Law on Partnerships and Private Corporations

Definition of Partnership by the Law:

1. By the contract of partnership
2. Two or more persons bind themselves
3. To contribute money, property, or industry
4. To a common fund
5. With the intention of dividing the profits
among themselves
! Two or more persons may form a partnership for the
exercise of a profession
Concept of Partnership
Other definitions
-Association - co-ownership
-Legal relation - carrying out lawful business
-Joint undertaking - in sharing profit and loss
-Status - arising out of contract
-Organization - for production of income
-Entity - distinct and apart from its members
! As a form of business organization, a partnership
falls between two extremes of organizational form
(single proprietorship and corporation)
Partnership for the exercise of a profession
! Strictly speaking, the practice of a profession is not a
business or an enterprise for profit; however, the law
allows joint pursuit by two or more partners
! The law does not allow individuals to practice a
profession as a corporate entity
Reason: it defeats the characteristic of a corporation
that should not have personal qualifications such as
age, good moral character, and college degree
Characteristic elements of partnerships
1. Consensual - perfected by mere consent (upon
express or implied agreement)
2. Nominate - has a special name in the law
3. Bilateral - rights and obligations between the
parties are reciprocal
4. Onerous - parties must give something
5. Commutative - undertakings of the partners are
the same or equal
6. Principal - not an accessory or does not depend
on another contract for existence and validity
7. Preparatory - entered into as a means to an end
! A partnership contract is a contract of agency

Essential features of partnership

1. There must be a valid contract
2. The parties must have legal capacity to enter
into the contract
3. There must be a mutual contribution of money,
property, or industry to a common fund
4. The object must be lawful; and
5. The purpose or primary purpose must be to
obtain profits and to divide the same among the
parties
! It is required that the articles of partnership must not
be kept secret among the members; otherwise, the
association shall have no legal personality and shall
be governed by Civil Code
Existence of a valid contract
Delectus personae (choice of the person)
! No one can become a member of the partnership
without the consent of all the other associates
! Partnerships may be informally created, but then
customary to embody the terms of the association in a
written document
! A person cannot enter into a contract of prtship
solely with himself; there must be at least two
competent parties
! Partnerships excludes associations which do not
have their origin in a contract, express or implied.
! There is no such thing as a partnership created by
law or by operation or implication of law
Not Considered Partnership because not created by
expressed or implied contract:
-Religious societies
-Conjugal or community prtship
! A limited prtship cannot be created by mere
voluntary agreement alone
Legal capacity of parties to enter into a contract
! Before there can be a valid contract, it is essential
that the parties have the legal capacity to enter into
contract.
! GR: any person may be a partner who is capable
under the law of entering into contractual relations
! Any person who cannot legally give consent to a
contract cannot be a partner

Persons who cannot give consent:

-Unemancipated minors
-Insane or demented persons
-Deaf-mutes who do not know how to write
-Persons who are suffering from civil interdiction
-Incompetents who are under guardianship
! Persons who are prohibited from giving each other
any donation or advantage cannot enter into a
universal partnership
! A married woman may enter into a contract of
partnership even without her husbands consent, but
the latter may object under certain conditions
! There is no prohibition against a partnership being a
partner in another partnership
! Unless authorized by law, a corporation is without
capacity or power to enter into a contract of
partnership
Reason: in a prtship, a corporation would be bound by
the acts of persons who are not its duly appointed and
authorized officer and agents, and this is entirely
inconsistent with the policy of the law that the
corporation shall manage its own affairs separately
and exclusively
Mutual contribution to a common fund
! Partners must have a proprietary of financial interest
in the business
Not money, but only representatives of money:
-checks
-drafts
-promissory notes payable to order
-other mercantile documents
! There is no contribution of money until they have
been cashed
! Property contributed may be real or personal,
tangible or intangible
! Credit such as promissory note or other evidence of
obligation or even a mere goodwill may be
contributed as it is considered property
! Share in the profits by the industrial partner is not
salary
! The law does not specify the kind of industry that a
partner may contribute
! A limited partner cannot contribute mere industry or
services

Legality of Object
! The object is unlawful when it is contrary to law,
morals, good customs, public order, or public policy
! The effect of unlawful object to the contract is void
ab initio
! A partnership may be organized for any purpose
except that it may not engage in an enterprise for
which the law requires a specific form of business
organization (banking should only be corporation)
Intention to realize and divide profits
! The idea of obtaining pecuniary profit or gain
directly as a result of the business to be carried on is
the very reason for the existence of a business prtship
! Intention to realize and divide profit is the element
that distinguishes the contract of partnership from
voluntary religious or social organization
! Even an unprofitable business can be a partnership
provided its goal is to obtain profits
! Sharing of profits (principal purpose) need not be
the exclusive aim of a partnership
Sharing of profits
! One without any right to participate in the profits,
cannot be deemed a partner
! The sharing of profits is merely presumptive and not
conclusive, even if cogent, evidence of partnership
! There are numerous instances of parties who have a
common interest in the profits and losses of an
enterprise but who are not partners
! If the division of profits is merely used as a guide to
determine the compensation due to one of the parties,
such one is not a partner
Sharing of losses
! The right to share in the profits carries with it the
obligation to share also in the losses
! Where a prtship has been validly created, a
subsequent stipulation which excludes one or more
partners from any share in the profits (or losses) will
not affect its existence. Only the stipulation is void
Partnership, a juridical person
! Death of a partner is not a ground for the dismissal
of a pending suit against the prtship

Effect of failure to comply with statutory

requirements
! In case of failure to comply with statutory
requirement when the capital exceeds 3000, such
partnership still acquires juridical personality
R: most partnerships are created with very small
capital to engage in small business and it would be
impractical and inconvenient to require the parties to
comply with the requirements
A. Except Partnership of Estoppel, persons who
are not partners as to each other are not partners
as to third persons
B. Co-ownership or co-possession does not of itself
establish a partnership, whether they do or do not
share any profits made by the use of the property
C. Sharing of gross returns does not of itself
establish a partnership, whether or not there is coownership
D. 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, except profits received:
D1. As a debt by installments or otherwise
D2. As wages of an employee or rent to a
landlord
D3. As an annuity to a widow or representative
of a deceased partner
D4. As interest on a loan--amounts of payment
vary with the profits of the business
D5. As the consideration for the sale of a
goodwill of a business or other property by
installments or otherwise
! (D) The receiving partner shall not be entitled to
receive payment where there are no profits; nor shall
he be liable to share any losses incurred bu the prtship
! In general, to establish the existence of a partnership
all of its essential features or characteristics must be
present
A. Persons not partners as to each other
! Persons who are partners as between themselves are
partners as to third persons; if they are not partners
as between themselves, they cannot be partners as to
third persons
! Persons who are partners in fact may not avoid the
consequences of the relation by mere denial that they
are partners
! Where persons misled third persons or parties into
believing that the former are partners in a non-existing

prtship, such persons become subject to liabilities of

partners to all who, in good faith, deal with them in
their apparent relations
B. Co-ownership or co-possession
! Co-ownership of property does not of itself establish
the existence of a prtship, although co-ownership is an
essential element of prtship
C. Sharing of gross returns
! The mere sharing of gross returns alone does not
indicate a partnership; must satisfy first its liabilities/
expenses
! If one takes a share as payment of a debt, he is not a
partner
D. Receipts of share in the profits
! The mere fact of a right under the contract to
participate in both profits and losses of a business
does not of itself have the effect of establishing a
partnership between those engaged therein: where the
recipient is a creditor, employee, widow, or seller. The
recipient is not entitled to receive payment where
there are no profits; nor be liable to share any losses
Test and incidents of partnership
Typical incidents of partnership:
-parties share in P/L
-equal rights in management and conduct of
business
-every partner is an agent of prtship
-unlimited liability (except limited)
-a fiduciary relation exists between the partners
-on dissolution, prtship is not terminated until
winding up is completed
! Incidents may be modified by stipulation of the
partners subject to the right so third persons dealing
with the partnership
Partnership distinguished from co-ownership
! There is a co-ownership whenever the ownership of
an undivided thing or right belongs to different
persons
! Co-ownership is generally created by law

Distinguished:
Creation
Juridical
Personality
Purpose
Duration
Disposal of
Interest

Power to act
with third
persons
Effect of Death

Partnership
Contract needed
Has
Realization of
profits
No limitation
May not dispose
individual
interest for
assignee (unless
agreed)
Partners bind
the prtship
Dissolution

Co-ownership
No contract
needed
Has none
Common
enjoyment of the
thing or right
More than 10 yrs
is not allowed
May freely do so

Co-owner will
not bind other
co-owners
Not dissolved

Partnership distinguished from conjugal partnership of

gains
! Unless otherwise agreed in the marriage settlements,
the net gains or benefits obtained by either or both of
them during the marriage should be divided equally
upon dissolution of marriage or partnership
Parties
Laws which
govern
Juridical
Personality
Commencement

Prtship
Either sex
Stipulation of
the partners
Has
Moment of
execution of
contract (unless
stipulated)
Obtain profits

CPOG
Future spouses
Governed by law
Has none

Date of the
celebration of
marriage (any
stipulation is void)
Purpose
Regulate the
property relations
Distribution of
According to
Shares are divided
profits
agreement
equally
Management
Shares equally
Administration
(unless there is
belongs to both,
appointment) husbands decision
shall prevail
Distribution of Interest may be
Cannot be
Shares
disposed
disposed during
without consent
marriage even
of others
with the consent
Partnership distinguished from voluntary associations

Prtship
Juridical
Personality
Purpose
Contributions of
members
Liability of
members

Has
For pecuniary
profits
Capital
Partnership is
liable in the first
place

Voluntary
Association
Has none
Objective is
lacking
Fees collected,
no contribution
of capital
Individually
liable for the
debts

E. A partnership must have a lawful object or

purpose, and must be established for the common
benefit or interest of the partners
F. When an unlawful partnership is dissolved by a
judicial decree, the profits shall be confiscated in
favor of the State, without prejudice to Penal Code
governing the confiscation of the instruments and
effects of a crime.
Effects of an unlawful partnership
1. The contract is void ab initio and the
partnership never existed in the eyes of the law
2. The profits shall be confiscated in favor of the
government
3. The instruments or tools and proceeds of the
crime shall also be forfeited in favor of the govt
4. The contributions of the partners shall not be
confiscated unless they fall under No. 3
! Such proceeds/instruments or tools shall be
confiscated and forfeited in favor of the Govnt
(unless property of a third person not liable) but those
articles which are not subject of lawful commerce
shall be destroyed
Dissolution of unlawful partnership
Instances of unlawful object:
-creates illegal monopolies or combinations in
restraint of trade
-carry on gambling
-smuggling purposes
-leasing furnished apartments to prostitutes
-prevent competition in bidding for govnt contract
! Judicial decree is not necessary to dissolve an
unlawful partnership
Form of Partnership Contract

GR: no special form is required for the validity or

existence of the contract of partnership; the contract
may be made orally or in writing regardless of the
value of contributions
Exp: unless immovable property or real rights are
contributed, in which case, requires the the execution
of a public instrument.
! To affect third persons, the transfer of real property
to the partnership must be duly registered in the
Registry of Property of the province or city where the
property contributed is located
Partnership with capital of 3000 or more
2 Requirements where capital is 3000 or more
1. The contract must appear in a public
instrument
2. It must be recorded or registered with SEC
! However, failure to comply with requirements does
not prevent the formation of the partnership or affect
liability to third persons (you cannot make it an
excuse/defense against third persons)
! Any partner is granted the right by the law to compel
each other to execute the contract in a public
instrument
Registration of Partnership
! The recording or registration of the articles or
contract of prtship is not for the purpose of giving the
partnership a juridical personality.
! The only objective of the law is to make the
recorded instrument open to all and to give notice
thereof to interested parties
Partnership with contribution of immovable property
! Contract of partnership is void if it will not comply
with requirement
Requirements for contribution of immovable property:
1. The contract must be in a public instrument
2. An inventory of the property contributed must
be made, signed by the parties, and attached to the
public instrument
! If personal property, aside from real property, is
contributed, the inventory need not include the public
instrument
Acquisition or conveyance of property by partnership
! Immovable property may be acquired in the
partnership name

! Title so acquired can be conveyed only in the

partnership name
Secret Partnerships without juridical personality
! Associations whose articles or agreements are kept
secret among the members and wherein anyone of
them may contract in his own name with third persons
are deprived of juridical personality; NOT
PARTNERSHIPS.
! Governed by provisions of Co-ownership
! It is essential that the articles of partnership be given
publicity for the protection not only of the members
themselves but also third persons
Universal partnership of all present property
Common property of all the partners:
-Property which belonged to each of them at the
time of constitution of prtship
-Profits they may acquire from the contribution
Classifications of Partnership
1. As to subject matter/Object:
A. Universal partnership
a. universal partnership of all present
property
b. universal partnership of profits
B. Particular partnership
2. As to liability
A. General partnership
B. Limited partnership
3. As to duration
A. Partnership at will
B. Partnership with a fixed term
4. As to legality of existence
A. De jure partnership
B. De facto partnership
5. As to representation to others
A. Ordinary or real partnership
B. Ostensible Partnership or Partnership by
estoppel
6. As to publicity
A. Secret partnership
B. Open or notorious partnership
7. As to purpose

A. Commercial or trading partnership

B. Professional or non-trading partnership
Kinds of Partners
1. Under the Civil Code
A. Capitalist partner
B. Industrial partner
C. General partner
D. Limited/special partner
E. Managing/general/real partner
F. Liquidating partner
G. Partner by estoppel/ partner by
implication/nominal partner/quasi-partner
H. Continuing partner
I. Surviving partner
J. Subpartner
2. Other Classifications
A. Ostensible partner - active; known
B. Secret partner - active; not known
C. Silent partner - not active; may be known
D. Dormant/sleeping partner - not active; not
known: silent and secret partner
E. Original partner
F. Incoming partner
G. Retiring/withdrawing partner
! All partners in any of these classes are subject to
liability for all partnership obligations
! If an ostensible partner is not actually a partner, he is
subject to liability by doctrine of estoppel
! Silent partner need not be a secret partner; if he
withdraws, he must give notice to persons who do
business with the firm to escape liability in the future
! Dormant partner may retire without giving notice
and cannot be held liable for the obligations of the
firm subsequently; only interest in joining is the
sharing of profits
Contribution of Future Property
GR: future properties cannot be contributed
! Properties contributed included in the partnership
requires the contribution of things determinate
! Property subsequently acquired by
-inheritance
-legacy
-donation
Cannot be included by stipulation except the
fruits.
! Any stipulation including property so acquired is

void
! Profits from other sources (not from properties
contributed) will become common property only if
there is stipulation
Universal Partnership of Profits Explained
! Partners retain their ownership over their present and
future property
! What pass to the partnership are the profits and the
usufruct of the property
! Upon dissolution, such property is returned to
partners who own it
! Profits acquired by the partners through chance
(lottery or by lucrative title) without the employment
of any physical or intellectual efforts, are not included
! Fruits of property subsequently acquired by the
partners do not belong to the partnership
! But those fruits of property subsequently acquired
may be included in profits by express stipulation
! Profits acquired by the use of industry or work and
usufruct belong to the partnership as a matter of right
! An express stipulation is necessary to exclude any of
them
Presumption in favor of universal partnership of
profits
! Applies only when universal (not particular)
partnership has been organized
! When the articles of partnership do not specify its
nature, it is presumed to be partnership of profits
Reason: less obligations on the partners
Limitations upon the right to form a universal
partnership
! Persons who are prohibited by law to give donations
cannot enter into a universal partnership for the reason
that each of the partners virtually makes a donation.
! Partnership formed in violation of this article is null
and void; no legal personality acquired
! A husband and wife may enter into a particular
partnership or be members there (cannot enter into
universal)
! If there is subsequent marriage between partners, it
is viewed as dissolution
Pertinent Legal Provisions
! Every donation or grant of gratuitous advantage,
direct or indirect, between spouses (or live-in partners
without valid marriage) during marriage shall be void
except moderate gifts for family rejoicing

Donations Void:
1. Made between persons guilty of adultery or
concubinage at the time of the donation
2. Made between persons found guilty of the
same criminal offense
3. Made to a public offer or his wife, descendants,
and ascendants by reason of his office
! In 1, declaration of nullity may be brought by the
spouse of the donor or donee; the guilt may be proved
by preponderance of evidence
Business of Partnership need not be continuing in
nature
! The carrying of business of a continuing nature is
not essential to constitute a prtship

Chapter 2: Obligations of the Partners

Section 1 - Obligations of the Partners among
Themselves
Relations created by a contract of partnership:
1. Relations among the partners themselves
2. Relations of the partners with the partnership
3. Relations of te partnership with third persons
with whom it contracts
4. Relations of the partners with such third
persons
(1) GR: Partnership begins from the moment of
execution of contract
EXP: It is otherwise stipulated
! A partnership is a consensual contract; it exists from
the moment of the celebration of the contract by
partners
! Even when the partners have not yet actually given
their contribution, there is partnership, as they pertain
to accidental and not essential parts of the contract
! Where a partnership relation results, the law itself
fixes the incidents of this relation if the parties fail to
do so.
! Partners may stipulate some other date for the
commencement of the partnership
! They do not become partners until or unless the
agreed time has arrived or condition has happened
! There can be a future partnership which at the
moment has no juridical existence yet
! So long as the agreement remains executory, no
partnership can be said to exist
! General partnership (not limited) may result from
oral contract except those by the terms of the
agreement are to be formed for more than 1 year, in
which agreement must be in existing as required by
Statute of Frauds
(2) When a partnership for a fix term or particular
undertaking is continued, without any express
agreement, the rights and duties of partners
remain the same as they were at the termination
but only insofar as it is consistent with a
partnership at will
Continuation without any settlement or
liquidation is prima facie evidence of continuation
of the partnership.

! Such partnership may be extended or renewed by the

partners by express agreement, written or oral, or
impliedly, by mere continuation (without any
settlement or liquidation)
! With such continuation, the partnership for a fixed
term or particular undertaking is dissolved and a new
one, partnership at will, is created.
! Continued existence will then depend upon the will
of the partners
! GR: Partnership is at will
Exp: Unless provided by the partners as for fix term
or undertaking
Reason for general ruling: partnership relationship is
a personal one; law will not force any one to become
or continue as a partner
(3) Every partner is a debtor of the partnership for
whatever he may have promised to contribute
thereto.
He shall also be bound for warranty in case of
eviction with regard to specific and determinate
things as the same manner as the vendor is bound
with respect to vendee
He shall also be liable for fruits thereof from
the time they should have been delivered, without
the need of any demand
Obligation with respect to contribution of property:
1. To contribute at the beginning or stipulated
time what he promised
2. To answer for eviction
3. To answer for the fruits of the contribution
from the date they should have been contributed to
actual delivery
4. To preserve such property with diligence of a
good father of a family
5. To indemnify partnership for any damage
caused by retention or delay
! The property contributed by a partner becomes the
property of the partnership
! Cannot be withdrawn or disposed of by contributing
partner without consent or approval of other partners
! Becomes debtor even in the absence of any demand
! Remedy in eviction, delay, or retention of
contribution is not rescission or cancellation of
contract of partnership, but:
-action for specific performance
-damages & interest from the time he should
have complied

! Such case conforms with vendor-vendee analogy,

thus governed by law on sales
! Obligation of warranty in case of eviction is in
consequence of the character of the contract of
partnership which is an onerous contract
! As a general rule, a demand by the creditor is
necessary before a debtor will be bound to comply
with his obligation
(4) When the capital which a partner is bound to
contribute consists of goods (or other kinds of
property--no law prohibits), their appraisal must
be:
-made in the manner prescribed in the
contract
-in the absence of stipulation, made by experts
chosen by partners
According to current prices, subsequent
changes thereof being for the account of the
partnership
! In the absence of stipulation, the share of each
partner in the P/L is in proportion to what he may
have contributed
! Partnership bears the risk or gets the benefit of
subsequent changes in value
! In case of immovable property,:
-the appraisal is made in the inventory of said
property
-otherwise may be made as to 1787
(5) Partner becomes a debtor for interest and
damages if he has:
-undertaken to contribute a sum of money and
fails from the time he should have complied
-taken any amount from the partnership
coffers from the time he converted the amount
to his own use
Obligation to partnership capital:
1. To contribute on the date due
2. To reimburse amount he had taken for his own
use
3. To pay agreed or legal interest
4. To indemnify partnership for damages caused
! The guilty partner is liable for both interest and
damages not from the time judicial or extrajudicial
demand is made

! As general rule, in obligations consisting of payment

of sum of money, indemnity for damages shall only be
the payment of interest agreed upon or 6% legal
interest when no stipulation (partnership is an
exception: damages and interest)
(6) GR: Industrial partner cannot engage in
business for himself
EXP: unless the partnership EXPRESSLY
permits him to do so
Violation: either...
-exclude him from the firm
-avail themselves of the benefits which he may
have obtained in violation of this provision
Plus damages for either one
! Remedies also applies to industrial partner if the
capitalist violates provision
! Owner of the industrial services is the industry
partner which are his contribution
! He becomes debtor of the partnership of his services
the moment of the commencement of the prtship.
! Industrial partner cannot engage in any same or
different type of business: reason is to insure faithful
compliance
! Capitalist partner cannot engage in the same kind of
business, unless there is stipulation
(7) GR: Partners shall contribute equal shares to
the capital of partnership
EXP: Unless there is stipulation
! Such is just and consistent with the rule that partners
are deemed to have equal rights and obligations
! Not applicable to an industrial partner unless,
besides his services, he has contributed capital
pursuant to an agreement to that effect
(8) GR: In case of imminent loss of the business,
any partner who refuses to contribute adtl capital
(except industrial partner) to save the venture,
shall be obliged to sell his interest other partners
EXP: If there is agreement to the contrary
! GR: a capitalist partner is not bound to contribute to
the partnership more than what he agreed to
contribute
! EXP: in case of imminent loss, obliged to contribute
adtl share; if he refuses, shall be obliged to sell his
interest to other partners

Requisites for application of adtl capital for capitalist

1. There is an imminent loss of the business of the
partnership
2. The majority of the capitalist partners are of the
opinion that an adtl contribution to the common fund
would save the business
3. The capitalist partner refuses (deliberately not
because of his financial inability) to contribute an
adtl share to the capital
4. There is no agreement that even in case of an
imminent loss of the business the partners are not
obliged to contribute
! The industrial partner is exempted from the
requirement to contribute adtl share in case of
imminent loss.
! The refusal of the partner to contribute his adtl
share reflects his lack of interest in the continuance of
the partnership
! Reason: It would be unjust for him to remain and
reap the benefits of efforts of the others while he
himself refuses to help
! Remedy: incidentally for both partners--the partner
who refuses to contribute is paid while the other
partners are relieved from burden of continuing with
him
(9) If managing partner collects a demandable sum
which was owed to him, from a person who also
owed the partnership another sum also
demandable, the collected amount shall be applied
to two credits in proportion to their amounts even
though he may have given a receipt for his own
credit only
But if the receipt is to the partnership, the
amount is fully applied thereto.
The debtor is given the right to prefer payment
to the partner if it should be more onerous to him
! If no receipt, apply to the partnership
! The collecting partner should be a MANAGING
partner
Requisites for application of sum of money:
1. There exist at least two debts, one where the
collecting partner is creditor, and the other where the
partnership is the creditor
2. Both debts are demandable
3. The partner who collects is authorized to
manage and actually manages the partnership

! The provision does not apply if the collecting partner

is not a managing partner
! Reason is for the managing partner to attend more to
the interest of the partnership than his own.
! Where the manner of management has not been
agreed upon and all the partners participate int he
management of partnership, then every partner shall
be considered a managing partner
! If the personal credit of the partner is more onerous
(has higher interest rate), debtor can prefer the
payment to him.
(10) A partnership who has received, in whole or in
part, his share of a partnership credit, when the
other partners have not collected theirs, shall be
obliged, if the debtor should thereafter become
insolvent, to bring to the partnership capital what
he received even though he may given receipt for
his share only.
! The provision is based on the community of interest
among the partners
Requisite of application:
1. A partner has received, in whole or in part, his
share of the partnership credit
2. The other partners have not collected their
shares
3. The partnership debtor has become insolvent
(11) GR: Every partner is responsible to the
partnership for damages suffered by it through his
fault, and he cannot compensate them with the
profits and benefits which he may have earned for
the partnership by his industry.
EXP: Court may equitably lessen/mitigate this
responsibility
if
through
the
partners
extraordinary efforts in other activities of the
partnership, unusual profits have been realized.
! No compensation/offsetting
! Any person guilty of negligence or fault in the
fulfillment of his obligation, shall be liable for
damages
! No compensation; for compensation requires that the
negligent partner be both a creditor and a debtor of the
partnership; partner is a debtor for the industry, and
debtor for the damages

(12) The risk of specific and determinate things

which are not fungible, contributed so that only
their use and fruits may be for the common
benefit, shall be borne by the partner who owns
them
If the things contributed are (1) fungible, or (2)
cannot be kept without deteriorating, or (3) if
contributed to be sold, the risk shall be borne by
the partnership
GR: risk of things brought and appraised in
the inventory is borne by the partnership; and that
claim shall be limited to the value at which they
were appraised
EXP: if there is stipulation to the contrary
! Fungible means interchangeable or capable of
substitution
5 Cases shown; partnership borne the risk except 1:
1. Specific and determinate things which are not
fungible and only the use is contributed - borne by
partner
2. Specific and determinate things the ownership
transferred to the partnership
3. Fungible things or things which cannot be kept
without deteriorating even if contributed only for the
use of the partnership
4. Things contributed to be sold
5. Things brought and appraised in the inventory
! The above cases presuppose that the things
contributed have been delivered actually or
constructively to the partnership; before delivery, the
risk of loss is borne by the partner
! If the loss is due to the fault of any partner, shall be
liable for damages
(13) The partnership shall be responsible to every
partner for the amounts he may have disbursed on
behalf of the partnership and for the
corresponding interest, from the time the expenses
are made
It shall also answer to each partner for the
obligations he may have contracted in good faith in
the interest of the partnership business, and for
risks in consequence of its management
Responsibility of the Partnership to partners:
1. To refund amounts disbursed plus the
corresponding interest from the time expenses are

made (not from date of demand)

2. To answer obligation the partner contracted in
good faith
3. To answer risk in consequence of the
management
! Being a mere agent, the partner is not personally
liable, provided that he is free from all fault and acted
within the scope of his authority (abide the rules of
the partnership)
(14) P/L shall be distributed in conformity with the
agreement
If only the share of profit is agreed upon, share
in the loss shall be the same proportion
Absence of stipulation, share in P/L is in
proportion to contribution
Industrial partner is not liable for losses
If, besides his services, he has contributed
capital, he shall also receive a share in the profits
proportioned to his capital
! Industrial partner shall receive just and equitable
share, which must be satisfied first before the
capitalist partners divide the profits
! If Industrial partner has capital, two shares. 1st is for
his industry that should be satisfied first. 2 nd is for his
capital proportion on the remaining profit for others
! Industrial partner is not liable for losses
(15) If the partners have agreed to entrust to a
third person the designation of the share of each
one in the P/L, such designation may be impugned
only when it is manifestly inequitable. In no case
may a partner who has begun to execute the
decision of the third person, or who has not
impugned the same within a period of 3 months
from the time he had knowledge thereof, complain
of such decision
The designation of P/L cannot be entrusted to
one of the partners
! The article follows the general rule in contracts that
the fulfillment of a contract cannot be left to the will
of one of the contracting parties alone.
! The partner in the 1st paragraph is guilty of estoppel
or to have given his consent or ratification to the
designation
! The reason for short period of 3 months to impugn is
to forestall any paralyzation in the operation of prtship

(16) A stipulation which excludes one or more

partners from any share in the P/L is void
Types of such stipulations:
1. Stipulation generally void, but partnership
subsists
P/L shall be apportioned as if there were no
stipulation
2. Stipulation, a factor to show no partnership
exists
When parties expressly stipulate that there is
no liability for losses
By nature of contract, it is clear that a party
did not intend to share in losses
3. Where partner excluded is industrial partner
Naturally valid
! Reason for exempting industrial: because he cannot
withdraw the work or labor already done by him; if
there are losses, he labored in vain, thus, already
contributed his share in the loss
! GR: stipulation for unequal shares for P/L is valid
EXP: unless, if the unequality is so gross that is, in
effect, a simulated form or attempt to exclude a
partner from any share in the P/L: stipulation is void
(17) the partner who has been appointed manager
in the articles of prtship may execute all acts of
administration despite the opposition of his
partners, unless he should act in bad faith; and his
power is irrevocable without just or lawful cause,
The vote of the partners representing the
controlling interest shall be necessary for such
revocation of power.
A power granted after the prtship has been
constituted may be revoked at any time
! Unless otherwise agreed, each partner in a general
partnership has a right to an equal voice in the
conduct and management of the business and this
right is not dependent on amount or size of the
partners contribution or services
Constituted in articles of partnership (before)
GR: manager may execute all acts
administration notwithstanding the opposition
EXP: unless he acted in bad faith

of

! His power is revocable only:

-upon just and lawful cause
-upon the vote of the controlling interest
Appointed after constitution of partnership
! He may be revoked at any time for any cause
Reason: revocation is not founded on a change of will
of the partners; appointment not being a condition of
the contract
! It should be noted that the provision is applicable to
a partner only not a stranger.
! A partner is not entitle to compensation for his
services other than his share of the profits

Relations created by a contract of partnership

Remedies where industrial partner engages in

business
Extent of contribution to partnership capital

Commencement of Partnership

Executory agreement of partnership

Obligation of capitalist
additional capital

partner

to

contribute

Requisites for application of rule

Continuation of partnership beyond fixed term
Reason for the sanction
Obligations with respect to contribution of property
Obligation of managing partner who collects debt
Effect of failure to contribute property promised

Reason for applying payment to partnership credit

Liability of partner in case of eviction

Right of debtor to application of payment

Liability of partner for fruits of property in case of

delay

Obligation of partner who receives

partnership credit

Appraisal of goods of property contributed

Requisites for application of rule

share of

Reason for imposing obligation to return

Obligations with respect to contribution of money
converted to personal use
Obligation of partner for damages to partnership
Liability of guilty partner for interest and damages

Compensation of damages with profits earned for

partnership by guilty partner

Obligations of industrial partner

Risk of loss of things contributed
Prohibition against engaging in business

Responsibility of partnership to partners

Rules for distribution of profits and losses

Designation of share in profits and losses by a third
person
Binding force of designation by third person
Stipulation excluding partner from any share in profit
or losses
Reason for exemption of industrial partner from losses
Stipulation providing for unequal shares in profits or
losses

Rights and obligations with respect to management

Scope of power of a managing partner
Compensation for services rendered
Powers of two or more managing partners whose
respective

ENUMERATION:
Characteristic elements of partnership
1. Consensual
2. Nominate
3. Bilateral
4. Onerous
5. Commutative
6. Principal
7. Preparatory
Essential features of partnership
1. There must be a valid contract
2. The parties must have legal capacity to enter
into the contract
3. There must be a mutual contribution of money,
property, or industry to a common fund
4. The object must be lawful; and
5. The purpose or primary purpose must be to
obtain profits and to divide the same among the
parties
Not Partnership because of no creation upon
expressed or implied contract:
-Religious societies
-Conjugal or community partnerships
Persons who cannot give their consent:
-Unemancipated minors
-Insane or demented persons
-Deaf-mutes who do not know how to write
-Persons who are suffering from civil interdiction
-Incompetents who are under guardianship
Forms of Contribution
-Money
-Property
-Industry
Distinction between Partnership & Co-ownership
-Creation
-Juridical Personality
-Purpose
-Duration
-Disposal of interests
-Power to act with third persons
-Effect of Death

Circumstances not used to determine whether one is a

Partner through a Share of Profits received as
Payment of:
1. As a debt by installments
2. As wages of an employee or rent to a landlord
3. As an annuity to a widow or representative of a
deceased partner
4. As interest on a loan, though the amounts of
payment vary with the profits of the business
5. As the consideration for the sale of a goodwill
of a business or other property by installment s or
otherwise
Distinction between Partnership
Association
-Juridical Personality
-Purpose
-Contribution of members
-Liability of members

&

Voluntary

Effects of an Unlawful Partnership

1. The
contract is void ab initio and the
partnership never existed in the eyes of the law
2. The profits shall be confiscated in favor of the
government
3. The instruments or tools and proceeds of the
crime shall also be forfeited in favor of the govt
4. The contributions of the partners shall not be
confiscated unless they fall under No. 3

MIDTERM
Section 3 - Obligations of the Partners with Regard to
Third Persons
(1) Every partnership shall operate under a firm
name, which may or may not include the name of
one or more of the partners.
Those who include their names in the firm
name, but not being members of the partnership
shall be subject to the liability of a partner.
! A partnership must have a firm name under which it
will operate
! A firm name is necessary to distinguish the
partnership from the individuals composing it and
other partnership
! Such firm name must be registered with the Bureau
of Commerce (now DTI)
! Firm name:
-individual partner
-surnames of all partner
-surname of one or more of the members with the
addition and Company
-individual names wholly distinct from the names
of any of the members
! Firm name should not be identical with or
deceptively similar to a name which was previously
adopted by any other entity, or interfere with the
rights of others, or is contrary to law
! Partnership cannot continue to use in its firm name
the names of deceased partners
! In the choice of a firm name, no false, misleading or
assumed name shall be used.
! The continued use of the name of a deceased partner
is permissible provided that the firm indicates in all
communications that said partner is deceased
! Persons who include their names in the firm (but not
being partners) do not acquire the rights of a partner,
but under 1815 (estoppel), they shall be subject to the
liability of a partner insofar as third persons without
notice are concerned.
! Art 1815 (estoppel) does not cover:
-third persons who represents himself to be a
partner (1825)
-limited partner who allows his name to be
included in the firm name (1846)
-a person continuing the business of a partnership
after dissolution, uses the name of dissolved

partnership or name of deceased partner as part

thereof.
(2) All partners, including industrial ones, shall be
liable pro rata with all their property and after all
the partnership assets have been exhausted, for the
contracts which may be entered into in the name of
the partnership, under its signature and by a
person authorized to act for the partnership.
However, any partner may enter into a separate
obligation to perform a partnership contract.
! GR: a partner has the right to make all partners
liable for contracts he makes for the partnership in the
name and for the account of the partnership
EXP: partner may enter into separate undertaking in
his name for the partnership
! A partner may assume a separate undertaking with
a third party in his name to perform a partnership
contract or make himself solidarily liable on a
partnership contract.
! The partner is personally bound by his contract even
if only the partnership is show to have derived
benefits from it
! the debts and obligations of the partnership are, in
substance, also the debts and obligations of each
individual member of the firm.
! The liability to creditor is pro rata and subsidiary
! Pro rata, in law, means equally or jointly and not
proportionately: pro-rating is based on the number of
partners and not on the amount of their contributions
! Liability of one of the party that cannot be enforced
(if he, for example, left the country) or condoned by
the creditor cannot increase the liability of the other
partners
! It is subsidiary because the partners become
personally liable only after all the partnership assets
have been exhausted (unless a particular partner
assumes a separate obligation to perform partnership
contract or make himself solidarily liable on the
contract)
! GR: Industrial partner also has to pay, but he can
recover the amount he has paid from the capitalist
partners
EXP: unless there is an agreement to the contrary.
! Neither on principle of law or justice can the
industrial partner be relieved from liability to third
persons for debts of the partnership
! The inability of a partnership to pay a debt to a third

party does not necessarily mean that business has

been operated at a loss.
! Industrial Partners
-losses: exempted
-liability to third persons: not exempted
(3) Any stipulation against the liability laid down
in the preceding article shall be void, except as
among the partners
! GR: A stipulation among the partners contrary to the
pro rata and subsidiary liability is void as it affects the
rights of third persons
EXP: it is valid and enforceable only as among the
partners
! They must each pay an equal amount; then, as to
their liking, subsequently rearrange the amount paid
among themselves.
(4) Every partner binds the partnership, unless the
partner acting:
-has no authority to act for the partnership in
the particular matter; AND
-the person with whom he is dealing has
knowledge of that he has no such authority
An act of a partner which is not apparently for
the carrying on of business of the partnership in
the usual way does not bind the partnership unless
authorized by the other partners; abandoned the
business.
One or more, but less than all (not all)
partners have no authority to:
1. Assign the partnership property in trust for
creditors or on the assignees promise to pay the
debts of the partnership
2. Dispose of the goodwill of the business
3. Do nay othr act which wold make it
impossible to carry on the ordinary business of a
partnership
4. Confess a judgment
5. Enter into a compromise concerning a
partnership claim or liability
6. Submit a partnership claim or liability to
arbitration
7. Renounce (waive) a claim of the partnership
Except when authorized by the other partners
or unless they have abandoned the business.
No act of a contravening partner shall bind the
partnership to persons having knowledge of the

restriction.
! In the absence of an agreement to the contrary, all
partners have equal rights in the management and
conduct of the partnership business; each partner has
the implied authority to do all things necessary to
carry out the ordinary business of the partnership.
! Each partner is regarded as both a principal and an
agent
! Apparent authority is based on the doctrine of
estoppel
! The relation of partners to third persons is thus
founded on the doctrine of mutual agency
! Limitations upon the authority of any one of the
partners are not binding upon innocent third persons
who have the right to assume that every general
partner has power to bind the partnership especially
those partners acting with ostensible authority
! Third persons are not bound to ascertain whether or
not the partner with whom the transaction is made has
the consent of the other partners; his knowledge is
enough that he is contracting with a partner
! Third parties should not assume that a partner has
unlimited authority.
! Generally, a partner has no authority to do the acts:
-assign property in trust for creditors
-dispose goodwill
-other acts which would make it impossible to
carry on the ordinary business
-confess judgment
-enter into compromise
-submit a partnership claim to arbitration
-waive a claim of partnership
! When a third party deals with a partner who has no
express, implied, or apparent authority, the
partnership is not liable for his acts unless the other
partners ratify or are estopped (has knowledge of
transaction) from asserting the partners lack of
authority
2 Requisites in order that the partnership will not be
liable:
1. The partner so acting has, in fact, no authority;
2. The third person knows that the acting partner
has no authority