnership contracts. In discussing these, we will touch on the
provisions of law and legal concepts and legal principles.
Students are also exposed to actual legal business cases where they could apply theories
and concepts regarding this module.
Learning Outcomes
At the end of this module, students should be able to:
1. Discuss general provisions on partnership.
2. Determine when there is a partnership and be familiar with the tests used by courts of
law.
3. Distinguish partnership and co-ownership.
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4. Understand the essential features of partnership and be able to discuss each feature.
Lesson 1. Concept of partnership and governing law
Article 1767 of Republic Act No. 386 or otherwise known as the Civil Code of the
Philippines provides the legal definition of partnership as a contract. Said article states that, “[B]y
the contract of partnership, two or more persons bind themselves to contribute money, property,
or industry to a common fund, with the intention of dividing the profits among themselves."
According to De Leon (2005), based on the provision above, partnership under the
Philippine Law is a contract. To simplify, partnership is a contract or an agreement itself where
out of which it is created whereby two or more persons agree to become common owners over an
object which maybe money, property or even industry. Upon this agreement of being common
owners over an object, the parties involve also agree to share on the profits which may be derived
from their business.
According to De Leon & De Leon, Jr. (2005) on Comments and Cases on Partnership,
Agency and Trusts, a partnership may also be an association, a legal relation, a status arising out
of a contract, an organization, an entity, a joint undertaking to share in the profit and loss and
even a legal concept. Citing various references, De Leon & De Leon, Jr. (2005) provided other
definitions of partnership as follows:
1) “A partnership is a contract of two or more competent persons to place their

money, effects, labor and skill, or some or all of them, in lawful commerce or business and to
divide the profits and bear the losses in certain portions.”
2) “A partnership is an association of two or more persons to carry on as co-owners
of a business for profit.”
3) “A partnership is a legal relation based upon the express or implied agreement of

two or more competent persons whereby they unite their property, labor or skill in carrying on
some lawful business as principals for their joint profit.”
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4) “A partnership is the status arising out of a contract entered into by two or more
persons whereby they agree to share as common owners the profits of a business carried on
by all or any of them on behalf of all of them.”
5) “A partnership is an organization for production of income to which each partner

contributes one or both of the ingredients of income, which are capital or service.”
6) “A partnership is an entity, distinct and apart from the members composing it,
and, for the purpose of which it was created, it is a person having its own assets and liabilities
and any benefit or liability attaching to a member of the partnership, results from the
partnership relation.”
7) “A partnership is a joint undertaking to share in the profit and loss.”
8) “Partnership is a legal concept, but the determination of the existence of a
partnership may involve inferences drawn from an analysis of all the circumstances attending
its creation and operation.”
Governing Law on Partnership in the Philippines
De Leon & De Leon, Jr. (2005) also discusses the laws governing partnership. At present, it is
the Civil Code of the Philippines or Republic Act No. 386 which took effect on August 30, 1950 that
governs the law on partnership. Before the Civil Code took effect, there is the Code of Commerce
which governs the commercial or mercantile partnerships and the Old Spanish Code which governs the
non-commercial or civil partnerships.
The provisions of the Civil Code on partnership were mostly lifted from the old Civil
Code, the Uniform Partnership Act and the Uniform Limited Partnership Act. Some provisions
were taken from the Code of Commerce and other rules were formulated by the Code
Commission (De Leon & De Leon, Jr., 2005).
Lesson 2. Characteristics and Elements of Partnership
By now, you should be familiar with the definition of partnership based on Article 1767
of the Civil Code of the Philippines. From that definition, we can understand the
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characteristics and elements of partnership as discussed by De Leon (2005) which we will discuss
one by one below in this lesson.
First, it is discussed by De Leon (2005) that partnership as a contract is consensual.

Consensual is defined by Stewart (2006) as a word which is applied to designate one species of
contract known in the civil laws and these contracts derive their name from the consent of the
parties which is required in their formation, as they cannot exist without such consent. Thus,
partnership as being consensual is perfected by giving consent.
Second characteristic of partnership according to De Leon (2005) is that it is nominate. It

has a special name or designation under the law.
De Leon (2005) gave a third characteristic that a partnership is bilateral. Bilateral means
having or formed of two sides or two-sided that is mutual. That is why partnership is defined
under the law as a contract formed by two or more persons. The persons involved in the
partnership contract in turn have rights and obligations arising from that contract which are
always mutual.
Fourth characteristic as per De Leon (2005) is that partnership is an onerous contract.

Onerous means troublesome or oppressive and burdensome. How is that? It is explained by De
Leon (2005) that partnership is an onerous contract because each of the partner benefit only by
giving something.
The contract of partnership is also commutative according to De Leon (2005) because the
undertaking of each of the partners is considered as the equivalent of that of the others. This is the
fifth characteristic of a contract of partnership.
The sixth characteristic according to De Leon (2005) is that being of a principal contract
itself. As the term implies, a contract of partnership does not depend its existence on other
contracts. A contract of partnership exists on its own.
The seventh characteristic is that a contract of partnership is preparatory or as a promise

to a future agreement according to De Leon (2005). As the Civil Code defines
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partnership, it is a contract to contribute money, property or industry with a future agreement to divide
profits realized among the partners from such partnership agreement.
Lesson 3. Nature of Partnership
Article 1768 of the Civil Code of the Philippines states the nature of a partnership. Art.
1768 provides that,"[T]he partnership has a judicial personality separate and distinct from that of
each of the partners, even in case of failure to comply with the requirements of Article 1772, first
paragraph". Thus, it is clear that the partnership retains its juridical personality even it fails to
register, so long as the contract has the essential requisites. (Sunga-Chan vs. Chua, G.R. No.
143340, August 15, 2001).
Paras (2000) emphasized that Article 1772 on the other hand requires that the contract
must appear in a public instrument and be registered with the Securities and Exchange
Commission if the capital is Three Thousand Pesos (Php 3,000.00) or more.
A juridical person is defined by Tolentino (1992) as a non-human legal entity, in other

words any organization that is not a single natural person but is authorized by law with duties and
rights and is recognized as a legal person and as having a distinct identity. This includes any
incorporated organizations including corporations, government agencies, and NGOs or national
government organizations and partnership based on Article 1768, Civil Code.
Therefore, Tolentino (1992) deduced that a partnership duly formed under the law is a
juridical person to which the law grants a juridical personality separate and distinct from that of
each of the partners. As an independent juridical person, a partnership may enter into contracts,
acquire property of all kinds in its name, incur obligations, bring civil or criminal actions in
conformity with the laws and regulations of its organizations. (Article 46, Civil Code.)
Lesson 4. Tests of Partnership Existence

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Article 1769 of the Civil Code of the Philippines states the rules in determining whether a
partnership exits. These rules are quite tedious but these rules must be remembered somehow.
Said article is read as follows:
"Article 1769. In determining whether a partnership exists, these rules shall apply:
(1) Except as provided by Article 1825, persons who are not partners as to each other
are not partners as to third persons;
(2) Co-ownership or co-possession does not of itself establish a partnership, whether

such co-owners or co-possessors do or do not share any profits made by the use of
the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or
not the persons sharing them have a joint or common right or interest in any
property from which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is prima facie
evidence that he is a partner in the business, but no such inference shall be drawn
if such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with

the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or

other property by installments or otherwise."
We must somehow remember the provision above so as to tell whether a partnership

contract exists. Nevertheless let us remember that in general, to establish partnership, all of its
essential features or requisites must be present (De Leon & De Leon, 2005). These essential
features will be discussed in the next module one by one.
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Aside from the provision quoted above, there are two (2) simple tests taught to us in law
school and also discussed by De Leon & De Leon (2005) to determine if a partnership exists and
they are as follows:
1. Whether or not there is an agreement to contribute money, property, or industry to a

common fund; and
2. Whether or not there is an intention on the part of the parties to divide the profits among
themselves.
Lesson 5. Partnership Distinguished from Co-Ownership
As discussed above, Article 1769 of the Civil Code of the Philippines states the rules in
determining whether a partnership exits. It can be derived then according to De Leon & De Leon
(2005) that if none of the rules are present, it is not partnership under the contemplation of law but
maybe another legal entity. The table below is a comparison of the different characteristics
between a partnership and co-ownership as discussed in Paras (2000).
Table 1. Partnership and co-ownership distinguished
Characteristics Partnership Co-ownership

1. Creation Always created by a contract, Generally created by law.
either express or implied. It may exist even without a contract.
2. Juridical personality Has a juridical personality Has no juridical personality

separate and distinct from that
of each of the partners.
3. Purpose To obtain profit Common enjoyment of a thing or right.

Does not necessarily involve sharing
of profits.
4. Duration / Length ofNo term limit is set by law. An agreement to kept the thing
existence if created by undivided for more than 10years is not
contract allowed.
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5. Disposal of interest A partner cannot dispose his A co-owner may dispose his interest
interest as to make the without the consent of the other co-
transferee a partner without owners.
the unanimous consent.
6. Power to act with thirdPartner may bind the Co-owner cannot represent the co-
persons partnership, unless there is a ownership
stipulation to thecontrary.
7. Profits Partners may stipulate upon Profits must always depend on the
the sharing and division of proportionate share and any
profits. stipulation to the contrary is void as
per Art. 485, Civil Code.
8. Effect of death Death or incapacity of a Does not necessarily dissolve co-

partner dissolves the ownership
partnership
9. Form A partnership may be made in No public instrument is needed even if

any form except when real real property is the object f co-
property is contributed. ownership.
Lesson 6. Essential Features of Partnership
A. Existence of a Valid Contract
De Leon (2005) put emphasis that a partnership is a contract under the Civil Code.
Partnership is created by agreement of the parties involved. This agreement may be oral or
written, or express or implied from the acts and declarations of the parties and subject to the
provisions of Articles 1771 to 1773 of the Civil Code as to form which will be discussed in
subsequent lessons.
Art. 1305 of the Civil Code also defines a contract as a meeting of minds between two
persons whereby one binds himself, with respect to the other, to give something or to render some
service. Since there must exist a valid contract for a partnership to be effective, all the essential
elements of a valid contract must be present. Article 1318 of the Civil Code provides the essential
elements of a contract to be valid as follows:
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"Art. 1318. There is no contract unless the following requisites concur:
(1) Consent of the contracting parties;
(2) Object certain which is the subject matter of the contract;
(3) Cause of the obligation which is established."
Thus, for a valid contract to exist there must be consent, object and the cause or
consideration. Obviously, at least two (2) persons are required for a partnership to arise as defined
in Article 1767 earlier discussed. Further, we have already discussed that a contract of partnership
is consensual, hence the requisite of consent given by the parties. Next one is the object which
may be money, property or industry. The last requisite of a valid contract is the cause or
consideration existing as between the partners (De Leon & De Leon, 2005).
B. Legal Capacity of Parties to Enter into Contract
We have previously discussed that partnership is consensual. Thus, a valid consent must
be given by the parties to enter into a partnership contract (Paras, 2000).
Consequently, we must know who are the persons who cannot give their consent to a
contract of partnership. De Leon & De Leon, Jr. (2005) enumerated the following as persons who
cannot give their consent to a contract of partnership:
(1) Unemancipated minors;

(2) Insane or demented persons;
(3) Deaf-mutes who do not know how to write;
(4) Persons who are suffering from civil interdiction; and
(5) Incompetents who are under guardianship.
A question now is raised on whether a partnership may enter into another partnership. The
answer is yes. As explained by De Leon (2005), there is no prohibition against a partnership being
a partner in another partnership.
De Leon (2005) poses another question on whether a corporation may become a partner
of a partnership. The answer is no. A corporation has no power to enter into a contract of
partnership since a corporation cannot be bound by the acts of the other
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partners who are not its duly authorized agents or representatives. A corporation only acts through
its authorized agents, officers or representatives. However, a partnership may become part of the
corporation under the Revise Corporation Code. We will learn more on this later when we discuss
corporation law.
C. Mutual Contribution of Money, Property, or Industry to

a Common Fund
According to Paras (2000), there is an obligation for each parties or partners to contribute
in a contract of partnership. Such contribution may either be in the form of money, property or
labor, or any two or one of them. We can deduce then that without the contribution to a common
fund, there can be no partnership.
What is the object of contribution? It can be money, property or industry as per the Civil
Code. Let us go over it one by one.
De Leon (2005) discusses that money refers to the currency which is legal tender in the
Philippines. De Leon further stated that checks, drafts, promissory notes payable to order and
other mercantile documents are not money but only representatives of money. Thus, there is no
contribution of money until they have been cashed as per Article 1249 of the Civil Code.
When it comes to property, it may be real or personal property, corporeal or incorporeal

(Tolentino, 1992).
Industry in turn pertains to work or labor to be contributed by a party which may either be
personal manual labor or even intellectual (De Leon, 2005).
In the case of Lim Tong Lim vs. Philippine Fishing Gear Industries, Inc., 115 SCAD 159,
317 SCRA 728 [1999], the Supreme Court explained that a partnership may, therefore, exist even
if it is shown that the parties have not contributed any capital of their own to a common fund for
the contribution may be in the form of credit or industry not necessarily cash or fixed assets.
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A partner contributing his work or industry must, however, be differentiated from a lessor
of services. In case of a lessor of services, he is under supervision of the lessee or employer while
in case of a partner, no such supervision over the other partner (De Leon, 2005).
D. Object must be Lawful
A contract of partnership is just like other contracts in civil law. Partnership has to have a
lawful object (Paras, 2000).
Article 1306 of the Civil Code provides that the object is unlawful when it is contrary to
law, morals, good customs, public order, or public policy. The purpose for which the partnership
is created must also be lawful (De Leon, 2005).
Article 1770, Civil Code states that:
“Art. 1770. A partnership must have a lawful object or purpose, and must be established
for the common benefit or interest of the partners. When an unlawful partnership is dissolved by a
judicial decree, the profits shall be confiscated in favor of the State, without prejudice to the
provisions of the Penal Code governing the confiscation of the instruments and effects of a
crime.”
Thus, De Leon & De Leon (2005) states that there is no partnership if it appears that the
object or the purpose is unlawful and the contract will be regarded as inexistent and void ab initio.
(Article 1409 [1], Civil Code.)Thus:
“Art. 1409. The following contracts are inexistent and void from the beginning:
(1) Those whose cause, object or purpose is contrary to law, morals, good customs,
public order or public policy;
xxx
These contracts cannot be ratified. Neither can the right to set up the defense of
illegality be waived.”
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Further, as stated in the above provision of law, the profits shall be confiscated or taken in
favor of the government. The same rule applies to instruments, tools, profits and effects of a crime
(De Leon & De Leon, 2005).
E. Primary Purpose is to Obtain Profits, Share and Divide

the Same Among the Parties
The essence of partnership is that the partners share in the profits and losses as
exemplified in the case of Tacao vs. Court of Appeals, 365 SCRA 463 [2001]. Thus, the very
reason for the formation of the contract of partnership itself is the intention of the parties to obtain
profit from its business (De Leon, 2005).
Article 1799 of the Civil Code provides that without the sharing of profits, it cannot be
said that an agreement or contract of partnership exists or has been entered into. Thus, if there is a
stipulation in the contract excluding one or more partners from any participation in the profits,
such stipulation is void or not valid (Article 1799, Civil Code.)
According to De Leon & De Leon (2005), aside from the agreement to share on the
profits, the partnership agreement also has an implied stipulation to share on the losses, in case of
such in their business. Although there is no express or written stipulation in the contract on how
the partners will share in case of losses, what the partners will follow is the same sharing on the
profits as stipulated. Article 1797 par. 1 of the Civil Code is clear on this as it states that:
“Art. 1797. The losses and profits shall be distributed in conformity with the
agreement. If only the share of each partner in the profits has been agreed upon, the
share of each in the losses shall be in the same proportion.
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Assessment Task 1
Please answer carefully and objectively.
Facts 1.
In a partnership named A & B Company, A and B are the partners. A and B registered
the partnership with the Securities and Exchange Commission and obtain other permits
to start their business of selling face masks and face shields, among others. A and B
started to sell their products but the government sets a standard retail price for face
masks and face shields, respectively, resulting to losses to A & B Company.
Questions:
1. How many persons are enumerated in the case above? State each one of them
and discuss what kind of entity or personality are they.
2. What if A and B did not register their partnership with the Securities and
Exchange Commission, can A and B still operate their business? Why or why
not?
3. Briefly discuss in one paragraph using your own words the term
"separate juridical personality".
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Summary
Partnership is defined under Art. 1767 of the Civil Code and this Code also presently governs
partnership contracts in the Philippines. Partnership is a contract and partnership may also be an association, a
legal relation, a status arising out of a contract, an organization, an entity, a joint undertaking to share in the
profit and loss and even a legal concept (De Leon, 2005).
A partnership may also be classified based on its purpose. A partnership may either be trading or
non-trading. Non-trading partnership also refers to the exercise of profession. Thus, exercise of a
profession is not considered engaged in business or for a commercial purpose (De Leon & De Leon,
2005).
Partnership has different characteristics and elements. Partnership is said to be consensual,

nominate, bilateral, onerous, commutative, principal and prepatory. These characteristics and elements of
a partnership contract defines the nature of partnership and the laws governing partnership in our
jurisdiction (De Leon, 2005).
Partnership is different from a mere co-ownership as discussed by Paras (2000). The rights,
obligations and liabilities of a partner are different from that of a co-owner. A co-ownership even has no
juridical personality unlike a partnership.
There are rules provided by Art. 1769 to determine whether a partnership exists or not.
There are also tests provided by De Leon (2005) that can easily determine if a partnership exits.
The tests dwell down on the purpose and intention of the partners.
Partnership is essentially a contract. Thus, a partnership contract must essentially have the
elements of a valid contract under the Civil Code. The essential elements of a valid contract are consent,
object, and consideration. The same requirements must be present in a partnership contract (Paras, 2000).
The purpose of a partnership contract is basically the sharing of profits and losses, as well as
dividing these profits and losses among themselves. There are however exceptions under the law. The
Civil Code even states that without this essential purpose, there can be no partnership (De Leon & De
Leon, 2005).
In a partnership contract, the partners make a common fund. This common fund may consist of
money in the form of cash, property which may be real or personal property/ies, or even industry or work
or labor is a valid contribution of a partner (De Leon, 2005).
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The object of a partnership contract must be a lawful object. Partnership contracts where the
object is unlawful shall be rendered void from beginning by the courts of law partnership (De Leon & De
Leon, 2005).
In the absence of stipulation, the share of each partner in the profits and losses shall be in
proportion to what he may have contributed, but the industrial partner shall not be liable for the losses. As
for the profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the profits
in proportion to his capital (De Leon & De Leon, 2005).
References
Books and Laws:
De Leon, H. and Hector de Leon, Jr., Comments and Cases on Partnership, Agency and Trust, Sixth
Edition. 2005, Manila: Rex Printing Company, Inc.
De Leon, H, The Law on Partnerships and Private Corporations, 2005 Edition, Manila: Rex Printing
Company, Inc.
Paras, E., Civil Code of the Philippines Annotated Book V 14th Edition. 2000, Manila: Rex Printing
Company, Inc.
Republic Act No. 386 or the Civil Code of the Philippines, June 18, 1949.
Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the Philippines, Volume 5.
1992, Quezon City: Central Lawbook Publishing Co.
MODULE 2
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FORMALITIES AND DIFFERENT
CLASSIFICATIONS OF PARTNERSHIP
Introduction
This module touches on the form required of a partnership contract. This module will discuss the
essence of form in a partnership contract and understand when there is a need of a public instrument. We
will also have a discussion on when a partnership has to be registered with the proper agencies of the
government.
This module will also deal with the different classification and kinds of partnership. By learning
and being able to distinguish what kind of partnership one is, you will be able to appreciate what
partnership kind is ideal for a given situation or business.
In discussing the formalities of partnership, we will touch on the provisions of law and legal
concepts and principles, as well as some Supreme Court decisions.
Learning Outcomes
1. Identify the form required in executing a partnership contract and be able to apply it;
2. Understand the importance of form in a partnership contract;
3. Determine whether a partnership may exist if one of the formalities of law is lacking;
4. Learn and be able to distinguish a particular kind of a partnership;
5. Understand the importance of distinguishing a partnership contract from that of another kind; and
6. Be able to apply what you will learn and acknowledge the effect of choosing a particular kind of
partnership.
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Lesson 1. Form of Partnership Contract
Article 1771 of the Civil Code is the provision to look into with regards to form of a partnership
contract. The said provision is quoted below for easy reference. Thus:
"ARTICLE 1771. A partnership may be constituted in any form, except where immovable
property or real rights are contributed thereto, in which case a public instrument shall be
necessary."
According to Paras (2000), a partnership may be constituted in any form. A partnership may be
made orally or in writing regardless of the value of the contributions. The exception provided by law is in
case immovable or real property or real rights are contributed by the partners.
Based on Article 1771 above, a public instrument is necessary in case real property or real rights
are contributed by the partners. A public instrument, in turn, refers to any legal instrument (legal
document) recorded with and authenticated by a public office or employee, usually a notary public
(Tolentino, 1992).
Please remember what immovable properties are and what are not. Article 415 of the Civil Code
states:
"ARTICLE 415. The following are immovable property: attached in land
(1) Land, buildings, roads and constructions of all kinds adhered to the soil;
(2) Trees, plants, and growing fruits, while they are attached to the land or form an integral
part of an immovable;
(3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be
separated therefrom without breaking the material or deterioration of the object;
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(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings
or on lands by the owner of the immovable in such a manner that it reveals the intention to
attach them permanently to the tenements;
(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement
for an industry or works which may be carried on in a building or on a piece of land, and which
tend directly to meet the needs of the said industry or works;
(6) Animal houses, pigeon-houses, beehives, fish ponds or breeding places of similar
nature, in case their owner has placed them or preserves them with the intention to have
them permanently attached to the land, and forming a permanent part of it; the animals in
these places are included;
(7) Fertilizer actually used on a piece of land;
(8) Mines, quarries, and slag dumps, while the matter thereof forms part of the bed, and
waters either running or stagnant;
(9) Docks and structures which, though floating, are intended by their nature and object to
remain at a fixed place on a river, lake, or coast;
(10) Contracts for public works, and servitudes and other real rights over immovable
property."
Lesson 2. Registration of Partnership
De Leon (2005) further discussed that Article 1772 of the Civil Code of the Philippines requires
registration of a contract of partnership in certain cases. Art. 1772 provides that:
"ARTICLE 1772. Every contract of partnership having a capital of three thousand pesos or
more, in money or property, shall appear in a public instrument, which must be recorded in
the Office of the Securities and Exchange Commission.
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Failure to comply with the requirements of the preceding paragraph shall not affect the
liability of the partnership and the members thereof to third persons."
De Leon (2005) put emphasis that from the provision above, there are in fact two (2)
requirements to be done by the partners in case the amount of capital is Php3,000.00 or more. That is:
1. The partnership contract must appear in a public instrument; and

2. The partnership contract must be recorded with the Office of the Securities and Exchange
Commission.
Consequently, these are the steps on how to register a partnership before the Securities and
Exchange Commission which can easily be followed at their website www.sec.gov.ph:
(1) You must verify your company name.

(2) If the name is disallowed, you may appeal. Otherwise, choose a new name;
(3) Fill-out the Articles of Partnershipform with your partners;
(4) Submit your Articles of Partnership with the SEC, together with an affidavit of
undertaking to change name. Nowadays, this is also done online thru uploading of your
documents at SEC website for processing and evaluation;
(5) SEC will assess the filing fees you have to pay; and
(6) Pay your registration fees.
According to De Leon & De Leon (2005), registration is required under our law. The purpose of
registering your partnership business with the SEC is for the partnership business to have a license to
engage in business and trade. After registration, a tax identification number (TIN) will be assigned to
your partnership. Another reason for registration is to give notice to all and any interested parties dealing
with the partnership.
Lesson 3. When Immovable Property is Involve
19
Paras (2000) elaborated that when immovable or real property is contributed in a partnership, the
partners have to observe the formalities required under Article 1773 of the Civil Code. Article 1773
provides that:
gumawa ka ng
contract
partnership may "Art. 1773. A contract of partnership is void, whenever immovable property
separetae
document may
is contributed thereto, if an inventory of said property is not made, signed by the
inventory ka. so
yung mga
attachment mya parties, and attached to the public instrument."
mga pirma.
kasama to validy.
Aside from the requirement that the contract must be in a public instrument as we have
discussed under Article 1771, Article 1773 requires that there has to be an inventory of property
contributed, signed by the parties and attached to the public instrument. Otherwise, the contract of
partnership is void as per said provision of law (Paras, 2000).
According to De Leon (2005) therefore, in case immovable or real rights are contributed, the
following requirements are obligatory as mandated by law regardless of the value thereof:
1. the contract must be in a public instrument (Article 1771.); and

2. an inventory of the property contributed must be made, signed by the partners, and
attached to the public instrument (Article 1773.).
The key words here are "immovable property" and "contributed to the partnership".Thus, if it involves
only movable property contributed to the partnership, such inventory is not required. Also, there are
immovable and movable properties contributed to the partnership, only those immovable properties are
required to be included in the inventory (De Leon & De Leon, 2005).
Further, to be effective against third parties, the partnership must also be registered in the Registry of
Property of the province where the real property contributed is found (De Leon, 2005).
Tolentino (1992) discussed that the execution of a public instrument would be useless if there is
no inventory of the property contributed, because without its designation and description, they cannot be
subject to inscription in the Registry of Property. This will result in fraud to those who contract with the
partnership in the belief of the efficacy of the guaranty in which the immovable may consist.
20
Please read the case of Torres vs. Court of Appeals, G.R. No. 134559 December 9, 1999.A full
text copy is provided in this module below for easy reference.
Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
( Penned by Justice Ramon U. Mabutas Jr.; concurred in by Justices Emeterio C. Cui, Division chairman, and Hilarion L. Aquino,)
G.R. No. 134559 December 9, 1999

ANTONIA TORRES assisted by her husband, ANGELO TORRES; and EMETERIA
BARING, petitioners,
vs.
COURT OF APPEALS and MANUEL TORRES, respondents.
PANGANIBAN, J.:
Courts may not extricate parties from the necessary consequences of their acts. That the terms of
a contract turn out to be financially disadvantageous to them will not relieve them of their
obligations therein. The lack of an inventory of real property will not ipso facto release the
contracting partners from their respective obligations to each other arising from acts executed in
accordance with their agreement.
The Case
The Petition for Review on Certiorari before us assails the March 5, 1998 Decision 1 of the Court
of Appeals 2 (CA) in CA-GR CV No. 42378 and its June 25, 1998 Resolution denying
reconsideration. The assailed Decision affirmed the ruling of the Regional Trial Court (RTC) of
Cebu City in Civil Case No. R-21208, which disposed as follows:
WHEREFORE, for all the foregoing considerations, the Court, finding for the defendant and
against the plaintiffs, orders the dismissal of the plaintiffs’ complaint. The counterclaims of the
defendant are likewise ordered dismissed. No pronouncement as to costs. 3
The Facts
21
Sisters Antonia Torres and Emeteria Baring, herein petitioners, entered into a "joint venture
agreement" with Respondent Manuel Torres for the development of a parcel of land into a
subdivision. Pursuant to the contract, they executed a Deed of Sale covering the said parcel of
land in favor of respondent, who then had it registered in his name. By mortgaging the property,
respondent obtained from Equitable Bank a loan of P40,000which, under the Joint Venture
Agreement, was to be used for the development of the subdivision. 4 All three of them also agreed
to share the proceeds from the sale of the subdivided lots.
The project did not push through, and the land was subsequently foreclosed by the bank.
According to petitioners, the project failed because of "respondent's lack of funds or means and
skills." They add that respondent used the loan not for the development of the subdivision, but in
furtherance of his own company, Universal Umbrella Company.
On the other hand, respondent alleged that he used the loan to implement the Agreement. With
the said amount, he was able to effect the survey and the subdivision of the lots. He secured the
LapuLapu City Council's approval of the subdivision project which he advertised in a local
newspaper. He also caused the construction of roads, curbs and gutters. Likewise, he entered into
a contract with an engineering firm for the building of sixty low-cost housing units and actually
even set up a model house on one of the subdivision lots. He did all of these for a total expense of
P85,000.
Respondent claimed that the subdivision project failed, however, because petitioners and their
relatives had separately caused the annotations of adverse claims on the title to the land, which
eventually scared away prospective buyers. Despite his requests, petitioners refused to cause the
clearing of the claims, thereby forcing him to give up on the project. 5
Subsequently, petitioners filed a criminal case for estafa against respondent and his wife,
who were however acquitted. Thereafter, they filed the present civil case which, upon
respondent's motion, was later dismissed by the trial court in an Order dated September
6, 1982. On appeal, however, the appellate court remanded the case for further
proceedings. Thereafter, the RTC issued its assailed Decision, which, as earlier stated,
was affirmed by the CA.
Hence, this Petition. 6
Ruling of the Court of Appeals
In affirming the trial court, the Court of Appeals held that petitioners and respondent had formed
a partnership for the development of the subdivision. Thus, they must bear the loss suffered by the
partnership in the same proportion as their share in the profits
22
stipulated in the contract. Disagreeing with the trial court's pronouncement that losses as well as
profits in a joint venture should be distributed equally, 7 the CA invoked Article 1797 of the Civil
Code which provides:
Art. 1797 — The losses and profits shall be distributed in conformity with the agreement.
If only the share of each partner in the profits has been agreed upon, the share of each in
the losses shall be in the same proportion.
The CA elucidated further:
In the absence of stipulation, the share of each partner in the profits and losses shall be in
proportion to what he may have contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such share as may be just and
equitable under the circumstances. If besides his services he has contributed capital, he shall also
receive a share in the profits in proportion to his capital.
The Issue
Petitioners impute to the Court of Appeals the following error:
. . . [The] Court of Appeals erred in concluding that the transaction . . . between the petitioners
and respondent was that of a joint venture/partnership, ignoring outright the provision of Article
1769, and other related provisions of the Civil Code of the Philippines. 8
The Court's Ruling
The Petition is bereft of merit.
Main Issue:
Existence of a Partnership
Petitioners deny having formed a partnership with respondent. They contend that the Joint
Venture Agreement and the earlier Deed of Sale, both of which were the bases of the appellate
court's finding of a partnership, were void.
In the same breath, however, they assert that under those very same contracts, respondent is
liable for his failure to implement the project. Because the agreement entitled them to receive 60
percent of the proceeds from the sale of the subdivision lots, they pray that respondent pay them
damages equivalent to 60 percent of the value of the property. 9
The pertinent portions of the Joint Venture Agreement read as follows:
KNOW ALL MEN BY THESE PRESENTS:
23
This AGREEMENT, is made and entered into at Cebu City, Philippines, this 5th day of March, 1969,
by and between MR. MANUEL R. TORRES, . . . the FIRST PARTY, likewise, MRS. ANTONIA B.
TORRES, and MISS EMETERIA BARING, . . . the SECOND PARTY:
WITNESSETH:
That, whereas, the SECOND PARTY, voluntarily offered the FIRST PARTY, this property located at
Lapu-Lapu City, Island of Mactan, under Lot No. 1368 covering TCT No. T-0184 with a total area of
17,009 square meters, to be sub-divided by the FIRST PARTY;
Whereas, the FIRST PARTY had given the SECOND PARTY, the sum of: TWENTY THOUSAND
(P20,000.00) Pesos, Philippine Currency upon the execution of this contract for the property
entrusted by the SECOND PARTY, for sub-division projects and development purposes;
NOW THEREFORE, for and in consideration of the above covenants and promises herein
contained the respective parties hereto do hereby stipulate and agree as follows:
ONE: That the SECOND PARTY signed an absolute Deed of Sale . . . dated March 5, 1969, in the
amount of TWENTY FIVE THOUSAND FIVE HUNDRED THIRTEEN & FIFTY CTVS.
(P25,513.50) Philippine Currency, for 1,700 square meters at ONE [PESO] & FIFTY CTVS.
(P1.50) Philippine Currency, in favor of the FIRST PARTY, but the SECOND PARTY did not
actually receive the payment.
SECOND: That the SECOND PARTY, had received from the FIRST PARTY, the necessary
amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, for their personal
obligations and this particular amount will serve as an advance payment from the FIRST PARTY
for the property mentioned to be sub-divided and to be deducted from the sales.
THIRD: That the FIRST PARTY, will not collect from the SECOND PARTY, the interest and the
principal amount involving the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine
Currency, until the sub-division project is terminated and ready for sale to any interested parties,
and the amount of TWENTY THOUSAND (P20,000.00) pesos, Philippine currency, will be
deducted accordingly.
FOURTH: That all general expense[s] and all cost[s] involved in the sub-division project should
be paid by the FIRST PARTY, exclusively and all the expenses will not be deducted from the sales
after the development of the sub-division project.
FIFTH: That the sales of the sub-divided lots will be divided into SIXTY PERCENTUM 60% for the
SECOND PARTY and FORTY PERCENTUM 40% for the FIRST PARTY, and
24
additional profits or whatever income deriving from the sales will be divided equally according to
the . . . percentage [agreed upon] by both parties.
SIXTH: That the intended sub-division project of the property involved will start the work and all
improvements upon the adjacent lots will be negotiated in both parties['] favor and all sales shall
[be] decided by both parties.
SEVENTH: That the SECOND PARTIES, should be given an option to get back the property
mentioned provided the amount of TWENTY THOUSAND (P20,000.00) Pesos, Philippine
Currency, borrowed by the SECOND PARTY, will be paid in full to the FIRST PARTY, including
all necessary improvements spent by the FIRST PARTY, and-the FIRST PARTY will be given a
grace period to turnover the property mentioned above.
That this AGREEMENT shall be binding and obligatory to the parties who executed same freely
and voluntarily for the uses and purposes therein stated. 10
A reading of the terms embodied in the Agreement indubitably shows the existence of a
partnership pursuant to Article 1767 of the Civil Code, which provides:
Art. 1767. By the contract of partnership two or more persons bind themselves to contribute
money, property, or industry to a common fund, with the intention of dividing the profits among
themselves.
Under the above-quoted Agreement, petitioners would contribute property to the partnership in
the form of land which was to be developed into a subdivision; while respondent would give, in
addition to his industry, the amount needed for general expenses and other costs. Furthermore,
the income from the said project would be divided according to the stipulated percentage.
Clearly, the contract manifested the intention of the parties to form a partnership. 11
It should be stressed that the parties implemented the contract. Thus, petitioners transferred
the title to the land to facilitate its use in the name of the respondent. On the other hand,
respondent caused the subject land to be mortgaged, the proceeds of which were used for the
survey and the subdivision of the land. As noted earlier, he developed the roads, the curbs and the
gutters of the subdivision and entered into a contract to construct low-cost housing units on the
property.
Respondent's actions clearly belie petitioners' contention that he made no contribution to the
partnership. Under Article 1767 of the Civil Code, a partner may contribute not only money or
property, but also industry.
Petitioners Bound by
25
Terms of Contract
Under Article 1315 of the Civil Code, contracts bind the parties not only to what has been
expressly stipulated, but also to all necessary consequences thereof, as follows:
Art. 1315. Contracts are perfected by mere consent, and from that moment the parties are bound
not only to the fulfillment of what has been expressly stipulated but also to all the consequences
which, according to their nature, may be in keeping with good faith, usage and law.
It is undisputed that petitioners are educated and are thus presumed to have understood the terms
of the contract they voluntarily signed. If it was not in consonance with their expectations, they
should have objected to it and insisted on the provisions they wanted.
Courts are not authorized to extricate parties from the necessary consequences of their acts, and
the fact that the contractual stipulations may turn out to be financially disadvantageous will not
relieve parties thereto of their obligations. They cannot now disavow the relationship formed
from such agreement due to their supposed misunderstanding of its terms.
Alleged Nullity of the

Partnership Agreement
Petitioners argue that the Joint Venture Agreement is void under Article 1773 of the Civil Code,
which provides:
Art. 1773. A contract of partnership is void, whenever immovable property is contributed thereto,
if an inventory of said property is not made, signed by the parties, and attached to the public
instrument.
They contend that since the parties did not make, sign or attach to the public instrument an
inventory of the real property contributed, the partnership is void.
We clarify. First, Article 1773 was intended primarily to protect third persons. Thus, the eminent
Arturo M. Tolentino states that under the aforecited provision which is a complement of Article
1771, 12 "The execution of a public instrument would be useless if there is no inventory of the
property contributed, because without its designation and description, they cannot be subject to
inscription in the Registry of Property, and their contribution cannot prejudice third persons. This
will result in fraud to those who contract with the partnership in the belief [in] the efficacy of the
guaranty in which the immovables may consist. Thus, the contract is declared void by the law
when no such inventory is made." The case at bar does not involve third parties who may be
prejudiced.
26
Second, petitioners themselves invoke the allegedly void contract as basis for their claim that
respondent should pay them 60 percent of the value of the property. 13 They cannot in one breath
deny the contract and in another recognize it, depending on what momentarily suits their
purpose. Parties cannot adopt inconsistent positions in regard to a contract and courts will not
tolerate, much less approve, such practice.
In short, the alleged nullity of the partnership will not prevent courts from considering the
Joint Venture Agreement an ordinary contract from which the parties' rights and obligations to
each other may be inferred and enforced.
Partnership Agreement Not the Result

of an Earlier Illegal Contract
Petitioners also contend that the Joint Venture Agreement is void under Article 1422 14 of the
Civil Code, because it is the direct result of an earlier illegal contract, which was for the sale of
the land without valid consideration.
This argument is puerile. The Joint Venture Agreement clearly states that the consideration for
the sale was the expectation of profits from the subdivision project. Its first stipulation states that
petitioners did not actually receive payment for the parcel of land sold to respondent.
Consideration, more properly denominated as cause, can take different forms, such as the
prestation or promise of a thing or service by another. 15
In this case, the cause of the contract of sale consisted not in the stated peso value of the land,
but in the expectation of profits from the subdivision project, for which the land was intended to
be used. As explained by the trial court, "the land was in effect given to the partnership as
[petitioner's] participation therein. . . . There was therefore a consideration for the sale, the
[petitioners] acting in the expectation that, should the venture come into fruition, they [would]
get sixty percent of the net profits."
Liability of the Parties
Claiming that respondent was solely responsible for the failure of the subdivision project,
petitioners maintain that he should be made to pay damages equivalent to 60 percent of the value
of the property, which was their share in the profits under the Joint Venture Agreement.
We are not persuaded. True, the Court of Appeals held that petitioners' acts were not the
cause of the failure of the project. 16 But it also ruled that neither was respondent responsible
therefore. 17 In imputing the blame solely to him, petitioners failed to give any
27
reason why we should disregard the factual findings of the appellate court relieving him of fault.
Verily, factual issues cannot be resolved in a petition for review under Rule 45, as in this case.
Petitioners have not alleged, not to say shown, that their Petition constitutes one of the exceptions
to this doctrine. 18 Accordingly, we find no reversible error in the CA's ruling that petitioners are
not entitled to damages.
WHEREFORE, the Petition is hereby DENIED and the challenged Decision AFFIRMED.
Costs against petitioners.
SO ORDERED
Melo, Vitug, Purisima and Gonzaga-Reyes, JJ., concur.
_____________________________________________
Footnotes
1 member.
2 Second Division.
3 CA Decision, p. 1; rollo, p. 15.
Lesson 4. Articles of Partnership
We should all be familiar on the contents of an actual Articles of Partnership. The following
information should be provided or stated in the articles of partnership as discussed by De Leon
& De Leon (2005):
1. Name of the partnership
2. Principal office address
4. Telephone number of the partnership
5. Name, citizenship, address, birthday and TIN of the partners
6. Capital contribution of the partners
7. Purpose of the partnership
Below is an actual example of an Articles of Partnership drafted by yours truly for a client.
ARTICLES OF PARTNERSHIP
OF
A-B DIALYSIS, CO.
_____________________________________
28
KNOW ALL MEN BY THESE PRESENTS:
That the undersigned, all of legal age and residents of the Republic of the Philippines have
agreed to form a general partnership under the terms and conditions herein after set forth and subject to
the provisions of existing laws of the Republic of the Philippines.
AND WE HEREBY CERTIFY:
ARTICLE I: That the name of the partnership shall be A-B DIALYSIS, CO.
ARTICLE II: That the principal office of the partnership shall be located at #10 Rizal Avenue, Brgy.
San Isidro, Sta. Cruz, Manila.
ARTICLE III: That the names, citizenship and residence of the partners of said partnership are as
follows:
Name Citizenship Residence
A Filipino Lot 29 Block 2 Carmella Homes,
Cavite City, Antipolo City

B Filipino 19 Barcelona Street, Vista Verde,
Muntinlupa City
ARTICLE IV: That the term for which said partnership is to exist is FIFTY (50) years from and after
the recording of said partnership by the Securities and Exchange Commission;
ARTICLE V: That the purpose/s for which said partnership is formed are as follows:
To own, manage and operate high-quality nephrology clinics and kidney dialysis centers in the
Philippines, and to undertake such related activities as are permitted under all applicable laws and are
necessary, appropriate or advisable in furtherance of such business, including, without limitation, the
importation and wholesale of supplies and equipment, the leasing of property and equipment, the
management of dialysis centers and the delivery of consulting and technical assistance.
ARTICLE VI: That the capital of this partnership shall be FIVE MILLION PESOS, Philippine
Currency contributed in cash by the partners as follows:
29
Name Amount
Contributed
A Php 2,500,000.00
B 2,500,000.00
TOTAL Php 5,000,000.00
That no transfer of interest which will reduce the ownership of Filipino citizens to less than the
required percentage of capital shall be allowed to be recorded in the proper books of the partnership;
ARTICLE VII: That the profits and losses shall be divided pro-rata among the partners;
ARTICLE VIII: That the firm shall be under the management of A as General Manager and as such
he/she shall have charge of the management of the affairs of the partnership.
ARTICLE IX: That the partners manifest their willingness to change their partnership name in the
event another person, firm or entity has acquired a prior right to use the said firm name or one
deceptively or confusingly similar to it.
IN WITNESS WHEREOF, we have hereunto set our hands this _____ day of
_________________, 2013 at _______________________ Philippines.
__________________________________ __________________________________
A B
TIN: xxxxxxxxx TIN: xxxxxxxx
Signed in the presence of:
__________________________________ __________________________________
ACKNOWLEDGEMENT
Republic of the Philippines)
______________________ ) S.S.
30
BEFORE ME, a Notary Public for and in __________________
Philippines, this
___________________________ personally came and appeared the following persons with their Tax
Identification Numbers as follows:
Name Tax Identification Date/Place Issued
No.:
A xxxxxxxxx
B Xxxxxxxxx
known to me and to me known to be the same persons who executed the foregoing Articles of
Partnership, and they acknowledged to me that the same is their voluntary act and deed.
WITNESS MY HAND AND SEAL, on the date first above-written.

Doc. No. _______;
Page No. _______;
Book No. ______;
Series of .
Lesson 6. Different Classification of Partnership
A. Classification as to Object
De Leon (2005) cites Article 1776 of the Civil Code and gives the first classification of partnership
that is according to its object or subject matter. The following provisions are relevant:
“Art. 1776. As to its object, a partnership is either universal or particular. xxx” Art.
1777. A universal partnership may refer to all the present property or to
all the profits.
Art. 1778. A partnership of all present property is that in which the partners
contribute all the property which actually belongs to them to a common fund, with the
intention of dividing the same among themselves, as well as all the profits which they may
acquire therewith.
31
Art. 1779. In a universal partnership of all present property, the property which
belongs to each of the partners at the time of the constitution of the partnership, becomes
the common property of all the partners, as well as all the profits which they may acquire
therewith.
A stipulation for the common enjoyment of any other profits may also be made; but the
property which the partners may acquire subsequently by inheritance, legacy, or donation
cannot be included in such stipulation, except the fruits thereof.
Art. 1780. A universal partnership of profits comprises all that the partners may
acquire by their industry or work during the existence of the partnership.
Movable or immovable property which each of the partners may possess at the time
of the celebration of the contract shall continue to pertain exclusively to each, only the
usufruct passing to the partnership.
Art. 1781. Articles of universal partnership, entered into without specification of its
nature, only constitute a universal partnership of profits.
Art. 1782. Persons who are prohibited from giving each other any donation or
advantage cannot enter into universal partnership.
Art. 1783. A particular partnership has for its object determinate things, their use or
fruits, or specific undertaking, or the exercise of a profession or vocation.”
According to De Leon (2005), the fundamental difference between a universal partnership and a
particular partnership lies in the scope of their subject matter or object. In the former, the object is vague
and indefinite reflecting a general business with some degree of continuity, while in the latter, it is limited
and well-defined, being confined to an undertaking of a single, temporary, or ad hoc nature.
A universal partnership of all present properties is one which comprises all that the partners may
acquire by their industry or work during the existence of the partnership. Aside from this, property which
belonged to each of them at the time of the constitution of the partnership
32
and profits which they may acquire from the property contributed will become common property of the
partnership as per paragraph 1 of Article 1779 above (De Leon, 2005).
De Leon & De Leon (2005) discusses that a universal partnership of profits on the other hand
comprises of all that the partners may acquire by their industry or work during such partnership and the
usufruct of movable or immovable property which each of the partners may possess at the time of the
contract.
As to ownership of present and future property, the partners retain ownership over these and
what passes only to the partnership are the profits or income in a universal partnership of profits. Further,
profits acquired through chance not included. Also, fruits of the property subsequently acquired are not
included in this kind of partnership, unless expressly stipulated by the partners (De Leon & De Leon,
2005).
B. Classification as to Liabilities of Partners
Paras (2000) explained that Article 1776 of the Civil Code also provides the second classification
of partnership which is according to liabilities of the partners. The following provisions of the Civil Code
are relevant:
“Art. 1776. Xxx.
As regards the liability of the partners, a partnership may be general or limited.”
Paras (2000) further explained that a general partnership is one consisting of general partners
who are liable pro rata and in general, subsidiarily liable only (Art. 1822-1824) with their separate
property for partnership debts. A limited partnership is defined under Article 1843 which is reproduced
below.
“Art. 1843. A limited partnership is one formed by two or more persons under the
provisions of the following article, having as members one or more general partners and one
or more limited partners. The limited partners as such shall not be bound by the obligations
of the partnership.”
33
From the provision above, a limited partnership is composed of two (2) kinds of partners, a
general and a limited partner according to Paras (2000). We will tackle the other different kinds of
partners on the next lesson.
The liability of the limited partner is limited to the amount of money he has put into the
partnership contract. That is the reason for the name limited. This type of partnership is an exception to
the general rule that all partners including the industrial partners are liable pro rata of all their property
for partnership debts (Paras, 2000).
The general partnership may be constituted in any form while a limited partnership is created by
members after compliance with the requirements set forth by law (Paras, 2000).
Let us differentiate and have an overview of a general partnership vis-à-vis a limited partnership
as compared by De Leon & De Leon (2005).
Table 3. Differences between a general partnership / general partner and a limited partnership /
limited partner
General Partnership Limited Partnership

1. personally liable for partnership 1. liability extends only to his capital
obligations (Art. 1816.) contribution (Arts. 1845, 1848, 1856.)
2. when the manner of management has 2. a limited partner has no share in the
not been agreed upon, all general management of a limited partnership. His
partners have equal right in the rights are limited to those enumerated in
management of the business whether Article1851, such that he renders himself
or not the general partner has made liable to creditors as a general partner if
any capital contribution (Art. 1803, 1810 he takes part in control of the business
[3].) (Art. 1848.)
3. may contribute money, property, 3. must contribute cash or property to the
industry to the partnership (Art. 1767.) partnership but not services (Art. 1845.)
4. general partners are proper parties to 4. not a proper party to proceedings by or
34
proceedings by or against a partnership against a partnership unless he is also a general
partner or where the objects of the proceedings
is to enforce a limited partner’s right against or
liability to the partnership 5. a limited partner’s
5. a general partner’s interest to the
interest is freely assignable, with the assignee
partnership may not be assigned as to make
acquiring all the rights of the limited partner
the assignee a new partner without the
(Art. 1859.)
consent of the other partners although he
may associate a third person with him in his
share (Art. 1804.) 6. the limited partner’s name as a general rule,
must not appear in the firm name (Art. 1846.)
6. the name of the general partner may

appear in the firm name (Art. 1815.) 7. a limited partner can engage in business
since he is considered merely as a contributor
to the partnership (Art. 1866.)
7. a general partner is prohibited in
engaging in business similar to that of the
partnership, if he is a capitalist partner
(Art. 1808.), or in any business if he is an
industrial partner (Art. 1789.) 8.retirement, death, insanity or insolvency of
a limited partner does not dissolve the
8. retirement, death, insanity or
partnership (Art. 1861.)
insolvency of a general partner dissolves
the partnership (Arts. 1860, 1830, 1831.)
C. Classification as to its Duration
Paras (2000) states that Article 1785 of the Civil Code cites another classification of partnership
and that is partnership at will and partnership with a fixed term.Article 1785 states that:
“Art. 1785. When a partnership for a fixed term or particular undertaking is

continued after the termination of such term or particular undertaking without any
35
express agreement, the rights and duties of the partners remain the same as they were at
such termination, so far as is consistent with a partnership at will.
A continuation of the business by the partners or such of them as habitually acted

therein during the term, without any settlement or liquidation of the partnership affairs, is
prima facie evidence of a continuation of the partnership.”
De Leon & De Leon (2005) states that a partnership at will is one in which no time is specified
and is not formed for a particular undertaking or venture. A partnership at will is also one which may be
terminated anytime by mutual agreement of the partners, or by the will of any one partner alone. It also
occurs when originally a partnership is one for a fixed term or particular undertaking which is continued
by the partners after the termination of such term or particular undertaking without express agreement.
An example is cited by Paras (2000) where a partnership between A and B is entered for the
construction of a building XYZ. After the construction of XYZ building, A and B decided to continue the
partnership and pursue another construction project.
According to De Leon (2005), a partnership with a fixed term is one in which the term for which
the partnership is to exist is fixed or agreed upon or one formed for a particular undertaking, and upon the
expiration of the term or completion of the particular enterprise, the partnership is dissolved, unless
continued by the partners.
D. Classification as to Legality of its Existence
De Leon (2005) explained that there is this classification of partnership depending on the legality of
its existence. A partnership may be a de jure partnership or a de facto partnership.
36
De Leon (2005) also discussed that a de jure partnership is one which has complied with all the legal
requirements of law for its establishment. On the other hand, a de facto partnership is one which has failed to
comply with all the legal requirements for its establishment.
Paras (2000) gave an example of a de facto partnership by citing the case of Andres de Jesus vs.
Nicanor Padilla and Roman de Jesus, C.A. L-12191-R, April 19, 1955.
In this case, the husband continued to manage the formerly conjugal properties now owned by
him and the common children, after the wife died. The children allowed their father to manage the
property without even causing their rights to the property to be recorded in the Office of the Register of
Deeds or in the Assessor's Office.
The question now is what kind of partnership was formed?
The Supreme Court explained that a partnership de facto has been created. It is therefore to be
presumed that all the acts performed by the father, as managing partner, were for the benefit of all the
partners.
E. Classification as to Representation to Others and as

to Publicity
A partnership may be classified as to its representation to others and as to its publicity as per De
Leon (2005).
As to the first classification mentioned, a partnership may be either an ordinary partnership

which is also called a real partnership, or an ostensible partnership which is also known as partnership by
estoppel (De Leon, 2005).
De Leon (2005) explained that an ordinary partnership is one which actually exists among the
partners and also as to third persons. On the other hand, an ostensible partnership is one which in reality is not
a partnership but is considered a partnership only in relation to those who, by their conduct or admission, are
precluded to deny or disprove its existence. (Art. 1825.)
37
In other words, the parties are estopped to deny the existence of the partnership contract due to
their actions or admission. Even if no real partnership exists, they are bound to third persons by their
conduct (Paras, 2000).
As to the second classification mentioned above, partnership is classified as to publicity. A

partnership may either be a secret partnership or an open partnership which is also called notorious
partnership (De Leon, 2005).
De Leon (2005) discussed that a secret partnership is one wherein the existence of certain persons is
not made known to the public by any of the partners. On the other hand, an open or notorious partnership is
one whose existence is made known to the public by the partners.
F. Classification of Partnership as to its Purpose
De Leon (2005) discussed another classification of partnership according to its purpose. Based
on this classification, a partnership may either be a commercial or trading partnership, or a professional
or non-trading partnership as mentioned under Article 1767 of the Civil Code.
De Leon & De Leon (2005) also discussed paragraph 2 of Art. 1767 of the Civil Code which
relates to the exercise of a profession. A profession has been defined as 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.(In the matter of the Petition for Authority to Continue Use of Firm
Name “Sycip, Salazar, etc.” / “Ozaeta, Romulo, etc.,” 92 SCRA 1 [1979], citing Dean Pound.)
Profession is also defined as any type of work that needs special training or a particular skill,
often one that is respected because it involves a high level of education; or jobs that need special training
and skill, such as being a doctor or lawyer, rather than jobs in business or industry. In the latter definition,
it is specifically stated that the word profession refers to jobs other than being engaged in business or
industry and this is the other type of partnership mentioned above, or the commercial partnership (De
Leon, 2005).
De Leon (2005) further emphasized that the practice of a profession is not a business or an
enterprise for profit. Further, it is the individual partners who engage in the practice of
38
profession and are responsible for their own acts. It is not the partnership then but the partners themselves
who practice profession.
Further, De Leon (2005) discussed that the law does not allow individuals to practice a profession
as a corporate entity. The reason for this is because personal qualifications for the practice of profession
cannot be possessed by a corporation but only by the individual partners themselves.
Assessment Task 2
Answer the following objectively.
A. After reading the case of Torres vs. Court of Appeals, [G.R. No. 134559
December 9, 1999], answer the following questions: Resolve the following
issues.
1. Discuss the importance of making inventory of real property in a

partnership.
2. Was a partnership formed according to the Supreme Court? Why
or why not?
3. Draft your own example of an Articles of Partnership.
Summary
Before one has to register a partnership, articles of partnership have to be drafted by the parties.
The supposed partners have to agree on the terms in the contract. Once all the details in the articles of
partnership are settled, this has to be notarized to be a public document.
39
Article 1772 states when a partnership needs to be registered with the Securities and Exchange
Commission (SEC). One also has to know the procedures to be followed and done with SEC.
Registration also gives security to third parties dealing with the partnership
When immovable property is contributed by the partner, the partner/s has/have to execute an
inventory, signed by the partners and attached to the contract. Further, the contract has to be in a public
instrument. If the formalities are not followed by the parties, the contract is not valid.
As a general rule then, a partnership contract may be constituted in any form. It may either be
made orally or in writing. However, in case the contribution involved real property, certain formalities
under the law are required.
The first classification of partnership depends on the subject matter or object of the partnership contract.
If the partnership contribution covers all of the present properties or if it covers only the profits from such
property; thus particular and universal partnerships are differentiated (De Leon, 2005).
A general partnership differs from a limited partnership in terms of the liabilities of the partners.
With these kinds of partnerships, there is a general partner and a limited partner and their contributions
also differ (De Leon, 2005).
A partnership de jure and a partnership de facto look on the formalities required by law. Even
though a partnership did not comply with the formal requirements of law, the partners cannot deny the
presence of a partnership contract. The parties will still be liable to the other partners and third persons
dealing with them differ (De Leon, 2005).
A partnership at will and a partnership with a fixed term basically differ depending on the
duration of the partnership contract. This is easily understandable as there are partnership contracts
entered only for a specific undertaking or for a definite term or period differ (De Leon, 2005).
A partnership is also classified as to its representation to others and as to publicity. A partnership

may either be a real partnership or an ostensible partnership. A partnership may also be a secret
partnership or an open partnership. The distinction between these partnerships
40
depend on the conduct of the parties and how the partnership is known to third persons (De Leon, 2005).
References
Books and Laws:
Company, Inc.
Company, Inc.
Tolentino, A., Commentaries and Jurisprudence on the Civil Code of the Philippines, Volume
5. 1992, Quezon City: Central Lawbook Publishing Co.

https://www.sec.gov.ph
MODULE 3
OBLIGATIONS OF THE PARTNERS
Introduction
41
This module touches on the obligations of the partners in a partnership contract. This module will
discuss the relations created by a contract of partnership thereby establishing the different obligations of a
partner among themselves, to the partnership and to third persons.
This module will also touch on the rules on distribution of profits and loss among the partners as
part of their obligation in a partnership contract, as well as the rules on management of a partnership. It
will also be discussed here the property rights of the partner and the rights, in general, of a partner in a
partnership contract.
In this module, we will understand the obligations of partners in a partnership as imposed by law
and their contract. We will discuss how to enforce these obligations. We will also discuss what law
governs partner's rights and obligations. In discussing these, we will touch on the provisions of law and
legal concepts and principles.
Learning Outcomes
1. Understand the obligations of partners among themselves, to the partnership and to third persons;
2. Identify and explain the relations created in a partnership contract;
3. Be able to discuss these obligations of the partners among themselves, to the partnership and to
third persons;
4. Determine whether these obligations are proper or not;
5. Discuss the property rights of the partners in a partnership; and
6. Explain the rules governing on management of a partnership.
Lesson 1. Obligations of Partners among Themselves
42
1. Obligation with respect to contribution of property.
The first obligation of partners among themselves is written under Article 1786 of the Civil Code
of the Philippines which provides the principal obligation of the partners for contribution of property as it
states that, “[e]very partner is a debtor of the partnership for whatever he may have promised to
contribute thereto. He shall also be bound for warranty in case of eviction with regard to specific and
determinate things which he may have contributed to the partnership, in the same cases and in the same
manner as the vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof
from the time they should have been delivered, without the need of any demand."
De Leon & De Leon (2005) discussed that the above provision of law touches on the following
obligations of the partners among themselves and to the partnership with respect to contribution of
property:
(1) To contribute what had been promised at the beginning of the partnership or at the
stipulated time the money, property, or industry which he may have promised to contribute;
(2) To warrant and answer for eviction in case the partnership is deprived of the determinate
property contributed; and
(3) To deliver the fruits of the property from the time they should have been delivered,
without need of any demand.
In addition, De Leon (2005) added that a partner has the following obligations:
(4) To preserve said property with the diligence of a good father of a family pending delivery
to the partnership (Art. 1163.); and
(5) To indemnify the partnership for any damage caused to it by the retention of the same or
by the delay in its contribution. (Arts. 1788, 1170.)
De Leon (2005) explained the rationale for the mutual contribution of property to common fund
as he stated that without such contributions, the partnership is useless. It is but logical that the failure to
contribute will make the partner automatically a debtor of the partnership even in the absence of any
demand.
Under this article, the remedy of the other partners or the partnership is not rescission or
cancellation of the contract of partnership but an action for specific performance (to collect what
43
is owing with damages from the defaulting partner who is made a debtor for what he has promised to
contribute to the partnership. (Sancho vs. Lizaraga, 55 Phil. 60)
As for the obligation on warranty in case of eviction, it includes warranty against hidden defects
as the provision on law on sales should be applied. (5 Tolentino, 1992)
De Leon & De Leon (2005) elaborated that when contribution is in goods, the amount thereof
must be determined by proper appraisal of the value thereof at the time of the contribution as stated in
Article 1787 of the Civil Code. Article 1787 states that, “[w]hen the capital or a part thereof which a
partner is bound to contribute consists of goods, their appraisal must be made in the manner prescribed in
the contract of partnership, and in the absence of stipulation, it shall be made by experts chosen by the
partners, and according to current prices, the subsequent changes thereof being for the account of the
partnership."
De Leon (2005) emphasized on Article 1787 stating that the appraisal of the value of the goods
contributed is necessary to determine how much has been contributed by the partners. The appraisal is
made firstly, in the manner prescribed by the contract of partnership and secondly, by experts chosen by
the partners and according to current prices in the absence of stipulation.
2. Obligations with respect to contribution of money and money converted to personal

use.
The second obligation of partners among themselves according to Paras (2000) deals with the
contribution of money and money converted to personal use which is covered under Article 1788 stating that,
"[a] partner who has undertaken to contribute a sum of money and fails to do so becomes a debtor for the
interest and damages from the time he should have complied with his obligation. The same rule applies to any
amount he may have taken from the partnership coffers, and his liability shall begin from the time he
converted the amount to his own use."
De Leon (2005) states that this article contemplates two distinct cases. The first paragraph refers
to money promised but not given on time and the second, to partnership money converted to the personal
use of the partner.
44
In correlation to the above provision, De Leon (2005) identified the following obligations of the
partners with respect to the partnership capital:
(1) To contribute on the date due the amount promised to be given;
(2) To reimburse any amount he may have taken from the partnership coffers and converted to
his own personal use;
(3) To pay the agreed or legal interest of 6% (Art. 2209), if he fails to pay under(1) and (2) which
is due from the time the partner should have complied with his obligation or from the time he converted
the amount to his own use; and
(4) To indemnify the partnership for the damages caused to it by the delay in the contribution or
the conversion of any sum for his personal benefit.
3. Obligations of Industrial partner not to engage in other business for himself.
De Leon & De Leon (2005) discusses particularly an industrial partner who refers to one who
contributes his industry, labor, or services to the partnership. He is considered the owner of his services,
which are his contribution to the common fund. (Limuco vs. Calina, [C.A.] No. 10099-R. Sept. 9, 1953.)
Under Article 1789, "an Industrial partner cannot engage in business for himself, unless the
partnership expressly permits him to do so; and if he should do so, the capitalist partners may either
exclude him from the partnership or avail themselves of the benefits which he may have obtained in
violation of this provision, with a right to damages in either case." The provision in effect stipulates that
the partnership acquires an exclusive right to avail itself of the industrial partner's work or industry.
Consequently, if he engages in business for himself, such act is considered prejudicial to the interest of
the other partners.(De Leon & De Leon, 2005.)
De Leon (2005) further explained that the prohibition as regards an industrial partner is absolute
and applies whether the industrial partner is to engage in the same business in which the partnership is
engaged or in any kind of business. On the other hand, the prohibition for capitalist partners extends only
to any business which is of the same kind in which the partnership is engaged unless there is a stipulation
to the contrary.
Tolentino (1992) opined that the reason behind this provision of law is because the partnership is
considered the owner of the partner's services. Paras (2000) even stated that the
45
violator of this rule can be ousted from the partnership on the ground of loss of trust and confidence which
would ultimately result to dissolution of the partnership with a right to damages.
De Leon (2005) noted that the obligation of the partners to give capital is subject to Article 1790
which states that, "[U]nless there is a stipulation to the contrary, the partners shall contribute equal shares
to the capital of the partnership." Thus, the partners can stipulate the contribution of unequal shares to the
common fund, but in the absence of such stipulation, the presumption is that their contribution shall be in
equal shares. This principle is just and reasonable and is consistent with the rule that partners are deemed
to have equal rights and obligations. (Art. 1770, par. 1.)
Please note what we have discussed on the previous modules in case an industrial partner also
contributed capital aside from his work or industry. Thus, the above rule will not apply. (See Art. 1797,
par. 2.)
4. Obligation of capitalist partner to contribute additional capital.
According to Article 1791, "[i]f there is no agreement to the contrary, in case of an imminent loss
of the business of the partnership, any partner who refuses to contribute an additional share to the capital,
except an industrial partner, to save the venture, shall be obliged to sell his interest to the other partners."
De Leon (2005) stated that as a general rule, a capitalist partner is not bound to contribute to the
partnership more than what he agreed to contribute. In case, however, of (1) an imminent loss of the
business, and (2) there is no agreement to the contrary, he is (3) under obligation to contribute an
additional share to save the venture. If he refuses to contribute, he shall be obliged to sell his interest to
the other partners based on the provision above. It is to be noted that the industrial partner is exempted
from the requirement to contribute an additional share as he is already giving his entire industry.
5. Obligation of managing partner who collects debt.
Article 1792 states that, "[i]f a partner authorized to manage collects a demandable sum, which
was owed to him in his own name, from a person who owed the partnership another sum also
demandable, the sum thus collected shall be applied to the two credits in proportion to their
46
amounts, even though he may have given a receipt for his own credit only; but should he have given it for
the count of the partnership credit, the amount shall be fully applied to the latter. The provisions of this
article are understood to be without prejudice to the right granted debtor by article 1252, but only if the
personal credit of the partner should be more onerous to him."
De Leon (2005) elaborated on the above provision and stated that where a person is separately
indebted to the partnership and to the managing partner at the same time, any sum received by the
managing partner shall be applied to the two credits in proportion to their amounts, except where he
received it for the account of the partnership only, in which case, the whole sum shall be applied to the
partnership credit only. Further, the debtor is given the right to prefer payment of the credit of the partner
if it should be more onerous to him in accordance with his right to application of payment.
De Leon (2005) gives the following example:
A and B are partners in X and Co., with A as the managing partner. C is indebted to A in
the sum of P2,000.00. C is also indebted to the partnership in the sum of P4,000.00. Both debts
are demandable. A collects the amount of P1,500.00fromC.
If A issues a receipt to the effect that it is in payment of his (A’s) credit, P500.00 will be
applied only to his credit, the partnership being entitled to a proportionate amount of P1,000.00 in
the payment made by C.
But if A gives a receipt for the account only of the partnership credit, the amount of
P1,500.00 will be fully applied to the latter.
If the obligation in favor of A bears 15% interest per annum while that in favor of the
partnership is 14% interest per annum, the credit of A being more onerous or burdensome, the
law allows C to prefer the payment of A’s credit in case he so desires. (De Leon, 2005)
Please remember when the manner of management has not been agreed upon and all the partners
participate in the management of the partnership (see Art. 1803.), every partner shall be considered a
managing partner for purposes of Article 1792.
47
6. Obligation of partner who receives share of partnership credit.
Article 1793 states that, "[a]partner who has received, in whole or in part, his share of a
partnership credit, when the other partners have not collected theirs, shall be obliged, if the debtor should
thereafter become insolvent, to bring to the partnership capital what he received even though he may have
given receipt for his share only."
In the present article, De Leon (2005) explained that there is only one credit — credit in favor of
the partnership. Furthermore, the present article applies whether the partner who receives his share of the
partnership credit is authorized to manage or not. The reason behind this is that the debt in favor of the
partnership becomes a bad debt after the debtor becomes insolvent.
De Leon (2005) gave an example below:
D owes partnership X and Co. P4,500.00. A, a partner, received a share of P1,500.00

ahead of B and C, the two other partners. When B and C were collecting from D, the latter was
already insolvent.
In this case, even if A had given a receipt for his share only, he can be required to share
the P1,500.00 with B and C.
7. Obligation of partner for damages to partnership.
De Leon (2005) explained that Article 1794 follows the general rule applicable to all contracts
that any person guilty of negligence or fault in the fulfillment of his obligation shall be liable for
damages. (Art. 1170.) The partner’s fault, however, must be determined in accordance with the nature of
the obligation and the circumstances of the person, the time, and the place. (Art. 1173.)
Article 1794 specifically states that, "[e]very partner is responsible to the partnership for
damages, suffered by it through his fault, and he cannot compensate them with the profits and benefits
which he may have earned for the partnership by his industry. However, the courts may equitably lessen
this responsibility if through the partner’s extraordinary efforts in other activities of the partnership,
unusual profits have been realized."
48
De Leon (2005) explained that under this provision, every partner is responsible for damages
suffered by it through his fault. He cannot compensate them 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.
8. Obligation to render information.
Paras (2000) conversed that partners shall render on demand true and full information of all
things affecting the partnership to any partner or the legal representative of any deceased partner or any
partner under disability. (Art. 1806.) Even without demand, honesty demands the giving of vital
information, refraining from all kinds of concealment.
9. Obligation to account for any benefit and hold as trustee unauthorized personal profits.
De Leon& De Leon (2005) argued that every partner must account to the partnership any benefit he
will receive, and thereby holding that partner a trustee for any profits derived by him without the consent of
the other partners from any transaction, connected with the formation, conduct, and even liquidation of the
partnership or from any use by him of its property. (Art. 1807.)
Risk of loss of things contributed.
De Leon (2005) also enumerated five cases contemplated under Article 1795 for the
determination of the risk of the things contributed to the partnership, namely:
(1) Specific and determinate things which are not fungible where only the use is contributed. —
The risk is borne by the partner because he remains the owner of the things (like car);
(2) Specific and determinate things the ownership of which is transferred to the partnership.—
The risk isforthe account of the partnership, being the owner;
(3) Fungible things or things which cannot be kept without deteriorating even if they are contributed
only for the use of the partnership.— The risk of loss is borne by the partnership since use is impossible
without the things being consumed or impaired. Fungible things are things or
49
goods of which any unit is, from its nature or by mercantile usage, treated as the equivalent of
any other unit (U.S. Uniform Sales Act. Sec. 76.), such as oil, wine, rice, etc.;
(4) Things contributed to be sold.— The partnership bears
the risk of loss for there cannot be any doubt that the partnership was intended to be the owner; otherwise,
the partnership could not effect the sale; and
(5)Things brought and appraised in the inventory. — The partnership bears the risk of loss
because the intention of parties was to contribute to the partnership the price of things contributed with an
appraisal in the inventory. There is thus an implied sale making the partnership owner of the said things.
The above rules presuppose that the things contributed have been delivered actually or
constructively to the partnership. Before delivery, the risk of loss is borne by the partner. (see Arts. 712,
1164, 1262, 1263.) If the loss is due to the fault of any of the partners, he shall be liable for damages to
the partnership in accordance with the provision of the preceding article.(De Leon, 2005.)
Responsibility of the partnership to the partners.
De Leon (2005) elaborated on the following obligations of the partnership to every partner:
(1) To refund amounts disbursed by him in behalf of the partnership (e.g., advances for
partnership debts due and payable) plus the corresponding interest from the time the expenses are made
(not from date of demand). Here, the law refers to loans or advances made by a partner to the partnership
other than capital contributed by him;
(2) To answer for the obligation (e.g., purchase price of supplies needed by the partnership) he may
have contracted in good faith in the interest of the partnership business; and
(3) To answer for risks (e.g., loss of his property accidents) in consequence of its management.
De Leon (2005) added that in the absence of an agreement to the contrary, no partner is entitled to
compensation for his services to the partnership without the consent of all the partners unless it can be implied
from the circumstances that the parties intended a partner to receive additional compensation where the
partner’s work was beyond normal partnership functions.
50
EXAMPLE:
The articles of partnership of Partnership X composed of A, B, and C provides that any

purchase in excess of P5,000.00 must first be approved by all the partners. C made a purchase of
goods out of his personal funds for P10,000.00 without the knowledge and approval of A and B.
The partnership incurred a loss. In this case, C is not entitled to be reimbursed for the
purchase. (De Leon, 2005)
Lesson 2. Rules for Distribution of Profits and Losses
De Leon & De Leon (2005) proceeded on discussing the rules for distribution of profits and
losses among the partners. The applicable provision for this is Article 1797 which states that, "[t]he
losses and profits shall be distributed in conformity with the agreement. If only the share of each partner
in the profits has been agreed upon, the share of each in the losses shall be in the same proportion. In the
absence of stipulation, the share of each partner in the profits and losses shall be in proportion to what
he may have contributed, but the industrial partner shall not be liable for the losses. As for the profits, the
industrial partner shall receive such share as may be just and equitable under the circumstances. If
besides his services he has contributed capital, he shall also receive a share in the profits in proportion
to his capital."
As per De Leon (2005), the rules governing the distribution of profits are as follows:
(a) The partners share the profits according to their agreement subject to Article
1799.
(b) If there is no such agreement:
1) The share of each capitalist partner shall be in proportion to his capital

contribution. This rule is based on the presumed will of the partners.
2) The industrial partner shall receive such share, which must be satisfied first
before the capitalist partners shall divide the profits, as may be just and equitable under
the circumstances.
51
A, B, and C formed a partnership, whereby each of them contributed P30,000.00. They

agreed that should the partnership realize profits, the same shall be distributed in the following
proportions:
A, as managing partner............ 40%

B.............................................. 30%
C.............................................. 30%
In this case, the partners shall share the profits in conformity with their agreement if
there is no agreement with respect to the share of each partner, then, they shall share the profits
equally.
Suppose, the contributions of the partners are as follows:
A.............................................. P30,000.00
B.............................................. 20,000.00
C.............................................. 10,000.00
Total............................. P60,000.00
In the absence of stipulation, the share of each of the partners shall be in proportion to his
contribution, that is:
A.............................................. 3/6
B.............................................. 2/6
C .............................................. 1/6
If D is an industrial partner, he shall receive such share as may be just and equitable
under the circumstances. Assuming that the partnership makes a profit of P17,000.00, the
partners may determine considering all the circumstances, that D, as industrial partner, is entitled
to P2,000.00. The balance of P15,000 will be divided among A, B, and C in proportion to their
respective capital contributions.
Now, if D, aside from his services, contributed P4,000.00, then, he will also share in the
balance of P15,000.00 in proportion to his contribution which is 1 / 16 (P4,000.00/
52
P64,000.00) or P937.50. A, B and C will share P7,031.25, P4,687.50, and P2,343.75,
respectively. (De Leon, 2005.)
De Leon (2005), in turn, cites the rules governing the distribution of losses as follows:
(a) First, the losses shall be distributed according to their agreement subject to Article
1799.
(b) If there is no such agreement, but the contract provides for the share of the partners in
the profits, the share of each partner in the losses shall be in accordance with the profit-sharing
ratio, but the purely industrial partner shall not be liable for losses.
(c) If there is also no profit-sharing stipulated in the contract, then losses shall be borne
by the partners in proportion to their capital contributions, but the purely industrial partner shall
not be liable for the losses.
In the same example given above, the partners will share in the losses in conformity with
their agreement. If they failed to agree as to the sharing of losses, the share of each partner in the
losses shall be in the same proportion stipulated with regard to the share of each in the profits, to
wit:
A .............................................. 40%
B.............................................. 30%
C.............................................. 30%
If there is also no profit-sharing ratio stipulated, then the losses shall be divided in
proportion to their capital contributions. D, however, being an industrial partner shall not be
liable for losses but the same shall be borne by A, B, and C, the capitalist partners. However, if D
is also a capitalist partner, then he shall share in the losses in proportion to his contribution. (De
Leon, 2005)
Designation of share in profits and losses by a third person.
De Leon (2005) also has the occasion to discuss that the designation of the share in the profits
and losses may be delegated to a third person by common consent of the partners. This article speaks of a
third person, not a partner, following the general rule in contracts that the
53
fulfillment of a contract cannot be left to the will of one of the contracting parties alone. (Arts. 1308,
1309.) In such case, the partner is deemed guilty of estoppel or to have given his consent or ratification to
the designation.
Stipulation excluding partner from any share in profits or losses.
De Leon (2005) discussed that according to Article 1799, the law does not, as a general rule,
allow a stipulation excluding one or more partners from any share in the profits and losses. We must
remember that the partnership must exist for the common benefit and interest of the partners. (Art. 1770.)
Hence, such an agreement would contravene the very purpose of a partnership contract, that is, profit-
sharing among the partners. However, although the stipulation is void, the partnership, if otherwise valid,
subsists and the profits or losses shall be apportioned as if there were no stipulation on the same. (see Art.
1797, par. 2.)
With reference to the industrial partner, since the law itself excludes him from losses (Art. 1797,
par. 2.),a stipulation exempting him from the losses is naturally valid. This is without prejudice, however,
to the rights of third persons. (Art. 1817.) Thus, an industrial partner is not exempted 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. (Paras, 2000)
Lesson 3. Management of Partnership
According to De Leon (2005), each partner has a right to an equal voice in the conduct of the
partnership business and this right is not dependent on the amount or size of the partner’s capital
contribution. The partners may select a managing partner or make such allocation of functions as the
needs of the business dictate.
The pertinent provision of law on this is Article 1800 which states that, “[t]he partner who has
been appointed manager in the articles of partnership may execute all acts of administration despite the
opposition of his partners, unless he should act in bad faith; and his power is irrevocable without just or
lawful cause. The vote of the partners representing the controlling interest shall be necessary for such
revocation of power. A power granted after the partnership has been constituted may be revoked at any
time.”
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As per De Leon (2005), the above provision of law speaks of two (2) distinct cases of
appointments of managers as follows:
The first one is appointment as manager in the articles of partnership. The partner appointed by
common agreement in the articles of partnership may execute all acts of administration notwithstanding
the opposition of the other partners unless he should act in bad faith. His power is revocable only upon
just and lawful cause and upon the vote of the partners representing the controlling interest. This does not
however include those acts of strict ownership such as those enumerated in Art. 1818, par. 3. (De Leon,
2005)
The second one is appointment as manager after constitution of the partnership. This type of
appointment may be revoked at any time for any cause whatsoever. It is merely a simple contract of
agency, which may be revoked at any time. (Art. 1920.) It is believed that the vote for revocation must
also represent the controlling interest. (De Leon, 2005)
Scope of power of a managing partner.
As per De Leon (2005), a partner appointed as manager has all the necessary and incidental
powers to carry out the object of the partnership in the transaction of its business. The exception is when
the powers of the manager are specifically restricted. Hence, unless expressly withheld, the managing
partner has the following necessary and incidental powers:
(a) To issue receipt in keeping with present day business dealings.
(b) The manager of a partnership engaged in buying and selling is clothed with sufficient
authority even without approval of the other partners to purchase on credit as it is usual or
customary to buy and sell on credit.
(c) The managing partner has authority to dismiss an employee particularly when there is
a justifiable cause for dismissal, after complying with the requirements prescribed by law for
terminating employment. (De Leon, 2005)
55
De Leon (2005) further emphasized that a managing partner cannot exercise powers which are
neither necessary nor incidental to carry out the object of the partnership, such as the following:
(a) A partner designated as one of the managers to take charge of “selling fish in Manila
and the purchase of supplies” has no authority to purchase for the partnership a “barge, a truck
and an adding machine,” inasmuch as neither of these properties can be considered as “supplies
for the partnership business.” (Teague vs. Martin, 53 Phil. 504.)
(b) Neither can the managing partner of a partnership formed for the purpose of
operating a tailoring shop, sell or convey the tailoring shop which is partnership property without
the consent of all the partners. (Santos vs. Villanueva, [CA.] 50 O.G. 175.)
(c) A managing partner may not bind the partnership by a contract wholly foreign to its
business. Thus, he has no authority to execute a mortgage on the firm’s property to secure the
debt of a third person for which the firm is not liable. (68 C.J.S. 577.)
Rule in case there are two or more managing partners whose respective duties are
unspecified.
The pertinent provision applicable is Article 1801 which sets out the following rule that each one
may separately perform acts of administration. Further:
(1) If one or more of the managing partners shall oppose the acts of the others, then
the decision of the majority (per head) of the managing partners shall prevail. Note that the right to
oppose can be exercised only by those entrusted with the management of the partnership and not by
any partner.
(2) In case of tie, the matter shall have to be decided by the vote of the partners
owning the controlling interest, that is, more than 50% of the capital investment. (De Leon, 2005)
Below is an example given by De Leon (2005):
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The respective interests of the partners in a partnership are as follows: A-5%; B-10%; C-
15%; D-15%; E-20%; and F-35%.
(1) A, B, and E were appointed as managing partners without specification of their

respective duties. A contract entered into by A, if with the conformity of B although against the
objection of E is valid.
(2) If the managing partners are A, B, C, and E, and C sided with E so that there was a
tie and when the matter was put to a vote of all the partners, A, B, and D were in favor with C, E,
and F against, the contract is not valid; if A and E were the ones who originally voted in favor of
the contract and subsequently, F sided with them, the transaction is deemed ratified by the
controlling interest in the partnership.
(3) Suppose after a tie, the voting is as follows: A, B, and F — in favor, and C, D, and E
— against, both sides representing 50% of the interest, with neither side willing to give way to
the other, what shall be the rule? The law is silent on this point. It is believed that in such case the
contract should be considered as having been entered into without authority In other words,
when the partners are equally divided, those who vote against the contract or who resist change
must prevail.
The best solution is for the partners to dissolve the partnership. A shall be responsible for
damages if it is found that he was at fault. (see Art. 1794.) If the contract is merely proposed, it
may or may not be entered into depending upon the decision of the majority of managing partners
or of the controlling interest, as the case may be. (De Leon, 2005)
Where unanimity of action stipulated.
De Leon (2005) reminded that the partners may stipulate that none of the managing partners shall
act without the consent of the others. In such a case, the unanimous consent of all the managing partners
shall be necessary for the validity of their acts. The only exception is when there is an imminent danger of
grave or irreparable injury to the partnership in which case, a partner may act alone without the consent
of the partner who is absent or under disability without prejudice to the former’s liability for damages
under Article 1794. (Art. 1802)
The consent of the managing partners is not, however, necessary in routine transactions, e.g., purchase
in the regular course of business by a managing partner of a partnership engaged
57
in buying and selling merchandise or goods regularly purchased by the partnership. (De Leon, 2005)
De Leon (2005) laid down rules when manner of management has not been agreed upon
under Art. 1803.
(1) All partners considered managers. — The partners may fail to designate who among them
shall act as manager, either when their contract is perfected or subsequently. In such case, all of them
shall be considered managers and agents (Art. 818.) and whatever any one of them may do alone shall
bind the partnership subject, however, to the provision of Article 1801 that in case of timely opposition of
any partner, the matter shall first be decided by the majority vote for the presumed intent is for all the
partners to manage. In case of a tie, then the matter shall be decided by the vote of the partners
representing the controlling interest.
EXAMPLE:
Thus, in the example given under Article 1801, if A, B, C, and D are in favor of a particular
transaction, their decision shall prevail although they do not represent the controlling interest. In case of
tie, the controlling interest rule shall govern.
(2) Unanimous consent required for any important alteration in immovable property of
partnership. — Under the second paragraph, the unanimous consent of all the partners is necessary for
any important alteration in the immovable property of the partnership. The consent need not be express. It
may be presumed from the fact of knowledge of the alteration without interposing any objection.
(a) This prohibition applies only to immovable property because of the greater
importance of this kind of property as compared to movable property. Any important alteration in
the immovable property of the partnership is an act of strict dominion. (see Art. 1818, pars. 2, 3.)
Hence, even the managing partner cannot make such alteration without the consent of all the
partners.
(b) If the refusal to give consent by the other partners is manifestly prejudicial to the
interest of the partnership, the intervention by the court may be sought for authority to make the
necessary alteration.
58
Facts: A, B, and C organized a partnership for the purpose of engaging in the

transportation business. Without a previous express authority, A contracted an indebtedness for
automobile supplies and accessories.
Issue: Are the partnership and the partners liable for said indebtedness?
Held: Yes. There being no agreement with regards to the manner of management, all the
partners are considered agents of the partnership. A must be deemed to have authority to contract
the indebtedness in question inasmuch as it wasincurredin the prosecution of the partnership
business. (Bachrach vs. “La Protectora,” 37 Phil. 441 [1978].)
Lesson 4. Rights and Duties of a Partner
Paras (2000) explained that one of the rights of a partner is to associate another person with him in his
share without the consent of the other partners. Such associate is sometimes referred to as a subpartner who is
permitted under Article 1804. But Paras (2000) further explained that the subpartner does not become a
member of the partnership without the consent of all the other partners, even if the partner having a subpartner
should be a manager. Not being a member of the partnership, a subpartner does not acquire the rights of a
partner nor is he liable for its debts. Thus, for a subpartner to become a partner all the other partners must
consent because a partnership is based on mutual trust and confidence among the partners.
A, B, and C are partners. A may contract with D, whereby the latter will participate in his
(A’s) share in the profits of the partnership. This A can do independently of the partnership and in
accordance with the principle of freedom to contract. The original contract of partnership between A,
B, and C is not in any manner altered.
D is considered merely a creditor of A, who is associated him in his share. Consequently, D

has no right to intervene in the partnership to which he is a mere stranger. Like an assignee, D cannot
interfere in the management or administration of the partnership business, require information or
account, or inspect partnership books. (Art.
59
1813.) A continues in the enjoyment of the rights and remains subject to the liabilities of a
partner as though no contract has been made by him with D.
D does not become a partner nor is he liable for the partnership debts even if the
agreement between A and D is with the knowledge and assent of B and C. D is an investor.
Another right of every partner is the right to inspect books of the partnership, which right must be
exercised at reasonable hours on business days. This right is in correlation to the duty of a partner to keep
partnership books (Art. 1805). The duty to keep books showing the partnership’s accounts open to
inspection of all members of the partnership primarily rests on the managing or active partner. Further,
books should be kept at the principal place of business subject to any agreement to the contrary.(De Leon,
2005.)
Third right to information is also based on the same principle of mutual trust and confidence
among partners, which is in correlation to the duty to render information. The information given, to be
sure, must be used only for partnership purpose. (Art. 1806) Not only is a partner bound to give
information on demand but in certain circumstances, he is under the duty of voluntary disclosure of
material facts within his exclusive knowledge relating to or affecting the partnership affairs. (De Leon,
2005)
Fourth one deals with the fiduciary nature of partnership wherein every partner is accountable to
the partnership for any benefit he will derive 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. A partner, therefore, who makes a secret profit out of the operation of the partnership,
or who accepts a secret commission from a third person dealing with the partnership, is duty bound to
account such profit or commission with his co-partners. (De Leon, 2005)
De Leon (2005) proceeded on the fifth right of a partner wherein a capitalist partner can engage in
business as provided under Article 1808. The partners may permit the capitalist partner to engage in the same
kind of business by express stipulation. What Article 1808 prohibits is to carry on a business connected or
competing with that of the partnership. Any capitalist partner violating this prohibition shall bring to the
common fund any profits accruing to him from his transaction, and shall personally bear all the losses.
Partnership is a fiduciary relation involving
60
trust and confidence. Without the prohibition, the partner may sacrifice the interests of the partnership to
favor his employer.
De Leon (2005) continued on the sixth right of partners to a formal account as to partnership
affairs under Article 1809. Article 1809 enumerated the following situations where such right is
demandable such as: (1) if one partner is wrongfully excluded from the partnership business or
possession of its property by his co-partners; (2) If the right exists under the terms of any agreement; (3)
as provided by article 1807; and 4) whenever other circumstances render it just and reasonable. The right
of a partner to demand an accounting without bringing about a dissolution is necessary corollary to his
right to share in the profits.
Lesson 5. Property Rights of a Partner
Article 1810 enumerates the principal property rights of a partner, as follows: (1) his rights in
specific partnership property; (2) his interest in the partnership; and (3) his right to participate in the
management.
Paras (2000) reminded first that we should distinguish the partnership property and partnership
capital. The value of partnership property is variable and is affected with the changes in the market value
of the partnership assets, while partnership capital is constant as the amount is fixed by agreement of the
partners. Further, partnership property includes not only the original capital contributions of the partners,
but all property subsequently acquired on account of the partnership or with partnership funds, including
partnership name and the goodwill of the partnership. On the other hand, partnership capital represents
the aggregate of the individual contributions made by the partners. Such contributions may be in cash or
in property or services, the value of which has been fixed in the partnership agreements.
De Leon (2005) elaborated on the first property right of a partner, that is, right to specific
partnership property. Under Article 1811, a partner is co-owner with his partners over the specific
partnership property. But we must not confuse co-ownership with partnership as the two (2) concepts are
different. Thus, Art. 1811 is not accurate because specific partnership property is owned not by the
partners in common but by the partnership as a juridical person.
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Paras (2000) added that the incidents of co-ownership are, however, applicable to partnership.
The following rules stated under Art. 1811 are as follows:
(1) A partner has an equal right with his partners to posses specific partnership property
for partnership purposes;
(2) A partner’s right in specific partnership property is not assignable except in

connection with the assignment of rights of all the partners in the same property. The reason for
this is because it is impossible to determine the extent of his beneficial interest in the property
until after the liquidation of partnership affairs
(3) A partner’s right in specific partnership property is not subject to attachment or

execution, except on a claim against the partnership; and
(4) A partner’s right in specific partnership property is not subject to legal support.
De Leon (2005) detailed on the second property right of a partner, that is, a partner's interest in
the partnership property under Article 1812 which pertains to his share of the profits and surplus. The
partner’s interest in the partnership consists of his share in the profits during the life of the partnership
and his share in the surplus after its dissolution. This interest is assignable by the partner in the absence of
any agreement to the contrary being personal property. On the dissolution of the partnership, the value of
his share usually cannot be accurately determined until liquidation of the business has taken place and
partnership accounts have been settled.
De Leon & De Leon (2005) proceeded on the effects of assignment of a partner's whole interest
in the partnership laid down under Article 1813 which may or may not dissolve the partnership. However,
such assignment does not grant the assignee the right: (1.) to interfere in the management or
administration; (2) to require any information or account; or (3) to inspect any of the partnership books as
no one can become a partner without the consent of the other partners under the principle of "delectus
personae."
But the transferee or assignee has the following rights: (1) to receive in accordance with his contract
the profits accruing to the assigning partner; (2) to avail himself of the usual remedies provided by law in the
event of fraud in the management; (3) to receive the assignor’s interest in case of dissolution; and (4) to
require an account of partnership affairs, but only in case the
62
partnership is dissolved, and such account shall cover the period from the date only of the last account
agreed to by all the partners. (De Leon, 2005)
According to Paras (2000), Article 1814 cites the remedies of separate judgment creditor of a
partner. He can apply for a charging order after securing judgment on his credit to subject the interest of
the debtor partner with payment of unsatisfied amount of the judgment credit. This remedy given to a
partner’s creditor is without prejudice to the preferred rights of partnership creditors under Article 1827.
It means that the claims of partnership creditors must be satisfied first before the separate creditors of the
partners can be paid out of the interest charged. (see Art. 1839[8].)
Paras (2000) further gave an example, to wit: Joe and Gil are partners, Joe personally owes Flor a
sum of money. Flor sues Joe and obtains a final judgment in his favor. However, Joe has no money. Flor
may go to the same court (or any other court possessed of jurisdiction) and ask that Joe’s interest the
partnership be “charged” for the payment to her of whatever has not been paid by him with interest
thereon. Take note, however, that partnership creditors are entitled to priority over partnership assets.
De Leon (2005) emphasized that a debtor-partner has the right of redemption of interest charged
as follows:
a) In case of general partnership, with the separate property of a partner, or with the
partnership property. In case of partnership property, this must be done with the consent
of all the partners whose interests are not so charged or sold.
b) In case of limited partnership, with the separate property of any general partner but not
with partnership property.
A, B, and C are partners. A is personally indebted to X in the sum of P5,000.00. X filed a

complaint against A and obtained from the court a final judgment in his favor.
If A is insolvent, X can ask the same court or any competent court that A’s interest in the
partnership be attached or levied upon for the payment of his debt.
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The other partners, B and C may redeem or purchase the interest of A, the debtor-partner,
before the foreclosure sale or before the redemption period fixed by the court without dissolving
the partnership.
Paras (2000) reminded that it is also one of the rights of a partner to participate in management
and one of this attribute of management participation is to be included in the firm name. The rule for this
is that persons who, not being partners, include their names in the firm name do not acquire the rights of a
partner, but under Art. 1815, they shall be subject to the liability of a partner insofar as third persons
without notice are concerned. Such persons become partners by estoppel. (De, Leon, 2005)
Lesson 6. Obligations of the Partners with Regard to Third

Persons.
A. Liability for contractual obligations of the partnership
Article 1816 states that, “[a]ll partners, including industrial ones, shall be liable pro rata with all
their property and after all the partnership assets have been exhausted, for the contracts which may be
entered into in the name and for the account of the partnership under its signature and by a person
authorized to act for the partnership. However, any partner may enter into a separate obligation to
perform a partnership contract.”
From the provision above, it is clear that all partners, including industrial partners, are personally
liable with all their property for the obligations contracted in the name and for the account of the
partnership. The debts and obligations of the partnership are, in substance, also the debts and obligations
of each individual member of the firm. Their individual liability is pro rata and subsidiary, unless
otherwise stipulated. Subsidiary means that liability attaches after all partnership assets have been
exhausted and 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. For the industrial partner, he
can recover the amount he has paid from the capitalist partners unless there is an agreement to the
contrary (De Leon, 2005).
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Facts: X company, a general partnership, purchased from A a motor vehicle on installment
basis. Upon failure of the partnership to pay an installment, A sued it and the five partners, B, C, D, E,
and F. B failed to file an answer and was declared in default. Subsequently, on motion of A, the
complaint was dismissed in so far as F was concerned. The rest of the defendants failed to appear at
the hearing and were declared in default.
Judgment was rendered against the partnership and the four partners, B, C, D, and E. B
and C moved to reconsider, saying that since there were five general partners, the joint and
subsidiary liability of each partner should not exceed one-fifth of the obligations of the company.
The lower court denied the motion, hence, the appeal.
Issue: Should B, C, D, and E alone be held liable for the obligation of the company in
view of the dismissal of the complaint with respect to F?
Held: No. In the instant case, there were five general partners when the promissory note
in question was executed for and in behalf of the partnership. Since the liability of the partners
are pro rata, the liability of each partner shall be limited to only one-fifth of the obligations of X
company. The fact that the complaint against F was dismissed, upon motion of A, does not
unmake F as a general partner in the defendant company. (Island Sales, Inc. vs. United Pioneers
General Construction Company, 65 SCRA 554 [1911], see Dietrich vs. Freeman, 18 Phil. 341
[1911]; Co-Pitcovs. Yulo, 8 Phil. 544 [1907].)
We should also note that 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 partners to third persons. An industrial partner is not exempted from liability to third
persons for the debts of the partnership. (Compania Maritima vs. Muñoz, 9 Phil. 326 [1907].)Article 1816
refers to “liabilities” while Article 1797 speaks of “losses.” There is, therefore, no conflict between the
two articles. (Pacific Commercial Co. vs. Aboitiz & Martinez, 98 Phil. 841 [1926].)
A and B are capitalist partners, with C as an industrial partner. A and B contributed

P10,000.00 each to the capital of the partnership. A contractual liability of P26,000.00 was
incurred by the partnership in favor of D.
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Under Article 1816, D can sue the firm and all the partners including C, the industrial
partner. The capital assetisP20,000.00 shall first be exhausted thereby leaving an unsatisfied
liability of P6,000.00. D can recover the amount from A, B, and C jointly or pro rata at
P2,000.00 each. After paying D, C can recover for reimbursement of P1,000.00 each from A and
B. Under Article 1797, he is exempted from the loss of P6,000.00 as among themselves, unless
there is a stipulation to the contrary.
If, in the same example, the capital contributions of A and B are P15,000.00 and
P5,000.00, respectively, In the absence of stipulation, they share in the loss of P6,000.00 in
proportion to their contributions, to wit: A — 3/4 or P4,500.00 and B — 1/4 or P1,500.00. Hence,
B can recover P500.00 and C, P2,000.00 from A. Art. 1817 further emphasized that any
stipulation against liability shall be void, except as among the partners. (De Leon, 2000)
De Leon (2005) gives further example:
A, B, and C are partners in a business. Each of them contributed P10,000.00 each.

They stipulated that the liability of A shall not exceed his capital contribution.
Thus, if the partnership assets have been exhausted and there still remains an unpaid
balance of P9,000.00 in favor of creditor D, the latter can still recover P3,000.00 each from the
partners as their stipulation cannot adversely affect him. However, since the agreement is binding
among the partners, A is entitled to credit from B and C for the amount of P3,000.00paid by him
to D. A, however, cannot recover his contribution of P10,000.00. (see Art. 1799.) (De Leon,
2000)
De Leon (2005) proceeded on discussing with the liability of partnership for acts of partners as
provided under Art. 1818. Article 1818 is quoted below for reference:
"ART. 1818. Every partner is an agent of the partnership for the purpose of its business,
and the act of every partner, including the execution in the partnership name of any instrument,
for apparently carrying on in the usual way the business of the partnership of which he is a
member binds the partnership, unless the partner so acting has in fact no authority to act for the
partnership in the particular matter, and the person with whom he is dealing has knowledge of the
fact that he has no such authority.
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An act of a partner which is not apparently for the carrying on of business of the
partnership in the usual way does not bind the partnership unless authorized by the other partners.
Except when authorized by the other partners or unless they have abandoned the
business, one or more but less than all the partners have no authority to:
(1) Assign the partnership property in trust for creditors or on the assignee’s promise to
pay debts of the partnership;
(2) Dispose of the goodwill of the business;
(3) Do any other act which would make it impossible to carry on the ordinary business
of a partnership;
(4) Confess a judgment;
(5) Enter into a compromise concerning a partnership claim or liability;
(6) Submit a partnership claim or liability to arbitration;
(7) Renounce a claim of the partnership.
No act of a partner in contravention of a restriction on authority shall bind the partnership
to persons having knowledge of the restriction."
De Leon (2005) explained that the principle behind the provision above is because the relation of
the partners to third persons is founded on the doctrine of mutual agency. Innocent third persons have the
right to assume that every general partner has power to bind the partnership especially those partners
acting with ostensible authority, by whatever is proper for the transaction in the ordinary and usual
manner of the business of the partnership. Third persons are not obligated, in entering a contract with any
of the partners, to ascertain whether or not the partner with whom the transaction is made, has the consent
of the other partners. His knowledge is enough that he is contracting with a partner. There is a general
presumption that each individual partner is an agent of the firm and that he has authority to bind the firm
in carrying on the partnership transactions. The presumption is sufficient to permit third persons to hold
the firm liable on transactions entered into by any one of the members of the firm acting apparently in its
behalf and within the scope his authority (Litton vs. Hill & Ceron, 67 Phil. 513 [1939], cited under Art.
1802.)
The acts of a partner mentioned in Article 1818 may be divided into three as enumerated below
by De Leon (2005):
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(1) Acts for apparently carrying on in the usual way the business of the partnership(par. 1.) — Every
partner is an agent and may execute such acts with binding effect on the partnership even if he has in fact no
authority unless the third person has knowledge of such lack of authority.
EXAMPLE:
(1) A, B, and C are partners in the buying and selling of home appliances. The sale of a
refrigerator by C to D is binding upon the partnership because it is apparently for carrying on in the
usual way the business of the partnership if C had, in fact, no authority.
But if D had knowledge of such lack of authority, then the partnership would not be
bound by the act of C.
(2) Where the partnership business is to deal in merchandise and goods, i.e., movable
property, the sale of its real property (immovables) is not within the ordinary powers of a partner,
because it is not in line with the normal business of the firm.
But where the express and avowed purpose of the partnership is to buy and sell real
estate, the immovables thus acquired by the firm form part of its stock-in-trade (not merely as
business site), and the sale thereof is in pursuance of partnership purposes, hence, within the
ordinary powers of the partner. (Goquiolay vs. Sycip, 9 SCRA 663.)
(2) Acts of strict dominion or ownership (pars. 2 and 3.) — For acts which are not apparently for
carrying on in the usual way the business of the partnership, the partnership is not bound, unless
authorized by all the other partners or unless they have abandoned the business. The instances of acts
which are generally outside the implied power of a partner are enumerated in the third paragraph of Art.
1818.
(3) Acts in contravention of a restriction on authority (par. 4.)— 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 way the business of the partnership.
De Leon (2005) further discussed Article 1819 on the effects of conveyance of real property/ies
of the partnership through the following examples:
(1) Title in partnership name, conveyance in partnership name (par. 1.). — A, B, and C
are partners in a partnership known as X & Co. A sold a parcel of land registered in the name of
X & Co. to D without express authority.
The conveyance passes title to D, but X &Co. can recover the property if (a) the
conveyance was not in the usual way of business or (b) D had knowledge of the fact that A had
no authority even though the conveyance was made in the usual way of business.
68
In no case may the partnership recover, if D had, in turn, conveyed the property to E who had
no knowledge of A’s lack of actual authority in making the conveyance to D.
(2) Title in partnership name, conveyance in partner’s name (par. 2.). — In the same
example, if the sale was executed by A in his own name to D, the latter does not become the
owner of the land. He gets only the equitable interest of X &Co., assuming that the selling of the
land is in the usual course of business of the partnership.
D would not be entitled even to the equitable interest if:
(a) X &Co. is not engaged in the buying and selling of lands; or
(b) D had knowledge of A’s lack of authority although the sale was made in the
usual course of business.
(3) Title in name of one or more partners, conveyance in name of partner or partners in
whose name title stands (par. .3.). — Although the parcel of land in question really belongs to the
partnership X &Co. it is, however, registered in the name of A and the record does not disclose
the right of X & Co. In this case, if A sold the land in his own name to D, title is conveyed to D.
The effect is the same as in paragraph 1.
(4) Title in name of one or more or all partners or a third person in trust for
partnership, conveyance executed in partnership name of in name of partner. — Suppose the
parcel of land is in the name of A in trust for the partnership X & Co. If A sells the land to D in
the name of X &Co or in his (A’s) name, the conveyance will pass only the equitable interest of
X & Co., A, being a mere trustee of the partnership. The rule is the same as in paragraph 2.
(5) Title in name of all partners, conveyance in name of all partners. — If the parcel of
land is registered in the name of A, B, and C conveyance made by all of the partners to D will
pass title to the property for the law says “a conveyance by all the partners passes all their rights
in such property. The effect obviously would be the same though the sale is not in the usual
course of business of X &Co.
We should also note that notice to or knowledge of any partner of any matter relating to
partnership affairs operates as a notice to or knowledge of the partnership except in case of fraud. To elaborate,
a third person desiring to give notice to a partnership of some matter pertaining to the partnership business
need not communicate with all the partners. If notice is delivered to a partner, that is an effective
communication to the partnership, notwithstanding the failure of the partner to communicate such notice or
knowledge to his co-partners. (Paras, 2000)
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B. Liability arising from partner’s wrongful act or breach of trust.
Articles 1822 to 1824 provide for the solidary liability of the partners and the partnership to third
persons for the partner’s wrongful actor omission or breach of trust acting within the scope of the firm’s
business or with the authority of his co-partners. This is true even though the other partners did participate in
or ratify, or had no knowledge of the act or omission. (De Leon, 2005)
Articles 1822 to 1824 are quoted below for easy reference:
“ART. 1822. Where, by any wrongful act or omission, of any partner acting in the
ordinary course of the business of the partnership or with the authority of his co-partners, loss or
injury is caused to any person, not being a partner in partnership, or any penalty is incurred, the
partnership is liable therefor to the same extent as the partner so acting or omitting to act
.
ART. 1823. The partnership is bound to make good the loss:
(1) Where, one partner acting within the scope of his apparent authority receives money
or property of a third person and misapplies it; and
(2) Where the partnership in the course of its business receives money or property of a
third person and the money or property so received is misapplied by any partner while it is in the
custody of the partnership.
ART. 1824. All partners are liable solidarity with the partnership for everything
chargeable to the partnership under articles 1822 and 1823.”
De Leon & De Leon (2005) further explained that the liability of the partners is, of course, different
from their liability for contractual obligations as previously discussed above. Here, the liability is solidary,
while in Article 1816, it is joint and subsidiary. Furthermore, while the liability in Artice1816 refers to
partnership obligations, this article covers the civil liability of the partnership arising from the wrongful acts or
omissions of any partner. The act or omission is called tort when it does not constitute a crime or felony
punishable by law. The partner must be guilty of a wrongful act or omission and he must be acting in the
ordinary course of business or with the authority of his co-partners even if the act is not connected with the
business. So, the partners are liable for the negligent operation of a vehicle by a partner, acting in the course of
the business which results in a traffic accident. But if he is driving a partnership-owned vehicle for
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purposes of his own, although with the permission of the other partners, the acting partner alone is liable.
You should also note that 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
involved in an unlawful enterprise with his knowledge or consent. Further, the partnership is liable for
anything suffered by a third person whose money or property is misappropriated by a partner who
received it within the scope of his authority or by any other partner after it was received by the
partnership in the ordinary course of business while in its custody. (Paras, 2000)
(1) A, B, and C are partners in partnership X & Co. engaged in a pawnshop business. A
received from D a diamond ring as security for a loan D obtained from the partnership.
In case of the misappropriation of the ring by A, who received the same or by B, all of
the partners are solidarily liable for the loss with X & Co. to D. Even the innocent partners are
personally liable without prejudice, of course, subject to their right to recover from the guilty
partner.
(2) A, B, and C are partners in X &Co., an investment firm. C fraudulently obtained
D’s money in the ordinary course of the firm’s business and used the money for personal
expenses rather than investing it. A and B did not consent to or participate in the breach of trust.
As a matter of fact, they came to know of the breach only some years after it had occurred.
All partners are solidarily liable to D. (De Leon, 2000)
Then the last one is the concept of estoppel under Article 1825. A person not a partner may become a
partner by estoppel, and thus be held liable to third persons as if he were a partner, when by words or by
conduct he directly represents himself to anyone as a partner in an existing partnership or in a non-existing
partnership with one or more persons not actual partners; or indirectly represents himself by consenting to
another representing him as partner in an existing partnership or in a non-existing partnership. The third person
with whom the partner contracted must show that the purported partner represented himself or permitted others
to represent him
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as a partner, and furthermore, that he dealt with the partnership to his injury in justifiable reliance on such
representation. (De Leon & De Leon, 2005)
There is also a partnership by estoppel if all the actual partners consented to the representation,
then the liability the person who represented himself to be a partner or who consented to such
representation and the actual partners is considered a partnership liability. The person becomes an agent
of the partnership and his act or obligation that of the partnership. (De Leon & De Leon, 2005)
It is to be noted however that when there is no existing partnership and all those represented as
partners consented the representation, or not all of the partners of an existing partnership consented to the
representation, then, the liability of the person who represented himself to be a partner or who consented
to his being represented as partner, and all those who made and consented to such representation, is joint
or pro rata. When there is no existing partnership and not all but only some of those represented as
partners consented to the representation or none of the partners in an existing partnership consented to
such representation, then the liability will be separate — that of the person who represented himself as a
partner or who consented to his being represented as a partner, and those who made and consented to the
representation, or that only of the person who represented himself as partner. (De Leon, 2005)
It must be emphasized however that Article 1825 does not create a partnership as between the
alleged partners. A contract, express or implied, is essential to the formation of a partnership. The law
considers them as partners and the association as a partnership only in so far as it is favorable to third
persons by reason of the equitable principle of estoppel. (McDonald vs. National City Bank of New York,
99 Phil. 156.) In other words, the actual partnership is one thing and liability of partners is another and
different thing.
De Leon (2005) gives the following examples:
(1) A, B, and C are partners in X & Co. D represented himself as a partner in X & Co. to
E who, on the faith of such representation, extended credit to X & Co.
D is a partner by estoppel. He is liable to E as though he is an actual member of X & Co.
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If all the partners A, B, and C consented to the representation, then a partnership liability
results. This is a case of partnership by estoppel. All the partners and D are liable.(par. 1[1].)
Note that in this case there is an existing partnership and all the partners consented to the
representation.
(2) If only A and B consented to the representation, there is no partnership liability. Only
A, B, and D are partners by estoppel. They are liable pro rata to E. (par. 1[2].)
(3) But if D acted alone without the consent of A, B, and C, then he alone is liable to E.
He is liable separately. (De Leon, 2005)
(4) Suppose A, B, and C are not really partners, and D represented himself as a partner
of A, B, and C to E.
If the representation was made without the consent of A, B, and C, then D alone shall be
liable separately to E. If it was made with the consent of A, B, and C, then all of them (A, B, C,
and D) shall be liable pro rata to E. They are partners by estoppel.
If only A consented to the representation, separate liability is created only against A and
D. Of course, if D is represented as a partner in an existing or non-existing partnership without
his consent, he is not liable to E.
In all the cases when there is no existing partnership (Example No. 4), or there is no
consent by all the members of an existing partnership (Example No. 2), it is the joint act or
obligation of the person acting and the persons consenting to the representation. . (De Leon,
2005)
For the would-be or incoming partners, the rule is cited under Art. 1826 which states that when a
person is admitted as a partner into an existing partnership, he is liable for all obligations existing at the time
of his admission as though he was already a partner when such obligations were incurred. For such
obligations, his liability is limited to his share in the partnership property, unless there is a stipulation to the
contrary. Those who were already partners at the time when the obligations were incurred are liable with their
separate property. (Art. 1816.) For all the
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obligations accruing subsequent to the admission of the new partner, all the partners are liable with their
separate properties. (De Leon, 2005)
A, B, and C are partners engaged in a drug store business. Their contribution is

P10,000.00 each. D is admitted as a new partner with a contribution of P4,000.00. At the time of
his admission, the partnership has an outstanding obligation to E in the amount of P40,000.00.
In this case, D is also liable to E for this obligation of P40,000.00. Thus, the assets of the
partnership amounting to P34.000.00 will be exhausted thereby leaving a balance of P6,000.00for
which only A, B, and C shall be liable jointly or pro rata, out of their separate property.
However, if the obligation was incurred by the partnership subsequent to the admission
of D, there would be no difference between old and new partners, as all of them shall be
personally liable for P1,500.00 each. D is entitled to a proportional reimbursement from A, B,
and C the amount he has paid in excess of his share of the liability as follows:
Shares of A, B, and C (10/34 of P6,000) — P1,764.70 each Share

of D (4/34of P6,000) — P705.88
So A, B, and C are liable for P264.70 each to D for the excess of P794.12, the difference
between P1,500.00 and P705.88. (De Leon, 2005)
It is to be noted then that the partnership creditors are entitled to priority of payment with respect
to partnership assets. (see Art. 1839[2, 3].) The rule is based upon the theory that the partnership, treated
as a legal entity distinct and separate from the members composing it (Art. 1768.), should apply its
property to the payment of its debts in preference to the claim of any partner or his creditors. Without
prejudice to the right to preference of partnership creditors, the creditors of each partner may ask for the
attachment and public sale of the share of the latter in the partnership assets. (Art. 1814.) Such share
really belongs to the partner. (Art. 1812.)
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However, the purchaser at the public sale does not become partner. (Arts. 1767, 1813.) (De Leon, 2005)
A, B, and C are partners in a partnership known as X & Co. They contributed equally to
the partnership. As they have no stipulation regarding the share of each partner in the profits, they
share equally in the partnership assets, namely: 1/3. After a year of operation, the assets of the
partnership amounted to P40,000.00. It is indebted to D in the amount P28,000.00. E is a separate
creditor of A for P6,000.00.
The different claims shall be settled as follows:
As partnership creditor is preferred, D shall be paid fir the amount of P28,000.00, thereby
leaving the partnership assets to only P12,000.00. Each partner shall, therefore, get only
P4,000.00 as his share in the assets. Hence, E can collect only P4,000.00 from the assets of the
partnership. His remedy is to recover the balance of P2,000.00 from the private property of A.
(see Art. 1839[9].)
Assessment Task 3
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Instruction: Solve the following problems.
1. A, B and C are all capitalist partners in ABC Partnership. After 5 years in

operation, ABC Partnership experienced an imminent loss and thus required
additional capital from the partners in the amount of P10,000.00 each. A
refused to give P10,000.00 and offered only P5,000.00 as it was stated in their
contract that he will give only ½ of the required additional capital from each
partners. What should be the next course of action of the partners?
2. A, B and C are partners who contributed the following: A-P6,000.00; B-

P4,000.00; and C-industry. They agreed that the profits and losses shall be
distributed as follows to wit: A-35%; B-25% and C-40%. How shall the loss of
P10,000.00 be distributed?
3. A, B and C are partners in a partnership with each contributing P100,000.00. D

is admitted as a new partner with a contribution of P50,000.00. At the time of
his admission, the partnership has a pre-existing obligation to E in the amount
of P150,000.00. What is the extent of D’s liability? Explain.
Summary
The relations created by a contract of partnership are four (4) distinct juridical relations as
follows (Paras, 2000):
1) Relations among the partners with the partnership

2) Relations of the partners with the partnership
3) Relations of the partnership with third persons with whom it contract
4) Relations of the partners with such third persons
It should be understood that partnership relationship is one of mutual trust and confidence. This
fiduciary relationship remains until partnership s terminated. Further, rights and obligations of the partners as
to each other are provided on the theory that a partner is both a principal and
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an agent in relation to his co- partners. But the relationship between a limited partner and other partners
in a limited partnership does not involve the element of trust and confidence. (De Leon, 2005)
The following are obligations of the partners among themselves according to De Leon
(2005):
1) To contribute at the beginning of the partnership the property, money or industry.
Failure to contribute property will make the partner a debtor of the partnership. The
remedy of other partners is specific performance with damages and interest.
2) To answer for eviction in case the partnership is deprived of the determinate property
contributed. The partner is bound in the same manner as the vendor is bound with
respect to the vendee.
3) To answer to the partnership for the fruits of the property, from the date they should
have been contributed up to the time of actual delivery. No demand needed to put the
partner in default. Failure to deliver the property prejudices the common purpose of
obtaining the greatest possible profits.
4) To preserve said property with the diligence of a good father.
5) To indemnify the partnership for any damage caused to it by the retention of the same
or by the delay in its contribution.
The following are the liabilities of partner for failure to perform service stipulated:
1) Partners are generally not entitled to charge each other for their services in the firm
business.
2) To require a partner to account for the value of his services would be allowing
compensation to the other members of the partnership for the services rendered.
3) If a partner neglects to render the services by reason of which the partnership suffered
loss, no good reason can be suggested why the erring partner should not be just as
responsible for the breach of his agreement.
4) If the partner is compelled to make good the loss, each member will receive his
proportion of the amount in the distribution of the partnership assets.
5) Measure of damages is based on the value of the services wrongfully withheld.
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It should be noted that money or property contributed cannot be withdrawn without the consent
of the partnership or of the other partners. (De Leon, 2005)
With respect to obligations with respect to contribution of money and money converted to
personal use, there are two (2) instances involved: money promised but not given on time and partnership
money converted to personal use of the partner. (De Leon, 2005)
The obligation of the partner under Article 1788 is to contribute on the date due the amounts he
has undertaken to the partnership to contribute. Further, the liability of guilty partner for interest and
damages is from the time he should have complied and not from judicial or extrajudicial demand. (De
Leon, 2005)
With respect to industrial partner, Paras (2000) discussed that an industrial partner contributes his
industry, labor or services to the partnership and is considered as the owner of his services. Thus, he
becomes a debtor of the partnership for the partnership acquires exclusive right to avail itself of his
industry. There is therefore a prohibition against engaging in business whether the industrial partner is to
engage in the same business or in any kind of business. In case of violation, capitalist partners have the
right to exclude him from the firm or avail of the benefits, with damages in either case.
De Leon (2005) cites the obligation of capitalist partner to contribute additional capital but only in
case of imminent loss wherein he is under obligation to contribute additional share to save the venture. If the
capitalist refuses, he is obliged to sell his interest to the other partners. This does not apply where the partner
who collects for his own credit is not authorized to manage if the manner of management has not been agreed
upon and all the partners participate in the management, then every partner shall be considered a managing
partner. Also a debtor is given the right to prefer payment of the credit of the partner if it should be more
onerous to him.
References
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Books and Laws:
Company, Inc.
Company, Inc.
MODULE 4
DISSOLUTION AND WINDING UP OF

PARTNERSHIP
Introduction
This module touches on the concepts of dissolution, winding up and termination of a partnership
under the legal parlance. The causes and effects of dissolution, as well as the procedure for dissolution
and winding up of partnership will also be discussed. This module will also discuss the rights of a partner
upon dissolution and the effect on each of the partner and to the partnership itself. We will also discuss
the manner of winding up required by law.
79
In studying the aforesaid topics, we will touch on the provisions of law and legal concepts and
principles.
Learning Outcomes
1. Understand the concepts of dissolution, winding up and termination and be able to differentiate it
from another;
2. Recognize and know the different causes of dissolution of partnership under the law;
3. Understand the effects of dissolution of partnership; and
4. Discuss the manner of dissolution.
Lesson 1. Dissolution, winding up and termination defined.
Article 1828 provides the legal definition of dissolution of a partnership as the change in the
relation of the partners caused by any partner ceasing to be associated in the carrying on as distinguished
from the winding up of the business.
De Leon (2005) distinguishes dissolution, winding up and terminations as the terms are often being
interchange improperly. Dissolution is defined under Article 1828 above as 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 that point in
time when the partners cease to carry on the business together. It represents the demise of a partnership.
Winding up on the other hand is the process of settling the business or partnership affairs after dissolution
while termination is that point in time when all partnership affairs are completely wound up and finally settled.
It signifies the end of the partnership life. Thus, Article 1829 emphasizes that on dissolution, the partnership is
not terminated, but continues until the winding up of partnership affairs is completed.
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De Leon (2005) proceeded on discussing the three (3) concepts. He emphasized that the principal
significance of dissolution is that, thereafter, no new partnership business should be undertaken, but
affairs should be liquidated and distribution made to those entitled to the partners’ interest. (Testate Estate
of Motavs.Serra, 47 Phil. 464 [1926].) The partnership continues until the winding-up is completed. Thus,
dissolution refers to the change in partnership relation and not the actual cessation of the partnership
business.
Dissolution of a partnership must also be distinguished from a mere suspension in the conduct of
its business or operations. (68 C.J.S. 842.)
Lesson 2. Causes of Dissolution.
Articles 1830 and 1831 provide for the causes of dissolution. Article 1830 provides:
ART. 1830. Dissolution is caused:
(1) Without violation of the agreement between the partners:
(a) By the termination of the definite term or particular undertaking specified in

the agreement;
(b) By the express will of any partner, who must act in good faith, when no
definite term or particular undertaking is specified;
(c) By the express will ofallthe 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;
(d) By the expulsion of any partner from the business bone fide in accordance with
such a power conferred by the agreement between the partners;
(2) In contravention of the agreement between the partners, where the circumstances do
not permit a dissolution under any other provision of article, by the express will of any partner at
any time;
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(3) By any event which makes it unlawful for the business of the partnership to be
carried on or for the members to carry it on in partnership;
(4) When a specific thing, which a partner had promised to contribute to the partnership,
perishes before the delivery; in any case by the loss of the thing, when the partner who
contributed it having reserved the ownership thereof, has only transferred to the partnership the
use or enjoyment of the same; but the partnership shall not be dissolved by the loss of the thing
when it occurs after the partnership has acquired the ownership thereof;
(5) By the death of any partner;
(6) By the insolvency of any partner or of the partnership;
(7) By the civil interdiction of any partner;
(8) By decree of court under the following article.
De Leon & De Leon (2005) note that dissolution may either be caused without violation of the
agreement between the partners (No. 1) or in contravention of said agreement (No. 2). It may also be
voluntary when caused by the will of one or more or all of the partners (Nos. 1 and 2) or involuntary
when brought about independently of the will of the partners or by operation of law (Nos. 3, 4, 5, 6, 7,
and 8). The dissolution of partnership may also be effected extrajudicially (Nos. 1 to 7) or judicially, that
is, by decree 4 court. (No. 8, in relation to Art.1831.)
It will also be observed that the causes provided in Article 1830 result in the automatic
dissolution of the partnership. This is not the case under Article 1831 which enumerates the grounds for
the judicial dissolution of the partnership. (Paras, 2000)
Note that once a partnership is dissolved, the same partners may form a new partnership to
continue the business under the same terms.
De Leon (2005) cited four ways by which a partnership may be dissolved without violation of the
partnership agreement as follows:
(1) Termination of the definite term or particular undertaking. — A partnership may be

constituted for a fixed term or it may have for its object a specific undertaking. (Art 1785, 1783.)
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After the expiration of the term or particular undertaking, the partnership is automatically dissolved without
the partners extending the said term or continuing the undertaking. (see Art. 1785.) The dissolution of the
partnership will be but in pursuance of the agreement of the partners which is the law between them. (Art.
1159.) If thereafter the partners continue the partnership without making a new agreement, the firm becomes a
partnership at will. (see Art. 1785.)
(2) By the express will of any partner. — A partnership at will may be dissolved at any time by
any partner without the consent of his co-partners without breach of contract provided the said partner
acts in good faith. Here, each partner has both the power and the right to terminate the partnership
relations at any time. If there is bad faith, the dissolution is wrongful.
(3) By the express will of all the partners. — The agreement to dissolve the partnership before the
termination of specified term or particular undertaking must be unanimous. The majority alone cannot dissolve
the partnership without breach of contract, it should be noted, however, that the consent of the partners who
have assigned their interests or suffered them to be charged for their separate debts (Art. 1814.) is not required
to effect dissolution without breach of the partnership agreement. The remaining partners alone may dissolve
the partnership.
(4) By expulsion of any partner. — The expulsion has the effect of decreasing the number of the
partners; hence, the dissolution. The expulsion must be in good faith, and in accordance with the power
conferred by the agreement between the partners. This power may be vested in one partner exclusively.
The partner expelled in bad faith (therefore in contravention of partnership agreement) can claim
damages.
De Leon (2005) then discussed the scenario where in a partnership may be dissolved in violation
of the partnership agreement as follows:
(1) Dissolution may be for any cause. — Any partner may cause the dissolution of the
partnership at any time without the consent of his co-partners at his sole pleasure or for reason which he
deems sufficient by expressly withdrawing therefrom even though the partnership was entered into for a
definite term or particular undertaking. Dissolution of such a partnership is, however, a contravention of
the agreement.
(2) Power of dissolution always exists. — The doctrine of delectus personae (see note 1 to Art.
1767.) allows a partner to have the power, although not necessarily aright, to dissolve a partnership, even
though his co-partners wish to continue the business.
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(3) Legal effects of dissolution. — The withdrawing partner is liable for damages for unjustified
dissolution but in no case can he be compelled to remain in the partnership. With his withdrawal, the
number of members is decreased; hence, the dissolution. (Rojas vs. Maglana, 192 SCRA 110.) The legal
effects of this dissolution are laid down in Article 1837, par. 2, Nos. 1, 2 and 3.
De Leon (2005) elaborated on the following causes below where partnership may be dissolved in
violation of the partnership agreement, to wit:
1. When the business becomes unlawful.
Dissolution may be caused involuntarily when a supervening event makes the business itself of
the partnership unlawful (e.g., a law makes the continuance of the business illegal, declaration of war
between countries of which the partners are respectively citizens) or makes it unlawful for the partners to
carry it on together. It should be noted that a partnership must have a lawful, object or purpose. (see Art.
1770.)
A is a partner in a law firm. Later on, A is appointed as Judge of the Regional Trial Court.
Under the law, a Judge of the Regional Trial Court is prohibited from engaging in the practice of law.
In this case, it would be unlawful for A to continue as a partner in the law firm. His appointment
dissolves the partnership of which he is a member.
2. In case of loss of specific thing.
(1) If the specific thing to be contributed by a partner is lost before delivery, the partnership is
dissolved because there is no contribution inasmuch as the thing to be contributed cannot be substituted with
another. There is, here, a failure of a partner to fulfill his part of the obligation.
(2) If the loss occurred after the delivery of the thing promised, then the partnership is not
dissolved because the ownership of thing is already transferred to the partnership. The partners may
contribute additional capital to save the venture. (see Art. 1791.)
(3) If only the use or enjoyment of the thing is contributed, the partner having reserved the
ownership thereof, whether the loss came before or after delivery, dissolves the partnership. Here, the
partner bears the loss and, therefore, he is considered in default with respect to his
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contribution. (Art. 1795, par. 1.) Upon dissolution, the partners may demand accounting and liquidation.
Note that the provision refers only to specific things. When the thing to be contributed is not
specific, Articles 1786 (par. 1.) and 1788 shall govern.
3. Death of any partner.
The dissolution of the partnership maybe caused by death wherein the deceased partner ceases to
be associated in the carrying of the business. The surviving partners have no authority to continue the
business except so far as is necessary, to wind up. (see Art. 1836.) The partnership agreement, however,
may provide that the death, withdrawal, or admission of a partner will not effect a dissolution. Under such
stipulation, the estate of the deceased is not liable for obligations contracted after dissolution beyond the
extent of his capital or interest permitted to remain in the business which is continued.
4. Insolvency of any partner or of partnership.
The insolvency of a partner subjects his interest in the partnership to the right of his creditors (see Art.
1814.) and makes it impossible for him to satisfy partnership obligations to its creditors in the event that
partnership assets have been exhausted. (see Art. 1816.) An insolvent partner has no authority to act for the
partnership nor the other partners to act for him. (Art. 1833.)
Secondly, the insolvency of the partnership renders its property in the hands of the partners liable
for the satisfaction of partnership obligations resulting in their inability to continue the business, which
practically amounts to a dissolution. (Ng Cho Cio vs. Ng Diong, 1 SCRA 275.)
5. Civil interdiction of any partner.
It is a requirement that partners in a partnership must have the legal capacity to enter into contracts. A
convicted person suffering from the accessory penalty of civil interdiction (or civil death) cannot validly give
consent (Art. 1327.) as his capacity to act is limited thereby (Art. 38.)
6. Judicial dissolution or by decree of court.
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There are many situations or events that may constitute a valid reason for dissolving a partnership
but which are to subject to dispute or difference of opinion to make a judicial dissolution necessary.
Dissolution of a partnership may be ordered judicially after a hearing on application either (1) by partner
in the cases mentioned in paragraph 1, Nos. 1-6; or (2) by the purchaser or assignee of a partner’s interest
under paragraph 2, Nos. 1 and 2.
(1) On application by a partner:
(a) Insanity. — The partner may have been previously declared insane in a judicial
proceeding; otherwise, the fact of his being of unsound mind must be duly proved. An insane
person is incapacitated to enter into a contract. (Art. l327[2].)
(b) Incapacity. — The incapacity must be one which affects the ability of a partner to
perform his duties as a partner.
(c) Misconduct and persistent breach of partnership agreement. — Like incapacity,

conduct prejudicial to the carrying of the business (e.g., inveterate drunkenness) and persistent
breach of the partnership agreement are grounds for judicial dissolution, for they defeat and
materially affect and obstruct the purpose of the partnership.
(d) Business can be carried on only at a loss. — Since the purpose of a partnership is the
carrying of a business for profit, it may be dissolved by decree of court when it becomes apparent that
the business is unprofitable with no reasonable prospects of success (Lichaucovs. Lichauco, 33 Phil.
350.) orit can be carried on at a loss.
(e) Other circumstances — Examples of circumstances which render a dissolution equitable

are abandonment of the business, fraud in the management of the business, refusal without justifiable
cause to render accounting of partnership affairs, etc. In a case, it was held that the sale of all real
property (lots) of a partnership did not work the dissolution of the firm which was left without the real
property it originally had because the firm was not organized to exploit the lots sold but to engage in
buying and selling real estate, and “in general real estate agency, and brokerage business.” (Goquiolay
vs. Sycip,
108 Phil. 984.)
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(2) On application by a purchaser of a partner’s interest. - In either of the two cases
mentioned in the last paragraph, a purchaser of a partner’s interest under Article 1813 or 1814
may apply for judicial dissolution of a partnership.
EXAMPLES:
(1) A, B, and C formed a partnership to continue for a term of five (5) years. On
the third year, C sold his entire interest to D.
Under Article 1813, such conveyance does not dissolve the partnership, and D
does not become a partner his only right being to receive the profits to which C would
otherwise be entitled. Hence, D cannot ask for judicial dissolution the partnership.
However, if after the fifth year the partnership is continued, D s entitled to ask
for judicial dissolution. The partnership as continued may or may not be a partnership at
will.
(2) Suppose now, after the fifth year, the partnership was continued by the
partners without any express agreement, becoming a partnership at will. (see Art 1785.)
If C’s interest was purchased by D or a charging order was issued by a court

against C in favor of D, his judgment creditor may ask for judicial dissolution. (De Leon,
2005)
Lesson 3. Effects of Dissolution.
A. As to partner’s authority to act for the partnership

Article 1832 provides that, "[e]xcept so far as may be necessary to wind up partnership affairs or
to complete transactions begun but not then finished, dissolution terminates all authority of any partner to
act for the partnership:
(1) With respect to the partners,
(a) When the dissolution is not by the act, insolvency or death of a
partner; or
(b) When the dissolution is by such act, insolvency or death of a partner,
in cases where Article 1833 so requires;
(2) With respect to persons not partners, as declared in article 1834."
87
According to Paras (2000), based on the above provision, dissolution terminates all authority of
any partner to act for the partnership. The exceptions for this are:
1. Acts necessary to wind up partnership affairs; and
2. Acts necessary to complete transactions begun but unfinished.
From the general rule stated above, the following qualifications must be present according to De
Leon & De Leon (2005):
1. With respect to the partners (in so far as partners are concerned), the following rules are
observed:
a. When dissolution is not by act, insolvency or death of a partner, the general rule applies
such that dissolution terminates all authority of any partner to act for the partnership.
Hence, dissolution terminates the ACTUAL authority of a partner to undertake NEW
business for the partnership (Art. 1832)
b. When dissolution is by act, insolvency or death of a partner, the authority of partners

inter se to act for the partnership is NOT deemed terminated. Thus, each partner is liable
to his co-partners for his share of any liability created by any partner acting for the
partnership as if the partnership has not been dissolved. The exceptions are provided
under Art. 1833 as follows:
i. When the cause of dissolution is the ACT of a partner and the acting partner had
KNOWLEDGE of such dissolution; or
ii. When the cause of dissolution is the DEATH or INSOLVENCY of a partner and the
acting partner had KNOWLEDGE or NOTICE of such dissolution.
2. The rule with respect to third persons is as follows:

a. The following are instances when partnership is bound to third persons after dissolution
(Art. 1834):
i. Act appropriate for winding up partnership affairs
ii. Act for completing unfinished transactions
iii. Completely NEW transaction which would bind the partnership if dissolution had not
taken place provided: the other party is in good faith, meaning:
1) Previous creditor (had previously extended credit) AND NO KNOWLEDGE or
NOTICE of the dissolution, OR
88
2) NOT a previous creditor AND the fact of dissolution had not been published in a
newspaper of general circulation
b. The following are instances when partnership is NOT bound to third person after
dissolution:
i. Where partnership was dissolved because it was unlawful to carry on the business,
except when the act is for winding up;
ii. Where the acting partner in the transaction has become insolvent;
iii. Where the partner is unauthorized to wind up, except if the transaction is with third
persons in good faith (same circumstances as defined above);
iv. Where act is NOT appropriate for winding up or for completing unfinished
transactions; and
v. For completely NEW transaction which would bind the partnership if dissolution had
not taken place with third persons in bad faith
B. As to partner’s existing liability (Art. 1835)

Paras (2000) emphasized that dissolution does not automatically discharge the existing liability
of any partner. The reason for this is for the creditors not to be prejudiced particularly if a partner will
just withdraw anytime from the firm.
The exception whena partner may be relieved from all existing liabilities upon dissolution is only
by an agreement between:
1. Partner concerned;
2. Other partners; and
3. Partnership creditors. (Paras, 2000)
The consent of the creditors and partners to the novation may be implied from their conduct.
Lesson 4. Rights of a Partner upon Dissolution.
When the cause of dissolution is not in contravention of the partnership agreement, a partner has
the right to have partnership property applied to discharge partnership liabilities and receive in cash his
share of the surplus. (Paras, 2000)
89
On the other hand, when the cause of dissolution is in contravention of the partnership
agreement, the following shall be observed according to Paras (2000):
a. These are the rights of a partner who has not caused the dissolution wrongfully:
i. To have partnership property applied to discharge partnership liabilities;
ii. To receive in cash his share of the surplus;
iii. To be indemnified for damages caused by the partner guilty of the wrongful dissolution;
iv. To continue the business in the same name during the agreed term of the
partnership, by themselves or jointly with others; and
i. To possess partnership property should they decide to continue the business.
b. On the other hand, these are the rights of a partner who has wrongfully caused the
dissolution:
i. When business is not continued by the other partners:
1) To have partnership property applied to discharge partnership liabilities;
and
2) To receive in cash his share of the surplus less damages caused by his wrongful
dissolution.
ii. In case the business is continued by the other partners:

1) To have the value of his interest in the partnership at the time of the dissolution, surplus
less damages caused by his wrongful dissolution, to his co- partners, ascertained and paid
in cash or secured by bond approved by the court; and
2) To be released from all existing and future liabilities.
Paras (2000) noted that the value of the goodwill of the business is not considered in ascertaining
the value of the interest of the guilty partners.
Paras (2000) proceeded on discussing the rights of a partner where partnership contact is
rescinded on the ground of fraud or misrepresentation under Article 1838. The provision speaks of three
(3) rights, as follows:
1. Right of lien on, or retention of, the surplus of partnership property after satisfying partnership
liabilities for any sum of money paid or contributed by him.
90
2. Right of subrogation in place of the partnership creditors after payment of partnership liabilities;
and
3. Right of indemnification by the guilty partner against all debts and liabilities of the
partnership
Lesson 5. Manner of Winding Up.
There are also two (2) types of winding up a dissolved partnership, that is, either through extrajudicial
or judicial. Extrajudicial means that done by the partners themselves without the intervention of the court.
Judicial, in turn, means under the control and direction of the court upon proper cause shown by any partner,
his legal representative or his assignee. (De Leon, 2005)
Article 1838 enumerates who are persons authorize to wind up as follows:

1. Partners designated by the agreement;
2. In the absence of such agreement, all partners who have not wrongfully
dissolved the partnership; and
3. Legal representative of last surviving partner who is not insolvent.
Article 1839 (1) in turn enumerates the assets of the partnership to be considered in settling
accounts between the partners after dissolution as follows:
1. Partnership property (including goodwill); and
2. Contributions of the partners necessary for the payment of liabilities.
Article 1839 (2) in turn enumerates the order of payment in winding up as follows:
1. Those owing to creditors other than partners
2. Those owing to partners other than for capital or profits
3. Those owing to partners in respect of capital
4. Those owing to partners in respect of profits
De Leon (2005) has the occasion to explain the doctrine of “marshalling of assets” is covered
under Article 1839 (8) which states that when partnership property and the individual properties of the
partners are in possession of a court, partnership creditors have preference in partnership assets and
separate or individual creditors have preference in separate or individual properties, saving the rights of
lien or secured creditors.
91
De Leon (2005) also defined a partner’s lien as the right of every partner to have the partnership
property applied to discharge partnership liabilities and to have the surplus assets, if any, distributed in
cash to the respective partners, after deducting what may be due to the partnership from them as partners.
Paras (2000) reminded that Art. 1842 speaks of accounting to be done upon dissolution of the
partnership, while Art. 1809 refers to a demand for accounting before dissolution by reason of the
circumstances mentioned in the article.
Assessment Task 4
92
Briefly answer the following:
1. Distinguish dissolution from liquidation and termination.

2. How is a partnership dissolved?
3. A, B and C formed a partnership. After two years, partner A withdraw from the partnership.
Questions:
a) Is the partnership dissolve? Briefly explain.
b) Suppose B and C entered into subsequent transactions without their

knowledge of the withdrawal of partner A, what is the effect of the
transactions to the partnership?
c) What if B has knowledge about the withdrawal of A, and A transacted with X

who has no knowledge about the withdrawal of A. What is the legal effect of
the transactions to the partnership? Can X enforce this against the
partnership? Why or why not?
Summary
Dissolution is not synonymous with termination under the law as discussed above.
The enumeration of causes of dissolution stated under the law is exclusive. Articles 1830, 1831, and
1840 provide for causes of dissolution Under Art. 1830, extrajudicial dissolution may be caused without
violation of the agreement between the parties (no. 1) or in contravention of said agreement (no. 2). It may be
voluntary when caused by the will of one or more or all of the
93
parties (nos. 1 and 2) or involuntary when brought about independently of the will of the partners or by
operation of law (nos. 3-8) (De Leon, 2005)
Voluntary dissolution may be extrajudicial (nos. 1-7); or judicial (no. 8 in relation to Art. 1831)
The causes provided for in Art. 1830 result in the automatic dissolution of the partnership. In Art. 1840,
automatic dissolution takes place when a new partner is admitted or when a partner retires, withdraws, or
is expelled from the partnership. There is no automatic dissolution under Art. 1831. Art. 1831 enumerates
the grounds for the judicial dissolution of the partnership . (De Leon, 2005)
De Leon & De Leon (2005) discusses the four ways by which a partnership may be dissolved
without violation of the partnership agreement:
1. termination of the definite term or particular undertaking after the expiration of the term or
particular undertaking. However, if after said expiration the partners continue the partnership
without making a new agreement, the firm becomes a partnership at will;
2. by the express will of any partner provided, the said partner acts in good faith;
3. by the express will of all partner which may be accomplished either by an express agreement
or by words and acts implying an intention to dissolve; or
4. by expulsion of any partner which must be made in good faith.
There is also a dissolution effected in contravention of partnership agreement which may be for
any cause or reason at any time without the consent of his co- partners by expressly withdrawing
therefrom even though the partnership was entered into for a definite term or particular undertaking. Such
dissolution is a contravention of the agreement. (De Leon, 2005)
What is important to remember under this module is the order of payment in winding up as
follows:
1. Those owing to creditors other than partners
2. Those owing to partners other than for capital or profits
3. Those owing to partners in respect of capital
4. Those owing to partners in respect of profits. (De Leon, 2000)
94
References
Books and Laws:
Company, Inc.
Company, Inc.
95

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BL 2 - Prelims

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BUSINESS LAW

Atty. Jill B. Manangkil-Benitez

Course Description: This course is intended to give the students a broad

Course Intended Learning Outcomes (CILO):

PRELIM GRADE : 60% (Activity 1-4) + 40% (Prelim exam)

GENERAL PROVISIONS ON PARTNERSHIP

At the end of this module, students should be able to:

1. Discuss general provisions on partnership.

3. Distinguish partnership and co-ownership.

Lesson 1. Concept of partnership and governing law

1) “A partnership is a contract of two or more competent persons to place their

3) “A partnership is a legal relation based upon the express or implied agreement of

5) “A partnership is an organization for production of income to which each partner

Governing Law on Partnership in the Philippines

Lesson 2. Characteristics and Elements of Partnership

First, it is discussed by De Leon (2005) that partnership as a contract is consensual.

Second characteristic of partnership according to De Leon (2005) is that it is nominate. It

Fourth characteristic as per De Leon (2005) is that partnership is an onerous contract.

The seventh characteristic is that a contract of partnership is preparatory or as a promise

Lesson 3. Nature of Partnership

A juridical person is defined by Tolentino (1992) as a non-human legal entity, in other

Lesson 4. Tests of Partnership Existence

(2) Co-ownership or co-possession does not of itself establish a partnership, whether

(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

(e) As the consideration for the sale of a goodwill of a business or

We must somehow remember the provision above so as to tell whether a partnership

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

Lesson 5. Partnership Distinguished from Co-Ownership

Table 1. Partnership and co-ownership distinguished

Characteristics Partnership Co-ownership

2. Juridical personality Has a juridical personality Has no juridical personality

3. Purpose To obtain profit Common enjoyment of a thing or right.

8. Effect of death Death or incapacity of a Does not necessarily dissolve co-

9. Form A partnership may be made in No public instrument is needed even if

Lesson 6. Essential Features of Partnership

A. Existence of a Valid Contract

B. Legal Capacity of Parties to Enter into Contract

(1) Unemancipated minors;

C. Mutual Contribution of Money, Property, or Industry to

When it comes to property, it may be real or personal property, corporeal or incorporeal

D. Object must be Lawful

Article 1770, Civil Code states that:

E. Primary Purpose is to Obtain Profits, Share and Divide

Please answer carefully and objectively.

Partnership has different characteristics and elements. Partnership is said to be consensual,

Books and Laws:

At the end of this module, students should be able to:

"ARTICLE 415. The following are immovable property: attached in land

(7) Fertilizer actually used on a piece of land;

Lesson 2. Registration of Partnership

1. The partnership contract must appear in a public instrument; and

(1) You must verify your company name.

Lesson 3. When Immovable Property is Involve

1. the contract must be in a public instrument (Article 1771.); and

Republic of the Philippines

G.R. No. 134559 December 9, 1999

Alleged Nullity of the

Partnership Agreement Not the Result

Liability of the Parties

Lesson 4. Articles of Partnership

AND WE HEREBY CERTIFY:

Cavite City, Antipolo City