Partnership

Sources:
1. Civil Code
2. Uniform Partnership Act
3. Uniform Limited Partnership Act

ARTICLE 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.

Partnership is a:
1. Contract
2. Association
3. Legal relation
4. Status
5. Organization
6. Entity
7. Joint undertaking

Profession - a group of men pursuing a learned art as a common calling in the spirit of public service — no less a public
service because it may incidentally be a means of livelihood
Characteristic of Partnership:
(1) Consensual, because it is perfected by mere consent, that is, upon the express or implied agreement of two or
more persons
(2) Nominate, because it has a special name or designation in our law;
(3) Bilateral, because it is entered into by two or more persons and the rights and obligations arising therefrom are
always reciprocal;
(4) Onerous, because each of the parties aspires to procure for himself a benefit through the giving of something;
(5) Commutative, because the undertaking of each of the partners is considered as the equivalent of that of the
others;
(6) Principal, because it does not depend for its existence or validity upon some other contracts; and
(7) Preparatory, because it is entered into as a means to an end, i.e., to engage in business or specific venture for
the realization of profits with the view of dividing them among the contracting parties.

Essential features of partnership

(1) There must be a valid contract
(2) The parties (two or more persons) 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
(5) The primary purpose must be to obtain profits and to divide the same among the parties
(6) 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 the provisions of the Civil Code relating to co-ownership.

 Partnership is a voluntary relation created by agreement of the parties.

 The partnership relation is not the contract itself, but the result of the contract.

There must be an intention of dividing the profit among the partners (Art. 1767) since the firm is for the common benefit or
interest of the partners. (Art. 1770, Civil Code).
NOTE: The object must be for profit and not merely for common enjoyment; otherwise, only a co-ownership has been
formed.

However, pecuniary profit need not be the only aim; it is enough that it is the principal purpose. Thus, other ends — like
social, moral, or spiritual objectives — may also properly exist
There must be the affectio 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).

Form: The relation is evidenced by the terms of the contract which may be oral or written, express or implied from the acts
and declarations of the parties, subject to the provisions of Articles 1771 to 1773 and to the Statute of Frauds.

Article of Partnership: While the partnership relation may be informally created and its existence proved by manifestations
of the parties, it is customary to embody the terms of the association in a written document known as
“Articles of Partnership”5 stating the name, nature or purpose and location of the firm, and defining, among others, the
powers, rights, duties, and liabilities of the partners among themselves, their contributions, the manner by which the
profits and losses are to be shared, and the procedure for dissolving the partnership.
Requisites: Since partnership is fundamentally contractual, all the essentials of a valid contract must be present. Under
the law, the following requisites must concur:
1) Consent and capacity of the contracting parties
2) Object which is the subject matter of the contract
3) Cause which is established

EXAMPLE:
A bought a secondhand car. He told B that he would give B half the profit of its sale if B would repair the car. B did not
repair the car. A hired C to do the work and later sold the car at a profit. Obviously, B is not entitled to any of the profit.
There was no partnership between A and B because of the absence of consideration for A’s promise.

Partnership is a form of voluntary association entered into by the associates. It is a personal relation in which the element
of delectus personae exists, involving as it does trust and confidence between the partners.

Rights and Obligations:

1. Right to choose co-partners
 Unless otherwise provided in the partnership agreement, no one can become a member of the partnership
association without the consent of all the other associates
2. Power to dissolve partnership
 Among partners, mutual agency arises and the doctrine of delectus personae allows them to have the power,
although not necessarily the right, to dissolve the partnership
3. Application of Principles of Estoppel
 Where he holds himself out, or permits himself to be held out, as a partner in an enterprise
 In such cases, there is no actual or legal partnership relation but merely a partnership liability imposed by law in
favor of third persons.

NOTE: A partnership may be created without any definite intention to create it. It is the substance and not the name of the
arrangement, which determines the legal relationship, although the designation adopted by the parties should be
considered as indicative of their intention.

LEGAL CAPACITY - Before there can be a valid contract of partnership, it is essential that the contracting parties have
the necessary legal capacity to enter into the contract. As a general rule, any person may be a partner who is capable of
entering into contractual relations. Consequently, any person who cannot give consent to a contract cannot be a partner.

Individuals:
Not allowed to be a partner:
(a) Unemancipated minors;
(b) Insane or demented persons;
(c) Deaf-mutes who do not know how to write;
(d) Persons who are suffering from civil interdiction;
(e) Incompetents who are under guardianship.
Partnerships: There is no prohibition against a partnership being a partner in another partnership. When two or more
partnerships combine with each other (or with a natural person or persons) creating a distinct partnership, say,
partnership X, all the members of the constituent partnerships will be individually liable to the creditors of partnership X.

Corporations: The doctrine adopted by our Supreme Court is that, unless authorized by statute or by its charter, a
corporation is without capacity or power to enter into a contract of partnership.
Why? Since in a partnership the corporation would be bound by the acts of persons who are not its duly appointed and
authorized agents and officers, which would be entirely inconsistent with the policy of the law that the corporation shall
manage its own affairs separately and exclusively.

A corporation, however, may enter into joint venture partnership with another where the nature of the venture is in line
with the business authorized by its charter.

Contribution of money, property, or industry to a common fund:

A. Existence of proprietary interest
1. Money – legal tender
2. Property – real, personal, corporeal, incorporeal
3. Industry – the active cooperation, the work of the party associated, which may be either personal manual efforts
or intellectual, and for which he receives a share in the profits (not merely salary) of the business.
B. Proof of contribution
In partnership, proof is necessary that there be contribution of money, property, or industry to a common fund with the
intention of dividing the income or profits obtained therefrom.

If the partnership agreement provides simply that one of the parties is to give and the other is to receive a half interest in
the profits of an enterprise started by the former, without anything being promised by the latter toward the accomplishment
of its object, no enforceable contract exists, but if the latter takes part in carrying on the enterprise, and thus subjects
himself to partnership liability to outsiders, he furnishes sufficient consideration for the former’s promise and acquires all
the rights of a co-partner.

Sharing of Profits - Since the partnership is engaged for the common benefit or interest of the partners it is necessary that
there be an intention to divide the profits among the members, although not necessarily in equal shares. In the words of
the Supreme Court, “there must be a joint interest in the profits.”. Without this sharing of profits, it cannot be said that an
agreement of partnership has been entered into, and exists.

The sharing in profits is merely presumptive and not conclusive, even if cogent, evidence of partnership.

Sharing of Losses - the object of a partnership is primarily the sharing of profi ts, while the distribution of losses is but a
“consequence of the same.”
It is not necessary for the parties to agree upon a system of sharing losses, for the obligation is implied from the
partnership relation but if only the share of each partner in the profi ts has been agreed upon, the share ofeach in the
losses shall be in the same proportion.

Partnership vs. Corporation

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 interest to another, the transferee
does not become a partner unless all
other partners consent (This is due to
created by the state in the form of
a special charter or by a general
enabling law (The Corporation Code)
not more than 50 years; (Sec. 11,
Corp. Code), may be reduced, but
never extended
liable only for payment of their
subscribed capital stock
a transfer of interest makes the
transferee a stockholder, even without
the consent of the others
 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
Mismanagement 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
A stockholder cannot sue a
member of the board of directors who
mis-manages: the action must be in
the name of the corporation
a corporation is a national of the
country under whose laws it was
incorporated, except for wartime
purposes or for the acquisition of land,
natural resources and the operation of
public utilities in the Philip- pines, in
which case the veil of corporate
identity is pierced and we go to the
nationality of the controlling
stockholders
the firm be- comes a juridical
person from the time it is registered in
the Securities and Exchange
Commission,
and all requisites have been
complied with
such causes do not dissolve a
corporation

Capacity to Become Partner

(a) In general, a person capacitated to enter into contractual relations may become a partner. (40 Am. Jur. 140).
(b) An unemancipated minor cannot become a partner un- less his parent or guardian consents. Without such con-
sent, the partnership contract is voidable, unless other partners are in the same situation, in which case the
contract is unenforceable.
(c) A married 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. (See Art. 124, Family
Code).
(d) A partnership being a juridical person by itself can, it is believed, form another partnership, either with private
individuals or with other partnerships, there being no prohibition on the matter.
(e) The majority view is that a corporation cannot become a partner on grounds of public policy; otherwise, people
other than its officers may be able to bind it.

Art. 1768. The partnership has a juridical 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.

In the partnership X & Co., in which A and B are the partners, there are three distinct persons, namely, the partnership
X & Co., A, and B. As a consequence of the distinct legal personality possessed by X & Co., it may be declared insolvent
even if A and B are not. (Campos Rueda & Co. vs. Pacifi c Commercial & Co)

It may enter into contracts and may sue and be sued, it being suffi cient that service of summons or other process be
served on any and the death of either A or B is not a ground for the dismissal of a pending suit against X & Co.

Neither A nor B may sue on a cause of action belonging to X & Co., in his own name and for his own benefit. X & Co. may
sue and be sued in its firm name or by its duly authorized representative.

When the partnership capital exceeds P3,000.00, such partnership acquires juridical personality
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 are three persons: Sundiang, Castillo, and the firm “Sundiang and Castillo”.
(b) The partnership can, in general:
1. acquire and possess property of all kinds (Art. 46, Civil Code)
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.

Rules in Case of Associations Not Lawfully Organized as Partnerships

(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

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 itself establish a partnership, whether such co-owners or co-
possessors do or do not share any profits made by the use of the property;
(3) The sharing of gross returns does not of itself establish a partnership, whether or not the persons sharing
them have a joint or common right or interest in any property from which the returns are derived;
(4) The receipt by a person of a share of the profits of a business is prima facie evidence that he is a partner in
the business, but no such inference shall be drawn if such profits were received in payment:
(a) As a debt by installments or otherwise;
(b) As wages of an employee or rent to a landlord;
(c) As an annuity to a widow or representative of a deceased partner;
(d) As interest on a loan, though the amount of payment vary with the profits of the business;
(e) As the consideration for the sale of a goodwill of a business or other property by installments or
otherwise.

Rule when terms of contract is not clear: Article 1769 shall apply
Rule where existence is disputed: The existence of a partnership may be disputed by an interested party. The issue as to
whether a partnership exists is a factual matter to be decided on the basis of all circumstances. No single factor usually is
controlling. Where circumstances taken singly may be inadequate to prove the intent to form a partnership, nevertheless
the collective effect of these circumstances may be such as to support a fi nding of the existence of the parties’ intent.

Persons who are partners as between themselves are partners as to third persons. Partnership is a matter of intention,
each party giving his consent to become a partner. Whether or not the parties call their relationship or believe their
relationship a partnership is immaterial. However, whether a partnership exists between the parties is a factual matter.
Where the parties expressly declare they are not partners, this, as a rule, settles the question as between themselves.

A partnership can never exist as to third persons if no contract of partnership, express or implied, has been entered into
between the parties themselves. The exception refers to partnership by estoppel. Thus, where persons by their acts,
consent, or representations have misled third persons or parties into believing that the former are partners in a non-
existing partnership, such persons become subject to liabilities of partners to all who, in good faith, deal with them in their
apparent relations.

EXAMPLE:
If A and B are not partners as to each other, neither will they be partners with respect to C, a third person. But if A, with
the consent of B, represents to C that they are partners, then A and B will be considered partners as to C even if they are
not really partners.
There is co-ownership (or co-possession) whenever the ownership (or co-possession) of an undivided thing or right
belongs to different persons. Co-ownership of property does not of itself establish the existence of a partnership, although
“co-ownership” is an essential element of partnership.

If the parties are partners in the business undertaking, there is a well-defined fiduciary relationship between them as
partners. On the other hand, if the parties are merely co-owners, there is no fiduciary relationship between them. If the
parties are partners, the remedy for a dispute or difference between them would be an action for dissolution, termination,
and accounting. Where the relationship is that of co-owner, the remedy would be an action, as for instance, for non-
performance of a contract.

EXAMPLES:
(1) A and B inherited from their father an apartment
which is leased to third persons. Are they partners? No, they
are merely co-owners of the property, whether or not they
share in the profi ts made by the lease of the property, and not
of the lease business itself.
(2) A, B, and C, joint owners of merchandise, consigned
it for sale abroad to the same consignee. Each gave separate
instructions for his own share. In this case, the interests are
“several” and they are not to be treated as “partners” in the
adventure.