Agency, Trust and Partnership Review Notes.pdf

LAW ON PARTNERSHIP
ARTICLE 1767 – 1867 , NEW CIVIL CODE OF THE
PHILS.

‘Partnership’ Defined
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It is acontract whereby 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, or in order to exercise a profession.
(See Art. 1767).
It is also astatus and afiduciary relation subsisting
between persons carrying on a business in common
with a view on profit.

Requisites for Existence of Partnership
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In general, to show the existence of a partnership, all of its
essential characteristics must be proved; in particular it must be
proved that:
(a) there was anintention to create a partnership
(b) there was a common fund obtained from contributions
(c) there was a joint interest in the proﬁts.

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THEREFORE:
(a) mere co-ownership or co-possession (even with proﬁt-
sharing)
(b) mere sharing of GROSS returns (even with joint ownership
of the properties involved)
donot establish a partnership.

Characteristics of the Contract
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A. The contract isconsensual , because it is perfected by mere
consent, although such consent must be manifested in certain
cases by the proper formalities;
bilateral ormulti-lateral , because it is entered into between two or
more persons;
nominate, because it is designated by a speciﬁc name;
principal , because its existence does not depend on the life of
another contract
Onerous, because certain contributions have to be made; and
preparatory, in the sense that
after it has been entered into, other
contracts essential in the carrying out of its purposes can be
entered into.

B. There must be contribution to a common fund
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True or False?
A promissory note evidencing collectible may be contributed to a
common fund.
Political Credit is not a valid contribution.
A license to construct may validly part of the contribution.
The “industry” contributed may be intellectual or physical
A limited partner cannot contribute mere “industry.

C. The object must be alawful one.
D. There must be an intention of dividing the profit among
the partners
(Art. 1767) since the firm is for thecommon benefit or
interest of the partners

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A partnership was validly created:
where two people jointly borrowed from their father a sum of
money which,
together with their own personal funds,
was used by them in buying real properties
for lease to third parties,
such investment consisting of a series of transactions and
the management thereof being under one person
for more than 10 years
(Evangelista, et al. v. Coll. of Int. Rev., L-9996, Oct. 15, 1957)

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NOTE: The object must be for proﬁt and not merely for common
enjoyment; otherwise, only a
co-ownership has been formed.
E. There must be theaffectio societatis — the desire to
formulate an ACTIVE union
(Fernandez v. De la Rosa, 1 Phil. 671)
with people among whom there exist
mutual conﬁdence and
trust
(delectus personarum).

HOW CREATED VOLUNTARY agreement of parties
HOW LONG IT EXISTS No time limit except agreement of parties
LIABILITY TO
STRANGERS
may be liable with their private property
beyond their contribution to
the ﬁrm
TRANSFERABILITY OF
INTEREST
even if a partner transfers his interest to
another, the transferee does not become a
partner unless all other partners consent (This
is due to the principle of mutual trust and
conﬁdence —
the“delectus personarum.” )

ABILITY TO BIND
THE FIRM
generally, partners acting on behalf of the
partnership are
agents thereof; consequently they
can bind both the firm and the partners
MISMANAGEMEN
T
a partner can sue a partner who mismanages
NATIONALITY A partnership is a national of the country it was
created
ATTAINMENT OF
LEGAL
PERSONALITY
the firm becomes a juridical person from the time
the contracts begins
DISSOLUTION death, retirement, insolvency, civil interdiction, or
insanity of a partner dissolves the firm

Partnership’ Distinguished from ‘Business
Trusts’
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When certain persons entrust their property or money to others
who will manage the same for the former, a business trust is
created.
The investors are calledcestui que trust ; the managers are the
trustees. In a
true business trust, the
cestui que trust
(beneﬁciaries) do not at all participate in the management;
hence, they are exempted from personal liability, in that they can
be bound only to the extent of their contribution.

Partnership’ Distinguished from ‘Agency’
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“Agency” may in one sense be considered the broader term
because “partnership” is only a form of “agency.’’
An agent never acts for himself but only for his principal; a
partner is both a principal (for his own interests) and an agent
(for the ﬁrm and the others).

Partnership’ Distinguished from a ‘Joint Adventure’
(or JOINT ACCOUNTS)
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A joint adventure (an American concept similar to ourjoint
accounts ) is a sort of informal
partnership , with no ﬁrm name
and no legal personality. In a joint account, the participating
merchants can transact business under their own name, and can
be
individually liable therefor.
Usually, but not necessarily, a joint adventure is limited to a
SINGLE TRANSACTION, although the business of pursuing it to
a successful termination may continue for a number of years; a
partnership
generally relates to a continuing business of various
transactions of a certain kind.

Capacity to Become Partner: True or False?
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In general, a person capacitated to enter into contractual
relations may become a partner.
Anunemancipated minor cannot become a partner unless his
parent or guardian
consents . Without such consent, the
partnership contract is
voidable, unless other partners are in the
same situation, in which case the contract is unenforceable.

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Amarried woman , even if already of age, cannot contribute
conjugal funds as her contribution to the partnership, unless she is
permitted to do so by her
husband (See Art. 125, Family Code), or
unless she is the
administrator of the conjugal partnership, in
which
latter case, the court must give its consent/authority
Apartnership being a juridical person by itselfcan, it is believed,
form another partnership, either with private individuals or with
other partnerships, there being no prohibition on the matter.

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The majority view is that acorporation cannot become a partner
on grounds of
public policy; otherwise, people other than its
oﬃcers may be able to bind it.
However, a corporation can enter into ajoint venture with another
where the nature of that venture is in line with the business
authorized in its charter. Thus, a corporation, like the Gregorio
Araneta Co., may act as a sort of “managing partner” of another
corporation, for the purpose of conducting a lawsuit in line with
the corporate business of the corporations concerned.

Effect on Non-Compliance With Art. 1772, 1st Paragraph
(Registration With the Securities and Exchange
Commission)
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Under Art. 1772, “every contract of partnership having a capital
of
P3,000 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.”
Now then, suppose this requirement hasnot been complied with,
is the partnership still a juridical person, assuming that all
other
requisites are present?

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ANS.: Yes, in view of the express provision of Art. 1768.
Art. 1772 “is not intended as a prerequisite for the acquisition of
juridical personality by the partnership, but merely as 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.”

Consequences of the Partnership Being a Juridical
Entity
• A. Its juridical personality is SEPARATE and DISTINCT from that
of
each of the partners.
(Thus, in the partnership “Sundiang and Castillo,” there arethree
persons:
1.) Sundiang,
2.) Castillo, and
3.) the ﬁrm “Sundiang and Castillo”.)

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B. The partnership can, ingeneral:
1) acquire and possess property of all kinds
2) incur obligations(Art. 46, Civil Code);
3) bring civil or criminal actions(Art. 46, Civil Code);
4) can be adjudged INSOLVENT even if the individual members
be each ﬁnancially solvent.
(C) Unless he is personally sued, a partner has no right to make a
separate appearance in court, if the partnership being sued is
already represented.

Limitations on Alien Partnerships
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If at least 60% of the capital of a partnership isnot owned by
Filipinos, the ﬁrm
cannot acquire by purchase or otherwise
agricultural Philippine lands.
Foreign partnerships may lease lands provided the period does
not exceed 99 years
, there being no prohibition regarding lease.
Foreign partnerships may be themortgagees of land, the
mortgage to last for 5 years, renewable for another years.
However, they
cannot purchase the same at the foreclosure sale.

Rules in Case of Associations Not Lawfully Organized as
Partnerships
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(a) If an association is not lawfully organized as a partnership
(though it apparently carries on the business as a partnership), it
possesses no legal personality. Therefore, it
cannot sue as such.
However, the “partners”, in their individual capacity, can
(b) One who enters into contract with a “partnership” as such (as
when he borrows money therefrom)
cannot, when sued later on
for recovery of the debt, allege the
lack of legal personality on
the part of the ﬁrm, even if indeed it had no personality. The
reason is that the borrower is in estoppel.

Sharing of Net Profits
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Sharing of NET profits isprima facie evidence that one isa partner
except in the
five instances enumerated under
Art. 1769 (No. 4).
(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:

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(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.

Example
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D, to carry on a business, borrowed money fromC .
It was agreed thatD would return the money in installments and
that said installments would come from
D’s proﬁts in the
business.
Issue: Is a partnership created betweenD andC ?
ANS.: No. A difference must be made between LENDING money
to a business proprietor, and contributing money and INVESTING
it as CAPITAL in the business.

Fortis v. Gutierrez Hermanos 6 Phil. 100
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FACTS: Fortis was a bookkeeper in a partnership named
“Gutierrez Hermanos”, with a yearly salary amounting to 5% of
the net proﬁts for each year. Fortis, however, had no vote at all in
the management of the business.
Issue: Was he a partner?
HELD: No, for clearly this was a mere contract of employment.

Bastida v. Menzi and Co. 58 Phil. 188
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FACTS: Bastida worked for Menzi and Co.,as procurer of
contracts for fertilizers to be manufactured by the firm, and as
supervisor of the mixing of the fertilizers. However, he had no
voice in the management of the business except in his task of
supervising the mixing of said fertilizers.
For hisservices, he was entitled to 35% of the net profits in the
fertilizer business. Aside from this, he sued the firm for 35% of
the value of its
goodwill on the ground that he had become a
partner thereof.
Was he a partner?

•HELD: He wasnot a partner, but a mere employee with no power
to vote. While the parties had used the phrase
“en sociedad con,”
the truth is that this should not be interpreted to mean “in
partnership with” but only as
“en reunion con” or
“in association
with.”

Lyons v. Rosenstock 56 Phil. 632
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FACTS: Eliser and Lyons were real estate dealers who often
associated with each other in their business deals, and who
owned together a certain parcel of land. With Lyon’s consent,
Eliser mortgaged the
common land to obtain money for the
development of the
San Juan Estate. Lyons however expressed
a desire
not to participate in the project of development.
The business of Eliser prospered and later on Lyons asked for a
share obtained from the mortgage of the common property, and
that therefore, he and Eliser had been partners. Was there a
partnership created?

•HELD: No partnership was created, for Lyons himself did not
want to engage in the development project, the mortgage of the
common property being immaterial.

Valderrama and Co.
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Valderrama and Co., a general merchandise partnership, has
become insolvent for maladministration of the business and
entered into an agreement with its creditors to the effect that
the business should be continued for the time being under the
direction and management of an experienced businessman
appointed by the creditors, an arrangement to be carried out
until the claims of the creditors are fully satisﬁed.
Can you consider the creditors who are parties to the agreement
partners? Reasons.

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ANS.: The creditors are not partners, for their only interest in the
sharing of proﬁts is the
receipt or payment of their credits. (Art.
1769).
Moreover, in a partnership, the partners are supposed to trust
and have conﬁdence in all the partners — this element is not
present in the instant case.

Partnership by Estoppel
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If two persons not partners represent themselves as partners to
strangers, a partnership by estoppel results.
Similarly when 2 persons, who are partners, in connivance with
a friend (who is
not a partner), inform a stranger that said friend
is their partner, a partnership by estoppel may also result to the
end that the stranger should not be prejudiced.

Lawful Object or Purpose
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If a partnership has several purposes, one of which is unlawful,
can the partnership still validly exist ?
Yes, so long as the illegal purpose can be separated from the
legal purposes.

Is a Judicial Decree Needed to Dissolve an Unlawful
Partnership?
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ANS.: No, for the contract is void from the very beginning, and
therefore never existed from the viewpoint of the law.
However, there would be nothing wrong in having the court
dissolve the partnership. This will be good and convenient for
everybody; moreover, there may be a question as to
whether or
not the partnership is indeed unlawful.
This is particularly true when the object was lawful at the
beginning but has
later on become unlawful.

Instances When a Partnership Is Unlawful
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A partnership formed to furnish apartment houses which would
be used for prostitution.
A partnership for gambling purposes
A partnership formed for the purpose of acquiring parcels of
land much in excess of the maximum allowed by the Friar Lands
Act

Consequences of Unlawful Partnership
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(a) If the ﬁrm is also guilty of a crime, the Revised Penal Code
governs both the criminal liability and the
“forfeiture of the
proceeds of the crime and the
instruments or tools with which it
was committed.
Such proceeds and instruments or tools shall be conﬁscated
and forfeited in favor of the Government, unless they be the
property of a
third person not liable for the offense, but those
articles which are not subject of lawful commerce shall be
destroyed.”
(Art. 45, Rev. Penal Code).

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(b) The partners forfeit the proceeds or proﬁts, but NOT their
contributions, provided no criminal prosecution has been
instituted.
(Arbes v. Polistico, 53 Phil. 489). If the contributions
have already been made, they can be RETURNED; if the
contributions have
not yet been made, the partners cannot be
made to make the contribution.
(c) An unlawful partnership has no legal personality.

Arbes v. Polistico, et al. 53 Phil. 489
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FACTS: An organization, “Turnuhan Polistico and Co.,” was
engaged in conducting a lottery among its partners-members
every weekend. The members contributed a weekly amount, all
of which except a certain amount were distributed in turn to the
lottery winners. Obviously, the court had no alternative except to
declare the partnership an unlawful one.
Issue: Can the partners get back their capital? their proﬁts?

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HELD: Capital- YES, Profit- No
The partners can get back their capital, for the law speaks only of
the confiscation of profits which certainly should not be returned,
first because of the express provision of the law on profits, and
second, because to legally get profits, the action must be based
on a lawful contract or transaction, not an illegal one like this.
Recovery of the capital indeed may be had, except if the same can
come under the category of “instruments and effects of the crime.”

Formalities Needed
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(a) For VALIDITY of the contract (among the parties) as well as
for ENFORCEABILITY, NO FORM is required as a
general rule,
regardless of the value of the contributions.
Therefore, the contract may even be ORAL.(Magalona v.
Pesayco, 59 Phil. 453). (
Note that a partnership contract is not
one of those covered by the Statute of Frauds.)

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Exception: Wheneverreal properties orreal rights in real
properties are contributed —
regardless of the value — a PUBLIC
INSTRUMENT is needed.
(The contract itself must be in the public instrument; moreover,
there must be an INVENTORY of the immovables. This
INVENTORY must be
signed by the parties and
attached to the
public instrument.) (See Art. 1773, Civil Code).
[NOTE: Without the public instrument,the partnership is VOID.

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[NOTE: The inventory is important to show how much is due from
each partner to complete his share in the common fund and how
much is due to each of them in the event of liquidation.
(Tablason
v. Bollozos, et al., C.A., 51 O.G. 1966). Without such inventory, the
contract is void.
(b) For EFFECTIVITY of the partnership contract insofar as
innocent third persons are concerned, the same must be
REGISTERED if REAL PROPERTIES are involved.

Case Illustration
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A partnership was formed orally though more than P500 was
contributed in cash. Now then, under the last paragraph of Art.
1358, contracts “where the amount involved exceeds P500 [such
contract] must appear in
writing, even a private one.”
Should the oral partnership formed be considered valid?

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ANS.: Yes, because Art. 1358 applies only for the purpose of
convenience and not for validity or enforceability. Being valid,
the contract can be put in writing upon the demand of any of the
parties.
Hadreal property been contributed, the oral partnership would
be
void; and therefore not one of the partners can compel the
others to execute the public instrument.

Magalona v. Pesayco 59 Phil. 453
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FACTS: Pesayco, a partner in anoral partnership for the
catching of ﬁsh, with
cash as the only contributions thereto
refused to account for proceeds of the ﬁrm on the ground that
the agreement was not in writing. Is he correct?
HELD: No, because the oral partnership is valid, real properties
not having been contributed.

Agad v. Mabato L-24193, Jun. 28, 1968
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FACTS: On Aug. 29, 1952, a partnership was entered into between
Mauricio Agad and Severino Mabato “to
operate a fishpond.” Neither
partner contributed a fishpond or a real right to any fishpond. Their
contributions were limited to the sum of P1,000 each.
The partnership contract was in apublic instrument, but an inventory
of the fishpond to be operated was
not attached to said instrument.
ISSUE: Is the contract of partnership valid?

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HELD: Yes, the contract is valid, despite the lack of the inventory.
The purpose of the partnership was
not “to engage in a fishpond
business” but “to
operate a fishpond.” Neither said fishpond nor a
real right thereto was contributed to the partnership, or became
part of the
capital thereof, even if a fishpond or a real right
thereto could become part of its assets.
Art. 1773 which states that “a contract of partnership is void,
whenever immovable property is
contributed thereto, if inventory
of said property is not made, signed by the parties, and attached
to the public instrument,” is, therefore, NOT APPLICABLE.

Problems
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If two persons agree to form a partnership in the future, does
the partnership immediately arise from the moment of said
agreement?
ANS.: No. An agreement toform a partnership does not of itself
create a partnership. When there are conditions to be fulfilled or
when a certain period is to elapse, first, the partnership is not
created till after the fulfillment of the conditions or the arrival of
the term, and this is true even if one of the parties has already
advanced his agreed share of the capital.

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A andB today orally agreed to form a partnership one and a half
years from today, each one to contribute P1,000.
If at the arrival of the period, one refuses to go ahead with the
agreement, can the other enforce the agreement?

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ANS.: No, because the agreement was merelyoral and
executory. It is true that a partnership contract is not governed
by the Statute of Frauds but here, there is merely an agreement
to form a partnership in the future.
Since therefore the agreement is to be enforcedafter one year
from the making thereof, the same should be in writing to be
enforceable under the
Statute of Frauds.

Speciﬁc Performance not applicable
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[NOTE: In one case our Supreme Court ruled that even if there
was a prior agreement to form in the future a partnership, still if
one of those who had so agreed refuses to carry the agreement
and to execute the necessary partnership papers, he cannot be
obliged to do so. For here, his obligation is one to DO,
not to
GIVE.
This is, therefore, a very personal act(acto personalisimo) of
courts may not compel compliance, as it is an act of violence to
do so.

Classiﬁcation of Partnerships
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(a)According to manner of creation:
1) orally constituted
2) constituted in a private instrument
3) constituted in a public instrument
4) registered in the Oﬃce of the Securities and Exchange
Commission

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(b) According to object:
1) universal
a) with all present property
b) with all profits (the individual properties here continue to
be owned by the partners, but the usufruct thereof passes to
the firm)
2) particular — here the object are determinate things, their use
or fruits; a specific undertaking, or the exercise of a profession
or occupation
(Art. 1783, Civil Code).

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(c) According to liability:
1) limited partnership — that where at least one partner is a
general partner, and the rest are limited partners. (
NOTE: A
general partner is liable beyond his contribution; a limited
partner is liable only to the extent of his contribution.)
2) general partnership — that where all the partners are
general partners.

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(d) According to legality:
1) lawful or legal
2) illegal or unlawful
(e) According to duration:
1) for a speciﬁc period or till the purpose is accomplished
2) partnership at will
a) here, no period, express or implied, is given and so its
duration depends on the will of the partners;
b) if the period has expired, but the partnership continued,
without liquidation, by the partners who habitually acted as
such during the term.

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(f)According to representation to others:
1) ordinary partnership
2) partnership by estoppel

Classiﬁcation Into General and Limited
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Ageneral partnership is one whereall the partners aregeneral
partners (that is, they are liable even with respect to their
individual properties, after the assets of the partnership have
been exhausted).
A limited partnership is one where atleast one partner is a
general partner and the others are limited partners. (A
limited
partner is one whose liability is limited only up to the extent of
his contribution.)

All are limited partners?
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A partnership where all the partners are “limited partners”
cannot exist as a limited partnership; it will even be refused
registration.
If at all it continues, it will be ageneral partnership, and all the
partners will be general partners.

Formalities Needed for the Creation of a Partnership
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(a) Personal property
1) less than P3,000 (total) — may be oral
2) P3,000 or more — must be in a public instrument and
registered in the Securities and Exchange Com- mission. But
even if this is not complied with, the partnership is still valid and
possesses a distinct personality.
(Arts. 1772, 1768, Civil Code).
Evidently, the requirement is merely for administrative and
licensing purposes.

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(b) Real property — Regardless of the value contributed, a
public instrument is needed, with an
attached inventory;
otherwise the partnership is VOID and has NO juridical
personality even as between the parties.
Moreover, to be effective against third parties, the partnership
must also be registered in the Registry of Property of the
province where the real property contributed is found.
After all, there is an alienation here of areal right on real
property.

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(c) Limited partnership — must be registered AS SUCH in the
Oﬃce of the Securities and Exchange Commission; otherwise, it
is
not valid as a limited partnership.
(
NOTE: However, even without such registration, it may still be
considered a general
partnership, and as such, possesses
juridical personality)

Kinds of Universal Partnerships
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(a) Partnership of all present property
(b) Partnership of all proﬁts

ALL PROFITS ALL PRESENT PROPERTY
Only the USUFRUCT of the properties
of the partners becomes COMMON
PROPERTY (owned by them and the
partnership); NAKED OWNERSHIP is
retained by each of the partners.
All the property actually belonging to
the partners are CONTRIBUTED —
and said properties become
COMMON PROPERTY (owned by all
the partners and by the partnership).
ALL PROFITS acquired by the
INDUSTRY or WORK of the partners
become COMMON PROPERTY
(regardless of
whether or not said
proﬁts were obtained through the
usufruct contributed).
As a rule , aside from the contributed
properties,
only the PROFITS of said
contributed COMMON PROPERTY
(not other proﬁts).

NOTE: All Present Property
Proﬁts from other sources may become COMMON, but only if
there is a stipulation to such effect.)
Properties subsequently acquired byinheritance, legacy , or
donation, cannot be included in the stipulation, BUT the
fruits
thereof can be included in the stipulation.)

Future Property Can Not Be Included
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Reasons why future (by inheritance, legacy, donation) property
cannot be included in the stipulation regarding the
universal
partnership of all present property:
(a) First, as a rule, contracts regardingsuccessional rights cannot
be made.
(b) Secondly, a partnership demands that the contributedthings be
determinate, known, and certain.
(c) Thirdly, a universal partnership of all present properties really
implies a donation, and it is well-known that generally, future
property cannot be donated.

ALL PRESENT PROPERTY
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A andB entered into a universal partnership of all present
property.
No stipulation was made regarding other properties.
Subsequently, A received a parcel of land by inheritance from his
father; and another parcel of land from the San Beda College as
remuneration for
A’s work as professor therein.
Question: Are thetwo parcels of land and their fruits to be
enjoyed by the partnership?
ANS.: No, because there was no stipulation regarding future
properties or their fruits.

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Same as (a) except that in the contract, it wasstipulated thatall
properties
subsequently acquired would belong to the partnership.
ANS.: The land acquired as salary as well as its fruits will belong
to the ﬁrm; but the land acquired later by
inheritance will NOT
belong to the partnership since this cannot be stipulated upon.
(Art. 1780).
The fruits of the inherited land will go to the ﬁrm because said
fruits may be considered as properties
subsequently acquired, and
there is no
prohibition to
stipulate on fruits, even if the fruits be
those of properties acquired later on by inheritance, legacy, or
donation.

on Proﬁts
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In a universal partnership of proﬁts,A contributed the use of his
car. At the end of the partnership, should the car be returned to
him?
ANS.: Yes, because the naked ownership had always been with
him, and upon the end of the usufruct, full ownership reverts to
him. Remember that only its use had been previously
contributed.

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A andB entered into a universalpartnership of proﬁts.
Subsequently,
A won 1st prize in the sweepstakes. Will the
money belong to the partnership?
ANS.: No, because it was not acquired by “industry or work.

•
•
•
•
A andB entered into a universalpartnership of profits.
Subsequently
A became a teacher at the Poveda Learning Centre.
Will
A’s salary belong to the partnership?
ANS.: Yes, even though no stipulation was made on this point
because after all the salary was acquired by
A ’s “industry or work
during the existence of the partnership.”
(Art. 1780, par. 1).
Such “profit” belongs therefore to the firm as a matter of RIGHT.
Of course, had there been a stipulation that such salary would be
excluded, the stipulation would be VALID.

•
•
•
A andB entered into a universalpartnership of profits. Later,A
purchased a parcel of land. Will the fruits of said land belong to the
partnership?
ANS.: As a rule, NO, because the usufruct (use and fruits) granted to
the firm under Art. 1780, par. 2 refers only to that of the property
possessed by the partner at the
time of the celebration of the contract.
It follows that fruits of after-acquired property do not belong to the
firm as a matter of right. However, it would be
valid to stipulate that
the usufruct of after-acquired properties would belong to the
partnership.

Presumption:
• Art. 1781. Articles of universal partnership, entered into without
speciﬁcation of its nature, only constitute a universal
partnership of proﬁts.

Persons Who Together Cannot Form a Universal
Partnership
•
•
•
•
(a) Husband and wife — as a rule.(Art. 133, Civil
Code).
(b) Those guilty of adultery or concubinage.(Art. 739, Civil
Code).
(c) Those guilty of the same criminal offense, if the partnership
was entered into in consideration of the same.
(Art. 739, Civil
Code).

Reason for the Article
• 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.

Particular Partnership’
•
•
To construct a building; to buy and sell real estate; to practice
the law profession. Here in a sense, it is as if all the members
are industrial partners.
NOTE: A husband and his wife may enter into a particular
partnership.)

OBLIGATIONS OF THE PARTNERS
• OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES

Different Relationships
•
•
•
•
•
•
•
When two persons,A andB , form a partnership, different
relations may arise:
(a) Relations betweenA andB;
(b) Relations betweenA andB on the one hand, and the
partnership on the other hand;
(c) Relations betweenA andB on the one hand, andthird
persons on the other hand;
(d) Relations between thepartnership and thethird persons.

Some Obligations of a Partner
•
•
•
•
•
•
(a) To give his contribution.
(b) Not to convert firm money or property for his own use.
(c) Not to engage in unfair competition with his own firm.
(d) To account for and hold as trustee, unauthorized personal profits.
(e) Pay for damages caused by his fault.
(f) Duty to credit to the firm, payment made by a debtor who owes
him and the firm.
(g) To share with the other partners the share of the partnership
credit which he has received from an insolvent firm debtor.

Some Rights of a Partner
•
•
•
•
(a) property rights.(Art. 1810, Civil Code).
1) rights in specific partnership property (example —rights in a
car contributed to the firm).
2) interest in the partnership (share in the profits and surplus).
3) right to participate in the management.(Art. 1810, Civil Code).
[NOTE: This right is not given to the limited partner.(Art. 1848,
Civil Code).]

•
•
•
•
(b) right to associate with another person in his share.(Art.
1804, Civil Code).
(c) right to inspect and copy partnership books.(Art. 1805, Civil
Code).
(d) right to demand a formal account.(Art. 1809, Civil Code).
(e) right to ask for the dissolution of the ﬁrm at the proper time.

Rule if Contributions Have Not Yet Been Actually
Made
• Generally, even if contributions have not yet been made, the ﬁrm
already
exists, for partnership is a
consensual contract (of
course all the requisite formalities for such consent must be
present).

Duration of a Partnership
• A partnership is unlimited as to its duration in the sense that no
time limit is fixed by law. The duration may be agreed upon —
expressly (as when there is a definite period) or
impliedly (as
when a particular enterprise is undertaken — it being understood
that the firm ends as soon as its purpose has been achieved).

Partnership “At Will”
•
•
•
•
•
There are two kinds of a partnership “at will.”
(a) 1st kind — when there is no term, express or implied
(b) 2nd kind — when it is continued by the habitual managers —
although the period has ended, or the purpose has been
accomplished.
This is“prima facie” evidence of the ﬁrm’s continuation.)
It is called “at will” because its continued existence really
depends upon the will of the partners, or even on the will of any
of them.

Three Important Duties of Every Partner
•
•
•
(a) the duty tocontribute what had been promised;
(b) the duty to deliver thefruits of what should have been
delivered; and
(c) the duty to warrant.

The Duty to Contribute
• The contribution must be made ordinarily at the time the
partnership is entered into, unless a different period is
stipulated. In either case, no demand is needed to put the
partner in default, because in a partnership the obligation to
contribute is one where
time is of the essence (for without the
contribution, the partnership is useless).

• The partner must exercise due diligence in preserving the
property to be contributed, before he actually contributes the
same; otherwise, he can be held liable for losses and
deterioration.

The Duty to Deliver the Fruits
•
•
Ifproperty 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 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.
If money has been promised,“interest and damages from the
time he should have complied with his obligation” should be
given.
(Art. 1788). Here again, no demand is needed to put the
partner in default.

•
•
Query: Who owns the propertybefore it is delivered?
ANS.: It is submitted that both in the case ofmoney or property,
it is the partner who still owns the same before delivery, for it is
delivery,
actual or
constructive, that transfers ownership.

The Duty to Warrant
•
•
The warranty in case of eviction refers to “speciﬁc and
determinate things”
already contributed.
There is “eviction” whenever by a ﬁnaljudgment based on a
right prior to the sale or an act imputable to the partner, the
partnership is deprived of the whole or a part of the thing
purchased. The parties may however suppress, increase, or
diminish this legal obligation.
(See Art. 1548, Civil Code). The
partner who made the contribution should be summoned in the
suit for eviction, at the instance of the partnership.

•
•
If a partner fails to contribute within the stipulated time what was
promised, may the partnership contract be rescinded?
ANS.: As a general rule, NO. The reason is, rescission is not the
proper remedy; the remedy should be to collect what is owing, as
well as damages. The general rule in obligations cannot apply in
the case of partnership.
(Sancho v. Lizarraga, 55 Phil. 601).
However, if the defaulting partner is already dead, rescission may
prosper

When Contribution Consists of Goods
•
•
•
•
Appraisal of value is needed to determine how much has been
contributed.
How Appraisal Is Made
(a) Firstly, as prescribed by the contract.
(b) Secondly, in default of the ﬁrst, by EXPERTS chosen by the
partners, and at CURRENT prices.

Necessity of the Inventory-Appraisal
•
•
•
Proof is needed to determine how much goods or money had
been contributed. An inventory is therefore useful.
Risk of Loss
After goods have been contributed, the partnership bears the
risks of subsequent changes in their value.

Why No Demand Is Needed to Put Partner in Default
•
•
•
In the case of thecontribution, becausetime 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, the injury is
constant.
In the case of conversion, because the firm is deprived of the
benefits of the money, from the very moment of conversion.
[NOTE: Even if no actual injury results, the liability exists,
because the article is absolute.

•
•
•
•
•
Teague v. Martin, 53 Phil. 504
A partner who uses for his own purposes partnership funds
must ACCOUNT for the same.
U.S. v. Clarin, 17 Phil. 84
Mere failure of the managing partner to return to the others
their share of the
capital does not necessarily constitute estafa.
(NOTE: After all, there may really have been a business loss.
Moreover, what should be brought is a
civil case.)

Classiﬁcation of Partners
•
•
Capitalist partner — one who furnishes capital. (He is not
exempted from losses; he can engage in other business
provided there is NO COMPETITION between the partner and his
business.)
Industrial partner — one who furnishes industry or labor. [He is
exempted from losses as between the partner; he
cannot
engage in
any other business without the express consent of the
other partners; otherwise:

•
•
•
1) he can be EXCLUDED from the ﬁrm (PLUS DAMAGES);
2) OR the beneﬁts he obtains from the other businesses can be
availed of by the other partners (PLUS DAMAGES).
(Art. 1789)
[NOTE: The rule remains true whether or not there is
COMPETITION.
Reason: All his industry is supposed to be given
only to the partnership.
(Limuco v. Calinao, C.A., L-10099-R, Sept.
30, 1953).]

•
•
•
•
(c) Capitalist-industrial partner — one who contributes both
capital and industry.
D) General partner — one who is liable beyond the extent of his
contribution.
E.)Limited partner — one who is liable only to the extent of his
contribution.
[NOTE: An industrial partner can only be a general partner, never a
limited partner.
(See Art. 1845, Civil Code).]

•
•
•
•
Managing partner — one who manages actively the firm’s affairs.
Silent partner — one who does not participate in the management
(though he shares in the profits or losses).
Liquidating partner — one who liquidates or winds up the affairs of
the firm after it has been dissolved.
Ostensible partner — one whose connection with the firm is public
and open (that is, not hidden). (Usually his name is included in the
firm name.)

•
•
•
Secret partner — one whose connection with the ﬁrm is concealed
or kept a secret.
Dormant partner — one who is both a secret (hidden) and silent
(not managing) partner.
Nominal partner — one who is not really a partner but who may
become liable as such insofar as third persons are concerned.
(
Example: a partner by estoppel.)

Distinctions Between a ‘Capitalist’ and an ‘Industrial
Partner’
•
•
•
(a) As to contribution:
1) the capitalist partner contributesmoney orproperty
2) the industrial partner contributes hisindustry
(mental or physical)

•
•
•
(b) As to prohibition to engage in other business:
1) the capitalist partner cannot generally engage in thesame or
similar enterprise as that of his ﬁrm (the test is the possibility of
unfair competition).
2) the industrial partner cannot engage inany business for
himself
(Reason: all his industry is supposed to be contributed to
the ﬁrm).

•
•
•
(c)As to proﬁts:
1) the capitalist partner shares in the proﬁts according to the
agreement thereon; if none,
pro rata to his contribution.
(Art.
1797)
2) the industrial partner receives a just and equitable share.(Art.
1797, Civil Code).

•
•
•
•
•
•
(d)As to losses:
1) capitalist
a) ﬁrst, the stipulation as to losses
b) if none, the agreement as toproﬁts
c) if none,pro rata to contribution
2) the industrial partner is exempted as to losses (as between the
partners). But is liable to strangers, without prejudice to
reimbursement from the capitalist partners.

•
•
•
•
•
Amount of Contribution
(a) It is permissible to contribute unequal shares, if there is a
stipulation to this effect.
(b) In the absence of proof, the shares are presumed equal.
To Whom Applicable
The rule applies tocapitalist partners apparently; however, the
share of the industrial partner is undoubtedly also available, for
his industry may be worth even more than the entire capital
contributed.

When a Capitalist Partner Is Obliged to Sell His Interest to the
Other Partners
•
•
•
(a) If there isimminent loss of the business of the partnership;
(b) and herefuses (deliberately and not because of poverty,
otherwise this would be unjust) to contribute an
additional share
to the capital;
(c) and provided further that there is noagreement to the
contrary.

Reason
•
•
Because of his apparent lack ofinterest, and granting that he
sincerely believes that efforts to save the ﬁrm would be futile,
the capitalist partner referred to should get out of the ﬁrm.
Note that the industrial partner is exempted.
Reason: He is already giving hisentire 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 who owed the partnership another sum 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.
Rule if Managing Partner Collects a Credit

Rule if Managing Partner Collects a Credit
•
•
•
•
The following requisites must concur:
(a) The existence of at least 2 debts (one where theﬁrm is the
creditor; the other, where the
partner is the creditor).
(b) Both sums are demandable.
(c) Thecollecting partner is amanaging partner.

Example
•
•
P , a managing partner, isX ’s creditor to the amount of P1
million, already demandable.
X also owes the partnership P1
million, also demandable.
P collects P1 million.
(a) IfP gives a receipt for theﬁrm, it is theﬁrm’s credit that has
been collected.

•
•
•
(b) IfP gives a receipt for hisown credit only, P500,000 will be
given to him; the other P500,000, to the ﬁrm.
(Note the use of the
word “proportion.”)
[Reason for the law: To prevent furtherance of the partner’s
personal interest to the detriment of the ﬁrm.
Exception: X may decide that he is paying onlyP’s credit in
accordance with his right of “application of payment.”
(Art. 1262,
Civil Code). This is all right; BUT only if the personal credit of
P is
more onerous to
X

Example
•
•
•
X owes a ﬁrm P1 million.P , a partner, was given his share of
P500,000, there being only two partners. Later
X becomes
insolvent.
MustP share the P500,000 with the other partner?
ANS.: Yes, even ifP had given a receipt for his share only.
Reason for the law: Equity demands proportionate share in the
beneﬁts and losses.

Who bears the Risk
•
•
•
•
(a) Specific anddeterminate things (NOT fungible) — whoseusufruct is
enjoyed by a firm — like a car —
partner who owns it bears loss for
ownership was never transferred to the firm.
(b) Fungible or Deteriorable — Firm bears loss for evidently, ownership
was being transferred; otherwise, use is impossible.
(c) Things Contributed to be Sold — Firm bears loss for evidently, firm
was intended to be the
owner ; otherwise, a sale could not be made.
(d) Contributed under Appraisal — Firm bears loss because this has the
effect of an implied sale.

Responsibility of Firm
•
•
•
(a) Torefund amounts disbursed on behalf of ﬁrm plus interest (legal)
from the time
expenses were made (and not from
demand, since after
all, a partner is an agent, and the rule on agency applies to him).
[NOTE: Refund must be made even in case offailure of the enterprise
entered into, provided the partner is not at fault.
Reason: Being a mere
agent, the partner should
not assume personal liability.
Moreover, conversion by the partner results in liability from the
moment of conversion.

•
•
[NOTE: A partner who advances funds from his own pocket for
taxes on partnership land, must be reimbursed the same from
partnership assets. If the ﬁrm is
insolvent, the other partners
must reimburse the paying partner
except for the latter’s
proportionate share in the taxes.
(b) Toanswer to each partner forobligations, he may have
entered into in
good faith in the interest of the partnership, as
well as for RISKS in consequence of its management.
(
Reason: The partner is an AGENT.)

How are P & L Distributed?
•
•
Art. 1797. The losses and profits shall be distributed in
conformity with the agreement. If only the share of each partner
in the profits has been agreed upon, the share of each in the
losses shall be in the same proportion.
In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive
such share as may be just and equitable under the
circumstances. If besides his services he has contributed
capital, he shall also receive a share in the profits in proportion
to his capital.

•
•
•
•
•
•
•
(1) How Proﬁts Are Distributed
(a) according toagreement (but notinequitously to defeat).
(b) if none, according to amount of contribution.
(2) How Losses are Distributed
(a) according to agreement — as tolosses (butnot inequitously )
(b) if none, according to agreement as toproﬁts
(c) if none, according to amount of contribution.

•
•
•
•
•
•
(3) Industrial Partner’s Proﬁts
Ajust and equitable share (under theold law, a share equivalent to
that of the capitalist partner with the
least capital).
(4) Industrial Partner’s Losses
While he may be held liable by third persons, still he can recover
whatever he is made to give them, from the other partners, for he is
exempted from LOSSES, with or without stipulation to this effect.
(5) Non-Applicability to Strangers
Art. 1797 applies only to the partners, not when liability in favor of
strangers are concerned, particularly with reference to the industrial
partner.

•
•
•
•
•
•
Designation by Third Person of Shares in Proﬁts and Losses
(a) The Article speaks of a “third person,” not a partner.
Reason: To avoid partiality.
(b) When designation by 3rd party may beimpugned — “when it is
MANIFESTLY INEQUITABLE.”
(c) When designation by third partycannot be impugned even if
manifestly inequitable:
1) if the aggrieved partner has alreadybegun to execute the decision;
2) or if he hasnot impugned the same within a period ofthree months
from the time he had
knowledge thereof
(not from the time of
making).

Stipulation Excluding a Partner from Proﬁts or Losses
•
•
(a) The general rule is that a stipulation excludingone ormore
partners from any share in the proﬁts or losses is void.
Reason: The partnership is for COMMON BENEFIT.
(b) One exception is in the case of theindustrial partner whom
the
law itself excludes from losses.
(Art. 1797, par. 2).
If the law itself does this, astipulation exempting the industrial
partner from losses is naturally
valid.

Reason Why Industrial Partner Is Generally Exempted
from 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 alreadyhas shared in the
losses in that, if the partnership shows no proﬁt, this means that
he has labored in vain.

Example
•
•
•
A, B, andC were partners, the first one being an industrial partner.
During the first year of operation, the firm made a profit of P3
million. During the second year, a loss of P1.5 million was
sustained. Thus, the net profit for the two years of operation was
only P1.5 million. In the articles of partnership it was stipulated
that
A, the industrial partner would get 1/3 of the profits, but would
not participate in the losses.
(a) Is the stipulation valid? Why?
(b) How much willA get: 1/3 of P3 million or 1/3 of P1.5 million?
Why?

ANS.:
•
•
1) The stipulation isvalid, for even the law itself exempts the
industrial partner from losses. His share in the profits is
presumably fair.
2)A will get only 1/3 of P1.5 million, the net profit and not 1/3 of
P3 million.
While it is true that he does not share in thelosses, this only means
that
he will not share in the net losses. It is understood that he
share in the losses insofar as these can be accommodated in the
profits. It is but fair to compute
all the various transactions in
determining the net profits or losses

Appointment of Manager
•
•
•
Art. 1800 speaks of two modes of appointment:
(a) appointment as manager in the articles ofpartnership;
(b) appointment as manager made in an instrumentother than
the articles of partnership or made
orally.

Appointment in Articles of Partnership
•
•
•
•
(a) Power isirrevocable without just or lawful cause.
THEREFORE:
1) to remove him for JUST cause, thecontrolling partners (controlling
ﬁnancial interest) should vote to OUST HIM.
(See Art. 1800, par. 1)
2) to remove him WITHOUT CAUSE, or FOR AN UNJUST 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.

•
•
•
Extent of power:
1) if he acts in GOOD faith, he may do all acts of
ADMINISTRATION (not ownership)
despite the opposition of his
partners.
2) if in BAD faith, hecannot (however, he is presumed to be
acting in good faith; moreover, if he really is in bad faith the
controlling interest should remove him.

Appointment Other Than in the Articles of Partnership
•
•
•
(a) Power to act may be revoked atany time, with or without just
cause.
[Reason: Such appointment is a mere delegation of power,
revocable at any time. Removal should also be done by the
controlling interest].
(b) Extent of power: As long as he remains manager, he can
perform all acts of ADMINISTRATION, but of course, if the others
oppose and he persists, he can be removed.

Rule When There Are Two or More Managers
•
•
•
•
•
Art. 1801 applies when:
(a) two or more partners are managers;
(b) there is NO speciﬁcation of respective duties;
(c) there is no stipulation requiring unanimity.
THEREFORE: Art. 1801 does not apply ifunanimity is required;
or when there is a designation of respective duties.

Speciﬁc Rules
•
•
•
•
(a) Each may separately execute all acts of administration
(unlimited powers to administer).
(b) Except ifany of the managers should oppose. =MAJORITY of
the managers shall prevail.
(Suppose there is atie, = CONTROLLING INTEREST prevail —
provided they are also managers.)
[NOTE: The rights to oppose isnot given to non- managers because
in appointing their other partners as managers, they have stripped
themselves of all participation in the administration.

•
•
•
When must the other managers make theopposition ?
ANS.: Before the acts produce legal effects insofar as third
persons are concerned.
Reason — For them to delay or for them to protest after third
parties are affected would be
unfair to said third parties.
Moreover, the acts of the ﬁrm would be unstable

Duty of Third Persons
•
•
The rule that third persons are not required to inquire as to
whether or not a partner with whom he transacts has the
consent of all the managers, for the presumption is that he acts
with due authority and can bind the partnership applies only
when they innocently deal with a partner apparently carrying on
in the usual way the partnership business
(See Art. 1818)
because under Art. 1802, it is imperative that ifunanimity is
required it is essential that there be unanimity; otherwise, the act
shall not be valid, that is, the partnership is not bound.
(Art.
1802, ﬁrst clause).

• It would be wise therefore if the third person could inquire
whether or not unanimity is required, and if so, if such unanimity
is present. This is for his own protection. Thus, it has been held
that a sale by a partner of partnership assets without the
consent of the other managers is not valid.

Smith, Bell and Co. v. Aznar
•
•
FACTS: Tobes, anindustrial partner, was authorized to “manage,
operate, and direct the affairs, business, and activities of the
partnership” and “to make, sign, seal, execute, and deliver
contracts —
upon terms and conditions acceptable to him
duly
approved in writing by the capitalist partner.” The ﬁrm was
engaged in the business of buying and selling merchandise of
all kinds.
One day, Tobes purchased “on credit” certain goods regularly
purchased by the Company, but
without ﬁrst getting the
authority of the capitalist partner.

ISSUE: Is the partnership bound?
•
•
HELD: Yes, since the transaction, even if “on credit” was a
routine one.
Moreover, authority to purchase carries with it theimplied
authority to purchase on credit. The requirement of written
authority refers obviously to formal and unusual contracts in
writing.

Rules to Be Observed When Manner of Management Has Not Been
Agreed Upon
•
•
•
(a) Generally, each partner is an agent.
(b) Although each is an agent, still if the acts of one are opposed
by the
rest, the majority should prevail
(Art. 1801) for the
presumed intent is for
all the partners to manage, as in Art. 1801.
(c) When a partner acts as agent, it is understood that he acts in
behalf of the ﬁrm; therefore when he acts in his own name, he
does not bind the partnership generally.

•
•
•
Generally, a sale made by a partner of partnership property is not
binding on the firm if
not authorized
. However, said transaction
may be ratified as when the proceeds thereof are spent for the
benefit of the firm.
D.) On the other hand, paragraph 1 or the authority to bind the firm
does not apply if somebody else had been given authority to
manage in the articles of organization or thru some other means
.
Of course, proof on this point that somebody else was authorized
must be given; otherwise, the general rule — “all are agents” —
prevails.
(e) Alterations require unanimity.

Associate of Partner
•
•
•
•
•
•
(a) For a partner to have anassociate in his share, consent
of the other partners is
not required.
(b) For the associate to become apartner, ALL must
consent (whether the partner having the associate is a
manager or not).
Reasons:
1) mutual trust is the basis of partnership;
2) change in membership is a modiﬁcation or novation
of the contract.

Partnership Books
•
•
(a) The right in this Article is granted to enable the partner to
obtain true and full information of the partnership affairs
(Art.
1806), for after all, he is a co-owner of the properties, including
the books.
(b) However, the Article presupposes a “going partnership,” not
one pending dissolution, for here the right depends on the court’s
discretion nor to one already dissolved, for here, although the
books belong to all the partners (in the absence of a contrary
agreement), still no single partner is duty-bound to continue the
place of business for the beneﬁt of the others. Neither is a
purchaser of the ﬁrm’s goodwill duty-bound to keep the books for
the inspection of the former partners.

•
•
•
(c) Art. 1806 says a reasonable hour.”
What is this?
Our Supreme Court has held that the reasonable hour should be
on
business days
throughout the year, and not merely during
some capricious or arbitrary period selected by the managers.

Value of Partnership Books of Account as
Evidence
•
•
They constitute an admission of the facts stated therein, an
admission that can be introduced as evidence against the
keeper or maker thereof. And this is true even if the books are
kept strictly in accordance with the provision of the law.
The only way out is to prove that the entries had been placed
therein as a result of fraud or mistake, which of course must be
proved

Duty of Partners to Give Information
•
•
•
Reason for the law — There must be no concealment between
partners in all matters affecting the ﬁrm’s interest.
This is required by good faith. Thus, this duty to give on demand
“true and full information.”
[NOTE: Even without the demand, honesty demands the giving
of vital information, the refraining from all kinds of
concealment.

Who Can Demand Information
•
•
•
•
•
Note that under Art. 1806, the following are entitled to true and
full information:
(a) any partner
(b) legal representative of adead partner
(c) legal representative of any partner underlegal disability
[
NOTE: The duty to give information is distinct from the duty to
account under Art. 1807.]

Duty to Account
•
•
(a) Reason for the law: The fiduciary relations between the
partners are relationships of trust and confidence which must
not be abused
(Pang Lim & Galvez v. Lo Seng, 42 Phil. 282) or
used to personal advantage.
(b) The trust relations exist onlyduring the life of the partnership,
not before, nor after. Hence, fiduciary relations do
not exist
between the persons still negotiating for the formation of
partnership The trust relations end with the death of the
partnership
unless the foundation for the breach of trust took
place even during the existence of the firm.

Some Illustrations:
•
•
A partner with partnership funds, and unknown to the others,
purchased a house in his own name. Who owns the house?
ANS.: The partnership owns the house. The buying partner
should only be considered a trustee.
(See Art. 1807).

•
•
A partner in the real estate business, without the knowledge of
the other partners, bought a parcel of land in his daughter’s
name and subsequently sold the same at a proﬁt. Should the
other partners share in the proﬁts?
ANS.: Yes, for the transaction can be considered an affair of the
partnership.

•
•
A, B andC are partners.A, as a result of a transaction connected
with the conduct of the partnership, has in his hands, so
that it
may be traced, a specific sum of money or other property.
A is
insolvent. Is the claim of the partnership against
A a claim
against him as an ordinary creditor, or is it a claim to the specific
property or money in his hands?
ANS.: The words “and hold astrustee for the partnership any
profits” indicate clearly that the partnership can claim as their
own (hence,
specific property) any property or money that can be
traced.

Business Prohibition on Capitalist Partners
•
•
•
Note that while the industrial partner is prohibited from
engaging “in business for himself” (any business),
the capitalist partner is prohibited from engaging for his own
account in any operation “which is of the kind of business in
which the partnership is engaged” (same or similar business
that may result in competition).
The competition may become unfair in view of the knowledge
by the capitalist partner of the ﬁrm’s business secrets.

Instances When There Is No Prohibition
•
•
•
(a) When it is expressly stipulated that the capitalist partner
can so engage himself.
(Art. 1808, par. 1).
(b) When the other partnersexpressly allow him to do so.
(c) When the other partnersimpliedly allow him to do so.
(
Example: When ALL of them are likewise violating the article.)

•
•
•
(d) When the companyceases to be engaged in business (hence
during the period of liquidation and winding up, the article no
longer applies, even if the “engaging” partner is himself the
“liquidating partner”).
The reason is clear: there can possibly be no unfair competition.
(e) When the general-capitalist partner becomes merely a
limited partner in a competitive enterprise for after all, a limited
partner
does not manage.

Effect of Violation
•
•
(a) the violator shall bring to the partnership all the proﬁts
illegally obtained
(b) but he shallpersonally bear all the losses.

•
•
•
Suppose he gains a total of P10 million and losses for a total of
P2 million, how much must he bring to the ﬁrm?
ANS.: Strictly construed, he must bring P10 million, and suffer
the P2 million loss all by himself; however this would be unduly
harsh, and the proper interpretation, it is submitted, is for him to
give only P8 million. In other words, losses can be deducted
from proﬁts.
It is only net losses which he must shoulder.

•
•
(c) Although not mentioned in the law expressly, it is believed
that the violator can be
ousted from the firm on the ground of
loss of trust and confidence, particularly if the violation is
repeated after due warning.
This would of course result in the dissolution of the firm.

Right to Demand a Formal Account
(a) Generally, no formal accounting is demandable till after
dissolution.
Reason: After all there is access to the books.
(Art. 1805)
.
(b) However, in the instances enumerated in Art. 1809, it is evident
that the formal accounting can properly and justiﬁably be asked for
thus:
1) in No. 1 — he may have access to the books
2) in No. 2 — there is no express stipulation
3) in No. 3 — it is unfair if other partners can take undue advantage
of partnership funds or partnership transactions.
4) in No. 4 — as when one partner has been travelling for a long
period of time on a business involving the ﬁrm.

•
•
•
•
Art. 1810. The property rights of a partner are:
(1) His rights in speciﬁc partnership property;
(2) His interest in the partnership; and
(3) His right to participate in the management.

•
•
•
Property Rights of a Partner
(a) Example of “specific partnership property”:
A andB each contributed a car for the partnership.
The two cars arespecific partnership property.
(b) Example of “interest in the partnership” — the partner’s share
of the profits and losses (
without mentioning any particular or
specific property).
(c) Note that the right to participate in the management is a very
valuable property right.

Rights of a Partner in Speciﬁc Partnership Property
•
•
(
Example: a car contributed by one of the partners to the
partnership)
(a) In general, he has anequal right with his partners to possess
the car but only for
partnership purposes (not for other purposes,
except if the others
expressly or
impliedly give their consent).
(b) Hecannot assign his right in the car (except if all the other
partners assign their rights in the same property).

•
•
•
[NOTE: If this rule is violated, the assignment is VOID where the
other partners were able to recover what had been sold or
assigned).
The same rule applies if the right ismortgaged.
The assignee or purchaser does NOT become a co-owner of the
speciﬁc partnership property with the other partners.

•
•
•
NOTE: Reason forrule of non-assignability: It is hard to determine
how much it exactly is until after liquidation.
(c) His right in the car isnot subjectto the attachment or
execution (except on a claim against the partnership).
(
NOTE: If there is a partnership debt, the speciﬁc property can be
attached. Here, the partners or any of them or the representatives
of a deceased partner
cannot claim any right under the
homestead or exemption laws. This is because in
a sense, the
property is not considered their individual or separate property.)

•
•
[NOTE: Reason why in general, the right of the partner in the car
cannot be attached by his
separate or individual creditor : If he
cannot make a
voluntary assignment, neither should his separate
creditors be allowed an
involuntary assignment because “the
beneficial rights of the separate creditors of a partner in specific
partnership property should be
no greater than the beneficial rights
of their debtor.”
D. His right in the car is NOT subject to legal support under Art.
291
(said Article enumerates the people who are obliged to
support each other).

Kimbal v. Hamilton F. Ins. Co.
•
•
•
FACTS: A andB were partners. WithoutA’s consentB assigned
all the speciﬁc partnership properties to
X .
DoA andB haveinsurable interest in said properties?
HELD: Yes, for the assignment is void and is clearly against the
law.

McGrath v. Cowen
•
•
•
FACTS: A andB were partners.A mortgaged his right in a certain
specific partnership property. Later the firm creditor wanted to
get said property.
Who should prevail, the firm creditor or the mortgagee?
HELD: The firm creditors, for the mortgage in specific
partnership property is void,
B not having also assigned his right.
This is so, even if the mortgagee’s right therein be entirely
destroyed (without prejudice of course to his recovery from
A ).

A Partner’s Interest in the Partnership
•
•
While in general, a partner’s interest in speciﬁc partnership
property
cannot be assigned, cannot be attached, and is not
subject to legal support,
a partner’s interest in the partnership (his share in the proﬁts
and surplus) can in general
be assigned, be attached, be
subject to legal support

Effects of Conveyance By Partner of His Interest in the
Partnership
•
•
•
•
(a) If a partner CONVEYS (assigns, sells, donates) his WHOLE
interest in the partnership (his share in the proﬁts and surplus),
either of two things may happen:
1) the partnership may still remain; or
2) the partnership may be dissolved.
(
NOTE: However, such mere conveyance does NOT of itself
dissolve the ﬁrm, therefore in general the partnership
remains.)

•
•
•
•
•
•
(b) The assignee (conveyee) does not necessarily become a
partner. The assignor is still the partner, with a right to demand
accounting and settlement.
(c) The assigneecannot even interfere in the management or
administration of the partnership business or affairs.
(d) The assigneecannot also demand:
1) information;
2) accounting;
3) inspection of the partnership books.

Preferential Rights of Partnership Creditors
•
•
•
The law says “without prejudice to the preferred rights of
partnership creditors under Art. 1827.” What does this mean?
ANS.: This simply means that partnership creditors are entitled
to
priority over
partnership assets (including the partner’s
interest in the profits),
that is, theseparate creditors will get onlyafter the firm
creditors have been satisfied.

OBLIGATIONS OF THE PARTNERS WITH REGARD TO THIRD
PERSONS
•
•
•
•
•
•
Firm Name
(a) This is the name of the juridical entity.
(b) Under Art. 126 of the Code of Commerce, the name of at least one
of the general partners in the general partnership should appear with
the words “and company” (in case not all the partners were included).
The rule has now beenchanged . Thus, under the Civil Code, the ﬁrm
name
may or may not include the name of one or more of the partners.
(c) Suppose the ﬁrm name is changed in good faith but the members
remain the same, will the partnership under the new name retain all the
rights it had under the old name?
ANS.: Yes.(See Sharruf case).

Sharruf and Co. v. Baloise Fire Insurance Co.
•
•
FACTS: Sharruf and Eskenazi, partners under the name “Sharruf
and Co.,” insured for P40,000 their goods. Later, the name was
changed to “Sharruf and Eskenazi.”
The insured goods were subsequently burned, but the insurance
company refused to pay on the ground that its name, having
been changed, the partnership now had no juridical personality
to sue, nor did it have insurable interest in the goods.

•HELD: The change of name is not important, not having been
done to defraud the insurance company. Moreover, the
members remain the same. Therefore, the ﬁrm can collect the
insurance indemnity.

Liability Distinguished from Losses
•
•
•
While an industrial partner is exempted bylaw fromlosses (as
between the partners), he is not exempted from
liability (insofar
as third persons are concerned).
This means that the third person can sue the ﬁrm and the
partners, including the industrial partner. Of course, the partners
will be
personally liable (jointly or pro rata) only after the assets
of the partnership have been exhausted.
Even the industrial partner would have to pay, but of course he
can recover later on what he has paid, from the capitalist
partners, unless there is contrary agreement.

Liability of a Partner Who Has Withdrawn
• A partner who withdraws is not liable for liabilities contracted
after he has withdrawn, for then he is no longer a partner. If his
interest has
not yet been paid him, his right to the same is that
of a mere
creditor.

Unequal Contribution of Capitalist Partners
•
•
Supposecapitalist partners had contributed unequally to the
capital, will their liability to strangers be
equal or
proportionate
to their contributions?
ANS.: Proportionate for the law says“pro rata” (proportionate).
(See Art. 1815).

•
•
•
X, Y, andZ organized and registered a commercial regular
general co-partnership with a capital of P10 million,
X
contributing 50% of the capital,
Y 30% and
Z 20%. A certain
creditor who has a claim of P2 million against the co-partnership
desired to ﬁle suit to collect his claim.
(a) Who should be made party defendant or defendants in the
creditor’s suit?
(b) Whose assets are liable for the satisfaction of the creditor’s
judgment? Explain the extent of liability of the defendant or
defendants.

Answer:
•
•
•
(a) The defendants should be the firm itself and the three partners.
(Art. 1816). (
NOTE — Since there are no more commercial
partnerships today, the new Civil Code provisions should be applied).
(b) First, the assets of the firm (P10 million) must be exhausted,
then
X, Y and
Z will be liable
pro rata in the proportion of 50-30-20
for the remaining P10 million.
(Art. 1860). Hence,
X will pay from his
individual assets P5 million; P3 million; and
Z , P2 million.
As among themselves the losses will be divided, in the absence of
agreement on losses or profits, in accordance with their contribution
of 50%, 30%, and 20%.
(Art. 1797).

Effect of Stipulation Exempting Liability to Third Persons
•
•
Suppose it is stipulated that all theindustrial partners andsome
of the capitalist partners would be exempted from liability
insofar as third persons are concerned, would the stipulation be
valid?
ANS.: The stipulation would be null and void

Partner Acting in His Own Name
• Note that under Art. 1816, any partner may however “enter into a
separate obligation to perform a partnership contract.” (Here, he
does not act in behalf of the partnership; he acts
in his own
name, although for the beneﬁt of the
partnership .)

Stipulation Eliminating Liability
•
•
•
Query: Asamong the partners, is it permissible to stipulate that a
capitalist partner be exempted from
liability ?
ANS.: The answer is YES, under Art. 1817. And yet under Art.
1799, a stipulation which excludes one or more partners
(capitalist) from any share in the proﬁts or
losses is VOID.
How can these two articles be reconciled?

•
•
It would seem that the only way to harmonize the two articles
(insofar as
capitalist partners are concerned) is this:
it is permissible to stipulate amongthem that a capitalist
partner will be exempted from liability in
excess of the original
capital contributed;
but willnot be exempted insofar as his capital is concerned.

•
•
•
A, B , andC ,capitalist partners, each contributed P1 million. The
firm’s indebtedness amounts to P9 million. It was stipulated that
A
would be exempted from liability.
Assuming that the capital of P3 million is still in the firm, what
would be the rights of the firms creditors?
ANS.: To get the P3 million and to get still P2 millioneach from the
3 partners (a total of P9 million).
A will thus be liable to the third
persons for P2 million. How much, if any, can
A recover from
B and
C ? It is submitted that he can recover P2 million from
B and
C (P1
million each) for as to liability as among them, he is
exempted (Art.
1817) but he cannot recover his original capital of P1 million

•
•
•
In the articles of a general co-ownership, one of the partners is
expressly exempted from personal liability for the losses of the
partnership. Is this agreement valid? Explain.
Answer:
(a) If the exempted partner is an industrial one — the
agreement is valid as among themselves, but
not insofar as
creditors are concerned.
(b) If the exempted partner is a capitalist one — the agreement
is
void as against creditors of the ﬁrm. As among themselves, it
is valid — regarding contributions in excess of the capital
(Art.
1817); but void, regarding the
original contribution.
(Art. 1799).

When Will the Act of the Partner Not Bind the Partnership
•
•
•
(a) When, although for “apparently carrying on in the usual way
the business of the partnership,” still the partner has in fact NO
AUTHORITY, and the 3rd party
knows that the partner has no
authority. (This is to penalize customer or client in
bad faith.)
(b) When the act is NOT for “apparently carrying on in the usual
way” of the partnership and the partner has NO AUTHORITY.
Here,whether or not the 3rd party knows of the LACK of
AUTHORITY is
NOT IMPORTANT. As long as there was really no
authority, the ﬁrm is not bound.

•
•
[The 7 kinds of acts enumerated in Art. 1818 are instances of
acts which are NOT for “apparently carrying on in the usual way
the business of the partnership.”
In those seven instances, the authority must be UNANIMOUS
(from ALL the partners)
except if the business has been
abandoned.

Reasons Why the 7 Acts of Ownership are “Unusual”
(a) “assign the partnership property” — the firm will virtually be
dissolved
(b) “dispose of the goodwill” — goodwill isvaluable property
(c) “do any other act which would make itimpossible to carry on”
— this is evidently prejudicial
(d) “confess a judgment” — if donebefore a case is filed, thisis
null and void; if done later, the firm would be jeopardized

(e) “compromise” — this is an act of ownership and may be said
to be equivalent to alienation (which may
not be justiﬁed)
(f) “arbitration” — this is also an act of ownership which may not
be justiﬁed
(g) “renounce a claim” — why should a partner renounce a claim
that does not belong to him but to the partnership?

Conveyance of Real Property
•
•
•
•
•
•
Notice thatreal property may be registered or owned in the name
of:
1) thepartnership;
2) all the partners;
3) one, some, ornot all the partners;
4) one, some, or not all the partners in TRUST for the partnership;
5) third person in TRUST for the partnership.

Example : The Partnership
•
•
•
A ,B, C, and D are partners of the firm “Edimus.” A parcel of land
registered under the name “Edimus” was sold by
A on behalf and
in the
name of
the firm “Edimus,” but without express authority.
The purchaser is
X . Does
X become the ownership.
ANS.: Ordinarily YES, but the firm may get back the landunless:
(a) the firm is engaged in the buying and selling of land
(consequently, the act of
A is “usual”);

Example of Par. No. 2
•
•
A, B, C, andD are partners of the ﬁrm “Edimus” engaged in the
buying and selling of land. A parcel of land registered in the
name “Edimus” was sold by
A in
his own name. Does the buyer
become the owner of the land? If not, what right does the buyer
have?
ANS.: The buyer does not become the owner of the land.
However, he gets the “equitable interest” of the ﬁrm insofar as
the land is concerned, because after all the selling of land was
in the “usual” course of business.

•
•
Of course, the buyer may later on ask for thereformation of the
contract, so that now, the seller’s name would appear to be that
of Edimus, provided of course that the other partners would
not
object.
(
NOTE: If the partnership had not been engaged in the purchase
and sale of land, the buyer would
not even be entitled to the
“equitable interest.”)

•
•
A, B, C andD were partners in the real estate firm of “Edimus.”
Although a certain parcel of land really belonged to the firm, it
was registered in the name of
A and
B. A and
B sold, in their own
name, the land to
X . May the firm get back the land?
ANS.: Since the firm is engaged in the real estate business, the
act of selling the land was for carrying on in the usual way the
firm’s business. So, the firm cannot get back the land, for
title
thereto has been conveyed to
X.

•
•
•
•
Question: Suppose in the preceding problemA andB had not been
expressly disauthorized by the ﬁrm to sell land, would your answers
remain the same?
ANS.: Itdepends:
(a) IfX had been ingood faith, that is, he had no knowledge of the
lack of authority, the answer would be the same.
(1st par., Art. 1818).
(b) IfX had been in BAD FAITH, the ﬁrm can get back the land unless
X in turn had sold the property to
Y who is in GOOD faith. (Here the
assignee
Y of the purchaser
X is a “holder for value without
knowledge.”)

•
•
•
A, B, C, andD were partners in the real estate firm of “Edimus.” A
certain parcel of land was in the name of
“A, in trust for the firm
Edimus.”
(a) IfA sells the land toX in the name of Edimus, willX become
the owner?
ANS.: No. WhatX gets will only be theequitable interest of the
firm.

•
•
•
(b) IfA sells the land toX in his(A’s) own name, willX become
the owner?
ANS.: No. WhatX gets will also be only theequitable interest of
the ﬁrm.
Reason: It is clear in both instances that under the registry
records
A is only the
trustee.

•
•
A, B, C andD were partners in the real estate ﬁrm of “Edimus.” A
certain parcel of land was registered, not in the name of the ﬁrm,
but in the name of
A, B, C and
D. If
A, B, C, and
D will sell the land
to
X , will
X become the owner, or will he have only the equitable
interest?
ANS.: X will get the title. Consequently, he becomes the owner, for
the law says that “where the title to real
property is in the names
of all the partners, a conveyance executed by
all the partners
passes
all their rights in such property.”
(Art. 1819, par. 5).

Wrongful Act or Omission of a Partner
•
•
A, B, andC were partners. While acting within the scope of the
firm’s business,
A committed a tort against
X, a third person. Is
the firm liable?
ANS.: Yes.(Art. 1822). MoreoverA ,B, and C, as well as the firm
itself, are liable
in solidum. (Art. 1824). Note that even the
innocent partners are civilly
personally liable
, without prejudice
of course to their right to recover from the guilty partner.

Injury to an Employee
•
•
•
The law speaks of an injury to “any person, not being apartner.”
Does Art. 1822 apply to an injury to anemployee, not a partner,
of the ﬁrm?
ANS.: It would seem that the answer is YES, for a mere
employee is not necessarily a partner. And yet in a
Utah case,
the court decided otherwise apparently because the injury
should have been caused a person
not connected in any way
with the ﬁrm.

When the Firm and the Other Partners are NOT Liable
•
•
•
•
(a) If the wrongful act or omission was not done within the scope of the
partnership business and for its beneﬁt or with the
authority of the co-
partners. (Art. 1822).
(b) If the act or omission was NOT wrongful. (See Art. 1822 which uses the
term “wrongful”.)
(c) If the act or omission, although wrongful, didnot make the partner
concerned liable himself.
(d) If the wrongful act or omission was committed after the ﬁrm had been
dissolved (stopped its business) and same was not in connection with the
process of winding up.

Solidary Liability of the Partners With the Partnership
•
•
(a) While intorts andcrimes, the liability of the partners is
solidary, in
contractual obligations, it is generally merely joint.
(Art. 1816).
While Art. 1816 speaks ofpro rata liability of the partners, and
while the Code Commission says that
pro rata in this article
means “in proportion to their contribution” still the Supreme
Court has ruled that “pro rata” here means
joint,

•
•
(b) Note that torts and crimes result from individual acts of the
partners; while contractual liabilities arise from
partnership
obligations.
(c) Note that it is not only the partners that are liablein solidum;
it is also the partnership.

•
•
•
A andB are partners.A misappropriates a sum of money
belonging to a customer
X but which was already in the custody
of the partnership. Whom can
X hold liable?
ANS.: X can hold liable either the ﬁrm orA orB , and the liability
is for the whole amount because it is
solidary.
However, ifB is made to pay the full amount, he can recover the
whole amount, plus the interest from
A later on instead of only
A ’s share, for the simple reason that it is only
A who is guilty.

Entry of a New Partner Into an Existing Partnership
•
•
•
A, B, andC are partners.D is admitted as a new partner. WillD
be liable for partnership obligations contracted PRIOR to his
admission to the partnership?
ANS.: Yes, but his liability will extend only to his share in the
partnership property, not to his own individual properties.
(Art.
1826).
(
NOTE: Had he been an original partner, he would be liable both
insofar as his share in the ﬁrm is concerned, and his
own
individual property.)

Creation of a New Partnership in View of the Entry
•
•
•
Does the admission of a new partner dissolve the old firm and
create a new one?
ANS.: Yes, and it is precisely because of this principle that Art.
1826 has been enacted. The reason is simple: since the old firm
is dissolved, the original
creditors would
not be the creditors of
the new firm, but only of the original partners; hence, they may
lose their
preference.
To avoid this injustice, under the new Civil Code (together with
the new creditors of the new firm), they are also considered
creditors of the NEW firm.

DISSOLUTION AND WINDING UP
•
•
Dissolution is the change in the relation of the partners caused
by any partner
ceasing to be associated in the carrying on of the
business.
(Art. 1828). It is that point of time when the partners
cease to carry on the business together
Winding up is the process ofsettling business affairs after
dissolution.

•
•
Examples of winding up: thepaying ofprevious obligations; the
collecting of
assets previously demandable; even the
contracting for
new business if needed to wind up, such as the
contracting with a
demolition company for the
demolition of the
garage used in a “used car” partnership.)
Termination is the point in timeafter all the partnership affairs
have been wound up.

Effect on Obligations
•
•
(a) Just because a partnership is dissolved, this does not
necessarily mean that a partner can
evade previous obligations
entered into by the partnership.
(Testate Estate of Mota v. Serra,
47 Phil. 464).
(b) Of course, generally, dissolution saves the former partners
from new obligations to which they have not expressly or
impliedly consented, unless the same be essential for winding
up.
(See Art. 1843, par. 1;

Causes of Dissolution
•
•
(a) Arts. 1830 and 1831 give the causes for dissolution.
(b) Note that in Art. 1830, eight causes are given, the ﬁrst one
of which is subdivided into four instances.

No Violation of Agreement
•
•
•
In No. 1 cause (in Art. 1830), the partnership agreement has
NOT been violated —
(a) termination of thedefinite term orspecific undertaking
Here the contract is the law between the parties, if the firm
however still continues after said period, it becomes a
partnership at WILL.

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•
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(b) express will of a partner who must act ingood faith when
there is NO definite term and NO specified undertaking
If he insists on leaving in bad faith, the firm is dissolved, but he
may be responsible for damages.
(c) express will of all partners (except those who have AS-
SIGNED or whose interests have been CHARGED)
If one partner says he willnot have anything more to do with the
firm, and the other does not object, there is dissolution by
implied mutual consent.

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•
(d) expulsion in good faith of a member
(
NOTE: If one is expelled, the number of partners is decreased;
hence, the dissolution.)
(
NOTE: If a partner is expelled inbad faith, there can also be
eventual dissolution for here, there would be apparent lack of
conﬁdence, without prejudice of course to liability for damages.)

Cause No. 2 — Violation of Agreement
•
•
Even if there is a specified term, one partner may cause its
dissolution by expressly withdrawing
even before the expiration
of the period, with or without justifiable cause.
Of course, if the cause isnot justified, orno cause was given,
the withdrawing partner is liable for
damages, but in no case
can he be compelled to remain in the firm. With his withdrawal,
the number of members is decreased, hence, the dissolution.

Cause No. 3 — Unlawfulness of the Business
•
•
If the business later on becomes unlawful, it follows that the
ﬁrm will not be allowed to carry on.
On the other hand if the business or object had been unlawful
from the very beginning, the ﬁrm never had any juridical
personality.

Cause No. 4 — LOSS
•
•
•
•
(a) If a specific thing promised as contribution is lost BEFORE
delivery.
Reason: The firm is dissolved because the partner has NOT
given his contribution.
If lost after delivery, the firm bears the loss, and the partner
remains, since after all, he
had given his contribution.
The rules just given donot applyto generic things, for genus
does
not perish.

•
•
(b) Ifonly the use of a speciﬁc thing is contributed, and it is
LOST BEFORE or AFTER delivery to the ﬁrm.
Reason: Here, the naked owner reserved the ownership, its loss
is borne by him, so it is as if he had
not contributed anything.

(6) Cause No. 5 — DEATH of ANY Partner
•
•
The death of any partner, whether known or unknown to the
others causes a decrease in the number of partners, hence there
is automatic dissolution (but not automatic
termination for the
affairs must still be wound up)
Be it noted that a deceased partner is no longer associated in
the active business of the partnership; in a sense however, this
dissolution may be partial or total: partial, when the surviving
partners continue the business among themselves; and total,
when the survivors, instead of continuing the enterprise,
proceed to the liquidation of partnership’s assets.

Goquiolay v. Sycip
•
•
FACTS: The articles of a general partnership expressly stipulated
that “in the event of the death of any of the partners at any time
before the expiration of said term, the co-partnership shall not be
dissolved, but will have to be
continued, and the deceased
partner shall be represented by his heirs or assigns in said co-
partnership.”
One of the partners subsequently died, and this was before the
expiration of the partnership life. The deceased partner was then
replaced by his widow.

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•
Issue: Does the widow or substitute become also ageneral
partner or only a
limited partner?
HELD: She became a meregeneral partner. The articles did not
provide that the heirs of the deceased would be merely limited
partners; on the contrary, they expressly stipulated that in case of
death of either partner, “the co-partnership... will have to be
continued” with the heirs or assigns.

Cause No. 6 — Insolvency of any Partner or of the
Partnership
•
•
•
(a) The insolvency need not be judicially declared; it is enough
that the assets be
less than the liabilities.
It is submitted that no judicial decree is needed to dissolve the
partnership here, for otherwise, this cause would have been
inserted under No. 8, “by decree of the court.”
(b) Reason whyinsolvency is a ground for dissolution: The
business of a ﬁrm requires
solvency or ability to meet the
ﬁnancial demands of creditors.

(8) Cause No. 7 — Civil Interdiction of any Partner
•
•
•
Civil interdiction (or civil death) results in incapacity to enter into
dispositions of property,
inter vivos.
(9) Cause No. 8 — Decree of the Court under Art.
1831
The decree must be aﬁnal judgment rendered by a court of
competent jurisdiction.

Walter Jackson v. Paul Blum, et al.
•
•
FACTS: A andB were partners in a partnership at will. They
dissolved the partnership, and
A assigned his interest to
X .
Because of a debt, the partnership assets were in the
possession of a fourth party,
Y, as security.
MayX demand accounting fromY ?

•
•
HELD: Yes, even ifX was not a partner ofA andB for after the
partnership was dissolved,
A and
B became co- owners and
A
could assign his interest or share.
One ofA’s rights was to demand an accounting so that his share
could be determined. This right, he could transfer to
X. So
X can
demand the accounting.

Dissolution by Judicial Decree
• This Article speaks of a dissolution bydecree of the court. In a
suit for dissolution, proof as to the existence of the ﬁrm must
ﬁrst be given.

Who Can Sue for Dissolution
•
•
•
(a) Apartner for any of the 6 causes given in the ﬁrst paragraph.
(b) The purchaser of a partner’s interest in the partnership
under Art. 1813 or 1814, provided that the period has
expired or
if the ﬁrm was a
partnership at will when the interest
was
assigned or
charged.
If the period is not yet over, said purchaser cannot sue for
dissolution

Insanity of a Partner
•
•
(a) Even if a partner hasnot yet been previously declared
insane by the court, dissolution may be asked, as long as the
insanity is
duly proved in court.
(b) Reason for making insanity a cause: The partner will be
incapacitated to contract.

Two Kinds of Causes for Dissolution
Dissolution may be caused:
(a) On the one hand by:
A — act (like withdrawing of a partner)
I — insolvency
D — death
(b) On the other hand by other things, like TERMINATION of the
period.

Dissolution Caused by A-I-D
•
•
Art. 1833 speaks of dissolution caused by A-I-D, and the effects
on the
partners as among themselves, if a
partnership liability is
incurred (that is, if the ﬁrm is STILL BOUND).
If the ﬁrm is not bound, see Art. 1834, where only the partner
acting is liable.

Effect of A-I-D
•
•
•
In Art. 1833, all the partners are still bound to each other
generally,
except in the 2 instances mentioned, namely:
(a) If the partner acting had KNOWLEDGE (as distinguished
from mere NOTICE, but without actual knowledge), if
dissolution is caused by an ACT
(like withdrawing, retiring).
(Here, only the partner acting assumes liability, in that even if
the ﬁrm
may be held by strangers, and even if the partners will
still be individually liable,
still the other partners can always
recover from the partner acting.)

•
•
(b) If the partner acting had KNOWLEDGE or NOTICE, if
dissolution was caused by
death or
insolvency.
Here again, while the ﬁrm may be liable, in proper cases,
recovery can be had by the other partners from the partner
acting.

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•
A, B, andC were partners.A resigned from the firm. Therefore it was
dissolved.
B knew this, and yet he still deliberately entered into
new
transactions with
X , an innocent
customer. (The meaning of “innocent
customer” will be discussed in the next article.) The transactions
were
not needed for winding up. Will the
firm be still liable?
ANS.: Yes.(See Art. 1834). If the firm assets are not enough,X can
still go after the individual assets of
A, B, and
C .
After all of them have paidX , canA andC still recover fromB, the
partner who
acted despite his knowledge of the firm’s dissolution?
ANS.: Yes, becauseB should not have done what he did.

•
•
(b) If in the preceding problem,X knew of the dissolution, the
ﬁrm cannot be held liable. Neither will
A or
C be liable. Only
B
and
X are concerned, and they will have to settle with each
other, depending on their reason why they still entered into the
contract.
(c) Note that for (a) to apply,B, must haveknowledge, not
merely
notice. If A had
died or had become
insolvent, the
principles in (a) will be followed whether
B had
knowledge or
mere
notice.

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•
[NOTE: Death or insolvency, being more ordinary than an “act,
notice is enough. Hence, the law provides “knowledge or notice.”
However, it is still essential that there be “knowledge or notice”
of the fact of
death or
insolvency to justify non-liability of the
other partners to the partner acting.
Otherwise, it would be unfair to let the partner acting assume
the whole liability

When Firm Is Bound or Not Bound
•
•
•
This Article speaks of two possibilities:
(a) when the partnership isbound to strangers;
(b) when the partnership is notbound to strangers.

When Partnership Is BOUND (a partnership liability
is created)
•
•
•
(a) business is for WINDING UP
Example: Selling of property of firm to pay off partnership debts;
mortgaging firm assets for same purposes.
(b) business is to complete unfinished transactions
(c) COMPLETELY NEW BUSINESS with third parties considered
innocent. [See (a) & (b) of No. (2) of the 1st paragraph.]

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•
The differences between (a) and (b), No. 2 of the 1st paragraph
are these:
In (a), the customer had previously extended credit, that is, was
a
previous creditor. In case of dissolution he deserves to
ACTUALLY KNOW.
In (b), he wasnot a previous creditor. Here, if there was
publication of the dissolution, it is
presumed he already
knows,
regardless of actual knowledge or non- knowledge. ]

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A, B, andC are partners.A dies.B knows this, but still he later
transacts
new business with
X , a business not connected with
winding up. This notice of dissolution was in the paper but
X did
not read the notice, and when
X transacted with
B, X thought all
the time that the ﬁrm had not yet been dissolved.
(a) IfX had been a previous creditor, is the ﬁrm liable?
ANS.: Yes[Art. 1834, 1st par. (2)(a)] BUT later on, as among the
partners,
B alone will be liable, because he knew of
A’s death.

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•
•
(b) If X hadnever extended credit before, is the firm liable?
ANS.: No, because after all there had been a publication of the
dissolution and it is
his fault that he did
not read the
advertisement. He did not deserve special attention for after all
he had never been a previous creditor of the firm.
OnlyB would be personally liable toX
Had there beenno notice of dissolution andX did not actually
know of the dissolution, the firm would have been liable

Liability of theUnknown orInactive Member:
•
•
•
A, B, andC are partners.A withdraws.B knows this, but he
entered into a new contract with
X , a previous creditor of the
firm who had
no actual knowledge of the dissolution.
C was
not
known by
X to be ever a partner of the firm, so it could not be
because of
C that
X had transacted the business.
Question: Is the firm liable?
ANS.: YES.

•
•
Question: If the partnership assets are insuﬃcient, canX go
after the
individual properties?
ANS.: Yes,except with reference toC , because the law says that
C ’s liability “shall be satisﬁed out of the
partnership assets alone.
”

When Is the FIRM Not BOUND?
•
•
•
(a) in all cases not included in our answer in COMMENT No. 2
of this article.
Example: new business with 3rd parties who are in BAD FAITH,
as already explained.
(b) where the ﬁrm was dissolved because it was UNLAWFUL to
carry on the business (as when its objects were later declared
by law to be outside the commerce of man)
EXCEPT — when the act is for WINDING UP

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•
•
(c) where the partner thatacted in the transaction has become
INSOLVENT
(d) where the partner is UNAUTHORIZED to wind up
EXCEPT — if the transaction is with a customer ingood faith (as
already deﬁned or explained).
It is understood that ifafter dissolution a stranger will represent
himself as a partner although he is not one, he will be a partner
by estoppel.

JCH Service Station v. Patrikes
•
•
FACTS: After a firm was dissolved, a partner borrowed money
under the firm name from
X. X knew that the firm had already
been dissolved. Is the firm liable?
HELD: No, because ofX ’s knowledge of the dissolution.

How a Partner’s Liability is Discharged
•
•
•
•
There must be an agreement. The following must agree:
(a) the partner concerned;
(b) the other partners;
(c) the creditors.

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•
A, B, andC are partners.A dies. IsA’s estate (separate
properties) liable for his share of the partnership obligations
incurred while he was still a partner?
ANS.: Yes, but of course his individual creditors (as
distinguished from the ﬁrm creditors) are to be preferred.
(3rd
par., Art. 1835).

Three Rights
•
•
•
•
The Article speaks of 3 rights (without prejudice to his other
rights under other legal provisions):
(a) right of LIEN or RETENTION
(b) right of SUBROGATION
(c) right of INDEMNIFICATION

right of LIEN or RETENTION
• To a lien on, or right of retention of, the surplus of the
partnership property after satisfying the partnership liabilities to
third persons for any sum of money paid by him for the
purchase of an interest in the partnership and for any capital or
advances contributed by him;

right of SUBROGATION
• To stand, after all liabilities to third persons have been satisﬁed,
in the place of the creditors of the partnership for any payments
made by him in respect of the partnership liabilities; and

right of INDEMNIFICATION
• To be indemniﬁed by the person guilty of the fraud or making
the representation against all debts and liabilities of the
partnership.

Order of Payment of Firm’s Liabilities
•
•
•
•
(a) First give tocreditors (who are strangers), otherwise they may be
prejudiced.
(b) Then give to partners who are alsocreditors (they should be placed
in a subordinate position to outside creditors for otherwise they may
prefer their own interests).
c) Then give to the partners theircapital
Capital should be given ahead of profit for it is only the surplus profit
over capital that should be considered as the
gain or the
profit of the
firm.

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•
•
An industrial partner, who has not contributed money or
property at all is, in the absence of stipulation, not entitled to
participate in the capital. He shares in the profits, however.
(d) Lastly, the profits must be distributed.
If, during the liquidation of a firm, the profits for acertain period
of time cannot be exactly determined because no evidence or
insufficient evidence thereof is available, the court should
determine the
profit for the period by finding the
average profits
during the period BEFORE and AFTER the period of time in
question.

New Contributions
•
•
•
If the partnership assets are insuﬃcient, the other partners must
contribute more money or property. Who can enforce these
contributions?
ANS.: (a) In general, anyassignee for the beneﬁt of the creditor;
or any
person appointed by the court (like a receiver).
. (Reason:
Said enforced contributions may be considered as partnership
assets, and should therefore be available to the creditors).
(b) Anypartner or hislegal representative (to the extent of the
amount which he has paid in excess of the share of the liability).
(

•
•
A, B, andC are partners.A died. IsA’s estate still liable for the
contributions needed to pay off the partnership obligations?
ANS.: Yes. (
Generally, as long as the said obligations had been
incurred prior to his death.)

LIMITED PARTNERSHIP
• Art. 1843. A limited partnership is one formed by two or more
persons under the provisions of the following article, having as
members one or more general partners and one or more limited
partners. The limited partners as such shall not be bound by the
obligations of the partnership.

(1) Requisites in the Formation of a Limited
Partnership
•
•
•
Two important things are needed:
(a) Thesigning under oath of the required certificate (with all
the enumerated items), and
(b) The filing for record of the certificate in the Office of the
Securities and Exchange Commission.

Non-Fulfillment of the Requisites
•
•
If the proposed limited partnership has not conformed
substantially with the requirements of this article, as when the
name of
not one of the general partners appear in the
firm name,
it is
not considered a limited partnership but a general
partnership.
This is because a firm transacting business as a partnership is
presumed to be a general partnership

Effect if Only Aggregate Contribution Is Stated
• The law says that the contribution of each limited partner must
be stated. Therefore if the aggregate sum given by two or more
limited partners is given, the law has not been complied with.

Effect of Omitting the Term “Limited” in the Firm
Name
• The law requires the ﬁrm name to have the word “Limited.” If
this provision is violated, the name cannot be considered the
ﬁrm name of a limited partnership

What the Limited Partner Can Contribute
•
•
•
Note that a limited partner is not allowed to contribute industry
or services alone.
Industrial Partner Can Join
An industrial partner can become ageneral partner in alimited
partnership, for the article speaks only of a “limited partner.”

Non-Inclusion of Name of the Limited Partner
• Note that a limited partner violating this article isli- able as a
general partner to innocent third parties,
without however the
rights of a general partner.

Effect of Taking Part in the Control of the
Business
•
•
(a) The following acts donot constitute taking “part in the
control of the business”:
1) mere dealing with a customer.
2) mere consultation on one occasion with the general
partners.

•
•
•
•
(b) The following have been held to constitute taking “part in
the control of the business”:
1) selection of who will be the managing partners.
2) supervision over a superintendent of the business of the ﬁrm
(c) Participation in the control of the business makes the limited
partner liable as a
general partner without however getting the
latter’s rights.

When Additional Limited Partners May Be
Admitted
• Note that even after a limited partnership has already been
formed, the ﬁrm may still admit new
limited partners, provided
there is a proper
amendment to the certiﬁcate.

Effect of Failure to Amend
• If additional limited partners are taken in, without proper
amendment of certiﬁcate with the SEC, this does not
necessarily mean the dissolution of the limited partnership.

Acts of Strict Dominion
•
•
Note thatas a rule, in the instances enumerated, the general
partners (even if already unanimous among themselves) must
still get the
written CONSENT or RATIFICATION of ALL the
limited partners.
Reason: In a sense the acts are acts of strict dominion or
ownership, and are not generally essential for the routine or
ordinary conduct of the ﬁrm’s business.

Rights of a Limited Partner
•
•
•
(a) A limited partner necessarily has lesser rights than a general
partner. These rights are enumerated in the Article.
(b) Note however that among other things he also has the right
to have dissolution and winding up by decree of the court.
(c) He cannot however bind the ﬁrm by a contract.

Liabilities of a Limited Partner
•
•
A andB are limited partners of a partnership. In the certiﬁcate, it
was stated that
A contributed P1.8 million when as a matter of
fact he had given only P1.5 million.
In the certiﬁcate too is a promise made byB to pay P200,000
additional contribution on Dec. 1, 2004. Should
A and
B make
good the P300,000 and P200,000 respectively?

•ANS.: Yes,A should pay now;B on Dec. 1, 2004.

Problem Involving Liability to Creditors
•
•
A , a limited partner, received the return of his contribution on the
date stated in the certiﬁcate. It was discovered that the
remaining assets were insuﬃcient to pay two creditors,
X and
Y.
X ’s claim arose before the return;
Y ’s claim arose after the return.
Should
A be compelled to give back what he had received?
ANS.: I distinguish:

•
•
•
•
(a) X ’s claim should be satisfied out of what has been returned to
A .
Reason: X’s claim arose before the return. If there is a balance, it
should be returned to
A . If there is a deficit,
A is not liable for this
because he is only a limited partner.
(b) Y ’s claim does not have to be satisfied from what has been
returned to
A as contribution.
Reason: His claim arose after the return.Y ’s claim should be
directed against the general partners.

•
•
A, a limited partner, assigned his interest toB. In the certiﬁcate,
A was expressly given the right to give the assignee the right to
become a substituted limited partner. Is
B now a substituted
limited partner?
ANS.: Not yet. He has to wait until the certiﬁcate is appropriately
amended.

•
•
A, a limited partner, assigned his right toX . In the cer- tiﬁcate,A
was not given the right to give his assignee the right to become
a substituted limited partner. How can
X acquire said right to
become a substituted limited partner?
ANS.: Only if all the members of the partnership so consent. If
they do consent,
X acquires the right to become a substituted
limited partner, BUT is not yet one, until after the certiﬁcate is
appropriately amended

•
•
•
Art. 1860. The retirement, death, insolvency, insanity or civil
interdiction of a general partner dissolves the partnership,
unless the business is continued by the remaining general
partners:
(1) Under a right so to do stated in the certiﬁcate, or
(2) With the consent of all members.

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