BUSINESS LAWS AND REGULATIONS

PARTNERSHIP
CHAPTER 2
OBLIGATIONS OF THE PARTNERS

KINDS OF PARTNERS
1.As to Contribution
a. Capitalist Partners
- contribute money/property or both

b. Industrial
- only industry/labor

c. Capitalist-Industrial Partners
- money/property and industry

2.As to Liability
a. General
- liable to third persons even to the extent of separate property
b. Limited
- not liable to third persons for partnership obligation

3.As to Management
a. Liquidating
- take charge of the winding up/liquidation
b. Silent
- not active but known/share in the P/L (- +)

c. Managing
- actively manage the business

4.As to Third Persons

a. Dormant
- do not take active part, not known (- -)

b. Ostensible
- active and known (+ +)

c. Secret
- active but not known (+ -)

5.As to Membership
a. Real
- partners in an existing legal partnership
 b. Partners by Estoppel
- not really partners but represent themselves as one

6.As to Continuation of the Business Affairs after dissolution

a. Continuing
- continues the business after dissolution

b. Discontinuing
- do not continue

7.As to Nature of Membership

a. Retiring
- withdraws from the partnership

b. Incoming
- became a member AFTER establishment

c. Original
- member from the time of its constitution

8.As to State of Survivorship

a. Surviving
- continues the partnership after its dissolution by reason of death of a partner

b. Deceased
- one who DIED while being a member

9.As to the Effect of Expulsion

a. Expelled
- who are EXPELLED

b. Expelling
- who CAUSED the expulsion

10.As to Value of the Contribution

a. Majority
- contribution represents the majority or CONTROLLING INTEREST

b. Nominal
- contribution represents the minority interest
Section 1
Obligations of the Partners Among Themselves

Legal Relations Created by a Contract of Partnership

Relations between:
1. Partners
2. Partners on one hand & Partnership on the other hand
3. Partners on one hand & Third persons on the other hand
4. Partnership & Third persons

Examples of Obligations and Rights of a Partners

Obligations:
1. Give their promised contribution.
2. Not to convert partnership money to their own use
3. To account and hold as trustee w/o consent of other partners
4. Not to engage in business (the same as the partnership is engaged)
5. Managing partners are to credit to the partnership the payment made by the debtor.
6. Share w/ other partners the share of partnership credit w/c they received from
INSOLVENT DEBTOR.
7. Pay for damages suffered by the partnership through their FAULT.

Rights:
1. Associate w/ other person in their share.
2. Have the access and inspect copy of partnership books.
3. Demand a formal account.
4. Ask for the dissolution of the partnership at reasonable hours.
5. Property rights:
a. Specific partnership property
b. Interest in the partnership
c. Participate in the management

Art. 1784

When partnership begins?

● From the moment of the execution of the contract.

Exception:
● Partners agreed on some other time.
Art. 1785

When partnership for a fixed term/particular undertaking continues after termination

● Rights and duties of the partners remain the same

Art. 1786

Obligations of Every Partner

1. Contribute what had been promised
- Failure to contribute is to make the partner a DEBTOR of the partnership
- Failure to deliver the promised contribution: remedy is specific performance w/
interest and damages.

2. Deliver the fruits

- Those arising from the time they should have been delivered, w/o the need of
any demand.

3. To warrant
- Warranty in case of eviction refers only to SPECIFIC or DETERMINATE
THINGS.

Art. 1787

When capital/part contributed by a partner consists of goods, MANNER OF APPRAISAL

must be through:
1. Contract of partnership/Stipulation
2. Experts chosen by the partners according to current prices.

Art. 1788

When partner becomes a DEBTOR for the interest and damages:

1. Money promised to be contributed not given on time.
2. Partnership’s money converted to partner’s own use.
*Applies from the time he should have complied w/ his obligations.

Essence of the Partnership

● Each partner must share in the P/L of the venture.
Exception to the general principle (NO DEFAULT, NO DEMAND). In other words, WHEN
DEMAND IS NOT NECESSARY:
1. In case of contribution: because time is of the essence.
2. In case of conversion

Art. 1789

General Rule
● Industrial Partner cannot engage in business for himself.

Exception
● Partnership permits

Remedies of Capitalist partners against an Industrial partner who engaged in business

for himself
1. Exclude the industrial partner from the partnership plus damages.
2. Capitalist partners may avail the benefits w/c the industrial partners obtained plus
damages.

Art. 1790

General Rule
● Partners shall contribute EQUAL shares to the capital of the partnership.

Exception
● There is a stipulation

Art. 1791

When capitalist partners are obliged to contribute additional capital

General Rule
● Not bound to contribute additional capital.

Exceptions
1. Stipulation
2. Imminent loss of the partnership business. (If a capitalist partner refuses to contribute
additional capital, he shall sell his interest to other capital partners willing to contribute additional
capital).
Art. 1792

When Managing Partner collects money, the sum should be applied to :

Receipt to Own Credit:
● Proportionate (partner & partnership)

Receipt to Partnership:
● Partnership

Obligation of Managing Partner who collects debt REQUISITES:

1. Existence of at least 2 debts (from manager’s and partnership’s credit)
2. Both sums are demandable

*Doesn’t apply to partners not managing partners.

*The rule only applies if the partner’s personal debt is MORE ONEROUS to the debtor.

Art. 1793

When a partner received his share in the partnership credit (in whole/part), while other
partners didn’t receive theirs yet and the debtor becomes INSOLVENT, the REMEDY is:
● Partner should share with the other partners what he has received (equally).

Difference between Art. 1792 and Art. 1793

Art.1792 Art. 1793

As to number of credits 2 distinct credits (from Only 1 (partnership)

managing partner &
partnership)

As to applicability Managing partner Any partner

As to Debtor’s Insolvency Not Insolvent Insolvent

Art. 1794

Who is responsible for the damages suffered by the partnership caused by the partner's
fault/negligence?
● Partner (who caused damage).
● He cannot use the profits and benefits he earned from the partnership.
*Courts may lessen the liability of the partner (who caused the damage) if he made an
extraordinary effort in other activities of the partnership in which unusual profits have been
realized.

Obligations that can’t be set-off:

1. Earn benefits & profits for the partnership
2. Not to cause damage through negligence for the partnership

Art. 1795

Who bears the Risk of Loss?

1. Specific/Determinate Things (not fungible)
● Partner (because what was contributed is only the use of the object)

2. Fungible things
● Partnership (there’s a transfer of ownership after delivery)

3. Things contributed to be sold

● Partnership

4. Things brought and appraised in the inventory

● Partnership

Art. 1796

Obligation of the partnership to every partner for the amount he have disbursed on
behalf of the partnership:
1. To refund, plus interest from the time expenses were made.
2. To be held responsible for the obligations they’ve entered into in good faith; and for the
risk associated with managing the partnership.

Art. 1797

Rules for Distributing P/L of the Partnership

Profits Losses

With agreement Distributed in conformity w/ *Distributed in conformity w/

the agreement. the agreement.
*Agreement (profits only);
 same proportion.
*Industrial partner are not
liable for the losses (if no
agreement)

No agreement ● Capitalist partners ● Capitalist partners

- Proportionate - Proportionate
to their to their
contribution contribution.

● Industrial partners ● Industrial partners

- What is just - Not liable for
and equitable losses.
(agreed by
partners)

Liability
● Obligation towards third persons.

Losses
● Obligations among partners.

Art. 1798

When third person designate the share of partners in the P/L

● Valid

Exception
● Manifestly inequitable, UNLESS:
a. Partner began to execute the third person’s decision
b. Partner doesn’t question the third person’s decision within a period of 3 months
from the time he had knowledge.

Art. 1799

Stipulation excluding 1 or more partner from any share in the P/L

● Void

Exception
● Industrial partners are NOT liable for losses unless he waived his right.
Art. 1800

2 Modes of Appointment as Manager

1. In the ARTICLES OF PARTNERSHIP
2. Instrument OTHER THAN THE ARTICLES OF PARTNERSHIP
ARTICLES OF OTHER THAN ARTICLES
PARTNERSHIP OF PARTNERSHIP

General Rule Irrevocable w/o just/lawful Revocable at any time,

cause. with/without just cause.

*Such appointment is a mere

delegation of power.
*Manager can do ALL acts of
administration.

Exception With just cause

● Partner’s vote having
controlling interest.

Without just cause

● Unanimity (including
own vote)

Art. 1801

When 2 or more Managing Partners have been Entrusted w/ the Management

Requisites
1. 2 or more partners as managers
2. No specification of respective duties
3. No stipulation requiring unanimity, that is, that one of them shall not act w/o the consent
of all the others.

General Rule
● Each one may SEPARATELY EXECUTE ALL acts of administration.

Exceptions: If any of the managers oppose

1. Decision of the majority (per head) of the managing partner prevails.
2. In case of tie, decision of the managing partners owning the controlling interest.
*Right to oppose is NOT given to NON-MANAGERS.

Art. 1802

Where there’s a stipulation requiring Unanimity of Action

● Necessary for the validity of acts (regardless of the absence/incapacity of other
managing partners).

Exception
● When there’s an imminent danger.

*This article is NOT applicable to third persons.

Art. 1803

Rules when there’s NO SPECIFIC AGREEMENT regarding how partnership should be

managed:
1. All partners are considered as managers.
2. Unanimity is required for important alterations in immovable property.

*Consent may be expressed/implied.

*Refusal of consent by other partners that harms partnership’s interest REMEDY:
● Seek court intervention.

Art. 1804

Contract of Sub-Partnership
● Every partner may associate another person to share his proportion of the partnership.
● New associate cannot become a full partner without unanimous consent of all existing
partners (even if the partner w/ an associate holds a managerial position).
*Reason:
a. Mutual trust is the basis of partnership
b. Change in membership is a modification/novation of the contract.

Art. 1805

Where shall the partnership books be kept?

● Principal place of the business
When shall every partner have the right to access and inspect copies of partnership
books?
● Reasonable hour (business days throughout the year, not arbitrary periods of a few
days).

Art. 1806

Who can demand true and full information of all things affecting the partnership?
1. Any partner
2. Legal representative (deceased partner)
3. Legal representative (partner under legal disability)

*Violation of this article is called CONCEALMENT.

Art. 1807

Where partners obtained gains from the partnership without other partner’s consent from
activities related to:
● Formation
● Conduct
● Liquidation
● Using partnership assets personally.

Obligation of the partners are to:

● Report and share to other partners their gains.
● Act as TRUSTEE for the partnership.

Fiduciary Relationship of partners

● Mutual trust
● Confidence

Art. 1808

Capitalist Partners
● Cannot engage in the same business as the partnership is engaged, UNLESS there’s a
stipulation.
Effects of Violation
● Capitalist partner is to bring to the common fund any profits he has obtained.
● Capitalist partners shall personally bear the loss.

Art. 1809

General Rule
● NO FORMAL ACCOUNTING is demandable until after the dissolution of the partnership.

Exception
1. Partner is wrongfully excluded from the partnership business.
2. Right to demand for accounting exists in the agreement.
3. As provided by Article 1807
4. Where other circumstances render it just and reasonable.

Industrial Partner Capitalist Partner

Prohibition Absolute Prohibition Relative Prohibition

● Cannot engage in ● Cannot engage in the
business for himself, same kind of business
UNLESS partnership as the partnership is
permits. engaged, UNLESS
there’s a stipulation.

Remedy Capitalist partner may: Capitalist partner who

● Exclude him from the VIOLATED shall:
firm, PLUS damages ● Bring to the common
● Avail themselves of fund any profits he
the benefits w/c he obtained.
may have obtained. ● Personally bears all
losses.

Section 2
Property Rights of a Partner

Art. 1810

Property Rights of a Partner

1. Rights in specific partnership property
2. Interest in the partnership
3. Rights to participate in the management
Art. 1811

Rules for the co-ownership of specific partnership property

1. Equal rights (for partnership purposes only).
2. Partner’s right is NOT assignable/transferable
3. Partner’s right is NOT subject to attachment/execution; or cannot be taken by legal
action.
4. Partner’s right is NOT subject to legal support.

Art. 1812

*Partner’s interest in the partnership is his share of the profits and surplus.
*Partner’s interest can be assigned, attached, subject to legal support.

Profits
● Excess of revenues over expenditures.

Surplus
● Excess of receipts over disbursement.

Art. 1813

When partner conveys their entire share in the partnership to someone, the EFFECTS
are:
1. Partnership doesn’t automatically dissolve.
2. The assignee:
a. Cannot interfere in the management of the partnership business
b. Cannot demand information/accounting of partnership transactions
c. Cannot inspects partnership books

Rights of the assignee

1. Received the profits (w/c the assigning partner is entitled)
2. In case of fraud in the partnership’s management, he may avail himself of the usual
remedies provided by the law.
3. In case of dissolution, to receive the assignor’s interest
4. In case of dissolution, he may require an account from the date only of the last account
agreed by all the partners.
Art. 1814

When a Partner has a Judgment Creditor

● That creditor can ask a court to use the partner’s share in the partnership to pay off their
debt, PLUS interest.
● Courts can also ASSIGN a receiver to handle the partner’s profits and partnership funds,
issuing orders and conducting inquiries as needed.

Redemption
● Gaining something back

Foreclosure
● Where lender reclaims & sells a property because the owner has failed to make
payments.

Redemption of Interest Charged:

1. Before Foreclosure
● At any time
2. After Foreclosure
● May still be purchased w/o causing a dissolution through:
a. Separate property of a partner (other partners)
b. Partnership property w/ the consent of ALL partners (whose interest are not
charged/sold)

Right of a partner under exemption law:

● Partner retains his interest right in the partnership.

When partner can’t avail himself of the exemption laws

● Partner’s right in specific partnership property.

Section 3
Obligations of the Partners With Regard to Third Persons

Art. 1815

General Rule
● Partners may use any firm name.
Exception
● Partnership cannot use identical name to that of any existing partnership/corporation.

*Every partnership shall operate under a FIRM NAME (may/may not include name of 1/more
partners).
*If persons who are not partners include their names in the firm’s name, he shall be subject to
the liability of the partner (Liable up to the extent of his separate property in favor of third
persons. But he has NO RIGHT as a partner).

Art. 1816

*All partners, including industrial ones, share liability in proportion to their contribution.
*Liability extends to partner’s personal assets after all partnership assets have been exhausted.

When partner enters into a contract w/ a third person, in his own name
● Only that person is liable.

Pro-rata vs Subsidiary
Pro-rata Subsidiary

● Equally/joint ● Partner’s personal interest may be

held liable only if all the partnership
assets have been exhausted by the
partnership creditors.

Art. 1817

Stipulation against Liability

● VALID among the partners
● VOID as to third persons

Art. 1818

When partner’s action binds the partnership

Binds the partnership Not

Acts for carrying on the usual

course of business
✔️ ● Partner acting has NO
authority
 ● Person w/c the
partner is dealing with
has knowledge that
he has no authority.

Acts NOT for carrying on the

usual course of business
● Unless authorized by
other partners
✔️
Acts of Ownership ● Authorized ● Not authorized

Acts in contravention of a _ ● As to persons having

restriction on their authority knowledge of the
restrictions.

Art. 1819

Rules about the Conveyance of Title to Real Property

If the title to real property is Where conveyance is What is being transferred?
in the… executed by:

Partnership name Any partner in behalf of the Property

(If partner has NO authority to
partnership ●

convey, partnership CAN recover).

● (If the conveyance is in line w/ the
ordinary course of business; and if
third person is in good faith,
partnership CANNOT recover).

Partnership name Partner in his own name Equitable interest of the

partnership only (not
transferred: if the partnership is not in
their ordinary course of business/partner has
NO authority to convey and the third person
has knowledge)

Partner’s name but not to all Partner who own the property Property (If partner has NO authority to
convey/if third person is in good faith,
partners partnership CANNOT recover)

Partner’s name (1/more/all); A partner in the partnership Equitable interest of the

or in a name, or in his own name partnership only (not transferred if
the partnership is not in their ordinary course
Third person in trust for the of business; or the partner who conveyed has
partnership NO authority).

Partner’s name (all) All the partners All their rights in such
property.

Title
● Legal evidence of a person’s ownership rights in property (instrument that constitutes
evidence).
Equitable Interest
● Beneficial interest. Interest held by virtue of an equitable title.

Art. 1820

Admission
● Statement in w/c someone admits that something is true or that she had done something
wrong.

Admission by any partner is evidence against the partnership if:

1. It concerns partnership affairs.
2. It is within the scope of his authority.

Art. 1821

General Rule:
● Notice to any partner is notice to the partnership.

Instances where knowledge of a partner is considered knowledge of the partnership:

1. Acquired while a partner
2. Present to his mind
3. Who could & should have communicated it to the acting partner.

Exception
● Fraud

Art. 1822

Where partnership is liable by the acts of partner

1. Wrongful act in the ordinary course of business of the partnership.
2. Acting WITH authority of co-partners

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.
 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

General rule
● All partners are liable solidarily w/ the partnership for everything chargeable
(loss,injury,penalty) to the partnership under Art. 1822 and 1823 (act of the partner).

Art. 1825

Partner by Estoppel
● Partner who represents himself as partner in an existing partnership.
● Liable jointly or pro rata (w/ the partner who consented) to third person.

Partnership by Estoppel
● All partners consented to the misrepresentation.
● Creates a partnership obligation (Legitimate creditor of the partnership has preference).

*Partnership by estoppel doesn’t apply when third person is NOT DECEIVED.

Art. 1826

Person admitted as partner in an existing partnership

● Liable for all partnership obligations arising even before his admission (shall be satisfied
only out of partnership property, UNLESS there’s a stipulation).

Art. 1827

Partnership property preference:

1. Partnership creditor
2. Partner creditors

Remedy of Partner’s Creditor

● Attach partner’s share in the partnership.