PARTNERSHIP

CHAPTER 1
GENERAL PROVISIONS

Art 1767. 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.

Two or more persons may also form a partnership for the exercise of a
profession. (1665a)

A partnership exists when two or more persons agree to place their money, effects, labor,
and skill in lawful commerce or business, with the understanding that there shall be a
proportionate sharing of the profits and losses among them.1

Meaning of Profession
Profession is "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. "2

Essential requisites of a contract of partnership

1. There must be a valid contract;
2. There must be a contribution of money, property, or industry to a common fund;
3. The partnership must be organized for gain or profit; and
4. The partnership should have a lawful object or purpose, and must be established for the
common benefit or interest of the partners.

What are the two tests to determine the existence of a partnership?

1. First test
Determine whether or not there is an agreement to contribute money, property or
industry to a common fund.

2. Second test
Determine whether or not there is an intent of the contracting parties to divide the
profits among themselves.

PARTNERSHIP - A JURIDICAL PERSON

To be considered a juridical personality, partnership must fulfill these requisites: (1)
two or more persons bind themselves to contribute money, property or industry to a
common fund; and (2) intention on the part of the partners to divide the profits among
themselves. It may he constituted in any form; a public instrument is necessary only where
immovable property or real rights are contributed thereto. This implies that since a contract
of partnership is consensual, an oral contract of partnership is as good as a written one.
Where no immovable property or real rights are Involved, what matters is that the parties
have complied with the requisites of a partnership.3

Characteristics of a contract of partnership

1. Consensual
It is a contract that is perfected by mere consent because all of the partners had a
meeting of minds to enter into a contract of partnership.

2. Commutative
The contribution of each partner, whether money, property or industry, is considered
as the equivalent of the contribution of the other partners.

3. Principal
it is a contract that does not depend on other contracts tor its existence.

4. Bilateral
It is a contract entered into by two or more persons.

5. Onerous
Each partner must contribute money, property, or industry. Of course, a partner can
contribute one, some or all of these.

6. Nominate
It is a contract which has a name in law.

7. Preparatory
It is a contract in preparation for another contract or contracts.

Example:
A and B entered into a contract of partnership for the purpose of selling
furniture. In this case, A and B initially entered into a contract of partnership in
preparation for contract of sale.

Money
The medium of exchange authorized or adopted by a government as part of its
currency.4

Property
Any external thing over which the rights of possession, use, and enjoyment are
exercised,5
Industry
Diligence in the performance of a task. A particular form or branch of productive
labor.6

Note:
The contribution to such fund need not be cash or fixed assets; it could be an
intangible like credit or industry.

Problem:
Sisters X and Y, entered into a "Joint Venture Agreement (JVA)" with Z 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 Z, who then had it
registered in his name. By mortgaging the property, Z obtained from Q Bank a loan of
P400,000 which, under the JVA, was to be used for the development of the
subdivision. All three of them also agreed to share the proceeds from the sale of the
subdivided lots.
The project was not realized, and the land was subsequently foreclosed by Q
bank.
Is there partnership?

Answer:
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, X and Y would contribute property to the

partnership in the form of land which was to be developed into a subdivision; while Z 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.
It should be stressed that the parties implemented the contract. Thus, X and Y
transferred the title to the land to facilitate its use in the name of Z. On the other hand, Z
caused the subject land to be mortgaged, the proceeds of which were used for the survey and
the subdivision of the land. Z developed the roads, the curbs, and the gutters of the
subdivision.
Z's actions clearly belie X and Y's 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.7
Partnership vs. Joint Venture
A partnership exists when two or more persons agree to place their money, effects,
labor, and skill in lawful commerce or business, with the understanding that there shall be a
proportionate sharing of the profits and losses between them. A contract of partnership is
defined by the Civil Code as one where two or more persons bound themselves to contribute
money, property, or industry to a common fund with the intention of dividing the profits
among themselves. A joint venture, on the other hand, is hardly distinguishable from, and
may be likened to, a partnership since their elements are similar, i.e., community of interests
in the business and sharing of profits and losses. Being a form of partnership, a joint venture
is generally governed by the law on partnership.8

DOCTRINE OF DELECTUS PERSONAE

The right to choose with whom a person wishes to associate himself is the very
foundation and essence of partnership. Its continued existence is, in turn, dependent on the
constancy of that mutual resolve, along with each partner's capability to give it, and the
absence of cause for dissolution provided by the law itself. Verily, any one of the partners
may, at his sole pleasure, dictate a dissolution of the partnership at will. He must, however,
act in good faith, not that the attendance of bad faith can prevent the dissolution of the
partnership but that it can result in a liability for damages.9

An unjustified dissolution by a partner can subject him to action for damages because
by the mutual agency that arises in a partnership, the doctrine of delectus personae allows
the partners to have the power, although not necessarily the right to dissolve the partnership.

Among partners, mutual agency arises and the doctrine of delectus personae allows
them to have the power, although not necessarily the right, to dissolve the partnership. An
unjustified dissolution by the partner can subject him to a possible action for damages.10

Delectus personarum ("choice of persons") or Delectus personae (“Choice of the

person”)

The rule that when personal relations are important, a person cannot be compelled
to associate with another person; specifically, the principle that one has the right to select
the person or persons with one whom one might form a partnership.11

Note:
Although a partnership is based on delectus personae or mutual agency, whereby
any partner can generally represent the partnership in its business affairs, it is non
sequitur that a suit against the partnership is necessarily a suit impleading each and
every partner. It must be remembered that a partnership is a juridical entity that has a
distinct and separate personality from the persons composing it.
In Aguila v. Court of Appeals, the complainant had a cause of action against the
partnership. Nevertheless, it was the partners themselves that were impleaded in the
 complaint. The Court dismissed the and held that it was the partnership, not its partners,
officers, or agents which should be impleaded for a cause of action against the.
partnership itself. The Court added that the partners could not be held
liable for the obligations of the partnership unless it was shown that the
legal fiction of a different juridical personality was being used for
fraudulent, unfair, or illegal purposes.12

Note:
In the spirit of fair play, it is a better rule that a partner must first be impleaded
before he could be prejudiced by the judgement against the partnership. A partner may
raise several defenses during the trial to avoid or mitigate his obligation to the
partnership liability. Necessarily, before he could present evidence during the trial, he
must first be impleaded and informed of the case against him. It would be the height of
injustice to rob an innocent partner of his hard-earned personal belongings without
giving him an opportunity to be heard.13

Partnership at will
A partnership that does not fix its term is a partnership at will. The birth and life of
a partnership at will is predicated on the mutual desire and consent of the partners. The right
to choose with whom a person wishes to associate himself is the very foundation and essence
of that partnership.14

Problem:
A contract of partnership of a law firm has the following provisions, among others:

1. "The purpose for which the partnership is formed, is to act as legal adviser and
representative of any individual, firm, and corporation engaged in commercial,
industrial or other lawful businesses and occupations; to counsel and advise such
persons and entities with respect to their legal and other affairs; and to appear for and
represent their principals and client in all courts of justice and government departments
and offices in the Philippines, and elsewhere when legally authorized to do so." And

2. "The partnership shall continue so long as mutually satisfactory and upon the death
or legal incapacity of one of the partners, shall be continued by the surviving partners."

Is the purpose of the partnership, as stated in its Articles of partnership, the sole
determinant if it is a partnership for a particular undertaking?

Answer:
The "purpose" of the partnership is not the specific undertaking referred to in the law.
Otherwise, all partnerships, which necessarily must have a purpose, would all be considered as
partnerships for a definite undertaking. There would, therefore, be no need to provide for
articles on partnership at will as none would so exist. Apparently, what the law contemplates,
is a specific undertaking or "project" which has a definite or definable period of completion.15
 Problem:
On behalf of "Q Corp.," X and Y entered into a contract, for the purchase of fishing nets
of various sizes from G, Inc. They claimed that they were engaged in a business venture with
Z, who, however, was not a signatory to the agreement. The total price of the nets amounted
to P532,045. Four Hundred pieces of floats worth P68,000 were also sold to the Corporation.
The buyers, however, failed to pay for the fishing nets and the floats; hence, G, Inc.
filed a collection suit against X, Y and Z. The suit was brought against the three in their
capacities as general partners, on the allegation that "Q Corp." was a nonexistent corporation
as shown by a Certification from the Securities and Exchange Commission.
Instead of answering the Complaint, X filed a Manifestation admitting his liability. Y
and Z filed their Answer.
The trial court ordered the sale of the fishing nets at a public auction. G, Inc. won the
bidding and deposited with the said court the sales proceeds of P900,000.
Are the acts of X, Y and Z deemed to have entered into a partnership?

Answer:
It is clear that X, Y and Z had decided to engage in a fishing business, which they
started by buying boats. In their Compromise Agreement, X, Y and Z subsequently revealed
their intention to pay the loan with the proceeds of the sale of the boats, and to divide equally
among them the excess or loss. These boats, the purchase and the repair of which were
financed with borrowed money, fell under the term "common fund" under Article 1767. The
contribution to such fund need not be cash or fixed assets; it could be an intangible like credit
or industry. That the parties agreed that any loss or profit from the sale and operation
of the boats would be divided equally among them also shows that they indeed formed a
partnership.
Moreover, it is clear that the partnership extended not only to die purchase of the
boat, but also to that of the nets and the floats. The fishing nets and the floats, both essential
to fishing, were obviously acquired in furtherance of their business. It would have been
inconceivable for Z to involve himself so much in buying the boat but not in the acquisition
of the aforesaid equipment, without which die business could not have
proceeded.16

Best Evidence of The Existence of a Partnership

In Idos v. Court of Appeals, the Supreme Court said:

The best evidence of the existence of the partnership, which was not yet terminated
(though in the winding up stage), were the unsold goods and uncollected receivables, which
were presented to the trial court Since the partnership has not been terminated, the petitioner
and private complainant remained as co-partners, xxx.17

Note:
A partnership may be deemed to exist among parties who agree to borrow money to
pursue a business and to divide the profits or losses that may arise therefrom, even if it is shown
that they have not contributed any capital of their own to a "common fund." Their contribution
may be in the, form of credit or industry, not necessarily cash or fixed asset. Being partner, they
are all liable for debts incurred by or on behalf of the partnership. The liability for a contract
entered into on behalf of an unincorporated association or ostensible corporation may lie in a
person who may not have directly transacted on its behalf, but reaped benefits from that
contract.18

Art. 1768. The 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, (n)

Under Art. 1768 of the Civil Code, a partnership "has a juridical personality separate
and distinct from that of each of the partners." The partners cannot be held liable for the
obligations of the partnership unless it is shown that the legal fiction of a different juridical
personality is being used for fraudulent, unfair, or illegal purposes. Hence, it is the
partnership, not its officers or agents, which should be impleaded in any litigation involving
property registered in its name.19

Article 1772 of the New Civil Code (NCC) states:

Art. 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.

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.

ARTIFICIAL PERSON / JURIDICAL PERSON

An entity, such as a corporation, created by law and given certain legal rights and
duties of a human being; a being, real or imaginary, who for the purpose of legal reasoning is
treated more or less as a human being.20

Example:
A, B, and C entered into a contract of partnership named ABC Partnership. In here, there
are four persons, that is, three natural persons (A, B, and C) and one juridical person (ABC
Partnership).

Thus, ABC Partnership can:

1. acquire and possess real and personal property;
2. incur obligations; and
3. bring civil or criminal actions.21
Problem:
X introduced Z to Y, who conveyed her desire to enter into a joint venture with her
for the importation and local distribution of kitchen cookware. X volunteered to finance the
joint venture and assigned to Z the job of marketing the product considering her experience
and established relationship with W Co., a manufacturer of kitchen wares in the U.S.A. Under
the joint venture, X acted as capitalist, Y as president and general manager, and Z as vice-
president for sales. Z organized the administrative staff and sales force while Y hired and
fired employees, determined commissions and/or salaries of the employees, and assigned
them to different branches. The parties agreed that X's name should not appear in any
documents relating to their transactions with W Company. Instead, they agreed to use Z's
name in securing distributorship of cookware from that company. The parties agreed further
that Z would be entitled to: (1) 10% of the annual net profits of the business; (2) commission
of 6% of the overall weekly production; (3) 30% of the sales she would make; and (4) 2% for
her demonstration services. The agreement was not reduced to writing on the strength of X
assurances that he was sincere, dependable, and honest when it came to financial
commitments.
Z having secured the distributorship of cookware products from W Co. and organized
the administrative staff and the sales force; the cookware business took off successfully. They
operated under the name of Y Enterprise; a sole proprietorship registered in Y’s name. X
made good his monetary commitments to Z.
Subsequently, Z learned that Y had signed a letter addressed to the Cubao sales office
to the effect that she was no longer the vice-president of Y Enterprise. The following day, she
received a note that Y had barred her from holding office and conducting demonstrations in
both Makati and Cubao offices. Consequently, Z filed a complaint against X and Y.
Does partnership exist?

Answer:
The fact that there appears to be no record in the Securities and Exchange
Commission of a public instrument embodying the partnership agreement pursuant to
Article 1772 of the Civil Code did not cause the nullification of the partnership. The pertinent
provision of the Civil Code on the matter states:

Art 1768. The partnership has a juridical personality separate and distinct from that of
each partner, even in case of failure to comply with the requirements of article 1772, first
paragraph.

X and Y admitted that Z had the expertise to engage in the business of distributorship
of cookware. Z contributed such expertise to the partnership and hence, under the law, she
was the industrial or managing partner. It was through her reputation with W Co. that the
partnership was able to open the business of distributorship of that company's cookware
products; it was through the same efforts that the business was propelled to financial
success.
The business venture operated under Y Enterprise did not result in an employer-
employee relationship between X and Y and Z. While it is true that the receipt of a percentage
of net profits constitutes only prima facie evidence that the recipient is a partner in the
business, the evidence in the case at bar controverts an employer-employee relationship
between the parties. In the first place, Z had a voice in the management of the affairs of the
cookware distributorship, including selection of people who would constitute the
administrative staff and the sales force. Secondly, Y's admissions militate against an
employer-employee relationship. She admitted that Z received only commissions and
transportation and representation allowances and not a fixed salary.
Undoubtedly, Y unilaterally excluded Z from the partnership to reap for herself
and/or for X financial gains resulting from Z's efforts to make the business venture a success.
Her instruction to the marketing manager, not to allow Z to hold office in both the Makati
and Cubao sales offices concretely spoke of her perception that Z was no longer necessary in
the business operation, and resulted in a falling out between the two. However, a mere falling
out or misunderstanding between partners does not convert the partnership into a sham
organization. The partnership exists until dissolved under the law. Since the partnership
created by X and Y and Z has no fixed term and is therefore a partnership at will predicated
on their mutual desire and consent, it may be dissolved by the will of a partner.22

Problem:
X filed a complaint against V and Y, daughter and wife, respectively of the deceased Z,
for Winding Up of Partnership Affairs and Accounting.
X alleged that he verbally entered into a partnership with Z in the distribution of LPG
in Manila. For business convenience, X and Z allegedly agreed to register the business name
of their partnership, Shellite, under the name of Z as a sole proprietorship. The partnership
allegedly had Z as manager. As compensation, Z would receive a manager’s fee of 10% of the
gross profit.
Allegedly, from the time that Shellite opened for business, its business operation was
profitable.
Upon Z’s death, his surviving wife, Y and particularly his daughter, V, took over the
operations and management of Shellite without X’s consent. Despite X's repeated demands
upon Y and V for accounting and winding up of the partnership, Y and V failed to comply.
Did X and Z enter into a contract of partnership?

Answer:
The action for accounting filed by X 3 years after Z’s death was well within the
prescribed period. The Civil Code provides that an action to enforce an oral contract
prescribes in 6 years while the right to demand an accounting for a partner’s interest as
against the person continuing the business accrues at the date of dissolution, in the absence
of any contrary agreement. Considering that the death of a partner results in the dissolution
of the partnership, in this case, it was Z’s death that X as the surviving partner had the right
to an account of his interest as against V and Y.
In a desperate bid to cast doubt on the validity of the oral partnership between X and
Z, Y and V maintain that said partnership that had initial capital of P200,000 should have
been registered with the Securities and Exchange Commission (SEC) since registration is
mandated by the Civil Code. True, Article 1772 of the Civil Code requires that partnerships
with a capital of P3,000 or more must register with the SEC, however, this registration
requirement is not mandatory. Article 1768 of the Civil Code explicitly provides that the
partnership retains. Its juridical personality even if it fails to register. The failure to register
the contract of partnership does not invalidate the same as among the partners, so long as
the contract has the essential requisites, because the main purpose of registration is to give
notice to third parties, and it can be assumed that the members themselves knew of the
contents of their contract. In the case at bar, non-compliance with this directory provision of
the law will not invalidate the partnership considering that the totality of the evidence
proves that X and Z indeed forged the partnership in question.23

Art. 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. (n)

Rule 1: Persons who are not partners as to each other are not partners as to third
persons

Example:
X and Y are not partners as to each other. Thus, as to Z, a third partner, it follows
that they are not also partners.

The exception is that if X misinterprets to Z that they are partners with Y and the
latter consented or Y did not object; then, as to Z, X and Y will be considered as partners
by operation of law. This is the concept of partnership by estoppel.

Partnership by Estoppel
Where a partnership not duly organized has been recognized as such in its dealings
with certain persons, it shall be considered as “partnership by estoppel” and the persons
dealing with it are estopped from denying its partnership existence.24

Rule 2: Co-ownership or co-possession does not of itself establish a partnership.

 Example:
X and Y are recipients of a gift consisting of an undivided parcel of land from
Z. In this case, X and Y are co-owners and not partners.

Partnership vs. Co-ownership

Partnership Co-ownership
Creation
Created by contract Created by contract and law.
Juridical Personality
It has legal or juridical personality. It has no juridical personality.
Thus, it can sue and be sued. Thus, it cannot sue or be sued.
Purpose
For profit Common enjoyment of a thing or
right. It is not necessarily
Profit
It may be stipulated upon. Profits must always depend on
the proportionate shares. Any
stipulation to the contrary is
VOID.
Dissolution
It is dissolved by death or incapacity It is not dissolved by the death or
of partner incapacity of owner
Form
It may appear in any form. However, No public instrument is needed
when real property is contributed, a even if real property is the object
public instrument is required. of co-ownership.

Rule 3: The sharing of gross returns does not of itself establish a partnership
Note:
There is a disputable presumption of establishing a partnership if what is being
shared by two or more persons are net profit However, if what is being shared by two or
more persons are gross returns or gross profit, then there is no presumption of establishing
a partnership.
 Example:
In a merchandising business, the basic formula for net profit is:
Gross Sales P xx

Less: Cost of Sales (xx)

Gross Profit xx
Less: Expenses (xx)
Net Profit or Net Loss xx or (xx)

Note:
It can be observed from the illustration that even if there is a positive amount or
figure for Gross Profit, you cannot still ascertain if it will arrive at Net Profit because it
may still turn out to be Net Loss as the expenses are controlling factor.

For example, if the Gross Profit is P50,000 and the Expenses is P20,000, then there
is a Net Profit of P30,000. However, if the Gross Profit remains at P50,000 and the
Expenses amounts to P60,000 then there is a Net Loss of Pl 0,000. Hence, the sharing of
gross returns does not of itself establish a partnership.

Rule 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

Prima facie
Sufficient to establish a fact or raise a presumption unless disproved
or rebutted; based on what seems to be true on first examination, even |
though it may later be proved to be untrue.25

Example:
X received from Y P50,000 as his share in the net profit of their business
amounting to P100,000. In this case, there is a disputable presumption that X and Y are
partners in a contract of partnership.

Note:
From the above, it appears that the fact that those who agree to form a co-
ownership share or do not share any profits made by the use of the property held in
common does not convert their venture into a partnership. Or the sharing of the gross
returns does not of itself establish a partnership whether or not the persons sharing
therein have a joint or common right or interest in the property. This only means that,
aside from the circumstance of profit, the presence of other elements constituting
partnership is necessary, such as the clear intent to form a partnership, the existence of
a juridical personality different from that of the individual partners, and the freedom to
transfer or assign any interest in the property by one with the consent of the others.
 It is evident that an isolated transaction whereby two or more persons contribute
funds to buy certain real estate for profit in the absence of other circumstances showing a
contrary intention cannot be considered a partnership.

Persons who contribute property or funds for a common enterprise and agree to
share the gross returns of that enterprise in proportion to their contribution, but who
severally retain the title to their respective contribution, are not thereby rendered partners.
They have no common stock or capital, and no community of interest as principal proprietors
in the business itself which the proceeds derived.

A joint purchase of land, by two, does not constitute a co-partnership in respect

thereto; nor does an agreement to share the profits and losses on the sale of land create a
partnership; the parties are only tenants in common.

Where plaintiff, his brother, and another agreed to become owners of a single tract of
realty, holding as tenants in common, and to divide the profits of disposing it, the brother
and the other not being entitled to share in plaintiffs' commission, no partnership existed as
between the three parties, whatever their relation may have been as to third parties.

In order to constitute a partnership, inter se, there must be: (a) An intent to
form the same; (b) generally participating in both profits and losses; (c) and
such a community of interest, as far as third persons are concerned as enables
each party to make contract, manage the business, and dispose of the whole
property. xxx.

The common ownership of property does not create a partnership between the
owners, though they may use it for the purpose of making gains; and they may, without
becoming partners, agree among themselves as to the management, and use of such property
and the application of the proceeds therefrom.26

Exceptions to Rule 4:
a. As a debt by installments or otherwise

Example:
A partnership named ABC Co. earned a net profit of P100,000 for its first year of
operation. X is a creditor of ABC Co. in the amount of P5,000. Later, ABC Co. paid the
P5,000 to X and this amount was taken from its net profit for the year. Is X a partner in
the ABC Co.? No, even though X received P5,000 which came from the net profit of ABC
Co., he is not a partner because this is in payment of its debt to X.

b. As wages of an employee or rent to a landlord

Example:
X, Y and Z formed XYZ partnership. V is the accountant of the partnership. In the
contract of employment between XYZ partnership and V, it was stipulated that the latter
will receive 15% of the net profit of the partnership. Is V a partner? No, V is an employee
 even though his salary will come from the net profit of the partnership. Their agreement
is a contract of employment

c. As an annuity to a widow or representative of a deceased partner

Example:
H, 1, and J formed HIJ partnership. Subsequently, H died survived by his widow,
W. It was agreed between I, J, and W that W will receive 5% of the annual net income of
the partnership pending liquidation. W will not become a partner.

d. As an interest on a loan
Example:
X, Y, and Z formed XYZ partnership. One of its creditors is W. The credit is
P100,000 with a stipulation as to interest of 6% per annum. It was agreed between XYZ
partnership and IV that the payment of interest will come from the annual net profit of
XYZ partnership. W is not a partner in XYZ partnership.

e. As the consideration for the sale of a goodwill of a business or other property

Example:
X, Y, and Z formed XYZ partnership. Q sold his only parcel of land to XYZ
partnership. In their contract of sale, it was agreed that the payment will come from the
annual profit of XYZ partnership. Q is not a partner in XYZ partnership.

Problem:
The heirs of the late X, namely: X's widow Y; and their children A, and B filed a
Complaint against W, widow of the late H, who was the eldest son of X and Y.
Y, A and B alleged that sometime in 1980, X, together with his friends U and V, formed
a partnership to engage in the trucking business. Initially, with a contribution of P50,000
each, they purchased a truck to be used in the hauling and transport of lumber of the sawmill.
X managed the operations of this trucking business until his death on August 15, 1981.
Thereafter, X's heirs, including H, and partners agreed to continue the business under the
management of H.
On May 18, 1995, H died, leaving W as his sole surviving heir. Y, A and B claimed that
W took over the administration of the aforementioned properties, which belonged to the
estate of X, without their consent and approval.
W claimed that H was himself a partner of U and V. W also claimed that per testimony
of Y, sometime in 1980, X gave H P50,000 as the latter’s capital in an informal partnership
with U and V. When H and W got married in 1981, the partnership only had one truck; but
through the efforts of H, the business flourished.
W also alleged that when X died in 1981, he left no known assets, and the partnership
with U and V ceased upon his demise. W also stressed that X left no properties that H could
have held in trust.
Who is the partner in the trucking business, X or H?
Answer:
Applying Article 1769 of the Civil Code to the facts of this case, the following
circumstances tend to prove that H was himself the partner of U and V: 1) Y testified that X
gave H P50,000, as share in the partnership, on a date that coincided with the payment of the
initial capital in the partnership; (2) H ran the affairs of the partnership, wielding absolute
control, power and authority, without any intervention or opposition whatsoever from any
of Y, A and B; (3) all of the properties, particularly the nine trucks of the partnership, were
registered in the name of H; (4) U testified that H did not receive wages or salaries from the
partnership, indicating that what he actually received were shares of the profits of the
business; and (5) none of Y, A and B, as heirs of X, the alleged partner, demanded periodic
accounting from H during his lifetime. A demand for periodic accounting is evidence of a
partnership.27

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. (1666a)

Lawful object or purpose

The object or purpose of a partnership must be within the commerce of man, not
impossible, and it must not be contrary to law, morals, good customs, public order or public
policy.

Examples of Unlawful Partnership

1. A partnership formed for gambling purposes.
2. A partnership formed to furnish houses for prostitution purposes.
3. A partnership formed to create illegal monopolies or combinations in restraint of
trade.

Effects of an unlawful partnership

1. The contract is void from the very beginning;28

Note:
A void contract is as if it never existed from the very beginning. Thus, it has no
legal personality.

2. The profits shall be confiscated in favor of the government;

3. The instruments or tools and proceeds of the crime shall be forfeited in favor of the
government29; and
4. The contributions of the partners shall not be confiscated unless they fall under no. 3.
Article 1771- A partnership may be constituted in any form, except where immovable
property or real property are contributed thereto, in which case a public instrument
shall be necessary. (1667a)

FORM OF CONTRACT OF PARTNERSHIP

General Rule:
No form is required. Thus, the contact may be oral or in writing.

Exception:
If real properties or real right in real properties are contributed regardless of the
value, a public instrument is needed; otherwise, the contract of partnership is void.

REAL RIGHTS
A right that is connected with a thing rather than a person, Real rights include
ownership, use, habitation, usufruct, predial servitude, pledge and real mortgage. 30

PUBLIC INSTRUMENT
A document prepared by a notary public in the presence of the parties who sign it
before witnesses.31

Example:
A and B agreed to form a partnership where A promised to contribute his only parcel of land
while B undertook to contribute P100,000. In this case, since A will contribute his only parcel
of land, a real property, their contract must be executed in a public instrument. Otherwise,
it is void.
What if A will contribute his only car while B will contribute P 100,000.00? The
contract may be oral or in writing whether private or public instrument and the contract of
partnership is valid.

A partnership may be constituted in any form.

Problem:
X, Y, and Z are brother and sisters, who are co-owners of certain lots which were
then being leased to SHELL Co. They agreed to open and operate a gas station thereat to
be known as XYZ Shell Service Station with an initial investment of P 950,000.00 to be
taken from the advance rentals due to them from SHELL for the occupancy of the said
lots owned in common by them. A joint affidavit was executed by them which was
prepared by Atty. W.
Y and Z agreed to help their brother X by allowing him to operate and manage the
gasoline service station of the family. They negotiated with SHELL. For practical
purposes and in order not to run counter to the company’s policy of appointing only one
 dealer, it was agreed that X would apply for the dealership, Y helped in managing the
business.
For some time, X submitted financial statements regarding the operation of the
business to Y and Z, but thereafter X failed to render subsequent accounting of the
profits. Thereafter, Y and Z filed a complaint.
Does a partnership exist between members of the same family arising from their
joint ownership of certain properties?

Answer:
Let it be noted that it is against the policy of SHELL that the business of the dealer
is a partnership. It should be a sole proprietorship.
Evidence in the record shows that there was in fact such partnership agreement
between the parties, this is attested by the testimonies of Y and Atty. W. X submitted to
Y and Z periodic accounting of the business. X gave a written authority to Y, his sister, to
examine and audit the books of their “common business”. Y assisted in the running of
the business. There is no doubt that the parties hereto formed a partnership when they
bound themselves to contribute money to a common fund with the intention of dividing
the profits among themselves. The sole dealership by X and the issuance of all
government permits and license in the name of X was in compliance with the afore stated
policy of SHELL and the understanding of the parties of having only one dealer of the
SHELL products.32

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.
Failure to comply with the requirements of the preceding paragraph shall not
affect the liability of the partnership and the members thereof to the third persons.
(n)

Partnership having a capital of P3,000 or more (personal property only)

The contract of partnership must appear in a public instrument and must be
recorded in the office of the SEC. Take note that non- compliance with the requirement of
execution in a public instrument will not make the contract void. Hence, it still valid.

Partnership having a capital of below P3,000 (personal property only)

No form is required. Thus, it may be verbal.

Purpose of Registration
The registration is to set “a condition for the issuance of licenses to engage in business
or trade. In this way, the tax liabilities of big partnerships cannot be evaded, and the public
can also determine more accurately their membership and capital before dealing with
them.33
 Problem:
X filed a complaint against V and Y, daughter and wife respectively of the
decreased Z, for winding up of Partnership Affairs and Accounting.
X alleged that in 1977, he verbally entered into a partnership with Z in the
distribution of LPG in Manila. For business convenience, X and Z allegedly agreed to
register the business name of their partnership, Shellite, under the name of Z as a sole of
proprietorship, the partnership manager’s fee of 10% of the gross profit.
Allegedly, from the time that Shellite opened for business on July 8,1977, its
business operation was profitable.
Upon Z’s death in the later part of 1989, his surviving wife, Y and particularly his
daughter, V took over the operations and management of Shellite without X’s consent.
Despite X’s repeated demands upon X and Vfor accounting and winding of the
partnership, Y and V failed to comply. Did X and Y form a partnership?

Answer:
In a desperate bid to cast doubt on the validity of the oral partnership between X
and Z, Y and V maintain that said partnership had initial capital of P 200,000 which
should have been registered with the SEC since registration is mandated by the Civil
Code,
True, Article 1772 of the Civil Code, requires that partnerships with a capital of
P3,000 or more must register with the SEC, however, this registration requirements is
not mandatory.
Article 1768 of the Civil Code explicitly provides that a partnership retains its
juridical personality even if it fails to register. The failure to register the contract or
partnership does not invalidate the same as among the partners, so long as the contract
has the essential requisites, because the main purpose of registration is to give notice to
third parties and it can assume that the members themselves knew of the contents of
their contract. In that case at bar, non- compliance with this directory provision of the
law will not invalidate the partnership considering that the totality of the evidence
proves that X and Y indeed forged the partnership in question.34

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. (1668A)

Note:
An Inventory is still required if aside from real property, personal property is
contributed. However, the inventory need not include the personal property.

A partnership may be constituted in any form, save when immovable property or real
rights are contributed thereto or when the partnership has a capital of at least P 3,000, in
case a public instrument shall be necessary. And an inventory to be a signed by the parties
and attached to the public instrument is also indispensable to the validity of the partnership
whenever immovable property is contributed to it.35
 Lest it be overlooked, the contract- validating inventory requirement under Article
1773 of the Civil Code applies as long as real property or real rights are initially brought into
the partnership.
In short, it is really of no moment which of the partners, contributed immovables. In
context, the more important consideration is that real property was contributed in which
case an inventory of the contributed property duly signed by the parties should be attached
to the public instrument. Else there is legally no partnership speak of.36

WHAT IS THE INTENSION OF ARTICLE 1773?

Article 1773 was intended primarily to protect third persons. Thus, the eminent
Arturo M. Tolentino states that under aforecited provision which is a complement of article
1771, 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 immovable 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.37

Art. 1774. Any immovable property or an interest therein may be acquired in the
partnership name. Title so acquired can be conveyed only in the partnership name.
(n)

The reason for the above-stated provision is that the partnership has a judicial
personality separate and distinct from that of each of the partners; hence, immovable
property to be acquired may be in the name of the partnership and if conveyed must also be
in the partnership name.

Example:
A, B, and C formed ABC partnership. Thus, if ABC partnership will be a donee or
a buyer of a specific real property then it shall be registered in its name and not in the
name of one or some or all of the partners. Consequently, if this will be conveyed, like
sale or donation, the seller or donor must only be in the name of the partnership.

Art. 1775. Associations and societies, whose articles are kept secret among the
members, and wherein any one of the members may contract in his own name with
third persons, shall have no juridical personality, and shall be governed by the
provisions relating to co-ownership. (1669)
 Partnership vs. Association
Partnership Association
Juridical Personality
It has a juridical personality. It has no juridical personality.
Purpose
It is for profit. It may not be for profit
Contribution of Members
There is a contribution of money, property, There is no contribution of capital although
or industry or a combination of these. fees are usually collected from the members
to maintain the organization
Liability
The partnership is the one liable. Members are individually liable for the
debts of the association.

The association of societies here cannot sue because it has no legal personality.
However, the fact that it has no legal personality as a partnership cannot be invoked by the
“partners” for the purpose of evading compliance with obligations contracted by them,
because they who caused the nullity of a contract are prohibited from availing of its
benefits.38

Art. 1776. As to its object, a partnership is either universal or particular. As it regards

to the liability of the partners, a partnership may be general or limited. (1671a)

CLASSIFICATION OF PARTNERSHIP
1. According to object
a. Universal partnership
Two Kinds:

(1) Universal partnership of all present property

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.

(2) Universal partnership of all profits

It comprises all that the partners may acquire by their industry or work
during the existence of the partnership.

b. Particular partnership
A particular partnership has its object determinate things, their uses or fruits, or
specific undertaking, or the exercise of a profession or vocation.
2. According to liability
a. General partnership
It is one where all the partners are general partners. All general partners here are
liable up to the extend of their separate properties after the assets of the partnership have
been exhausted.

b. Limited partnership
It is one where there is at least one general partner and one limited partner. A general
partner is liable beyond his contribution while a limited partner is liable only to the extent
of his contribution.

3. According to duration
a. Partnership at will
It is one where there is no fixed term or it is not formed for a particular undertaking,
or it is one for a fixed term or particular undertaking which is continued after the
termination of such term or particular undertaking without any express agreement.

Example:
A, B, and C formed a partnership where A contributed cash of P500,000. For B,
computers valued at P200,000 and C, his only truck valued at P300,000. In here, there is
no fixed term agreed upon nor it is for a particular undertaking so that it can be
dissolved anytime.

b. Partnership with a fixed term

It is one where the life or period of existence of the partnership has been agreed upon
by the partners.

Example:
A, B, and C formed a partnership where A contributed cash of P500,000. For B,
computers valued at P200,000 and C, his only truck valued at P300,000. The partners
agreed that the life of the partnership will be 15 years. In here, the parameters, as a rule,
can be dissolved after the lapse of 15 years.

c. Partnership for a particular undertaking

It is one where it will exist until the purpose is accomplished.

Example:
A, B, and C formed a partnership for the manufacture of 300 tables for a
particular school where A contributed a cash of 150,000, B contributed lumber valued
at P200,000 and C, the use of his truck. In here, the partnership will be dissolved after
the completion of the 300 tables.
4. According to representation to others
a. Ordinary partnership
It is one where 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.

Example:
A, B, and C established a partnership where A contributed or by conduct,
represent themselves, or consent to another representing them to anyone, as partners
in an existing partnership or with one or more persons not actual partners.

b. Partnership by estoppel
It is one where persons, by words or written or by conduct, represent themselves, or
consent to another representing them to anyone, as partners in an existing partnership or
with one or more persons not actual partners.

Example:
A, B, and C are partners in ABC partnership. Subsequently, X misrepresented to Y
that he is a partner in ABC partnership. When Y inquired from A, B, and C if X is one of
their partner, A, B, and C answered in affirmative. In here, A, B, C and X are partners by
estoppel and there is a also a partnership by estoppel so that if Y suffered damages
because of misrepresentations, the net assets of ABC partnership is liable together with
the separate property of X.

5. According to the legality of its existence

a. De jure partnership
It is one which has complied with all the requirements for its creation.

Example:
A, B, and C formed ABC Partnership where A contributed cash of 1,000,000, B
contributed his only parcel of land and C will contribute his industry during the term
of the partnership which is 10 years. The contract of partnership was written in a
public instrument. The partners made also an inventory which they all signed and
thereafter they attached it to their contract of partnership. In here, we have a de jure
partnership.

b. De facto partnership
It is one which has not complied with all the legal requirements for is creation.

Example:
A, B, and C formed ABC Partnership where A contributed cash of
P1,000,000, B contributed his only car and C will contribute his industry during the
term of the partnership. Their agreement is verbal. In here, the partnership is a de facto
partnership as it was not written in a public instrument and it was not registered in
the SEC.
Art. 1777. A universal partnership may refer to all present property or to all the
profits. (1672)

Kinds of Universal Partnerships

1. Partnership of all present property
2. Partnership of all 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. (1673)

The contributions of the partners here are the following:

1. All the properties actually belonging to the partners; and

2. The profits acquired with said properties.

Art. 1779. In a universal partnership of all present property, the property which
belongs to each of the partners at the time of constitution of the partnership, becomes
the 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. (1674a)

Future Property (Inheritance Legacy or Donation)

Future properties cannot be included because:
1. As a rule, contracts regarding successional rights cannot be made;
2. A partnership demands that the contributed things be determinate, known, and certain;
3. Universal partnership of all present property is really implying a donation, and it is well
known that generally future property cannot be donated. ³⁹

Example:
A, B, and C entered into a partnership named ABC Partnership. A contributed all his
present properties comprising two parcels of land. B contributed his only property which is a
specific car. C contributed his house and lot which is his only property. The contract of property
partnership formed by A, B and C is a universal partnership of all present property.

Article 1780. 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. (1675)

Partners retain their ownership over their present and future property. What passes
to the partnership are the profits and the use of the same. ⁴⁰
 Example:
A, B, and C entered into a partnership named ABC Partnership. A contributed the use of
his two parcels of land. B contributed also the use of his specific car for purposes of delivery of
goods. C contributed his house and lot to be used by the partnership as warehouse. The contract
of partnership formed by A, B, and C is a universal partnership of all profits.

Universal Partnership of all present Property Universal Partnership of profits

(At the time of constitution of the partnership) (During the existence of the partnership)
All the present property actually belong to the partners Only the usufruct (use and fruits) of the properties
are contributed to the partnership which become of the partners becomes common property of all the
common property of all the partners and the partners and the partnership.
partnership.
General Rule:
Only the prophets of said contributed property become
common property but not profits arising from other
property of the partners.

Exception:
If stipulated, the profits from other property of the
partners may become common.

Note:
The property subsequently acquired by
inheritance, legacy, or donation cannot be included in
the stipulation, but the fruits thereof can be included in
the stipulation.

Article 1781. Articles of universal partnership, entered into without specification of

its nature, only constitute a universal partnership of profits. (1676)

Presumption in favor of universal partnership of profits

The universal partnership of profits imposes less obligation because their real and
personal properties are retained by them in naked ownership.

Article 1782. Persons who are prohibited from giving each other any donation or
advantage cannot enter into universal partnership. (1677)

Rationale:
A universal partnership is virtually a donation to each other of the partner's
properties (or at least their usufruct). Therefore, if persons are prohibited to donate
to each other, they should not be allowed to do indirectly what the law forbids
directly. ⁴¹
Effect of Violation of Article 1782
The partnership is null, and void and its nullity may be raised anytime. No legal
personality was ever acquired. ⁴²

Examples of persons who cannot enter into a universal partnership

1. Legally married spouses; ⁴³
Note: However, spouses may enter into a particular partnership like the exercise
of a profession or vocation. ⁴⁴
2. Persons living together as husband and wife without a valid marriage; ⁴⁵
3. Persons who were guilty of adultery or concubinage at the time of the donation; ⁴⁶
4. Persons found guilty of the same criminal offense in consideration thereof; ⁴⁷
5. A person or persons and a public officer or his wife, descendants and ascendants, by
reason of his office.

Problem:
A limited partnership, named "WJD Ltd.," was formed by W as the general
partner, and J and G as the limited partners. The partners contributed, respectively,
P20,000, P18,000 and P20,000 pesos to the partnership. Subsequently, general partner
W and limited partner J got married and thereafter, limited partner G sold his share in
the partnership to them.
Was the partnership dissolved after the marriage of the partners, W and J and
the subsequent sale to them by G of his share?

Answer:
The thesis that the limited partnership, WJG Ltd., has been dissolved by
operation of law because of the marriage of the only general partner, W to the
originally limited partner, J one year after the partnership was organized is rested
upon the theory that:

Husband and wife may not enter into a contract of general co-partnership,
because under the Civil Code, which applies in the absence of express provision in the
Code of Commerce, person prohibited from making donations to each other are
prohibited from entering into universal partnerships. It follows that the marriage of
partners necessarily brings about the dissolution of a pre-existing partnership.

WJG Ltd. was not a universal partnership but a particular one. Universal
partnership requires either that the object of the association be all the present property
of the partners, as contributed by them to the common fund, or else "all that the partners
may acquire by their industry or work during the existence of the partnership." WJG Ltd.
was not such a universal partnership, since the contributions of the partners for fixed
sums of money, P20,000 by W and P18000 by J and neither one of them was an industrial
partner. It follows that WJG Ltd. was not a partnership that spouses were forbidden to
enter.
 Nor could the subsequent marriage of the partners operate to dissolve it, such
marriage not being one of the causes provided for that purpose. ⁴⁸

Article 1783. A particular partnership has for its object determinate things, their
use or fruits, are specific undertaking, or the exercise of a profession or vocation.
(1678)

The above stated article defines a particular partnership.

Examples:
1. A and B formed AB partnership where A contributed P1,000,000 and B
contributed his only parcel of land. They agreed to engage in buy and sell of motor
vehicles.
2. A and B formed AB partnership where A contributed P10,000,000 while B
contributed P3,000,000 and his industry, being an engineer, for the construction
of a building as they will engage in the business of leasing apartment units.
3. A and B, both certified public accountants, entered into a contract of partnership
to engage in accounting, audit, and tax consultancy.

Note:
If the partnership is a universal partnership, a husband and wife cannot enter
into such contract. However, if the partnership is a particular partnership, they can.

4. Not to engage in any business which is of the kind in which the partnership is
engaged. ¹⁸
5. Obligation of managing partners to credit to the partnership the payment made
by debtor who owes them and the partnership. ²⁰
6. Obligation to share with other partners the share of the partnership credit which
they have received from an insolvent partnership debtor. ²²
7. Pay for damages suffered by the partnership through their fault. ²³

SECTION 1.
Obligations of the Partners Among Themselves
Problem:
Y Co., a general partnership duly registered under the laws of the Philippines,
purchased from X Inc. a motor vehicle on installment basis and for this purpose executed
a promissory note for P9,440, payable in 12 equal monthly installments of P786.63, the
first installment payable on or before May 22, 1961 and the subsequent installment on
the 22nd day of every month thereafter, until fully paid with the condition that failure to
pay any of said installments as they fall due would render the whole unpaid balance
immediately due and demandable.
Having failed to receive the installment due, X Inc. sued Y Co. for the unpaid
balance amounting to P7,119. A, B, C, D, and E were included as co-defendants in their
capacity as general partners.
 Subsequently, on motion of X Inc., the complaint was dismissed insofar as partner
E is concerned.
B and C claimed that since there are 5 general partners, the joint and subsidiary
liability of each partner should not exceed one-fifth (1/5) of the obligations of Y Co.
Does the dismissal of the complaint in favor of partner E increases the joint and
subsidiary liability of each of the remaining partners of the obligations of the
partnership?
Answer:
In the instant case, there were 5 general partners when the promissory note in
question was executed for and in behalf of the partnership. Since the liability of the partners
is pro rata, the liability of partner C shall be limited to only one-fifth 1/5 of the obligations
of Y Co. The fact that the complaint against partner E was dismissed does not on make E as
a general partner in Y Co. In so moving to dismiss the complaint, X Inc. Nearly condoned
E's Individual liability.

Legal relations created by a contract of partnership

1. Relations between partners;
2. Relations between the partners on one hand and the partnership on the other hand;
3. Relations between the partners on one hand and third persons and the other hand the;
and
4. Relations between the partnership and the third persons.

Example:
A and B entered into a partnership named AB partnership. A and B are both
managing partners who at one time entered into a contract with C and D. The relations
created are the following:
1. Relations between A and B;
2. Relations between A and B on one hand and AB partnership on the other hand;
3. Relations between A and B on one hand and C and D on the other hand; and
4. Relations between AB partnership and C and D.
 Examples of obligations and rights of a partners
Obligations of partners Rights of Partners
To give their promise contribution¹² Try to associate with another person in their share. ¹³
Not to convert partnership money to their own use¹⁴ Right to have access to and inspect and copy
partnership books. ¹⁵
To account and hold as trustee for any profits Right to demand a formal account ¹⁷
derived without the consent of the other partners. ¹⁶
Not to engage in any business which is of the kind in Right to ask for the dissolution of the partnership at the
which the partnership is engaged. ¹⁸ proper time. ¹⁹

Obligation of managing partners to credit to the Property rights of partners²¹

partnership the payment made by a debtor who a. Rights in specific partnership property
owns them and the partnership. ²⁰ b. Interest in the partnership
c. Right to participate in the management
Obligation to share with the other partners the share Note:
of the partnership credit which they have received Limited partners have no right to participate in the
from an insolvent partnership debtor. ²² management.

Pay for damages suffered by the partnership

through their fault. ²³

Article 1784. A partnership begins from the moment of the execution of the contract
unless it is otherwise stipulated.

General rule:
A partnership begins from the moment of the execution of the contract.

Example:
X and Y entered into a contract of partnership on July 2, 2020. Here, the life of
their partnership begins on July 2, 2020 when the parties executed their contract of
partnership.

Exception:
The partners can agree on some other date for the start of the partnership.

Example:
X and Y entered into a contract of partnership on July 2, 2020.However, X and
Y agreed that the commencement of their contract of partnership will be on September
1, 2020. Here, the life of the partnership begins on September 1, 2020 as agreed upon
and not on July 2, 2020.
 Note:
As of July 2, 2020, the partnership to be formed by X and Y is a future partnership which
has no juridical existence yet. Consequently, there is no partnership yet from July to 2,
2020 to August 30, 2020. Therefore, there is no obligation nor right to speak of.

Article 1785. When a partnership for a fixed term or particular undertaking as

continued after the termination of such term or particular undertaking without any
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. (n)

Partnership with a fixed term

It is one where the life or period of existence of the partnership has been agreed upon
by the partners.

Partnership for a particular undertaking

It is one where it will exist until the purpose is accomplished.

Partnership at will
A partnership that does not fix its term is a partnership at will. The birth and life of a
partnership at will is predicated on the mutual desire and consent of the partners. The right
to choose with whom a person wishes to associating self is the very foundation in essence of
the partnership. ²⁴

Example of partnership for a fixed term

A and B entered into a contract of partnership for a period of 10 years. As a rule, after
the expiration of ten years the partnership of A and B will be dissolved. However, if after 10
years and the partnership of A and B continued the operation of the partnership without any
express agreement, then the rights and obligations of A and B will remain the same.
For example, the right to participate in the management. Hence, if A is the managing
partner then he will still be the managing partner despite the lapse of 10 years.

Example of a partnership for a particular undertaking

A, B, and C entered into a contract of partnership for the manufacture of 1,000 tables
for a certain school. As a rule, after the 1,000 tables were manufactured, the partnership will
be dissolved. However, if after the 1,000 tables were manufactured, and the partnership of
A, B and C continued the operations of their business without any express agreement, then
the rights and obligations of A, B and C will remain the same.
For example, the right to participate in the management. Hence, if A is the managing
partner then he will still be the managing partner despite the termination of the initial
particular undertaking, that is, the manufacture of 1,000 tables.
Problem:
Sometime in March 1946, V and T together with F entered into a partnership for
the purpose of engaging in the printing business. Later, V obtained a personal loan from
F in the amount of P1,100. Upon the request of V, T paid the said amount to F and this
time V used his share in the partnership as guarantee for T's payment. On June 3, 1946, F
sold his share of the partnership to T and who by virtue thereof became 2/3 owner of the
business. Subsequently, T asked V to settle his account, but due to his failure to do so, T
assumed full ownership of the business. T allegedly never rendered any accounting of the
business operations, or paid the share of V in the profits.
It is an incontrovertible fact that V had filed this action against T on February 10,
1961, nearly ten years after the expiration of the contract of partnership.
T, in defense, alleged that the whole business of the partnership became his alone
in 1947 after he had acquired by purchase the share of F and had taken over the share of
V, since the latter failed to pay the P1,100 V had requested T to pay to F, as security for
the payment of which, he had pledged his said share to T. Since 1947, T had always been
operating openly and publicly the said printing business from 1947 without any
intervention or participation of V and without said V making any claim of any kind in
connection therewith until the filing of the complaint on February 10, 1961, hence, all the
claims and causes of action of V had already prescribed.
Is Article 1785 applicable in the present case?

Answer:
Under these circumstances, it would be giving premium to in action and indifference
to still hold that V could sue T only a little short of ten years after the expiration of the
stipulated term of partnership. His claims for salaries accrued after each month they were
unpaid. Whether we assume that these claims lost basis in 1947 when T took over the
businesses of the printing press, by all standards, these claims had already prescribed when
the present suit was filed.
. Again, inasmuch as the longest period in the chapter on prescription of Civil Code
is ten years; it is evident that V's action for accounting already barred.
The provisions of Article 1785 to the effect that:
When a partnership for a fixed term or particular undertaking is continued after the
termination of such term or particular undertaking without any 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.
and Article 1829 thus:
On dissolution, the partnership is not terminated, but continues until the winding
up of partnership affairs is completed.
are clearly inapplicable here for the simple reason that those articles are premised on a
continuation of the partnership as ssuch. which is not our case because here T repudiated
the partnership as early as 1947 with either actual or presumed knowledge of V. By
analogy, at least, with the rule as to a co-ownership, which a partnership essentially is,
prescription does not run-in favor of any of the co-owners only as long as the co-owner
 claiming against the others expressly or impliedly recognizes the co-ownership, a
circumstance irreconcilably inconsistent with T's conduct of transferring the place of
business, changing its name and not paying V any of the salaries agreed upon in the articles
of partnership. 25

Art. 1786. Every 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. (1681a)

Obligation of every partner

1. The obligation to contribute what had been promised
The mutual contribution to a common fund is the first test order to have a contract of
partnership
The failure to contribute is to make the partner a debtor of the partnership even if
there is no demand. This is an exception to the general rule that there is no delay when there
is no demand
Consequently, in case of failure to deliver the promised contribution, the remedy is
specific performance with interest and damages occasioned thereby and not rescission.26

2. The obligation to deliver the fruits thereof; and

If property has been promised, the fruits thereof should also be given. The fruits
referred to are those arising from the time they should have been delivered, without the need
of any demand. If the partner is in bad faith, he is liable not only for the fruits actually
produced, but also for those that could have been produced.27
If money has been promised and that partner failed to do so, he becomes a debtor for
the interest and damages from the time he should have complied with his obligation.28

3. The obligation to warrant

The warranty in case of eviction refers only to specific or determinate things which a
partner contributed to the partnership.

ART. 1787. When 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 account of the partnership. (n)
 Rationale:
In order to know the monetary value of the contribution of that partner as of the
date of contribution. This is useful in the future operation of the partnership just like
in the accounting of the share of profit or loss of every partner. Under the law, 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.29

ART. 1788. 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 of his own use.
(1682)

Essence of Partnership
It is a settled rule that when a partner who has undertaken to contribute a sum of
money fails to do so, he becomes a debtor of the partnership for whatever he may have
promised to contribute and for interests and damages from the time he should have
complied with his obligation. Being a contract of partnership, each partner must share in the
profits and losses of the venture. That is the essence of a partnership.30

Cases covered of the liability for damages and interest

1. Money promised by a partner is not given on time; and
2. Money of the partnership is converted to partners’ own use.

Demand is not necessary

This case is an exception to the general principle in the law on obligation which states:
“there is no default, if there is no demand.”

1. In the case of contribution, because time is of the essence, a partnership is formed

precisely to make use of the contributions, and this use should start from its
formation, unless a different period has been set; otherwise, the firm is necessarily
deprived of the benefits thereof. Thus, injury is constant.31
2. In case of conversion, demand is also not necessary, even if no actual injury
results, the liability exists, because the Article is absolute.32

ART. 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 firm or avail themselves of the benefits
which may have obtained in violation of this provision, with a right to damages in
other case. (n)
 Capitalist partners
Those who contribute money or property or both money and property to the common
fund.

Industrial Partners
Those who contribute only their industry or labor to the common fund.

Capitalist-Industrial Partners
Those who contribute money or property and industry or both money, property and
industry to the common fund.

CAPITALIST PARTNER VS. INDUSTRIAL PARTNER

Capitalist Partner Industrial Partner
Contribution
Contributes money or property33 Contributes his industry34
Prohibition to engage in other business
General rule: cannot engage in the same kind of General rule: cannot engage in business for himself.
business in which the partnership is engaged.
Exception: If the partnership expressly permits him
Exception: stipulation authorizing him35 to do so36
Profits
Shares in the profits according to agreement; if there Shares in the profits according to agreement; if there
is no agreement, in proportion to his contribution37 is no agreement, he shall receive such share as may
be just and equitable under the circumstances.
Losses
General rule: the agreement as to losses; if any. General rule: the agreement as to losses; if any.
However, if there is no agreement, then the
agreement as to profits. Exception: in the absence of agreement, the
industrial partner shall not be liable for losses.
Exception: in the absence of agreement as to profits
and losses, in proportion to his contribution.

Remedies of the capitalist partners against an industrial partner who engaged in

business for himself

1. The capitalist partners may exclude the industrial partner from the partnership plus
damages; or
2. The capitalist partners may avail themselves of the benefits which the industrial
partner may have obtained plus damages.
 Note:
An action for specific performance to compel the partner to perform the promised
industry is not available as a remedy because this will lead to the prohibition on involuntary
servitude under the Philippine Constitution.

Example:
A and B formed a partnership to engage in the repair of computers. Partner A
contributed P100,000 while B contributed his industry. Adjacent the stall of the repair ship,
A opened a coffee shop. At the other side, B opened a store for selling computer parts. May A
and B engage in separate businesses?
A may engage in the coffee shop business as it is not the same kind as the business of
the partnership. While B may not engage in any kind of business, without the consent of A,
because as an industrial partner he must devote his full time to the partnership.

ART. 1790. Unless there is stipulation to the contrary, the partners shall contribute
equal shares to the capital of the partnership. (n)

Example:
A and B entered to into a contract of partnership having an initial capital of
P300,000. How much is the contribution of B?
Obviously, the facts of the case did not mention the separate contribution of partners A
and B. Hence, using the disputable presumption mentioned in the above-stated article, B
contributed P150,000 (P300,000/2 = P150,000).

ART 1791. If 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. (n)

Obligation of capitalist partners to contribute to additional capital

General rule:
Capitalist partners are not bound to contribute additional capital.

Exceptions:

1. Stipulation; and
2. In case of imminent loss of business of the partnership to save the venture. If the
capitalist partners refuse to contribute additional capital, they shall be obliged to sell
their interest to the other capitalist partners who are willing to contribute additional
capital.
 Note:
Contract of partnership is governed by the principle of fiduciary relationship, that
is trust and confidence, so that if a capitalist partner is not willing to make additional
contribution, then there is no more fiduciary relationship to speak of. Of course, the above-
article presumes that the capitalist partners are solvent.
Additionally, the above-stated article is not applicable to industrial partners because
they are already giving their entire industry.

ART. 1792. If a partner authorized to manage collects a demandable sum which was
owed to him in his own name, from a person owed the partnership another sums also
demandable, the sum thus collected shall be applied to the two credits in proportion to
their amounts even though he may have given a receipt for his own credit only; but
should he have given it for the account 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 to the debtor by Article 1252, but only if the personal credit of the
partnership should be more onerous to him. (1684)
Rationale:
To prevent furtherance of the partner’s personal interest to the detriment of the
partnership. The above stated article is not applicable to a partner who is not a
managing partner because there is no basis for the suspicion that the partner is in
bad faith.38

Example:
A and B entered into a contract of partnership. Who is the manager? Clearly,
the facts of the case did not state who is the manager so that the law provides that if
there is no partner designated as a manager in a contract of partnership, then all (A
and B) the partners are managers.39

Obligations of a managing partner who collects debt

Requisites:
1. The existence of at least 2 debts (one where the managing partner is the creditor and
the other where the partnership is the creditor); and
2. Both sums are demandable.

Example:
A and B formed A and B partnership. They agreed that partner A will be the
manager. Subsequently, in a contract, partner A has a receivable against X in the
amount of P100,000 due on August 1, 2020. In another transaction, AB partnership
had a receivable against X in the amount of P300,000 due also on August 1, 2020. On
September 1, 2020, X paid A the amount of P80,000. Should A collect the entire
amount? It depends.
 A. If A issued a receipt for his own credit, then the P80,000 should be applied
proportionately, that is P20,000 (P100,000/400,000 x P80,000) will be applied to his
own credit and the balance of P60,000 (300,000/400,000x P80,000) will be applied to
the credit of the partnership.
B. If A issued a receipt for the credit of the partnership, then the entire P80,000 will be
applied to the credit of the partnership’.
What if in the above problem, the debt of X to A has an interest or that X delivered a car
as a security in the form of pledge or chattel mortgage? In this case, the law allows
partner A to apply for the entire payment of P80,000 to his credit as this is more onerous
of X.

ART. 1793. 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. (1685a)

Rationale:
Equity demands proportionate share in the benefits and losses.40

Article 1792 vs. Article 1793

Article 1792 Article 1793
As to the number of credits
There are two distinct credits, that is, one in There is only one credit, that is, in favor
favor of the partnership and another in of the partnership.
favor of the managing partner.
As to applicability
Applied only if the partner is the managing Applies to any partner.
partner.
As to debtor’s insolvency
The debtor is not insolvent. The debtor has become insolvent.

Example:
A and B entered into a contract of partnership. Subsequently, X owed the
partnership the amount of P500,000. Thereafter, partner A collected P200,000 from X.
Later, X turned insolvent so that B could not collect from X.
In this case, the law provides that partner A should give the share of B in the
amount of P100,000.

Note:
The above article applies whether the partner has received his share in whole or
in part.
ART. 1794. Every 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. (1686a)

Rule:
Damages suffered by the partnership through the fault or negligence of a partner are
not generally subject to set-off with the profits and benefits which that partner may have
earned for the partnership by his industry.

Rationale:
It is the obligation of the partner to earn benefits and profits for the
partnership and it is also his obligation not to cause damages through negligence
for the partnership. These are two distinct obligations that cannot be set-off.
Moreover, in the law on obligation, only a right and an obligation are required to
be compensated or set-off.

Mitigation of liability by the courts

In case of a partner’s extraordinary efforts in other activities of the
partnership, unusual profits have been realized. This principle rests on equity.

ARTICLE 1795 – The risk of specific and determinate things, which are not fungible,
contributed to the partnership so that only their use and fruits may be for the common
benefit, shall be borne by the partner who owns them.
If the things contributed are fungible, or cannot be kept without deteriorating,
or if they were contributed to be sold, the risk shall be borne by the partnership. In
the absence of stipulation, the risk of the things brought and appraised in the
inventory, shall also be borne by the partnership, in such case the claim shall be
limited to the value at which they were appraised. (1687)
RISK OF LOSS
1. Specific and determine things which are not fungible
What was contributed here is only the use of the object.
For example, a partner contributes only the use of the delivery truck. Hence, it is the
partner who bears the risk of loss because the partner did not transfer the ownership to the
partnership.

2. Fungible things
It is the partnership who bears the risk of loss as there was transfer of ownership
after delivery of the fungible things.
3. Things contributed to be sold
It is the partnership who bears the risk of loss as there was transfer of ownership
after delivery of the things that were contributed to be sold.

4. Things brought and appraised in the inventory

It is the partnership who bears the risk of loss as there was transfer of ownership
after delivery of the things brought and appraised in the inventory.

ARTICLE 1796 – The partnership shall be responsible to every partner for the
amounts he may have disbursed on behalf of the partnership and for the
corresponding interest, from the time the expenses are made; it shall also answer to
each partner for the obligation he may have and for risks in consequence of its
management. (1688a)

OBLIGATION OF THE PARTNERSHIP to every partner.

1. To refund the amounts a partner may have disbursed on behalf of the partnership plus the
interest from the time the expenses were made.
Example:
A and B formed AB partnership. Subsequently, B purchased office supplies in the
amount of P20,000 out of his own money with the consent of A on August 1, 2020.
In this case, AB partnership must reimburse the amount of P20,000.
What if AB partnership reimbursed B only on October 1, 2020? In this case, AB
partnership must also be liable for legal interest for two months (from August 1, 2020
to October 1, 2020)

2. To answer to each for obligations, he may have contracted into in good faith in the interest
of the partnership, and for the risks in consequence of its management.
Example:
A and B formed partnership to engage in car repair shop. Subsequently, B purchases on
credit, car accessories from X Corp. in the amount of P400,000. In this case, AB
partnership is answerable to X Corp. for its accounts payable amounting to P400,000.

ARTICLE 1797 – The losses and profits shall be distributed in the 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 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 (1689a)

Being a contract of partnership, each partner must share in the profits and losses of
ventures. That is the essence of a partnership.41
 RULES FOR DISTRIBUTION OF PROFITS AND
LOSSES OF A PARTNERSHIP
1. DISTRIBUTION OF PROFITS
a. According to agreement
The profit shall be distributed in conformity with the agreement.
b. If there is no agreement
1. Capital partners – in proportion to what he may have contributed to the common
fund.
2. Industrial partners – that which is just and equitable under the circumstances.

Example:
A, B, C, and D entered into a contract of partnership. A contributed P5,000,000
in cash while B contributed his only car with a market value of P1,000,000. C also
contributed his only parcel of land with a market value of P2,000,000 while D his
industry as a managing partner. They agreed to share in the profit as follows: A= 40%;
B= 10%; C= 30%; and D= 20%. After their first year of operation, the partnership
realized a net profit of P200,000. How much is the share of every partner in the profit?

Since there is an agreement, their profit sharing will be as follows:

1. A will receive P80,000 (P200,000 x 40%);
2. B will receive P20,000 (P200,000 x 10%);
3. C will receive P60,000 (P200,000 x 30%); and
4. D will receive P40,000 (P200,000 x 20%)

What if there is no agreement? The sharing of the profit will be based on capital
contribution. However, in the present case, there is an industrial partner so that his just
and equitable share must first be given. For example, if it was agreed upon by all of the
partners that the just and equitable share of D, the industrial partner, is P20,000 then
the capitalist partners will share in the remaining P180,000 (P200,000 – P200,000).

Their profit sharing will be as follows:

1. A will receive P112,500 (P5,000,000/P8,000,000 x P180,000);
2. B will receive P22,500 (P1,000,000/P8,000,000 x P180,000,000
3. C will receive P45,000 (P2,000,000/P P8,000,000 x P180,000,000
4. D will receive P20,000 (agreed upon by the partners as his just and
equitable share)

What if aside from the fact that D is an industrial partner, he also contributed cash
in the amount of P2,000,000? This is a case where D is a capitalist-industrial partner.
Based on the same assumption that the just and equitable share of D as an industrial
partner is P20,000.
 Their profits sharing will be as follows:
1. A will receive P90,000 (P5,000,000/P10,000,000 x P180,000);
2. B will receive P18,000 (P1,000,000/P10,000,000 x P180,000);
3. C will receive P36,000 (P2,000,000/ P10,000,000 x P180,000);
4. D will receive P36,000 (P2,000,000/ P10,000,000 x P180,000) plus P20,000
(agreed upon by the partners as his just and equitable share)

2. DISTRIBUTION OF LOSSES
a. According to agreement
The losses shall be distributed in conformity with the agreement. If only agreement
pertains to the share of each partner in the profits, the share of each in the losses shall be in
the same proportion. However, the industrial partner shall not be liable for the losses.
b. If there is no agreement:
1. Capitalist partners – in proportion to what they may have contributed to the common
fund.
2. Industrial partners – not liable for losses.

Example:
A, B, C and D entered into a contract of partnership. A contributed P5,000,000 in
cash while B contributed his only car with a market value of P2,000,000. C also
contributed his only parcel of land with a market value of P2,000,000 while D his
industry as a managing partner. They agreed to share in the profit as well as losses as
follows: A= 40%; B= 10%; C= 30%; and D= 20%. After their first year of operation, the
partnership incurred a net loss of P100,000. How much is the share of every partner in
the loss?
Since there is an agreement, their loss sharing will be as follows:
1. A will share P40,000 (P100,000 x 40%);
2. B will share P10,000 (P100,000 x 10%);
3. C will share P30,000 (P100,000 x 30%); and
4. D will share P20,000 (P100,000 x 20%).

Note:
As a rule, an industrial partner is not liable for losses; however, in the instant
case, D agreed to shoulder 20% in case of loss. Such kind of agreement is valid. It is a
waiver of right on the part of partner D.

What if there is no agreement? The sharing of the losses will be based on capital
contribution. In the present case, there is an industrial partner so that as a rule an
industrial is not liable for losses.
Their loss sharing will be as follows:
1. A will share P62,500 (P5,000,000/P8,000,000 x 100,000);
2. B will share P12,500 (P5,000,000/P8,000,000 x 100,000);
3. C will share P25,000 (P2,000,000/P8,000,000 x 100,000); and
4. D, an industrial partner, is not liable.
 What if aside from the fact that D is an industrial partner, he also contributed
cash in the amount of P2,000,000? This is a case where D is a capitalist- industrial
partner.
Their loss sharing will be as follows:
1. A will share P50,000 (P50,000,000/P10,000,000 x P100,000);
2. B will share P10,000 (P1,000,000/P10,000,000 x P100,000);
3. C will share P20,000 (P2,000,000/P10,000,000 x P100,000); and
4. D will share P20,000 (P2,000,000/P10,000,000 x P100,000

NOTE:
The above-stated article excludes an industrial partner from losses, but he 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 because as to him
and his partners, that will now be treated as a loss.
Consequently, liability refers to the obligation towards third persons and losses
refer to obligation as among the partners.

Problem:
M, Inc. and G, Inc. entered into a Joint Venture Agreement (JVA) for the
construction and development of an office building on a land owned by M, Inc. in Makati
City. The joint venture engaged the service of X, Inc. to provide subsurface soil
exploration, laboratory testing, seismic study and geotechnical engineering for the
project.
X, Inc. then billed the joint venture for P284,553 representing the cost of partial
subsurface soil exploration; and for P250,800 representing the cost of the completed
seismic study. Despite repeated demands from X, Inc. the joint venture failed to pay its
obligation.
Meanwhile, due to unfavorable economic conditions at the time, the joint venture
was cut short and the planned building project was eventually abandoned.
X, Inc. subsequently filed a complaint for collection of sum of money against M, Inc. and
G, Inc.
Which between joint ventures M, Inc. and G, Inc. bears the liability to pay X, Inc.
its unpaid claims?

Answer:
M, Inc. and G, Inc. are jointly liable to X, Inc. A joint venture being a form of
partnership is to be governed by the laws on partnership. Article 1797 of the Civil Code
provides:

Art. 1797. The losses and profits shall be distributed in the 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
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 (1689a)

In the JVA, M, Inc. and G, Inc. agreed on a 50-50 ratio on the proceeds of the
project. They did not provide for the splitting of losses, however. Applying the above-
quoted provision of Article 1797 then, the same ratio applies in splitting the P535,353
obligation-loss of the joint venture.42

ARTICLE 1798 – If the partners have agreed to entrust to a third person the
designation of the share of each in the profits and losses, such designation may be
impugned only when it is manifestly inequitable. In no case may a partner who has
begun to execute the decision of the third person, or who has not impugned the same
within a period of three month from the he had knowledge thereof, complain of such
decision.
The designation of losses and profits cannot be entrusted to one of the partners.
(1690)

Third Person Designating the Share of Partners in the Profits and Losses

General Rule:
It is valid.

Exception:
It is not valid and it may be questioned if it is manifestly inequitable.
1. A partner began to execute the decision of the third person; or
2. A partner has not questioned the said decision of the third person within a period of
3 months from the time he had knowledge thereof.

ARTICLE 1799 – A stipulation which excludes one or more partners from any share in
the profits or losses is void. (1691)

General Rule:
A stipulation excluding one or more partners from any share in the profits and losses
is void. Take note that what are void are the stipulation only and not the contract of
partnership. Hence, the profits and losses shall be distributed as if there was no agreement
as discussed in the preceding article.
Also, let it be noted that one of the tests in order to have a partnership is the intent of
the contracting parties to divide the profits among themselves.

Exception:
An industrial partner is not liable for losses unless he waived this right.

Rationale: Why an Industrial Partner is not liable for losses?

While capitalist partners can withdraw their capital, the industrial partner cannot
withdraw any labor or industry he had already exerted. Moreover, in a certain sense, he
 already has shared in the losses in that, if the partnership shows no profit, this means
that he has labored in vain.43

ARTICLE 1800 – The partnership 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. (1692a)

Example of an act administration

A managing partner of a partnership may execute all acts of administration including
the right to sue debtors of the partnership in case of their obligation when it became due and
demandable.

Who shall manage the partnership?

Either one, some or all of the partners designed as managing partner/s either in the
articles of partnership or after the contract of management is vested in all of the partners.

TWO MODES OF APPOINTMENT

1. Appointment as manager in the articles of partnership; or
2. Appointment as manager made in an instrument other than the articles of partnership.

I. APPOINTMENT AS MANAGER IN THE ARTICLES OF PARTNERSHIP

General Rule:
1. To remove him for just cause, vote of partners having controlling interest is
necessary;44
2. To remove him without just cause, there must be unanimity including his own vote.

Reason:
This represents a change in the will of the parties; a change in the terms of the
contract; a novation; so to speak, requiring unanimity.45

EXTENT OF POWER:
1. If he acts in good faith, he may do all acts of administration despite the opposition of his
partners.
2. If he acts in bad faith, he cannot do any act of administration. It must be noted that the
presumption in law is in favor of good faith.
II. APPOINTMENT AS MANAGER MADE IN AN INSTRUMENT OTHER THAN THE
ARTICLES OF PARTNERSHIP
Rule:
The power to act may be revoked at any time, with or without just cause by the
partners owning the controlling interest.

Reason:
Such appointment is a mere delegation of power; revocable at any time.46

Extent of power:
The manager can do all acts of administration.

ARTICLE 1801 – If two or more partners have been entrusted with the management of
the partnership without specification of their respective duties, or without a
stipulation that one of them shall not act without the consent of all the others, each
one may separately execute all acts of administration, but if any of them should
oppose the acts of the others, the decision of the majority shall prevail. In case of a tie,
the matter shall be decided by the partners owning the controlling interest. (1693a)

When Two or More Managing Partners have been Entrusted with the Management
Requisites:
1. Two or more partners are managers;
2. There is no specification of respective duties; and
3. There is no stipulation requiring unanimity, that is, that one of them shall not act
without the consent of all the others.

General Rule:
Each one may separately execute all acts of administration.

Exceptions: If any of the managers should oppose:

1. The decision of the majority (per head) of the managing partners shall prevail.
2. In case of a tie, the decision of the managing partners owning the controlling interest
(more than 5%) shall prevail.

Note:
The right to oppose is not given to non-managers because in appointing their
other partners as managers, they have stripped themselves of all participation in the
administration.47

Example:
A (15%), B(10%), C(35%), D(20%), E(10%), and F(10%) are partners in AF
partnership. It was agreed upon that the managers are A, B, C, D. Afterwards, an issue
arose on whether or not to enter into a contract of lease with X Corp. managers A, B, and
C agreed to enter into a contract with X Corp. but D opposed the offer.
 In this case majority (per head) prevails, that is, AF partnership will enter into
a contract with X Corp.
What if A and B want to enter into a contract with X Corp. but C and D do not
want to enter into a contract? Since we have a tie per head count, the next rule is to go
their controlling interest so that A and B have a total of 25% (15% + 10%) interest while
C and D have a total of 55% (35% + 20%) interest, the latter shall prevail that is AF
partnership will not enter into a contract with X Corp.
Take note that partners E and F do not participate in management being non-
managers; thus, as a rule, they have no power or authority in all acts of administration.

Problem:
X is the proprietor of X Construction and Trading (XCT). On May 24, 1999, X
executed a Special Power of Attorney (SPA) authorizing Y to participate in the bidding
of a National Irrigation Administration (NIA) project.
On September 29, 1999, Y, participated in the bidding of a project and was
awarded the construction of a road system with a project cost of P5,613,591.
When W learned that Y is in need of heavy equipment for use in the NIZ project,
he met up with Y, in an apartment where the latter was holding office under an XCT
signboard. A series of meetings followed in said XCT office among W, X and Y.
On December 2 and 20, 1999, W and Y signed two Agreements for lease of W’s
dump trucks to XCT.
On April 27, 2000, X revoked the SPA he previously issued in favour of Y;
consequently, NIA refused to make payment to Y on her billings. W, therefore, could not
be paid for the rent of the equipment.
In a letter dated April 5, 2000, W demanded from Y and/or XCT payment of the
outstanding rentals which amounted to P726,000 as of March 31, 2000.
Is there a partnership? If yes, can X or Y separately execute all acts of
administration?

Answer:
X (or more appropriately XCT) and Y had entered into a partnership with regard
to the NIA project. X’s contribution thereto is his contractor’s license and expertise, while
Y would provide and secure the needed funds and labor, materials, and services and deal
with the suppliers and sub-contractors. For this, X would receive as his share 3% of the
project cost while the rest of the profit shall go to Y, X admitted this arrangement.
Evidence shows that when Y and W met and discussed (at the XCT office) the
lease of the latter’s heavy equipment for use in the project, X was present and interposed
no objection to Y’s actuations. Quite the contrary, Y’s actions were in accord with what
she and X originally agreed upon, as to division of labor and delineation of functions
within their partnership.
 Under the Civil Code, every partner is an agent of the partnership for the purpose
of its business; each one may separately execute all acts of administration, unless a
specification of their respective duties has been agreed upon, or else it is stipulated that
any one of them shall not act without the consent of all the others. At any rate, X does
not have any valid cause for opposition because his role in the partnership is to provide
his contractor’s license and expertise, while the sourcing of funds, materials, labor and
equipment has been relegated to Y.
X should be made civilly liable for abandoning the partnership, leaving Y to fend
for her own, and for unduly revoking her authority to collect payments from NIA,
payments which were necessary for the settlement of obligations contracted for and
already owing to laborers and suppliers of materials and equipment like W, not to
mention the agreed profits to be derived from the venture that are owing to Y by reason
of their partnership agreement.

ARTICLE 1802 – In case it should have been stipulated that none of the managing
partners shall act without the consent of the validity of the acts, and the absence or
disability of any one of them cannot be alleged, unless there is imminent danger of
grave or irreparable injury to the partnership. (1694)

Stipulation Requiring Unanimity of Action

General Rule:
Unanimous consent of all the managing partners (even if one of the managers is
absent or incapacitated) shall be necessary for the validity of the acts and absence or
disability of any managing partner cannot be alleged.

Exception:
When there is an imminent danger of graver or irreparable injury to the partnership.

ART. 1802 NOT applicable to third person

The stipulation in the articles of partnership that any of the two managing partners
may contract and sign in the name of the partnership with the consent of the other,
undoubtedly creates an obligation between the two partners, which consists in asking the
other’s consent before contracting for the partnership. This obligation of course is not
imposed upon a third person who contracts with the partnership. Neither it is necessary for
the third person to ascertain if the managing partner with whom he contracts has previously
obtained the consent of the other. A third person may and has a right to presume that the
partner with whom he contracts has, in the ordinary and natural course of business, the
consent of his co-partner; for otherwise he would not enter into the contract. The third
person would naturally not presume that the partner with whom he enters into the
transaction is violating the articles of partnership, but on the contrary is acting in accordance
therewith. And this finds support in the legal presumption that the ordinary course of
business has been followed, and that the law has been obeyed. This last presumption is
equally applicable to contracts which have the force of law between the parties.
ART. 1803 – When the manner of management has not been agreed upon, the
following rules shall be observed:
(1) All the partners shall be considered agents and whatever any one of them may
do alone shall bind the partnership, without prejudice to the provisions of article
1801.
(2) None of the partners may, without the consent of the others, make any
important alteration in the immovable property of the partnership, even if it may
be useful to the partnership. But if the refusal of consent by the other partners is
manifestly prejudicial to the interest of the partnership, the court’s intervention
may be sought. (1695a)

Rules When Manner of Management Has Been Agreed Upon

1. All the partners shall be considered as managers. Consequently, all partners can do all
acts of administration. If the acts of a partner are opposed by the other partners, the
majority (per head) shall prevail.

Example:
A, B, C, and D formed ABCD partnership. In case, it is presumed that all of the
partners are managers. Therefore, in case of opposition in decision-making of one or some
of the partners, we follow the rules stated in Article 1801, that is, majority wins (per head)
and in case of tie, then it will be decided by the vote of the partners representing the
controlling interest.

2. For important alterations in immovable property, unanimity is required.

Note:
Paragraph 2 deals only with immovable property.
a) First, because of their comparative greater importance than personality.
b) Second, because, in a proper case, they should be returned to the partners in
the same condition as when they were delivered to the partnership.

Consent of the others may be expressed or implied (as when the partner has knowledge
of the alteration and no opposition were made by them).

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. (1696)

The above stated article refers to Contract of Sub-partnership. In a contract of sub-

partnership, the consent of the other partners is not required. Hence, all partners can have
an associate in his share or sub-partner.
 It is a rule that no one can become a partner in a partnership without the consent of
all of the partners. Consequently, an associate or sub-partner shall not be admitted into the
partnership without the consent of all the other partners based on the following reasons:

a. Mutual trust is the basis of partnership; and

b. A change in membership is a modification or novation of the contract.52

Example:
A, B, C, and D entered into a contract of partnership. By virtue of a contract of
loan, D borrowed P50,000 from X and one of their stipulations is that 50% of the share
of partner D in the partnership income will be applied or deducted from the obligation
of D to X. In the first year of operation of the partnership, it earned a net income of
P100,000 and it was agreed that the share of D will be P25,000. Therefore, P12,500
(25,00 x 50%) will be applied or deducted from the obligation of D to X.