Chapter 2

OBLIGATIONS OF THE PARTNERS

A contract of partnership produces at least four distinct relationships, namely:

1. The relations of the partners among themselves;

2. The relations of the partners with the partnership;

3. The relations of the partnership with third persons with whom it transacts business; and

4. The relations of the partners with third persons.

Example:

If A and B organize a partnership called X, and X transacts business with Y, a third person, the
relationships produced will be as follows: The relationship between A and B on one hand, and X
(partnership) on the other; the relationship between X (partnership) and Y, the third person, and the
relationship between A and B on one hand, and Y, the third person, on the other hand.

Utmost good faith required of partners. The relation of partners to each other is one of great confidence
and trust, and the law demands from them the exercise of the highest integrity and good faith toward
each other. Each one is bound to use the partnership property and exercise his partnership powers for
the benefit of the firm and not for himself alone. Profits made in the course of the partnership belong to
the firm, and one partner will not be permitted to make gain for himself at the expense of the firm. x x x
This duty of good faith is intensified when one partner is conducting the business alone as managing
partner.

Section 1

OBLIGATIONS OF THE PARTNERS AMONG THEMSELVES

ART. 1784. A partnership begins from the moment of the execution of the contract, unless it is
otherwise stipulated. (1679)

Partnership begins from execution of contract. A partnership contract being consensual, the partnership
begins from the time that the partners agree to the contract unless i the partners stipulate otherwise.

Example:

A and B enter into a contract of partnership today. The partnership begins today unless A and B
expressly stipulate that it shall commence on a different date.

ART. 1785. When a partnership for a fixed term or particular undertaking is continued after the termi
nation of such term or particular undertakking without any express agreement, the rights and duties of
thei partners remain the same as they were at such termi nation, so far as is consistent with a
partnership at will.

A continuation of the business by the partners or such of them as habitually acted therein during the
term, without any settlement or liquidation of the partnership affairs, is prima facie evidence of a
continuation of thei partnership. (n)

Continuation beyond fixed term. A partnership organized for a fixed term or for a particular undertaking
is dissolved at the expiration of the term or accomplishment of the particular undertaking unless the life
of the partnership is extended expressly by agreement of the partners or impliedly by the mere
continuation of the business by the partner or partners who habitually manage the partnership.

Partnership at will. If no time is specified for the con tinuance of the partnership, and it is formed for a
particular transaction or the completion of a particular enterprise, it will be construed to be one which is
to last during the mutual consent i of the partners a partnership at will, which may be dissolved by
mutual agreement of the parties or by the act of any partner alone in accordance with his own will or
pleasure.2

Example:

A and B organized a partnership for a period of five years. 'Ihe term has recently ended. But A and B are
still continuing the business although without any express agreement to that effect. In this case, A and B
continue to be partners, having the same rights and duties as before the expiration of the period. But
the partnership is now a partnership at will which may continue or cease at the will of the partners or of
either of them.

ART. 1786. Every partner is a debtor of the partner ship for whatever he may have promised to
contribute thereto.i

He shall also be bound for warranty in case of eviction with regard to specific and determinate things
which he may have contributed to the partnership, in the same cases and in the same manner as the
vendor is bound with respect to the vendee. He shall also be liable for the fruits thereof from the time
they should have been delivered, without the need of any demand. (1681a)

Partner's failure to contribute. When a partner fails to contribute the money, property or industry which
he promised to contribute to the partnership he becomes a debtor to the partnership.

Obligations of partners to contribute. A partner: (a) shall deliver at the beginning of the partnership or, if
a different date has been agreed upon, at the stipulated time the properties he agreed to contribute; (b)
shall answer for eviction, in case the partnership 1s deprived of the ownership of any specific property
he contributed; (c) shall answer to the partnership for the fruits of the properties whose delivery he
delayed from the date he should have contributed it up to his actual delivery without necessity of any
demand; (d) shall preserve said properties with the diligence of a good father of a family pending their
delivery to the partnership; and (e) shall indemnify the partnership for any damage caused it by the
retention of said properties or by the delay in their contribution.3
Example:

A, B and C formed a partnership. A promised to contribute P5,000 which he failed to pay on the date
agreed upon; B contributed a parcel of land which was later on recovered by X by virtue of a judgment
of the court that said parcel of land belonged to X; C contributed P5,000 to the partnership. In this case,
what are the remedies of the partnership? The partnership may compel A to pay his contribution of
P5,000 plus interest; the partnership may hold B liable for damages under his warranty against eviction
from the land he contributed.

ART. 1787. When the capital or part thereof which a partner is bound to contribute consists of goods,
their appraisal must be made in the manner prescribed in the contract of partnership, and in the
absence of stipulation, it shall be made by experts chosen by the partners, and according to current
prices, the subsequent changes thereof being for the account of the partnership. (n)

Goods as contribution. A partner may contribute goods but an appraisal must be made according to the
terms of the contract of partnership and in the absence of an agreement to this efiect, the appraisal
shall be made by experts chosen by the partners who shall base their appraisal on current prices.

ART 1788. A partner who has undertaken to contri bute a sum of money and fails to do so becomes a
debtor for the interest and damages from the time he should have complied with his obligation.

The same rule applies to any amount he may have taken from the partnership coffers, and his liability
shall begin from the time he converted the amount to his own use. (1682)

Example:

A, B and C are partners. In their contract they agreed to deliver their contributions last October 31,
1964. Notwithstanding that A and B gave their contributions on time, C failed to deliver and has not yet
delivered his contribution in the sum of P2,000. On the other hand, A, who was designated managing
partner, took on January 5, 1965, P3,000 from the partnership coffers for hisi personal use. Under the
circumstances, C is a debtor of the partnership for the delayed contribution of P2,000 plus interest and
damages from October 31, 1964, the date when he should have paid the amount. On the other hand, A
shall be liable for P3,000, the amount he took from the partnership coffers, plus interest and damages
from January 5, 1965, the date he converted said amount for his own use.

Liability of partner for estafa. If aside from the failure to return the money taken, there is the element of
fraudulent appropriation of the money delivered to a partner with specific instructions for the use of the
partnership, then estafa is committed under the Revised Penal Code.

ART. 1789. An industrial partner cannot engage in business for himself, unless the partnership expressly
permits him to do so; and if he should do so, the capital ist partners may either exclude him from the
firm or avail themselves of the benefits which he may have ob tained in violation of this provision, with a
right to dam ages in either case. (n)
Concept of industrial partner. An industrial partner is one who contributes his industry or labor in the
partnership.

Industrial partner barred from engaging in business. The industral partner himself can not exploit his
own services for his own profit without the express permission of the owner, the partnership. The
prohibition seeks to prevent any conflict of interest between the industrial partner and the partnership,
and to insure faithful compliance by said partner with his prestation.

ART. 1790. Unless there is a stipulation to the contrary, the partners shall contribute equal shares to the
capital of the partnership. (n)

Example:

A and B enter into a contract of partnership. They do not agree as to the amount of contribution to be
given by each one of them. But they stipulate that the common fund is P3,000.00. In such case, it is
presumed that each one of them shall contribute equally. "his must be so for the reason that partners
are deemed to have equal rights and obligations.

ART. 1791. If there is no agreement to the contrary, in case of an imminent loss of the business of the
partnership, any partner who refuses to contribute ani additional share to the capital, except an
industrial partner, to save the venture, shall be obliged to sell his interest to the other partners.

Example:

A. B. C and D are partners in a partnership of which A, B and C are the capitalist partners while D is an
industrial partner. Due to business reverses, A and B have decided to contribute additional shares to the
capital to save the partnership from imminent collapse. C, however, refuses to give additional
contribution. If the partnership agreement does not provide that no partner can be compelled to make
additional contributions, C may be compelled by A and B to sell his interest to them because C's refusal
reflects his lack of interest in the business. D cannot be compelled to sell his interest for the reason that
being an industrial partner he has given all his industry to the firm.

ART. 1792. If a partner authorized to manage collects a demandable sum, which was owed to him in his
own name, from a person who owed the partnership another sum also demandable, the sum thus
collected shall be applied to the two credits in proportion to their amounts, even though he may have
given a receipt for his own credit only; but should he have given it for the account of the partnership
credit, the amount shall be fully applied to the latter.

The provisions of this article are understood to bei without prejudice to the right granted to the debtor
by Article 1252, but only if the personal credit of the partner should be more onerous to him. (1684)

Partner authorized to manage. 'Ihis provision applies only to the partner who has been authorized to
manage thei partnership and who actually undertakes its management. It does not apply to the other
partners who are not authorized to manage it, for there can be no ground for suspicion or apprehension
in the collection of credits that they may act in bad faith.
Example:

A and B are partners, with B as the managing partner. X owes the partnership and B the amount of
P5,000 each; both debts are due and demandable X pays B the sum of P5,000 and B issues a receipt

"Received from X P5,000 in payment of his debt to me. (Sgd.) B."

In such a case, even if B has issued a receipt for his own credit only, the payment made by X will be
divided between B and the partnership proportionately P2,500.00 will go to B and the other P2,500.00
will go to the partnership. If B, on the other hand, gives a receipt for the account of the partnership
credit, the whole amount of P5,000 shall be applied to the partnership credit. Thei reason for Article
1792 is that good faith cannot permit a managing partner to subordinate the interest of thei partnership
to that of his own.

ART. 1793. A partner 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 have given receipt
for his share only. (1685a)

Example:

A and B are partners in a duly organized partner ship. X owes the partnership the sum of P1,000. A and B
agree to divide the credit ith each undertaking to collect his own share. A collects the sum of P500.00
from X, giv ing a receipt for his share only. Later on, B demands payment from X, but the latter turns out
to be insolvent. In this case, A will be required to bring to the partnership capital the P500.00 he has
received, the reason being that in case the partnership debtor (X) becomes insolvent hisi debt becomes
a bad debt and it will be unfair for A not to share in the loss with his co-partners, B.

ART. 1794. 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. However, the courts may equitably lessen this responsibility if through the
partner's extraordinary efforts in other activities of the partnership, unusual profits have been realized.
(1686a)

Partner liable for damages caused the partnership. This article follows the general rule of contracts that
where a person is at fault in the fulfillment of his obligations he shall be liable for the payment of
damages. The partner's fault, however, must be determined in accordance with the circumstances of
person, time and place.

Example:

A, B and C are partners. Through the fault of A the partnership sustained damages in the amount of
P5,000. Under the law, A shall be responsible for such damages. However, if A, through extraordinary
efforts like overtime work, excellent salesmanship and public relations, was able to bring enormous
profits to the partnership, the court may mitigate or lessen A's responsibility for damages.
Liquidation necessary to ascertain damages. It has

been held that for the purpose of adjudicating to plaintiff damages which he alleges to have suflered as
a partner by reason for the supposed fraudulent management of the partnership referred to, it is first
necessary that a liquidation of the business thereof be made to the end that the profits and losses may
be known and the causes of the latter and the responsibility of the defendant as well as the damages
which each partner may have suffered, may be determined.?

ART. 1795. The risk of specific and determinate things, which are not fungible, contributed to the
partnership 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 fungible, or cannot be kept without deteriorating, or if they were
contributed to be sold, the risk shall be borne by the partnership. In the absence of stipulation, the risk
of things brought and appraised in the inventory, shall also be borne by the partnership, and in such
case the claim shall be limited to the value at which they were appraised. (1687)

Risk of specific and determinate things. The risk of speefic and determinate things which are not
fungble, (like a boat) only the use of which is contributed, shall be borne by the partner as the
ownership thereof is not transferred to the partnership. This follows the general rule that the thing
pershes with the owner.

Things fungible or perishable. But if the things contributed are fungble or cannot be kept without
deteriorating (perishable) like wine, ol, ete., even if they are contributed only for the use of the
partnership, the risk of loss shall be for the account of the partnership for the latter cannot make use of
them without their getting consumed or impaired.

Things contributed to be sold. If the things contrbuted are to be sold, the partnership bears the risk of
loss, for obviously the partnership is the intended owner; otherwise, the firm cannot make the sale.

Things brought and appraised in inventory. The partnership bears the risk of loss of things brought and
appraised in the inventory as this has the effect of an implied sale thus making the partnership the
owner of said things.

ART. 1796. 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 itsi management. (1688a)

Responsibility of the partnership to a partner. If a partner has advanced funds for the partnership, he is
entitled to recover the amounts advanced by him with interest. This must be so for the reason that a
partner is a mere agent of the partnership and under the rules of agency, an agent who advances funds
for his principal may recover the same with interest.

Example:
A and B are partners in a poultry business. At one time when A was on a vacation, B advanced the sum
of P300.00 for the purchase of feeds. May B demand reimbursement from the partnership ofthe sum
advanced by him? Yes. B may demand payment of the amount advanced with interest from the time
when the expenses i were made.

ART. 1797. The losses and profits shall be distributed in coniormity with the agreement. If only the share
of each partner in the profits has been agreed upon, the share of each in the losses shall be in the same
proportion.

In the absence of stipulation, the share of each partner in the profits and losses shall be in proportion to
what he may have contributed, but the industrial partner shall not be liable for the losses. As for thei
profits, the industrial partner shall receive such share as may be just and equitable under the
circumstances. If besides his services he has contributed capital, he shall also receive a share in the
profits in proportion to his capital. (1689a)

Sharing of profits and losses. The profit and loss of the partnership must be divided in the manner
stipulated, and if the agreement should only refer to the participation of each partner in the profits then
their corresponding share in the losses shall be in the same ratio. In the absence of an agreement

the share of each partner in the profits and losses shall be in proportion to what he may have
contributed.

Rules in profit sharing

1. The partners share the profits in acoordance with the ratio established by their contract.

2. If there is no such stipulation in the partnership contract, then:

(a) If all are capitalist partners they have the profits in proportion to their capital contributions;

(b) If there are capitalist as well as industrial partners, the industnal partners get a share each that is just
and equitable while the capitalist partners divide the remainder in proportion to their capital
contributions; and

(c) If there is a capitalist-industrial partner, he gets a share in the profits as an industrial partner and an
additional share in proportion to his capital contribution to be determined as in (b), above.

Rules in loss sharing:

1. The stipulation in the partnership agreement regarding loss sharing must be followed.

2. If there is no such agreement, but the contract provides for a profit sharing ratio, the profit sharing
ratio shall also be the loss sharing ratio.

3. In the absence of loss sharing and profit sharing stipulations in the contract, then the loss shall be
borne by the partners in proportion to their capital contributions; but a purely industrial partner is
exempted from participation in the loss.
Share of industrial partner in profits and losses. Unless agreed upon, the industrial partner shall receive
such share in the profits as may be just and equitable under the circumstances As for the losses, the
industrial partners is not liable. However, under Art. 1816, if the partnership has a contractual debt and
it cannot pay, the industrial partner equally with the capitalist partners, can be compelled by the
creditor to pay his pro rata share out of hus own property or assets.

Example:

Stipulation as to profits. A, B and C formed a partnership contributing P3,000 each to the common fund.
They agreed that should the partnership realize profits the same shall be distributed as follows: A will
get 50%; B will get 25%, while C will get the other 25%. In the event the partnership realizes profits, then
the partners will share the same in conformity with their agreement Ifthe only stipulation on profits and
losses is that indicated above, then since A, B and C failed to agree as to the sharing of losses, in the
event of a loss they shall share such loss as they would share in the profits. Their profit sharing ratio shall
also be their loss sharing ratio.

Absence of stipulation. A, B and C formed a partnership contributing P2,000 each to the common fund.
They did not agree as to the division of profits and losses. Under the law, profits and losses shall be
divided between the partners in the proportion of their contribution. Hence, A, B and C will share
equally the profits and losses as they also contributed equally.

Share of industrial partner in profits and losses. A and B are the capitalist partners in a partnership,
contributing P5,000 each while C is the industrial partner. In due course of business, the partnership
makes a profit of P6,000. How much should be the share of C? The share of C must be that which is Just
and equitable under the cireumstances to be determined by the partners. If the partners decide that
P2,000 is just and equitable after considering the circumstances, then such amount must be given to C.
Assuming that the partnership sustains a loss of P6,000 instead of profits? Then in such case, C shall not
be liable for such loss but the same shall be borne by A and B. capitalist partners.

The exemption of an industrial partner to pay for losses "relates exclusively to the settlement of thei
partnership affairs among the partners themselves, and has nothing to do with the liabilities of the
partners to third person.

Industrial Partner; determination of profit. For the purpose of determining the profit that should go to
an industrial partner (who shares in the profits but is not liable for the losses), the gross income from all
the transactions carried on by the firm must be added together, and from this sum must bei subtracted
the expenses or the losses sustained in the business. i Only in the difference representing the net profits
does not the industrial partner share. But if, on the contrary, the losses exceed the income, the
industrial partners does not share in the losses. (Fernando Santos vs. Sps. Arsenio and Nieves Reyes, G.R.
No. 135813, October 25, 2001.)

Right of partner to expected profits; explained.

Facts: Pecson and Moran entered into an agreement whereby both would contribute P15,000 each for
the purpose of printing 95,000 posters with Moran supervising the work; that i Pecson would receive a
commission of (P1,000 a month from April 15, 1971 up to December 15, 1971; that Pecson gave Moran
P10,000; that only a few posters were printed; that on or about May 28, 1971, Moran executed in favor
of Pecson a promissory note for P20,000 payable in two equal installments; that the whole amount shall
be due upon default in the payment of the first installment. Of the expected 95,000 copies of the
posters, Moran was able to print 2,000 copies only all of which, however, were sold at P5.00 each.
Pecson, on the other hand, failed to give his whole contribution of P15,000. The business venture failed
and Pecson sued Moran for the reoovery of a sum of money The case was elevated to the Supreme
Court on a question of law.

Issue: May a partner be entitled to recover expected profits notwithstanding the failure of the
parinership business?

Decision: Being a contract o partnershup, each partner must share in the profits and losses of the
venture. That is the essence of a partnership. And even with the assurance made by one of the partners
that they would earn a huge amount of profits, in the absence of fraud, the other partner cannot claim a
right to recover the highly speculative profits. In this case, on an investment of P15,000 Pecson was
supposed to earn a guaranteed P1,000 a month for eight months and around P142,500.00 on 95,000
posters costing P2 00 each but 2,000 of which were sold at P.00 each. The fantastic nature of the
expected profits is obvious.

Although Moran promised to give commission to Pecson, the payment of the commission could only
have been predicated on relatively extravagant profits. The parties could not have intended the giving of
a commission inspite of loss or failure of the venture. Since the venture was a failure, Pecson is not
entitled to the P8,000.00 commission. (Moran es. Court of Appeals, G.R. No, L-69956, Oet. 31, 1984).

ART. 1798. If the partners have agreed to intrust to a third person the designation of the share of each
one in the profits and losses, sueh designation may be impuged 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 three months from the time he had knowledge thereof, complain
of sueh decision.

The designation of losses and profits eannot be intrusted to one of the partners. (1690)

Reason for the provision. Admittedly, the designation of profita and losses cannot be entrusted to one of
the partners as the fulfillment of a contract cannot be left to one of the contracting parties. It may,
however, be entrusted to a third person by common consent.

ART. 1799. A stipulation which exeludes one or more partners from any share in the profits or losses is
void. (1691)
Stipulation to exclude a partner from profits and losses is void. The law does not allow a provision in the
contract of partnership excluding one or more partners from sharing in the profits and losses. The
reason is that a partnership is organized for the common benefit or interest of the partners.

Reason for exclusion of industrial partner. An industrial partner is not liable for losses "because if the
partnership fails to realize any profits, the industrial partner would have contributed his labor in vain.
Furthermore, thei industrial partner cannot withdraw the work already done by him for the
partnership,"10

ART. 1800. The partner who has been appointed manager in the articles of partnership 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 partnership has been constituted may be revoked at any time. (1692a)

Example:

Jose, Pedro and Juan are partners. By common agreement in the articles of partnership, Juan has been
appointed the manager. As such, Juan may execute all acts of administration despite the opposition of
his partners unless he should act in bad faith. His power is irrevocable without just or lawful cause. In
order to revoke the power of Juan as manager, provided there is a just or lawful cause, the vote of the
partners having the controlling interest is required.

If Juan has been appointed manager after the partnership has been formed, his power can be revoked at
any time.

Scope of power of manager. Unless his powers are specifically restricted, he has the powers of a general
agent, as well as all the incidental powers needed to carry out the objectives of the partnership, such as,
for example, the power to issue offi cial receipts in the transaction of business, otherwise, this would not
be in keeping with present-day business dealings.

Power of manager to dismiss employee. A manager of a partnership has, even without the approval of
the other partners, the power to dismiss an employee, particularly when a justifiable cause exists.

ART. 1801. If two or more partners have been intrusted with the management of the partnership
without specification of their respective duties, or without a stipulation that one of them shall not act
without the consent of all the others, each one may separately execute all acts of administration, but if
any of them should oppose the acts of the others, the decision of the majority shall prevail. In case of a
tie, the matter shall be decided by the partners owning the controlling interest. (1693a)

Example:

A. B and C are the managers of a business partnership without specification of their respective duties. As
such, A, B and C may separately execute all acts of administration even without the previous knowledge
or consent of the others. But suppose before the act is done. one of the partners interposes an
objection; suppose A objects to a projected purchase of goods by B or C, may B or C proceed in spite of
the objection? The matter will bei decided by all the partners; the decision of the majority shall prevail.
In case of a tie, the matter shall be decided by the partners owning the controlling interest.

Presumption as to authority of partners. There is a general rule of presumption that each individual
partner is an authorized agent for the firm and that he has authority to bind the firm in carrying on the
partnership transactions.

ART. 1802. In case it should have been stipulated that none of the managing partners shall act without
thei consent of the others, the concurrence of all shall be necessary for the validity of the acts, and the
absence or disability of any one of them cannot be alleged, unless there is imminent danger of grave or
irreparable injury to the partnership. (1694)

This article sanctions an agreement for unanimity of action among the managing partners. 'Thus, in a
partnership composed of A, B. C and D, it was agreed that all of them shall be thei managing partners
and that none of them shall act without the consent of the others. Hence, if A without securing the
consent i of B, C and D enters into a contract, said contract shall not bei valid and the absence or
disability of any one of the partners i cannot be alleged by A as a reason for his not getting such
partner's consent.

Consent of managing partners not necessary in routine matters. It has been held that where the
business of a partnership is to buy and sell, a partner who purchases on credit in the name of the firm is
acting within his implied powers, since it is usual to buy and sell on credit, and persons i dealing with a
firm have a right to assume that the authority of a partner is co-extensive with the business transacted
by his firm. Moreover, third persons are not as a rule bound to inquire on the partnership account, or for
his individual advantage.

ART. 1803. When the manner of management has not i been agreed upon, the following rules shall be
observed:

(1) All the partners shall be considered agents and whatever any one of them may do alone shall bind
thei partnership, without prejudice to the provisions of Article 1801.

(2) None of the partners may, without the consent of the others, make any important alteration in thei
immovable property of the partnership, even if it may be useful to the partnership. But if the refusal of
consent by the other partners is manifestly prejudiced to thei interest of the partnership, the court's
intervention may be sought. (1695a)

Equal participation in management. Presumably all partners have the right to participate in
management, and noi partner may be excluded from participation. 15 There may be an agreement for
concentration of management in one or more partners.

Examples:
All partners considered agents. Luis, Francisco and Mario are partners. None of them has been
appointed manager either when their contract was perfected or subsequently. In this case, each one of
them is considered manager or agent of the firm and any act of management i done by any of them shall
bind the partnership subject, however, to the provision of Article 1801, where in case of timely
opposition by any other partner, the matter shall be decided by all the partners. The decision of the
majority shall prevail.

No partner may make important alteration in immovable property. Let us say, in the example above.i
that Luis wants to make an important alteration in a building owned by the partnership, can he do it
without the consent of Francisco and Mario? No, Luis cannot. The law states that he cannot make an
important alteration in the immovable property owned by the partnership without the consent of the
partners even if it be useful to the firm. However, if the refusal of Francisco and Mario to give their
consent is prejudicial to the interest of the partnership the court's intervention may be sought.

Strangers can assume that partner has authority.

Strangers dealing with a partnership have the right to assume in the absence of restrictive clauses in the
co-partnership agreement, that every general partner has power to bind the partnership, specially those
partners acting with ostensible authority. Ihus, the consent of the other partners is not i necessary to
perfect the sale of partnership properties to third persons where the sale was entered into by one acting
as a managing partner.

ART. 1804. Every partner may associate another person with him in his share, but the associate shall not
be admitted into the partnership without the consent of all the other partners, even if the partner
having an associate should be a manager. (1696)

Example:

A, B, C and D are business partners. A wants his friend E to participate in his share in the profits. In such
case, A may associate E in his share without the consent of partners B. C and D. However, should A
desire to have E admitted as a partner, the consent of all the partners is necessary because the basis of a
partnership is mutual trust. A new partner admitted without the consent of all the partners may destroy
that basi8. Besides, the admission of a new partner will result in the modification of the partnership
contract which cannot be done without the consent of all the partners.

ART. 1805. The partnership books shall be kept, subject to any agreement between the partners, at thei
principal place of business of the partnership, and every partner shall at any reasonable hour have
access to and may inspect and copy any of them. (n)

Keeping of partnership books subject to agreement. Books should be kept at the place of business,s and
all partners are entitled to access to them. 9 It is presumed, though subject to rebuttal, that partners
have knowledge of the contents of thei partnership books.20 The books are presumed to state
accurately the state of accounts," but errors can be corrected.
Reasonable hours; meaning. It will be noted that our statute declares that the right of inspection can be
exercised "at reasonable hours." This means at reasonable hours on business days throughout the year,
and not merely during some arbitrary period of a few days chosen by the managing partners.

Inspection for partnership purposes. The right of a partner to make use of information contained in the
partnership books is confined to partnership purposes and protection of his rights as partner.

ART. 1806. Partners shall render on demand true and full information of all things affecting the
partnership to any partner or the legal representative of any deceased partner or of any partner under
legal disability.

Duty of partners to render information. Not only is ai partner bound to give information on demand,
but, in certain circumstances, he is under a duty of voluntary disclosure. Even when persons are
negotiating for the formation of a partnership, it has been held that there is a duty of disclosure of
material facts relating to what is to become partnership property, such as the cost at which it is to be
obtained by a partner or the interests of a partner in such property.

ART. 1807. Every partner must account to thei partnership for any benefit, and hold as trustee for it any
profits derived by him without the consent of the other partners from any transaction connected with
the formation, conduct, or liquidation of the partnership or from any use by him of its property.

Highest degree of good faith required. Above all other persons in business relations, partners are
required to exhibit towards each other the highest degree of good faith. In fact thei relation between
partners is essentially fiduciary, each being considered in law, as he is in fact, the confidential agent of
the other. It is therefore accepted as fundamental in equity Jurisprudence that one partner cannot, to
the detriment of another, apply exclusively to his own benefit that results of the knowledge and
information gained in the character of partners.

Example:

A and B were partners in the operation of a cinema business. In due course of business, they mortgaged
the theater and lot to X. For failure to pay the mortgage debt, X foreclosed the mortgage. A in his own
behalf redeemed the property mortgaged and then asked the court to cancel the old title of the
partnership and order another title to be issued in his own name alone. Despite the objection of partner
B, the court granted the petition of A Hence, B appealed to the Supreme Court. Held: As theory cannot
be sustained. A partner is an agent of the partnership. Every partner becomes a trustee for his co-
partner with regard to any benefits or profits derived from his act as partner. Consequently, when A
redeemed the property in question, he became a trustee and held the property in trust for his co-
partner, subject, of course, to his right to demand from the latter his contribution to the amount of
redemption.

ART. 1808. The capitalist partners cannot engage for their own account in any operation which is of the
kind of business in which the partnership is engaged, unless there is a stipulation to the contrary.
Any capitalist partner violating this prohibition shall bring to the common funds any profits accruing to
him from his transactions, and shall personally bear all the losses. (n)

Reason for prohibition. The reason for prohibiting capitalist partners from engaging in business, which is
of the same kind as that undertaken by the partnership, is that they are likely to prejudice the
partnership by the competition that they will offer. The capitalist partner, knowing the business secrets
and internal management of the company as well as its clientele, will be able to make gains at the
expense of the partnership

When prohibition ceases. The prohibition ceases when the partnership ceases to be engaged in
business. Hence, during the period of liquidation or winding up of affairs, there is no more prohibition.

A capitalist partner may engage in business, even if it be of the same line that the partnership is
engaged, if the other partners permit him.

Real property acquired by partner in his own name. When two commercial houses have formed a
partnership for the purpose of becoming interested in each other's business, and real property 18
acquired by the active member thereof in its own name, the other has no interest therein.

ART. 1809. Any partner shall have the right to al formal account as to partnership affairs:

(1) If he is wrongfully excluded from the partnership business or possession of its property by his co-
partners;

(2) If the right exists under the terms of any agreement;

(3) As provided by Article 1807;

(4) Whenever other circumstances render it just and reasonable.

Dissolution as a remedy. Partners should not seek to have the courts operate their affairs, and ifthey
cannot get along together amicably, they should dissolve and wind up. The refusal of a partner to render
an accounting when one is due is a sufficiently serious breach of the partnership obligation to warrant a
dissolution by decree of court.

Prescription; Right to demand accounting. Regarding the prescriptive period within which the private
respondent may demand an accounting, Articles 1806, 1807 and 1809 show that the right to demand an
accounting exists as long as the partnership exists. Prescription begins to run only upon the dissolution
of the partnership when the final accounting is done. (Fue Leung vs. Intermediate Appellate Court, G. R.
No. 70926, dan. 31, 1989).