Atty.

Uribe Lecture Notes: Partnership Page 1 of 14

Characteristics of partnership

Let’s start with a bar examination question.

Bar Q: A, using all his savings in the total amount of P2,000.00, decided to establish a restaurant.
B gave P4,000.00 to A as “financial assistance,” with the agreement that B will have 22% share in the
profits of the restaurant. After 22 years, B filed an action to compel A to deliver to him his share in the
profits claiming that he was a partner. A denied that B was his partner. Is B a partner of A?

A: Yes, B was a partner of A because there was a contribution of money to a common fund and
there was an agreement to divide the profits among themselves.

However, Atty. Uribe does not agree with that answer. He agrees with the alternative answer.

Alternative answer: B gave P4,000.00 only as “financial assistance.” It was not a contribution to a
common fund. As such, he actually became a creditor of A. As regards the agreement for the share in
profits, the law on partnership is very clear. A sharing in the profits does not necessarily result in a
partnership contract. The sharing may only be a way of compensating the other person. In fact, it can be the
mode of the payment of the loan.

As defined, in a 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.
(1767, 1st par.)

What if two or more persons agree to put up a partnership but they never intended to divide the
profits among themselves, would that still be a valid partnership contract? Yes. The 2nd par. of 1767, two or
more persons may also form a partnership for the exercise of a profession.

Even in other contracts, e.g. sale or agency, there would be a need to distinguish particular
contract from other contracts or other legal relationships. The same applies in partnership.

Bar Q: Distinguish partnership from co-ownership.

Creation. Partnership is created by agreement. Co-ownership may be created by agreement or by

operation of law.

Purpose. In partnership it is either to divide profits or to exercise a profession. In co-ownership it

is merely to collective enjoyment of the property or right held in common.

Juridical personality. A partnership has a juridical personality, separate and distinct from the
individual partners. A co-ownership has no juridical personality.

Agency or representation. In partnership, unless otherwise agreed upon, each partner is an agent of
the other partners and of the partnership. In co-ownership, as a rule, there is no mutual representation.

Share in profits. In partnership, the sharing may be stipulated upon by the parties and in absence
thereof it shall be based on the capital contribution of the partners. In co-ownership the profits are fixed by
law; profits always depend on their proportionate shares.

Effect of death. In partnerships, if it is a general partnership, with the death of one of the general
partners, the partnership is dissolved. Co-ownership is not extinguished by the death of one of the co-
owners (the heir of the decedent succeed to the co-ownership).

Essential elements of a contract of partnership

Just like any other contract, it should have the three essential requisites:
Atty. Uribe Lecture Notes: Partnership Page 2 of 14

(1) consent of the contracting parties,

(2) object certain (in partnership, it is to engage in lawful activity, whether it is a business or a
profession); and
(3) cause or consideration (the promise of each partner to contribute money, property or
industry).

(Note: From the definition of a partnership alone, you can see that the contract is essentially
onerous. Each partner has to contribute either money, property or industry.)

Consent of the contracting parties

The rules in contracts would be equally applicable. However, just like in sales or lease, there
persons who are bared from forming a partnership.

Bar Q: May the spouses enter into a limited partnership to engage in the realty business with the
wife as the limited partner?

A: Yes. Spouses are only prohibited under 1782 from entering into universal partnerships.
Therefore, if they form a limited partnership. They can contribute only P100,000.00 each and that will not
be universal partnership, but a particular partnership.

Bar Q: Can a corporation enter into a contract of partnership with an individual or with another
corporation?

A: No. As ruled by the Supreme Court in case of Tuason vs. Bolanos, while a corporation may
enter into a joint venture, it cannot validly enter into a contract of partnership. (Note: no discussion was
made by the Supreme Court in that case but it is said that the reason for such prohibition is that under the
law on corporations, the business is supposed to be governed or controlled by the board of directors. If such
a corporation would enter into a partnership contract, the other partners may bind the corporation in certain
activities without the consent of the board of directors. Another reason is the investment of the stockholders
may be exposed to a risk not contemplated by them.)

Alternative answer: As a rule corporation cannot enter in a contract of partnership, however, they
may enter so long as the following conditions are met:

(1) The articles of incorporation allow the corporation to enter into a partnership contract; and
(2) There is a stipulation in the partnership agreement that all the partners will manage the
business of the partnership.

This alternative answer is actually based only on an SEC Opinion. So treat this answer with
caution!

Aside from spouses and corporations, are they any other persons prohibited from entering into
partnership agreements? Yes, those who are prohibited from giving each other any donation or advantage
cannot enter into a universal partnership. (1782) Under 739, they are

(1) Persons who were guilty of adultery or concubinage;

(2) Persons found guilty of the same criminal offense; and
(3) Public officer or his wife, descendants and ascendants, by reason of his office.
Atty. Uribe Lecture Notes: Partnership Page 3 of 14

Object certain

Again, the object of a partnership is to engage in a lawful activity.

Q: If the object of a partnership is a lawful activity, is the partnership necessarily valid?

A: No. There are specific business activities wherein the law would require a particular business
relation, e.g., only a corporation may engage in the insurance and banking business.

Cause or consideration

The cause in partnership is the promise of the contracting parties to contribute money, property or
industry.

Illegal or unlawful partnership

What would be the effect if either the cause or the object of the partnership is illegal? (Examples of
unlawful objects are the business of jueteng, drug trafficking and prostitution. Examples of unlawful causes
are the promise of one of the partners to contribute 2 kilos of shabu, or his service in the prostitution
business.) Obviously the partnership contract is void.

Under the law, if a contract is void, it produces no legal effect whatsoever. Therefore an action to
compel the distribution of profits will never prosper. In fact, under the law on partnership, the State will
confiscate the profits of such illegal partnership. An action to compel a partner to render an account would
also not prosper. Any action to enforce a void contract will never prosper.

The only question in partnership, in fact in any other contract, is may a party to that void contract
at least be able to recover what he contributed or delivered pursuant to that void contract? As a rule, no,
because of the in pari delicto rule under 1411. As the Supreme Court would tell us consistently, the parties
in such a void contract should be left as they are. The Court should not aid them in any way.

What then are the exceptions? The exceptions are provided in for 1411, 1412, 1415 and 1416.
Under those circumstances a partner to such void agreement may be able to recover what he contributed.

There is a very practical article which states that in a contract which is void, a party to such
contract may recover what he contributed if he repudiated the contract before the consummation of the
contract and before damage is incurred by a third person.

As early as the case of Agnes vs. Pulistico, the Supreme Court has ruled that a partner may be able
to recover what he contributed even if the partnership is void as the object or cause is unlawful. (Note: the
ground used by the Supreme Court was unjust enrichment. This basis should no longer hold under the NCC
because of the in pari delicto rule.)

Formalities

Is an oral contract of partnership a valid and binding contract? As a rule, yes. Even if under 1772
the law provides that every contract of partnership having a capital of P3,000 or more shall be in a public
instrument and must be registered in the SEC. The basis of this conclusion are:

(1) The 2nd par. of 1772 provides that despite failure to comply with the requirements under the
preceding paragraph, this is without prejudice to the liability of the partnership or the partners
to third persons. From this article alone, it can be seen that despite non-compliance with the
form, a partnership is created.
(2) 1768 provides that the partnership has a juridical personality separate and distinct from the
individual partners even in case of non-compliance with the requirements under the 1st par. of
1772.
Atty. Uribe Lecture Notes: Partnership Page 4 of 14

So, after all, an oral contract of partnership shall be valid and binding upon the parties.

However, is there a partnership which requires a particular form for the validity of the partnership
agreement? Yes. There is only one scenario. If one of the partners promises to contribute an immovable,
there has to be an inventory of such immovable which must be signed by the contracting parties. If there is
no such inventory, 1773 is very clear, the partnership is void.

An interesting issue therefore would be the following: If there was such an agreement to
contribute an immovable and there was an inventory signed by all the partners, but the partnership
agreement itself was not put into writing, what is the status of that partnership contract?

Many authors disagree on the answer. The basis of authors in claiming that the partnership is void
is 1771. Atty. Uribe does not agree with this position. He agrees with Profs. Agbayani and Bautista in that
despite 1771, as long as there is an inventory of the immovable contributed, the agreement is valid and
binding and the juridical personality will be created. As ruled by the Supreme Court consistently, like in the
case of Hernaez vs. de los Angeles, for a contract to be void for non-compliance with the law as to form,
the law itself must provide for the nullity of the contract. It is as clear as that. Concretely, in antichresis, the
NCC states the agreement as to the principal and the interest must be in writing otherwise the antichresis is
void. In fact even in donations, you must have noticed that the donation of an immovable property must be
in a public instrument otherwise the donation is void. Form may be required only for the greater efficacy of
the contract. In partnership, the purpose of compliance with form may only be for the prevention of tax
evasion and for the protection of the public.

Juridical personality

As mentioned earlier, a partnership has a juridical personality separate and distinct from the
contracting parties. This is consistent with the entity theory or the legal person theory. (Note: the Uniform
Partnership Law of the US adheres to the aggregate theory. Thus, their partnerships have no juridical
personality.)

This has it consequences. A partnership may therefore own property. It can sue and be sued by
itself without the partners being impleaded as defendants. In fact, it may be found guilty of an act of
insolvency and thus be dissolved.

In the case of Campos Rueda vs. Pacific Commercial, the partnership filed a petition for
dissolution, but one of the creditors opposed the petition on the ground that there is no showing that the
individual partners are insolvent. The Supreme Court held that the solvency/insolvency of the individual
partners is irrelevant in the dissolution of a partnership. That partnership, having a personality which is
separate and distinct, may commit an act of insolvency regardless of the solvency or insolvency of the
individual partners. (Note: if one the partners in a general partnership is insolvent, there is already a
dissolution of the partnership by operation of law under 1830(6).)

Classification of partnership

As to the object of the partnership, if only to distinguish whether a person can enter into a
partnership, there is a need to distinguish whether the partnership is universal or particular. (Note: As
mentioned, there are persons who are prohibited from entering into a universal partnership.)

There are two kinds of universal partnership (1777):

(1) Universal partnership of present property; and

(2) Universal partnership of profits.

Under 1781, if the partners agreed to form a universal partnership but failed to state what kind it
is, it will be treated as a universal partnership of profits. Thus, it shall comprise only the result of their work
Atty. Uribe Lecture Notes: Partnership Page 5 of 14

or industry, as opposed to a universal partnership of present property where the individual partners are
deemed to have contributed all their present property. (Note: Not literally “all” because personal effects
and property exempt from execution are not included.)

Term of the partnership

If the partners failed to fix a period, does it mean that the partnership is a partnership at will and
may therefore be dissolved by one of the partners without any liability as long as he acted in good faith?
No, because the partnership may be a partnership for a particular undertaking even if there was no period
stated by the parties.

In the one case, the partnership was engaged in the bowling business. A partner dissolved the
partnership claiming that it was a partnership at will. The Supreme Court ruled that even if the partners
failed to state a period, the partnership cannot be considered as a partnership at will because there was a
stipulation in the partnership agreement that the debts of the partnership shall be paid out the profits that
will be obtained from the bowling business. Thus, the partnership cannot be dissolved before the payment
of debts. This is a partnership for a particular undertaking.

Classification of partners

According to the liability of partners

Partners are classified as:

(1) General; and

(2) Limited (1776).

This classification of partners into general or limited would be relevant only in limited
partnerships because in general partnerships all the partners are general partners.

A general partner is liable for partnership obligations up to their personal property. However, each
one of them has the right to participate in the management of the business of the partnership unless
otherwise agreed upon.

On the other hand, a limited partner, as a general rule, cannot be held liable up to his personal
property (his liability shall extend only to his capital contribution) and participate in the management of the
business of the partnership. However, as an exception, the limited partner can be held liable up to his
personal properties in the following instances:

(1) When he participates in the management of the business of the partnership;

(2) When his surname appears in the firm name, subject to further exceptions:
a. His surname is the same as that of a general partner; and
b. The surname was already in the firm name even before his entry into the partnership.
(3) When he is both a general and a limited partner in the partnership at the same time (note: As
regards the third scenario, the law provides for the consequences. The limited partner will
have all the rights and obligations of a general partner. However, he shall have a right to his
contribution as against the other partners which he would he would not have had, had he
been a limited partner. In other words, when it comes to the distribution of assets upon
dissolution, he has the priority); and
(4) When there was failure to substantially comply with the formalities required by the law for
the formation of limited partnerships (note: under the law, the agreement will be valid among
the partners, however, all of them can be treat as general partners by third persons. Thus, a
third person may hold the limited partner liable as a general partner. The only remedy such
limited partner is to seek reimbursement from the general partners.)
Atty. Uribe Lecture Notes: Partnership Page 6 of 14

As to the contribution

The partners are classified as:

(1) Capitalist; and

(2) Industrial.

Q: May an industrial partner be a general partner?

A: Yes. A general partner may either be a capitalist or an industrial partner.

Q: However, may an industrial partner be a limited partner?

A: No. A limited partner can only contribute money or property.

Q: Can a partner be both a capitalist and an industrial partner?

A: Yes, he can contribute money/property and industry.

Bar Q: A and B formed a partnership to operate a car repair shop. A contributed money while B
contributed his industry. While the car repair shop was already in operation, A, the capitalist partner,
operated a coffee shop beside the car repair shop, and B, the industrial partner, operated a car accessory
store on the other side of the repair shop. May these partners engage in those business activities?

A: As far as A is concerned, yes, because the law only prohibits him from engaging in a similar
activity. (1808) As far as B is concerned, no, because he cannot engage in any business in absence of an
express grant by the partnership for him to engage in such business. B is supposed to give all his time to the
partnership business. (1789)

Incoming partner

Q: ABC partnership is composed of partners A, B and C. Thereafter, D became a member of the

partnership. 6 months after the entry of D as a partner, a partnership obligation for P3M became due and
demandable. Can D be held liable for this obligation?

A: The obligation may have been incurred before or after the entry of D into the partnership. If it
was incurred after his admission, there is no question that if he is a general partner he can be held liable up
to his personal property. But if this obligation was incurred prior to his entry, he can be held liable only to
the extent of the partnership property which would include his capital contribution, unless there is a
stipulation to the contrary. (1826)

1792

Q: X is indebted to ABC partnership in the amount of P100,000.00. X is also a debtor of A, one of

the partners, in the amount of P50,000.00. X delivered P30,000.00 to A. Should this P30,000.00 be
distributed in proportion to the debts to A and to the partnership?

A: The answer would depend on who A is. If A is a limited partner, there will be no distribution of
the sum paid because 1792 would only apply if the partner to who payment was made is a managing
partner. A limited partner normally has no participation in the managing of the business of the partnership.

Q: Assuming that A is the managing partner, is it possible for A to retain the entire P30,000.00?

A: Yes, if his debt is already due and demandable and that of the partnership is not. 1792 would
only apply if both debts are due and demandable.
Atty. Uribe Lecture Notes: Partnership Page 7 of 14

Q: If both debts were already due and demandable, is it possible for the partnership to have the
right to the entire P30,000.00?

A: Yes, if A receipted the amount in the name of the partnership.

Q: If A receipted the P30,000.00 in his own name, may he be entitled to retain the entire sum?

A: Yes, if the debt to A is more onerous and X chose to have the payment applied to this debt.

Q: What will happen if both debts are of the same burden?

A: There will be a proportionate distribution of the payment. P20,000.00 to the partnership and
P10,000.00 to A.

Property rights

Under 1810 there are three major property rights:

(1) Rights in specific partnership property;

(2) Interest in the partnership; and
(3) Right to participate in the management.

(Note: There are other property rights which are considered minor like the right to have access to
the books of the partnership, the right to demand for a formal accounting, etc. However, a demand for a
formal accounting cannot be done at any time. There are specific conditions under 1809. The reason for
this is a partner has access to the books.)

Right in specific partnership property

Under 1811, a partner is a co-owner with his partners, not with the partnership, of specific
partnership property. But how can the partners be co-owners of property which they do not own since it is
the partnership which owns the property? Some authors would say that the problem with this article is that
is was copied from the Uniform Partnership Act of the US under which a partnership has no juridical
personality. They are right in that respect. However, the 2nd sentence of 1811 provides that this co-
ownership has its own incidents. In other words, this is not the ordinary co-ownership under Property law.
That is why other authors refer to it as “co-ownership sui generis.”

In property law, if two persons are co-owners of a parcel of land, can a co-owner dispose of his
interest without the knowledge or consent of the other co-owner? Yes. However, under the law on
partnerships, with regard to specific partnership property, there can be no valid assignment of rights to
specific partnership property by only one partner. In order to be valid, all of the partners must assign their
interest (1811 (2)).

Q: May a creditor of a co-owner of a parcel of land levy upon the interest of such co-owner?

A: Yes.

Q: However, in partnership, can a creditor of a partner levy upon a partner’s right in specific
partnership property?

A: No (1811 (3)). Only partnership creditors can levy upon partnership assets.

Interest in the partnership

Atty. Uribe Lecture Notes: Partnership Page 8 of 14

What is this interest? Simply put, it is the partner’s share in the profits and surplus ( 1812). (Note:
As opposed to rights in specific partnership property, interest in the partnership can be validly assigned by
a partner without the knowledge or consent of the other partners)

How do you determine a partner’s the share in the partnership:

(1) According to stipulation. The partners are free to agree on any proportion in the sharing.
However, if one of the partners was excluded in the sharing of the profits, the partnership
remains valid but the stipulation regarding the sharing is void.
(2) According to capital contribution. If one of the partners is an industrial partner, his share shall
be determine according to the value of the service he rendered. After the industrial partner
receives his share, the balance is distributed among the other partners in accordance to their
capital contribution.

Bar Q: A, B and C formed a partnership and agreed on an equal share in the profits. Later on, C
assigned his whole interest to X. Profits were then declared in the amount of P360,000.00. X demanded his
right to participate in the management of the partnership and his share in profits of the partnership. Are his
claims valid?

A: As to his claim to participate in the business, he has no such right as an assignee. Under 1813,
the assignee, unless otherwise agreed upon by the other partners, would have no right to participate in the
management of the business. He will not even have access to the books of the partnership. His only rights
would be to receive whatever the assigning partner would have received in the distribution of profits and
surplus. Thus, X is entitled to P120,000.00.

Right to participate in the management

Bar Q: W, X, Y and Z formed a partnership. W and X contributed industry. Y contributed

P50,000.00. Z contributed P20,000.00. In a meeting, the partners unanimously agreed to designate W and
X as managing partners. There was no statement as to their respective duties. Neither was there a statement
that one shall not act without the consent of the other. Thereafter, two persons applied for two positions,
secretary and accountant. W and X appointed the secretary over the opposition of Y and Z. The accountant
was appointed by W concurred by Z and opposed by X and Y. Would the appointments bind the
partnership?

A: As regards the secretary, his appointment is merely an act of administration. Since it was made
by both of the managing partners, the appointment binds the partnership. However, as far as the accountant
is concerned, note that the appointment made by W, a managing partner, was opposed by X, another
managing partner. So there is a tie which will be resolved by the partners with the controlling interest.
Since the controlling interest is determined by the capital contribution of the partners, Y has the controlling
interest. Since Y opposed the appointment, this appointment will not bind the partnership.

Management arrangements

The management arrangements are provided in 1800, 1801, 1802 and 1803.

(1) Only one managing partner. He can execute any act of administration even over the
opposition of the other partners. (1800)
(2) Two or more managing partners:
a. Solidary – without specification of their respective duties or without stipulation that
one shall not act without the consent of all. (1801)
b. Joint – it is stipulated that none of the managing partners shall act without the
consent of all others. Thus, every decision must be unanimous. The absence or
disability of one of the managing partners is not a valid reason for not obtaining his
consent unless there is imminent danger of grave or irreparable damage. It is also
known as “management by consensus.” (1802)
Atty. Uribe Lecture Notes: Partnership Page 9 of 14

(3) No management agreement. Each partner is considered as an agent of the partnership. (1803)

A managing partner may be removed but the manner of his removal would depend on whether he
was constituted as such in the articles of partnership or he was merely appointed after the constitution of
the partnership. If he was constituted as a managing partner in the articles of partnership, he can only be
validly removed under two conditions:

(1) There has to be just cause; and

(2) He must be removed by the partners with the controlling interest.

If he was merely appointed after the constitution of the partnership, he can be validly removed even
without just cause provided it was made by those partners having controlling interest.

Rights and obligations of partners among themselves

Basically a partner has three obligations:

(1) To make good his promised contribution;

(2) His fiduciary duties; and
(3) To participate in the losses.

To make good his promised contribution

In order to know the remedies that may be availed of by the other non-defaulting partners and the
partnership you have to know first what was promised by such defaulting partner, whether money, property
or industry.

If the partners promised to contribute money without specifying their respective shares, the law
provides that they shall contribute equally. So if there are 4 partners who will contribute a total of P1M,
they will have to contribute P250,000.00 each.

If a partner failed to make good his promised contribution of a sum of money, then he can be held
liable by the non-defaulting partners as to the amount promised plus interest and damages. If no rate was
stipulated by the parties, it will be the legal rate which is 12% (this is a forebearance in money). Normally
in obligations involving a sum of money, with regard to damages incurred by the other party, the liability
will only be payment of interest. But in partnership, the defaulting partner is also liable to pay damages.
Thus the non-defaulting partners may file an action for specific performance.

However, may the non-defaulting partners opt to rescind the partnership agreement? In the case of
Sancho vs. Lizaraga, the Supreme Court ruled that rescission is not a remedy of the non-defaulting
partners. Under the law on partnership, the defaulting partner is considered a debtor of the partnership.
Therefore, that provision prevails over the general rule in obligations and contracts under 1191 wherein
rescission would be a remedy in case of serious breach.

On the other hand, if a partner promised to contribute money, you have to consider what was
really contributed. Was it the property itself or mere its use. It would matter because if ownership was to be
contributed, the partner has the obligation to deliver and transfer ownership and to warrant the thing. Thus,
before delivery, the partner bears the loss of the thing. On the other hand, if what was contributed was only
the use and enjoyment of the property, like the use of a building, the risk of loss will be with the
contributing partner. This is because delivery was not meant to transfer ownership. Res perit domino. But
this is just the rule. There are exceptions:

(1) When the thing contributed is fungible;

(2) When the thing cannot be kept without deteriorating;
(3) It was contributed by a partner to be sold; or
(4) When there is an appraised value of the property.
Atty. Uribe Lecture Notes: Partnership Page 10 of 14

In these cases, it will be the partnership which will bear the loss of the property in its possession. Again,
specific performance is a remedy in this instance.

If a partner who promised to contribute industry, failed in his obligation, would specific
performance be a remedy? No. The remedy of the non-defaulting partners is to demand the value of the
service plus damages.

Fiduciary duty

The fiduciary duty refers to the duty to observe utmost honesty, good faith, fairness and integrity
in dealing with each other. Take note that this obligations starts as early as the negotiation stage.

The test in determining whether there was a violation of this duty is to determined whether a
partner has advantaged himself at the partnerships expense. Proof of evil motive is not required.

Until when does this duty last? Normally, this duty last until the termination of the partnership.
However, a partner may be liable for breach of the fiduciary duty even after termination. In the case of
Pang Lim vs. Lo Seng, the Supreme Court held that even if the breach was made after the termination of
the partnership, if the foundation of the breach was laid during the existence of the partnership, that can still
be considered a breach of fiduciary duty.

To participate in the losses

What will be the share of the partner in the losses of the partnership? You first have to consider
whether or not there was a stipulation as to losses.

Q: Partners A, B and C agreed upon a sharing in the losses in the proportion of 5:3:2 respectively.
Is this a valid stipulation?

A: Yes.

Q: Would your answer change if C were an industrial partner?

A: Yes. (Some authors disagree but Atty. Uribe says ‘yes.’ Who are we to deny the industrial
partner a share in the losses?)

Q: If one of the partners was excluded in the sharing of the losses, what would be the status of this
stipulation?

A: It depends on who was excluded. If the partner excluded is a capitalist partner, that stipulation
is void. But if the partner excluded is an industrial partner, it depends again. As among the partners, this
stipulation is valid among them. On the other hand, as to third persons, this stipulation is void.

What if there was no stipulation as to the sharing in the losses or such stipulation was void? The
first scenario is that there is an agreement as to profits. If there is such an agreement, the sharing in the
profits will be the same basis for the sharing in the losses. If A is entitled to 90% of the profits of the
partnership while B and C are entitled to 5% each, then the losses will also be distributed in the same
proportion.

The next scenario is that there is no stipulation both as to losses and profits. In this case, their
sharing in the losses will depend on their capital contribution. Thus, under this scenario, the industrial
partner will not share in the losses. But take note that under 1816, even if he is excluded from sharing in the
losses, it does not apply to third persons. Third persons can still hold industrial partners liable for
contractual obligations of the partnership.
Atty. Uribe Lecture Notes: Partnership Page 11 of 14

Q: Assuming that the assets of the partnership are not sufficient to cover its liabilities, what will
be the nature of the liability of the partners, solidary or joint?

A: The answer depends on the nature of their liability. For contractual obligations, as a rule, the
partners will only be jointly liable. However, under 1824, if the obligation arose from a tortuous or
wrongful act under 1822 and 1823, all the partners shall be solidarily liable with the partnership. Refer to
the case of Island Sales, Inc. vs. United Pioneers.

Obligation of partners with regard to third persons

Basically the question here is, when would a contract entered into by a partner bind the
partnership? For example: A partner went to a furniture shop and bought a set of furniture for P150,000.00.
If the price remains unpaid, can the seller demand payment from the partnership?

The answer depends on whether the contract was entered into in the name and for the account of
the partnership, under its signature, by a partner who is authorized to enter in such contract. If the contract
was in the name of the partner, he alone should be liable for the purchase price. The real problem lies in
determining whether the partner had the authority to bind the partnership when the contract was entered
into in the name and for the account of the partnership. Normally, when a partner enters in a contract, there
is no partnership resolution. Thus, whether or not a contract would bind the partnership depends on the
nature of the act of such partner and the nature of the business of the partnership.

Concretely, if a partner bought a set of SCRA in the name of the partnership, would that contract
bind the partnership? Again, it depends not only on the act of the partner but also on the business of the
partnership. What if the business of the partnership is a restaurant. It appears that the contract would not
bind the partnership. However, the seller may raise the defense that he had no knowledge of the nature of
the business of the partnership. Is that a valid defense? No. The Supreme Court would tell us that third
parties contracting with a partnership has the obligation to know at least the nature of the business of the
partnership. He can even demand for the presentation of the articles of partnership.

However, if it was a law firm which bought the SCRA, that act of buying a set of SCRA would be
considered as an act for apparently carrying on in the usual way the business of the partnership. Therefore,
that contract would bind the partnership. But would this hold true even if the partner who bought the SCRA
was not authorized by the partners? Yes. What if another partner was designated to make the purchase? The
contract still binds the partnership so long as the third person was not aware of such agreement of the
partnership. Again, that act is an act apparently for carrying on the business of the partnership in the usual
way. So if what a partner in a law firm bought was a set of heavy burners for a restaurant, that definite is
not an act for carrying on the business of the partnership. Therefore that act requires the consent of the
partners in order to bind the partnership.

Therefore there are acts which are for carrying on the usual business of the partnership but the are
also acts which are not within the apparent authority of a partner. For example: Would buying shares of
stock for partnership engaged in the business of a restaurant by within the apparent authority of a partner?
Of course not. Therefore, without the consent of the partners, that act would not bind the partnership. Also,
a contract wherein a partner binds the partnership as a guarantor when the business of the partnership is not
suretyship, would not be a valid and binding contract.

Finally, under 1818, there are certain acts in where the law requires the unanimous consent of all
the partners for a contract to bind the partnership like disposing the good will of the partnership; contesting
a judgment; renouncing a claim of the partnership; etc.

Dissolution, winding-up and termination of the partnership

These three concepts are separate from each other. Upon dissolution, the partnership is not
deemed terminated. It will still have to go through the process of winding-up the affairs of the business of
the partnership before the partnership is terminated.
Atty. Uribe Lecture Notes: Partnership Page 12 of 14

So when would there be a dissolution of the partnership? For example: two partners married each
other, would that result in the dissolution of the partnership? No.

Under the law there will be a dissolution when there is a change in the relation of the partners
caused by any of the partners ceasing to be associated with the carrying on of the business of the
partnership. That will result in the dissolution of the partnership. But may there be a dissolution
notwithstanding the fact that no partner ceased to be so associated? Despite the definition of dissolution
under 1828, the answer is yes. There is one scenario, the admission of a new partner. With the admission of
a new partner, under 1840, the partnership is dissolved.

So what is the effect of the dissolution of the partnership? Again, it does not result in the
termination of the partnership. It shall only start the winding-up process. Effectively, this will terminate the
authority of all partners to bind the partnership except if that act is necessary for the winding-up of the
business of the partnership or the act is necessary to complete a business which was then begun but was not
finished. If the partnership was to construct a road or even just a bridge, it would not be right for the
partnership to cease purchasing materials. They still have to buy materials, hire laborers, etc. So, those acts,
even if done after the dissolution, would still bind the partnership.

The next question would be what are the causes of the dissolution of a partnership?

The law itself would classify the causes of dissolution into the following:

(1) Extra-judicial:
a. Voluntary.
i. With violation of the partnership agreement.
ii. Without violation of the partnership agreement.
b. Involuntary.
(2) Judicial (necessarily it is voluntary).

Concretely, expiration of the period or termination of a particular undertaking agreed upon would
be an extra-judicial, voluntary, and without violation of the agreement. (Note: One author would claim that
this should fall under involuntary but all others would not agree with him because the fixing of the term is
by agreement of the parties therefore it is voluntary.) The other one is by the will of one of the partners.
The partnership may be dissolved without liability on the part of the partner if:

(1) The partnership is a partnership at will; and

(2) He dissolved the partnership in good faith.

Those are the two requirements in order for a partner to be able to dissolve the partnership without liability.

Bar Q: A, B and C agreed to form a partnership for a period of 5 years. After two years, C
assigned his own interest to Philip. The two remaining partners realizing that they would not be able to deal
with Philip, decided to dissolve the partnership. On the other hand, Philip, not knowing of the dissolution of
the partnership, filed a petition for the dissolution of the partnership with the court. Was the partnership
dissolved by the act of the two partners? Assuming that the partnership was not dissolved by the act of the
two partners, may the action filed by Philip prosper?

A: The express will to dissolve made by of all the partners who have not assigned their interest or
suffered them to be charged for their separate debts, is a cause for the dissolution of the partnership.
Therefore the two remaining partners validly dissolved the partnership. On the other hand, as far as Philip
is concerned, his action will not prosper. With the assignment of the interest of a partner to another person,
that does not make the assignee a partner in the partnership without the consent of the other partners. Thus,
Philip has no personality to file an action for the dissolution of the partnership.
Atty. Uribe Lecture Notes: Partnership Page 13 of 14

In involuntary, extra-judicial dissolution, one of the cause is supervening illegality. For example:
If one of the partners in the partnership was elected as senator, would that dissolve the partnership by
operation of law? No. Even if it is a partnership of lawyers? Still no. Because under the Constitution,
members of Congress are only prohibited from personally appearing before tribunals. They are not
prohibited from the private practice of profession. Thus, in the letterhead of the law firms of these members
of Congress, you would merely see a notation that they are on-leave.

But if a partner in a law office was appointed as a cabinet secretary, would that result in the
dissolution of the partnership by operation of law? Yes. Under the Constitution, members of the cabinet are
prohibited from the private practice of their profession. A classic example would the firm of Carpio,
Villaraza and Cruz. Appointment to the judiciary of a partner in a law firm would also dissolve the
partnership.

What is a partner to a law office was elected as Governor. Would that dissolve the partnership?
Yes. Under the LGC, local chief executives are prohibited from the private practice of profession. But the
Vice-Governor is not prohibited.

With regard to loss of the specific thing before delivery, if it what was supposed to be contributed
was a building but before delivery it was burned, then there would be an involuntary dissolution of the
partnership.

With regard to death of any partner, the premise of the discussion is that the partnership is a
general partnership. However, what if the partner who died was a partner in a limited partnership, would
that dissolve automatically the partnership? It depends on who this partner was, whether he was a general
or a limited partner. If he was a general partner, as a rule, the partnership is dissolved. By way of exception,
they may agree in the articles of partnership that they may continue the business of the partnership even
after the death of any general partner; or even without such agreement, all the surviving partners agreed to
continue with the business of the partnership. On the other hand, if the partner who died was a limited
partner, that does not result in the dissolution of the partnership. In fact, the executor or administrator of the
estate of the decedent limited partner would have the right to appoint a substitute limited partner. Anyway,
he doesn’t have any participation in the management of the business of the partnership.

In judicial causes, with regard to insanity or incapacity, it should be permanent in character and
such must affect the performance of the obligation of such partner with respect to the partnership business.

With regard to gross misconduct, under the law not every kind of misconduct could be the basis of
a petition for dissolution. Mere want of courtesy will not affect the business of the partnership adversely.
Also, a limited partner becomes a limited partner in another partnership, was not considered as a valid
ground for dissolution. A limited partner has not participation in the management of the business, thus there
is no conflict of interest. So what may be considered as gross misconduct? The following are included:

(1) Wrongful expulsion.

(2) Refusal to allow a partner to participate in the management of the business of the partnership
notwithstanding such partner’s authority to participate.
(3) Refusal of the managing partner to distribute profits when there is such obligation.
(4) Misappropriation of the assets of the partnership.

With regard to the business of the partnership can only be carried on at a loss, just because the
partnership has incurred losses for the past three years does not necessarily mean that it can be the basis of
the dissolution of the partnership. For example, the other partners may prove that in this particular year
there is a good possibility that the business of the partnership will now be able to recover. However, even if
losses were incurred for only one year and one of the partners can prove that there is really no hope for the
business of the partnership, that can be a valid ground.
Atty. Uribe Lecture Notes: Partnership Page 14 of 14

Other circumstances include grave quarrels among the partners. Mere petty quarrels are not
included. However, if because of those petty quarrels, dissention starts to arise among the partners,
affecting the conduct of the business of the partnership, that can be a valid basis for dissolution.

Upon the dissolution of the partnership, and there were assets left, the next question is how and to
whom may these assets be distributed?

The law provides the order of preference among certain groups of people:

(1) Partnership creditors who are not partners.

(2) Partnership creditors who are partners.
(3) Capitalist partners with respect to their contribution.
(4) Partners with respect to the profits.

Q: A contributed P100,000.00, B contributed P50,000.00, C constituted his industry. At the time

of dissolution, the total assets of the partnership was P1M and the total liabilities was P900,000.00. Would
the industrial partner have a share after payment of partnership liabilities?

A: No. The remaining P100,000.00 will be divided among the capitalist partners to cover their
capital contribution. Since, there is no surplus profits, C will not get a share.

If the assets of the partnership are not sufficient to cover its liabilities, as general partners they can
be held liable up to their personal property. But take note that they will be liable jointly.

Q: A, B and C contributed P100,000.00, P50,000.00 and P50,000.00 respectively. P1M

partnership assets and P1.9M partnership liabilities. Assuming there was not agreement with regard to their
share in the losses and profits of the partnership, how will the partners share the losses?

A: The losses will be based on their capital contribution. A-50%, B-25% and C-25%.

Q: What if A was insolvent, would B and C be liable for A’s share?

A: No, because their liability is joint.

In case an insolvent partner has both partnership creditors and separate creditors, the law provides
that the separate creditors shall be given preference. The residue, if any, shall be given to the partnership
creditors.

Limited partnership

Just a few points in limited partnership.

For a limited partnership to be established there has to be at least one limited partner and at least
one general partner.

As mentioned a while ago, the law required certain formalities. There are statutory requirements
for the establishment of a limited partnership. Concretely, under 1844 there has to be a certificate signed
and sworn to by the contracting parties. And this certificate must be filed for record with the SEC. This
certificate requires a lot but substantial compliance is sufficient.

The problem is the lack of substantial compliance with the formalities prescribed by law. Even if
there was no substantial compliance, the agreement of the partners to form a limited partnership is a valid
and binding agreement among themselves, however as to third persons, all of them may be held liable as if
all of them were general partners. Thus a limited partner may be held liable up to his personal property. His
remedy would be to seek reimbursement from the general partners.