CHAPTER 2 – OBLIGATIONS OF THE
Prohibition to engage in business for
PARTNERS
OBLIGATIONS OF PARTNERS AMONG
THEMSELVES
1. Contribution of Property (Art. 1786)
Properties contributed become part of the
partnership and cannot be withdrawn
without the consent of the other partners.
2. Contribution of money and money
converted to personal use (Art. 1788)
Every partner must:
a. Contribute money, property, and
industry on the due date;
b. Answer for eviction in case the
partnership is deprived of the
determinate property distributed;
c. Answer for the fruits of the property the
contribution of which he delayed;
d. Preserve the said property with the
diligence of a good father of a family
(Art. 11630); and
e. Indemnify the partnership for any
damage caused to it by the retention of
the same or by delay in its contribution.
(Note that on Atty. Licay’s lecture what is
included here is letter (a), reimburse
amount taken, and pay agreed or legal
interest.)
Rules in the distribution of Profit and
losses:
 According to their agreement
 In the absence of such agreement:
a. Capitalist partner – in proportion of
his contribution
b. Industrial partner – what is just and
equitable under the circumstances
QUESTION: Can partners appoint third
persons to designate the division of
their profits or losses?
Answer: Yes, and they cannot question it
unless the designation is manifestly
inequitable. (Art. 1798)
TN: A partner cannot be appointed.
3.
himself (Art. 1789)
 Industrial – absolute prohibition; any
kind of business is prohibited*
 Capitalist – only the same kind of
business is prohibited
*If an industrial partner violates this, he may be
excluded by the capitalist partners from the firm with
rights to damages.
**An industrial partner may engage in business with
the express permission given by the capitalist
partners. Mere tolerance does not excuse him from
liability.
4. Contribute Additional Capital (Art. 1791)
Requisites for the application of the rule:
a. Imminent loss
b. Majority opinion of the capitalist
partners
c. Capitalist partner refuses to deliberately
contribute (not due to financial inability)
d. There is no agreement to the contrary
5. Managing Partner who collects debts
Modes of Appointment:
a. Through the Articles of Incorporation
b. After the constitution of the Articles of
Incorporation
Two conditions should be both present in order
for the Article to apply:
First, two (2) debts and both are due and
demandable; and
Second, the one collecting should be the
managing partner
ILLUSTRATIVE 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 P1,500.00 from C.
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.
What is the rule where there are two or
more managers?
 GR: Each may separately execute all acts of
administration (unlimited power to
administer)
 XPN: If any of the managers opposes,
decision of the majority prevails
Note: In case of tie - Decision of the controlling interest
(who are also managers) shall prevail.
What is the rule when the manner of
management has not been agreed upon?
a. All partners shall be considered
managers and agents.
b. Unanimous consent is required for
alteration of immovable property.
Kinds of Managing Partners (Art. 1800)
a. Appointed DURING the Constitution
of the Partnership
- May execute all administrative acts
unless he acted in bad faith. His power
may not be revoked unless there is a
JUST and LAWFUL cause and the vote
of the partners with controlling interest.
- Even if there are objections as to his
decisions coming from the partners, his
authority will prevail UNLESS he has
acted in bad faith.
- Acts of administration: ordinary business
and administrative transactions.
b. Appointed AFTER the Constitution
of the Partnership
- May have his power revoked with or
without cause.
- Decided upon by those partners who own
controlling interest in the partnership.
Question: Why is the power of a
managing partner appointed DURING
the constitution of the partnership not
revocable?
6. Partner who receives share of
partnership credit (Art. 1793)
Problem No. 7
A and B are partners and C owes the
partnership a sum of P10,000.00. B is the
managing partner, but A collects his share in
the P10,000.00 and C pays A P5,000.00 to
which A issues a receipt in his name. When
B's turn to collect comes, C is already
insolvent. What should A do?
 A shall return his P5,000.00 to the
partnership and split it with B because C
has already become insolvent.
7. Damages to partnership (Art. 1794)
General Rule: Damages NOT subject to set-
off or compensation
Exception: Unusual profits realized through
the extraordinary efforts of the partner at fault.
8. Render Information (Art. 1806)
9. Accountable as fiduciary (Art. 1807)
OBLIGATIONS OF THE PARTNERSHIP TO
THE PARTNERS (Art. 1796)
a. To reimburse any amount disbursed by the
partners in behalf of the partnership
b. To answer for any obligation contracted in
good faith.
c. To answer for risks in management.
Subpartnership (Art.1804)
Every partner may associate another person with
him in his share, but the associate shall not be
admitted into the partnership without the consent
of all the other partners, even if the partner having
an associate should be a manager.
Illustrative Example:
A, B and C are in a partnership wherein A is
the managing partner. A enters into a contract
with D that states D will receive 50% of A’s
share in partnership profits. Can A do this
even without the consent of the other partners?
 Yes, because a sub-partnership will not
affect the composition of the partnership
and D will not be able to interfere with the
partnership’s management anyway.

PROPERTY RIGHTS OF PARTNERS

What are the Property rights of a partner?
(Art. 1810)
1. His rights in specific partnership
property
2. His interest in the partnership
3. His right to participate in the
management.
What is the nature of a partner's right in
specific partnership property?
 The partners are considered co-owners of
specific partnership property. (Art. 1811)

If A, B and C are partners who own specific

property under the partnership’s name, what are
their rights?
(1) They can use it for partnership business
purposes
(2) They cannot use it for personal purposes
WITHOUT the consent of others.

Question: Can A assign his right with

respect to the specific partnership
property?
 NO, because the property belongs to the
partnership, not to him. What he could
assign is his interest over the said property
but not the property itself.

What is the partner's interest in the

partnership?
 DURING operations, the partner's interest is
his share in profits and losses AFTER
Problem No. 8
 operations/LIQUIDATION/
DISSOLUTION, his interest is in the surplus
A, B, and C are partners. D offers to buy A’s
of partnership assets after all debts have
interest of P50,000.00 for P1,000,000.00 and
been cleared.
A agrees to sell his interest. What happens
Take note: Interest can be subject to attachment now?
or execution because it belongs to the partner,
not the partnership.

 D becomes the assignee and A
becomes the assignor but the
partnership will not be dissolved
because his interest in profits and surplus is
the one being sold. A will also continue to
be the partner but D will be the one to
receive his profits.
How can a partner convey his interest in
the partnership without getting the
partnership dissolved?
 By selling it to a 3rd person
 By donating it to a 3rd person
 By using it as security on a loan from a 3rd
perso
Rights of the Assignee:
 He shall get the assignor's share in
profits/surplus.
 He may avail of legal remedies of the
partners in cases of fraud by the assignor.
 He shall receive the assignor's interest in
case of dissolution.
 He can demand for an accounting upon
dissolution but only starting from the date of
the last accounting undertaken by the
partnership.
Preferential rights of partnership creditors
(Art. 1814, 1827)
1. Private creditors of each partner may ask
the attachment and public sale of the
latter's share in the partnership assets.
OBLIGATIONS OF THE PARTNERS WITH
REGARD TO 3RD PERSONS
1. Every partnership shall operate under a firm
name. Persons who include their names in the
partnership name even if they are not
members shall be liable as a partner. (Art.
1815)
What is prohibited?
a. Use of misleading names
b. Use of names of deceased partners,
XPN: When the firm indicates in all
its communication that the said
partner is deceased.
NB: Persons who, not being members, include
their names in the firm, do not acquire the
rights of a partner (Art. 1767) but under Art.
1815, they shall be subject to the liability of a
partner. (Art 1816)
2. All partners shall be liable for contractual
obligations of the partnership with their
property, after all partnership assets have been
exhausted: (Art. 1816)
a. Pro rata
b. Subsidiary
Art. 1817. Any stipulation against the liability laid
down in the preceding article shall be void, expect
as among the partners.
*As to 3rd persons, ALL partners are liable pro-rata and
subsidiary, but as to each other, they are liable in
proportion to their capital contribution.
Illustrative Examples:
1. A, B and C are in a partnership where C is
the industrial partner and a sum of
P26,000.00 is owed to D. A and B
contributed P15,000.00 and P5,000.00
respectively. How shall the debt be
shared?
 As to D, the partners will share equally
in the debt left after exhausting all assets
(P6,000.00) so they will each have to
pay P2,000.00 regardless of C being an
industrial partner. If C is insolvent, or if
B died, or if A has left the country, the
liability of the partners cannot be
increased.
As to each other, they are liable in
proportion to their capital contribution,
so B and C will be reimbursed by A.
2. A, B, C, D and E are sued in court but E
is later cleared of his charges. The court
orders A, B, C and D to pay their creditor,
but C moves to reconsider that all should
be charged, but this move was denied.
Can A, B, C and D alone be liable for the
debt?
  According to the Supreme Court, the 4
partners cannot alone be liable for the
debt because in excluding E, they have
increased the other partners’ liability and
this is prohibited by the law. The law
states that the liability of the partners
cannot be increased such that they
shoulder the liability of another partner.
3. What if there was an agreement that stated
B is only liable up to P5,000.00? How will
A, B and C share in their liability?
 The stipulation shall be void as to 3 rd
persons, so they will still share pro-
rata. Anyway, B and C will be
reimbursed by A, because as among
themselves, the stipulation is valid
and C is an industrial partner.
3. Admission or representation made by any
partner concerning partnership affairs within
the scope of his authority is evidence against
the partnership. (Art. 1820)
* Anything a partner says or admits, as long
as it is concerning the partnership affairs and
it is within the scope of his authority, is
sufficient evidence against the partnership.
4. Notice to partner of any matter relating to
partnership affairs operates as notice to
partnership except in case of fraud. (Art.
1821)
 Notice to any partner is notice to the
partnership despite such partner’s failure
to notify the other partners.
5. Partners and the partnership are solidarily
liable to 3rd persons for the partner's tort or
breach of trust. (Art. 1824)
Example:
A, B, and C are partners. A made an act of
omission with D as the victim. He caused
P50,000 worth of injury to D. What can D do?
 D can go to A for the full amount of P50,000
OR FROM B OR C.
6. Liability of incoming partner is limited to:
a. His share in the partnership property for
existing obligations; and
b. His separate property for subsequent
obligations (Art. 1826)
Meaning: A new partner admitted to an existing
partnership is also liable to the obligations
existing before he was admitted, but his liability
only extends to his contribution to the partnership
UNLESS stipulated.
Example:
A, B, and C are the original partners of the
partnership X with contributions of
P10,000.00 each. X partnership owes D
P40,000.00. Later on, E entered the
partnership and contributed P4,000.00. How
shall the debt be paid?
 P34,000.00 will be paid to D out of the
partnership assets, and the P6,000 will be
paid through A, B, and C’s personal
assets. The P6,000.00 will be divided
among the 3 original partners pro rata.
7. Creditors of partnership are preferred in
partnership property and may attach partner’s
share in partnership assets. (Art. 1827)
Meaning: Partnership creditors have BETTER
RIGHTS to partner obligation WITH REGARD TO
PARTNERSHIP PROPERTY.
Example:
A, B, and C are partners. A OWES E
P6,000.00. The PARTNERSHIP OWES D
P28,000.00. The total partnership assets
amount to P40,000.00. Who has better right to
the partnership property?
 In this case, D, the partnership creditor,
has a better right to the partnership
property. When obligation to D is paid,
what will be left for the partners to share
is P4,000.00. If E, the personal creditor of
A, demands to be paid out of partnership
property, he will only get P4,000.00 from
it since the priority is the partnership
creditor. The P2,000.00 will be paid out
from A’s personal property.
Effects of the Acts of Partners Acting as 6. Submitting
an Agent of the Partnership partnership claim
or liability to
Acts of a partner Effect arbitration; and
With binding effect Renouncing claim
except: of partnership.

1. When the partner so

acting has in fact no
authority to act for Acts in Partnership is not liable
the partnership in contravention of a to third persons having
Acts for apparently restriction or actual or presumptive
the particular matter,
carrying on in the authority. knowledge of the
and
unusual way the restriction. (Art.
2. The person with
business of the 1818(4), NCC)
whom he is dealing
partnership.
has knowledge of
the fact that he has
no such authority.
(Art. 1818(1),
NCC) Effect of Conveyance of Real Property
Title of Effect
Conveyance
Conveyance passes title, but
partnership can recover
Acts not in the Do not bind partnership unless:
ordinary course of unless authorized by 1.
business other partners. (Art. a. Conveyance was done
1818, NCC)
in the usual way of
business; and
b. The partner so acting
Acts of strict Title in the has the authority to act
dominion or partnership’s for the partnership; or
ownership: name;
Conveyance in 2. The property which has
1. Assigning partnership name been conveyed by the
partnership GR: One or more, but grantee or a person
property in trust less than all the partners claiming through such
for creditors; have no authority. grantee to a holder for
2. Disposing of value without knowledge
goodwill of XPNs: that the partner, in making
the conveyance, has
business;
exceeded his authority.
3. Doing an act which 1. Authorized
would make it by the other
impossible to carry Conveyance does not pass
partners; or
on the ordinary title but only equitable
2. Partners have
business of Title in the interest,
abandoned the
partnership; partnership’s provided:
business. (Art.
4. Confessing a 1818 (3), name;
judgment; NCC) Conveyance in a. Conveyance was done in
5. Entering a partner’s name the usual way of business;
compromise or
concerning a
partnership claim b. The partner so acting has
or liability; the authority to act for
 the partnership. (De Leon,
1.
2014)

Title in the name

of 1 or more or
all partners or
3rd person in
trust for
Conveyance will pass all the
partnership;
rights in such property. (De
Conveyance
Leon, 2014)
executed in
partnership
name or in the
name of the
partners
a.

b.