LA W O N PA R TN ER S H IP

Art. 1767. By the contract of

partnership two or more persons
bind themselves to contribute
money, property, or industry to a
common fund, with the intention of
dividing the profits among
themselves.
Two or more persons may also form a
partnership for the exercise of a
profession.
Concept ofpartnership

a partnership is a:
Contract
Association
Legal relation
Status arising out of a contract
Organization
Entity distinct and apart from its members
Joint undertaking to share in profit and
loss
 Characteristics/ elements of partnership:
A. Consensual perfected by mere consent
express or implied
B.Nominate special name or designation in law

C. Bilateral entered into by two or more persons
and the rights and obligations are reciprocal
D.Onerous benefit by giving something
Commutative undertaking of each partner is
considered as equivalent of the others Principal
E. does not depend on its existence on other
contracts
E. Preparatory means to an end
F. A contract of Agency
 Essential features of partnership:
There must be a valid contract
The parties must have legal capacity to
enter into the contract
There must be mutual contribution of
money, property, industry to a common
fund
The object must be lawful
The primary purpose must be to obtain
profits and to divide the same among
themselves
Articles of partnership must not be kept
secret among the members otherwise there
is no legal personality
 Existence of a valid contract:
Partnership relation fundamentally
contractual
o There is no such thing as partnership
created by law or operation of law alone

o Form oral or written, express or implied

subject to the provisions of Art. 1771, 1773,
and Statute of Frauds. Thus a member
need not sign articles of co- partnership to
become a member, election is sufficient
 o Articles of partnership a written
document embodying the terms of
the association. It contains: the
name, nature, purpose, location of
the firm and defines the powers,
rights, duties and liabilities of the
partners among themselves, their
contributions, the manner of which
the profits and losses are to share
and the procedure of dissolving the
partnership o Requisites as a
contract: consent of at least 2 parties,
object and cause which is established
 Partnership relation fiduciary in
nature voluntary association
entered into by the associates

o In general partnership there is the

element of delectus personae (choice
of the person/s which gives such wide
authority to one partner to bind
another by contract or otherwise).
Delectus personae allows one partner
the power (not the right) to dissolve
partnership
 Application of principles of estoppel

O When a partner holds himself out

or permits himself to be held out as a
partner in an enterprise in favour of
third persons. Even if no real
partnership exists, they are bound to
third persons by their conduct
 Legal capacity of the parties to enter
into the contract:
A. Individuals with legal capacity no
unemancipated minors, insane or
demented persons, deaf mutes who do
not know how to write, persons who are
suffering from civil interdiction,
incompetents under guardianship

B. Partnerships no prohibition against a

partnership being a partner with another
partnership
 Corporations unless authorized by
Statute or by its charter, a
corporation is without legal capacity
or power to enter into a contract of
partnership based on public policy
 A corporation however may enter into a Joint
Venture partnerships with another where the
nature of the venture is in line with the business
authorized by its charter

o Where the partnership agreement provides that

the two partners will manage the partnership so
that the management of the corporate interest is
not surrendered the partnership may be allowed

o Where the entry of the foreign corporation as a

limited partner in a limited partnership is merely for
investment purposes and it shall not take part in
management and control. It shall not be deemed as
doing business in the Philippines hence no license is
required (RA 7042 Foreign Investments Act)
 Contribution of money, property, or industry:

A. Existence of proprietary interest they must

contribute capital
o Money must be in legal tender. Checks, drafts,
promissory notes payable to order and other
mercantile documents must be cashed to
constitute contribution of money

o Property real, personal, corporeal or

incorporeal. Can be licenses, goodwill or credit
o Industry active cooperation which may be
either personal, manual efforts or intellectual for
which the partner receives share not merely salary.
Industrial partner must not be subject to control.
He shall be considered as a lessor of services if he
is subject to the supervision of other partners
 B. Proof of contribution proof that the
contribution was made with the intention of
dividing profits obtained therefrom

Legality of object if object is unlawful,

contract is inexistent and void ab initio. The
object is unlawful when it is contrary to law,
morals, good customs, public order, or public
policy

Purpose to obtain profits the very reason for

the existence of partnership; need not only
be the principal, not the exclusive claim;
there may be incidental, moral, social or
spiritual ends
 Sharing of profits not necessarily in
equal shares; not conclusive
evidence of partnership

Sharing of losses necessary

corollary of sharing in profits;
agreement not necessary
 Art. 1768. The partnership has a
judirical personality separate and
distinct from that of each of the
partners, even in case of failure to
comply with the requirements of
Article 1772, first paragraph.
 Partnership, a juridical person

A. A partnership duly formed under the

law is a juridical person to which the law
grants a juridical personality separate
and distinct. As an independent juridical
person, a partnership may:
1. Enter into contracts, acquire and
possess property of all kinds in its name
2. Incur obligations
3. Bring civil or criminal actions in
conformity with the laws and regulations
of its organizations
 Art. 1769. In determining whether a
partnership exists, these rules shall apply:
(1) Except as provided by Article 1825,
persons who are not partners as to each
other are not partners as to third persons;
(2) Co-ownership or co-possession does not
of itself establish a partnership, whether
such-co- owners or co-possessors do or do
not share any profits made by the use of the
property;
(3) The sharing of gross returns does not of
itself establish a partnership, whether or not
the persons sharing them have a joint or
common right or interest in any property
from which the returns are derived;
 (4) The receipt by a person of a share of the
profits of a business is prima facie evidence
that he is a partner in the business, but no
such inference shall be drawn if such profits
were received in payment:
(a) As a debt by instalments 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 instalments or otherwise.
 Rules in determining existence of
partnership:
Overview
o In general, all essential characteristics
of a partnership must be present.
Partners must expressly agree to
contribute money, property, or industry
as co- proprietors to carry on a business
for profit, and to share the profits
o An essential characteristic, by itself,
does not prove the existence of a
partnership
o In case of doubt, Art. 1769 would apply
 Test to determine the existence of
partnership
o The terms of the contract would
determine the legal nature of the contract
o Legal intention is the crux of partnership
existence of a partnership not always
dependent upon the personal arrangement
or understanding of the parties. Parties
may call themselves partners, but their
contract may be adjudged something
different. On the other hand, parties may
expressly stipulate that their contract is not
a partnership yet it may still be considered
a partnership based on the legal intention
 Incidents of partnership
o Share in the profits and losses
o Equal rights in management and conduct
of business (see Art. 1803)
o Every partner is an agent of the
partnership (Art. 1818)
o All partners, except limited partners, are
personally liable for partnership debts with
their separate property (see Art. 1816)
o There is a fiduciary relationship (see Art.
1807)
o Partnership is not terminated upon
dissolution. It continues until the winding
up is completed (see Art. 1828)
 Presumption and burden of proof
o Existence of partnership is not
presumed. It must be proved
o Persons who are acting as partners
are presumed to have entered into a
contract of partnership. The burden
of proof is on the party denying its
existence
o Once partnership is shown to exist,
the presumption is that it continues
in the absence of evidence to the
contrary. The burden of proof is on
the person claiming its termination


Use of partner o Person asserting

the existence of the partnership
cannot prove it by just showing an
agreement wherein the parties call
themselves partners. The use of
the word partners may be just for
convenience and not necessarily to
show the intention to create a
partnership o associate means
partner, but an employee may also
be an associate
 Persons not partners as to each
other:
A. Persons who are partners as
between themselves are partners as
to third persons. Consequently,
persons who are not partners as to
each other cannot be partners as to
third persons
B. General rule: persons who are not
partners as to each other cannot be
partners as to third persons
 Exception:
If by their acts, consent,
representations, third persons were
led to believe that they are partners
in a non-existing partnership
Example: A and B are not partners.
However, A, with the consent of B,
told X that they are partners. So as
to X, A and B are partners
 Co-ownership or co-possession:
A. Intention to obtain profits o In partnership,
the profits must be derived from the operation
of a business or undertaking and not merely
from property ownership
o There is no presumption of partnership
between co-owners because there must be a
clear intention to a partnership

B. Existence of fiduciary relationship

o There is no fiduciary relationship between co-
owners
o Persons may become co-owners without a
contract. For example, by inheritance. But they
cannot be partners without a contract.
 Co-ownership Partnership
Creation Generally Always created
created by law. by a contract,
It may exist either express
without a or implied
contract

Juridical Has a juridical No juridical

personality personality personality
Purpose Common To obtain profit
enjoyment of a
thing. Does not
necessarily
involve sharing
of profits
Duration Maximum is 10 No limitation
years
Disposal of May dispose his A partner
interest interest cannot dispose
his interest as
to make the
 Co-ownership Partnership
Power to act with Co-owner cannot Partner may bind
third persons represent the co- the partnership,
ownership unless there is a
stipulation to the
contrary
Effect of death Does not necessarily Dissolves the
dissolve the partnership
partnership
 Sharing of gross returns not
presumptive evidence of partnership

Reason: because in a partnership,

the partners, being interested in the
success and failure of the business,
share in the profits only after
satisfying all partnership liabilities
 Sharing of gross profits:
A. Prima facie evidence of partnership

o Sharing of profits and losses is a

strong presumptive evidence of a
partnership. Conversely, lack of such
agreement strongly negates the
existence of a partnership

o Sharing of profits and losses is not

conclusive evidence. This may be
rebutted by other circumstances
 B. When existence of partnership will not be inferred
despite share in the profits
o Profits received as payment of a debt by
instalment or otherwise Example: A is a creditor of
a partnership X. A was authorized to manage the
business. A will receive compensation, and a share in
the net profits as payment for the debt

o Profits received as wages of an employee or rent to

a landlord
1. Example: A is an employee of partnership X.
instead of a fixed salary, A agreed to receive a certain
percentage of the monthly net profits

2. Example: A is the owner of the building where

partnership X holds its office. As payment for rent, A
will receive a share if the net profits.
 o Profits received as an annuity to a widow or
representative of a deceased partner
Example: A is the widow of a partner in Partnership X.
A will receive an annuity based on a certain
percentage of the net profits in exchange for the
continuation of the partnership without liquidation and
satisfaction of the deceased partners interest

o Profits received as interest on a loan

Example: A is a creditor of partnership X. A agreed
that the interest on the loan be taken from the net
profits

o Profits received as the consideration for the sale of a

goodwill or other property by instalments or otherwise
Example: A sold a land to partnership X. A agreed that
the purchase price will be paid out of the net profits
 Partnership distinguished from other legal
relationships:
A. Distinguished from a labor union

o A labor union is an association of

employees, which exists in whole or in part,
for the purpose of collective bargaining
agreement or dealing with the employers
concerning terms and conditions of
employment
o The difference between them is the
purpose. The purpose of a partnership is the
realization of profits whereas the purpose of a
labor union is to negotiate with the
employers, collective bargain
 Distinguished from a business trust
o A trust is when the equitable
ownership and the legal title of a
property are with two different
persons
o The difference is that partners are
principals and agents of each other.
While in trust, the trustee is just a
principal, and not an agent
 Partnership vs Corporation
Manner of creation
Number of persons originally forming
Commencement of juridical personality
Powers
Management
Effect of Mismanagement
Right of succession
Extent of liability to third persons
Transferability of interest
Term of Existence
Firm Name
Dissolution
Governing Law
 Partnership vs Conjugal
Partnership of Gains
Parties
Laws which govern
Juridical personality
Commencement
Purpose
Distribution of profits
Management
Disposition of shares
 Partnership vs Voluntary
Association
Juridical personality
Purpose
Contribution of members
Liability of members
Art.1770

Art. 1770. A partnership must have a

lawful object or purpose, and must be
established for the common benefit or
interest of the partners.
When an unlawful partnership is
dissolved by a judicial decree, the profits
shall be confiscated in favor of the State,
without prejudice to the provisions of the
Penal Code governing the confiscation of
the instruments and effects of a crime
IllegalPurpose is separable

Where a partnership is sought to be

performed for several purposes, and
only one of the purposes is illegal,
the partnership will be sustained if
the illegal object can be clearly
separated from the legal object of
the partnership.
Exam ple ofU nlaw ful
Partnership
Partnership formed to create illegal
monopolies or combinations in
restraint of trade.
Partnership for illegal gambling
purpose
Partnership to furnish apartment
houses for prostitution or white
slavery.
Profi
ts obtained ifPh is
unlaw ful
No share in the profits
Confiscated in favor of the state
Com m on benefi
t

Must be established for the common

benefit of all the partners

Any stipulation which excludes one

or more partners from any share in
the profits or losses is void.
Art.1771

A partnership may be constituted in

any form, except where immovable
property or real rights are
contributed thereto, in which case a
public instrument shall be necessary.
Form ofpartnership contract

A. If contribution is money or
personal property
Contract may be oral or written,
express or implied
If capital is less than P3,000 in
money or property may be
constituted orally or in writing
 B. If immovable property or real
rights are contributed

Contract must appear in a public

instrument, together with inventory
of the immovables or real rights
contributed, signed by the parties,
and attached to the public
instrument, otherwise the contract is
void. (Art. 1773)
Coverage ofthe Statute of
Frauds
1. Promise to answer for the debt, default or
miscarriage of another must be in writing.
2. If the agreement to form a partnership shall
be performed after one year, the same must be
in writing.
3. Contracts for the sale of real property or any
interest therein for leasing of partnership
property for more than one year must be in
writing.
4. Sale of property at a price not less than P500
must be in writing, unless there is delivery or
payment.
Art 1772

Every contract of partnership having a

capital of three thousand pesos or more,
in money or property, shall appear in a
public instrument, which must be
recorded in the Office of the SEC.

Failure to comply with the requirements

of the preceding par. shall not affect the
liability of the partnership and the
members thereof to third persons.
D irectory provision,not
m andatory
Legal effects
1. There is a valid partnership,
separate and distinct from the
partners.
2. The partnership and the partners
are still liable.
3. The partners may compel each
other to put it in a public instrument
(Art. 1357)
Eff
ect ofnon-registration

For validity, a contract of partnership,

whether written or oral is valid.

Registration is only necessary as a condition

for the issuance of license to engage in
business or trade, so that tax liabilities of
big partnership cannot be evaded, and the
public can also determine more accurately
the partnership members and their capital
contribution on the partnership capital
before dealing with them.
Art.1773

A contract of partnership is void,

whenever immovable property is
contributed thereto if an inventory of
said property is not made, signed by
the parties, and attached to the
public instrument.
Requirem ents ifim m ovable
property is contributed
1. public instrument must be
constituted
2. Inventory of real or immovable
property, signed by the parties
3. Inventory must be attached to the
public instrument.
Eff
ect offailure to com ply

1. No juridical personality
2. The parties cannot compel each
other to observe the required form
3. The parties may request the return
of their capital contribution
Art.1774

Any immovable property or an

interest therein may be acquired in
the partnership name. Title so
acquired can be conveyed only in the
partnership name.
Acquisition ofim m ovable
property
Being a juridical person, it can
acquire and possess property of all
kinds, as well as incur obligations
and bring civil or criminal actions, in
conformity with the laws and
regulations of their organization.
Conveyance ofproperty

Only in the name of the partnership

Art.1775

Associations and societies, whose

articles are kept secret among the
members, and wherein any one of
the members may contract in his
own name with third persons, shall
have no juridical personality, and
shall be governed by the provisions
relating to co-ownership.
W here rules on co-ow nership
governs
Lack of legal personality as members
can enter into a contract in their
individual capacity.
Third persons with whom the
partnership wishes to deal are
entitled to know the articles of
partnership.
Art.1776

As to its object, a partnership is

either universal or particular.

As regards the liability of the

partners, a partnership may be
general or limited.