Partnership

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.
 Partnership is a contract whereby two or more persons bind themselves to contribute money,
property or industry to a common fund with the intention of dividing profits among themselves.
 Elements
1. Intention to form a contract of partnership
2. Participation in both profits and losses
3. Community of interests
 Basic Features
1. Voluntary agreement
2. Association for profit
3. Mutual contribution to a common fund
4. Lawful purpose or object
5. Mutual agency of partners
6. Articles must not be kept secret
7. Separate juridical personality
 Characteristics
1. Consensual – perfected by mere consent.
2. Bilateral – formed by two or more persons creating reciprocal rights and obligations.
3. Preparatory - entered into as a means to an end.
4. Nominate – has a special name or designation.
5. Onerous – contributions in the form of either money, property and/or industry must be
made.
6. Commutative – the undertaking of each partner is considered as the equivalent of that of the
others.
7. Principal – its existence or validity does not depend on some other contract.
 NOMINATE
- There is a name given by the law
- Contract of Partnership: CONSENSUAL (meaning it is perfected by both parties)
 PERSONS
 - Includes not only natural persons but also JURIDICAL persons. A corporation may NOT be a
partner but it may engage in JOINT VENTURES.
 BIND THEMSELVES
- Must be capable and competent, meaning, the following may are not included:
1. Minors
2. Emancipated Minors
3. Those under civil interdiction – accessory penalty of being convicted of crimes
4. Insane persons
5. Incompetent persons (see oblicon notes)
- HOWEVER, if the person is only a SUSPECT, he may still bind himself into a contract since there is no
final verdict yet.

 TO CONTRIBUTE MONEY, PROPERTY OR INDUSTRY

Makes the contract onerous since this is MUTAL and ALL must give either one of the above
- Examples:
1. A and B create a partnership with a promise of contributing P10,000 each in cash. A gave his
share while B gave a check worth P10,000. Is the issuance a contribution of money? No, unless the check
is encashed.
2. Considering the same information above but with B contributing P10,000 in equivalent
dollars.
No, the contribution must be made using the legal tender, in this case, Philippine pesos.
- Property contributed may be movable, immovable or intangible property. (Ex: equipment,
land, patents, etc.)
- If the partnership did not contribute money or property, then industry was contributed.
- Note: Contributions may differ for each of the partners.
 TO A COMMON FUND TO DIVIDE PROFITS AMONGST EACH OTHER
- The primary objective of partnerships is to make profits. Sharing profits need not be equal.
- Sharing ratios are determined by the partner’s agreement, and if there was no agreement,
then the ratios will be based on the ratio of the partners’ contributions.
- Sharing ratios for losses will be the same as the sharing ratios for profits.
- The industrial partner shall NOT share in losses.
 - The industrial partner is exempt only to the partners but not to 3rd parties without prejudice
to his right. A1816
 CONSENT (DELECTUS PERSONAE)
- You can’t join a partnership without the consent of ALL partners. Why? Because the partnership will
need to be dissolved before you are admitted and a new partnership will be made in its place.
 Principle of Delectus Personae (choice of persons) – a person has the right to select persons
with whom he wants to be associated with in partnership.
Article 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. (n)
Example:
 If A and B form a partnership with X & Co., the property of X & Co. is not A & B’s property and
likewise, A & B’s property is not X & Co.’s.
 -Since X & Co is a juridical entity, it can acquire any property since the partners are merely
agents.
 Thus the obligations of X & Co are not those of A & B’s.
 The partnership of X & Co can file against A & B and be sued by A & B, likewise, if a third party
sues X & Co., A & B are not affected.
 The partnership will still be a juridical entity even without compliance with A1772.
 If X & Co. is exempted from certain things, it does not follow that A & B are included.

 Consequences of being a Juridical Person
 Can sue and be sued
 Acquire any kind of property
 Insolvency of a partnership does not mean that the partners themselves are insolvent
Partnership, a juridical person
 As an independent juridical person, a partnership may enter into contracts, acquire and possess
property of all kinds in its name, as well as incur obligations and bring civil or criminal actions.
 Thus, a partnership may be declared insolvent even if the partners are not. It may enter into
contracts and may sue and be sued in its firm name or by its duly authorized representative. It is
sufficient that service of summons be served on any partner. Partners cannot be held liable for
the obligations of the partnership unless it is shown that the legal fiction of a different juridical
personality is being used for a fraudulent, unfair or illegal purpose.

Effect of failure to comply with statutory requirements

  Under Art 1772 Partnership still acquires personality despite failure to comply with the
requirements of execution of public instrument and registration of name in SEC.
 Under Arts 1773 and 1775 Partnership with immovable property contributed, if without
requisite inventory, signed and attached to public instrument, shall not acquire any juridical
personality because the contract itself is void. This is also true for secret associations or
societies. To organize a partnership not an absolute right It is but a privilege which may be
enjoyed only under such terms as the State may deem necessary to impose.
To organize a partnership not an absolute right It is but a privilege which may be enjoyed only under
such terms as the State may deem necessary to impose.
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-ownership
or coprocessors 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 installments
or otherwise.
In general, to establish the existence of a partnership, all of its essential features or
characteristics must be shown as being present. In case of doubt, art.1769 shall apply. This article seeks
to exclude from the category of partnership certain features enumerated herein which, by themselves,
are not indicative of the existence of a partnership.
 Provides the rule in determining partnerships
 Example for (1)
- If A & B say PUBLICLY that they are not partners, then according to A1825, if they told C that they are
and C enters into a contract of partnership with them, then A and B are in a PARTNERSHIP OF ESTOPPEL.
 Example for (2)
- If A & B inherited land from their parents and subsequently leased the land out for P50,000/month,
then it can be said that they share profits, but are they in a partnership? No, they are merely co-owners.
The P50,000 profit is merely incidental and besides, it was not derived from BUSINESS OPERATIONS.
- If they bought the land for P1,000,000 each to build a house but instead opted to sell it for P2,500,000
then they have a profit of P500,000 but are they partners? No, because even if there was a profit of
P500,000, this is merely incidental to the sale and not from business operations of A&B.
- If the land was instead used to build an apartment that is rented out? Yes, because A & B share profits
from RENTING, this can be considered as ordinary business operations.
 Example for (3)
- If a person owns a big tract of land for planting rice and entered into an agreement with a farmer that
they will divide the harvest, is the farmer partners with the owner of the land? No because of the
following reasons:
(1) The farmer had no contribution
(2) The farmer has no say in the disposition of the land
(3) The farmer has no say in management
(4) In case of loss, the owner shall carry the entire burden and the farmer need not pay anything
 Example for (4)
- A partnership borrowed P50,000 and instead of giving the creditor a specific amount to be repaid, they
agreed that the creditor will receive 1% of the partnership’s annual gross profit. Is the creditor a
partner? No because the receipt of share in net income happens to be because of an existing debt.
 Persons not partners as to each other Persons who are partners as between themselves are
partners as to third persons.
 Generally, the converse is true: if they are not partners between themselves, they cannot be
partners as to third persons. Partnership is a matter of intention, each partner giving his consent
to become a partner.
 However, whether a partnership exists between the parties is a factual matter. Where parties
declare they are not partners, this, as a rule, settles the question between them. But where a
person misleads third persons into believing that they are partners in a non-existent
partnership, they become subject to liabilities of partners (doctrine of estoppel).
 Whether or not the parties call their relationship or believe it to be a partnership is immaterial.
Thus, with the exception of partnership by estoppel, a partnership cannot exist as to third
persons if no contract of partnership has been entered into between the parties themselves.
Co-ownership or co-possession
There is co-ownership whenever the ownership of an undivided thing or right belongs to different
persons.
Clear intent to derive profits from operation of business
Co-ownership does not of itself establish the existence of a partnership, although it is one of its
essential elements. This is true even if profits are derived from the joint ownership. The profits must
be derived from the operation of business by the members of the association and not merely from
property ownership. The law does not imply a partnership between co-owners because of the fact
 that they develop or operate a common property, since they may rightfully do this by virtue of their
respective titles. There must be a clear intent to form a partnership.
Existence of fiduciary relationship
Partners have a well-defined fiduciary relationship between them. Co-owners do not. Should
there be dispute; the remedy of partners is an action for dissolution, termination and accounting.
For co-owners it would be one, for instance, for non-performance of contract. People can
become co-owners without a contract but they cannot become partners without one.
Persons living together without benefit of marriage
Property acquired governed by rules on co-ownership.
Sharing of gross returns not even presumptive evidence of partnership
The mere sharing of gross returns alone does not even constitute prima facie evidence of
partnership, since in a partnership, the partners share profits after satisfying all of the partnership’s
liabilities.
Reason for the rule
Partner interested in both failures and successes; it is the chance of loss or gain that
characterizes a business. Where the contract requires a given portion of gross returns to be paid over,
the portion is paid over as commission, wages, rent, etc.
Where there is evidence of mutual management
Where there is further evidence of mutual management and control, partnership may result.
Receipt of share in the profits strong presumptive evidence of partnership
An agreement to share both profits and losses tends strongly to establish the existence of a
partnership. It is not conclusive, however, just prima facie and may be rebutted by other circumstances.
When no such inference will be drawn
Under par. 4 of art. 1769, sharing of profits is not prima facie evidence of partnership in the
cases enumerated under subsections (a) – (e). In these cases, the profits are not shared as partner but in
some other respects or purpose. The basic test of partnership is whether the business is carried on in
behalf of the person sought to be held liable.
Sharing of profits as owner
It is not merely the sharing of profits, but the sharing of them as co-owner of the business or
undertaking that makes one partner.
Test: Does the recipient have an equal voice as proprietor in the conduct and control of the
business?
Does he own a share of the profits as proprietor of the business producing them?
One must have an interest with another in the profits of a business as profits.